What happens to your exposure for past acts when you cease practicing?
Over the past years we have often received inquiries from clients that are considering retirement and are concerned about residual prior acts exposure. No-one wants to have their golden years disturbed by an ugly, uninsured malpractice lawsuit. Before packing the golf clubs or beach chairs, it is crucial that serious consideration should be given to the various options for malpractice protection.
Exposure to prior acts claims arise from various areas but most significantly from:
- While a partner or employee of your current firm; or,
- While a partner or employee of a predecessor firm that was merged into your current firm.
The main concern is that your current firm provides you with continuous protection for at least six years, and ideally for an unlimited period, after the date you cease practicing.
There are various coverage options:
A Free Extended Reporting Period
This is usually only available to a retired solo practitioner who is over 55 years of age that has been insured with the same company for a certain number of years (usually 2 to 5 years). The insurer will provide an unlimited Extended Reporting Period at no cost. This coverage immediately cease is the accountant returns to work.
Start a new policy
If you are a member of a partnership and your retirement is the catalyst to restructure the practice, you and your partners may choose to cancel coverage and purchase an extended reporting period. Concurrent with this a new policy can be purchased for the new firm. The advantage is that the cost of the Extended Reporting Period is fixed (usually 200% of the last annual premium) and the new policy enjoys a hefty discount.
Maintain coverage with your existing firm
You can choose to rely upon the partners of your current firm to maintain coverage for your on-going protection. Most policies cover past, present and future partners and employees so there is nothing more to do and retirees are not “ratable staff” for the premium calculation. However, you must trust that the partners will maintain coverage for you for at least six years. Usually this is “free” insofar as there is no direct premium cost for this.
- it is wise to establish how the per claim deductible applied to future lawsuit arising from your services may be applied; and,
- if a claim arising from your services causes an increase in the firm’s premium, how will this be accounted for?
These matters should be determined before you leave to avoid any nasty future surprises.
Additionally, if the partners choose to merged with, or become acquired by, another firm in the future you must ensure that any transaction includes protection to retirees either by purchasing an Extended Reporting Period or by providing predecessor firm coverage which includes retirees.
There are various ways to find coverage and the best way depends upon your personal circumstances and relationship with your partners. However, careful planning is required and some predetermined agreement to establish future apportionment of costs. This will avoid the potential of disturbing a well-earned retirement.