NJ: No Vicarious Liability for Partner Where LLP Lacked Tail Coverage

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The requirement for a law firm organized as a limited liability partnership to maintain malpractice insurance does not extend to the period when a firm is winding up operations and has ceased to provide legal services, the Supreme Court has ruled.

The plain language of Rule 1:21-1C ties the insurance mandate to the performance of professional services, and that term doesn’t encompass the administrative duties related to a windup, the court ruled in Mortgage Grader v. Ward & Olivo. Affirming an Appellate Division order, the court said a motion judge erred by converting the Summit firm from an LLP to a general partnership for failing to carry malpractice insurance while winding up operations.

As a result of the ruling, Mortgage Grader Inc., which hired the firm’s John Olivo in 2009 to address claims of patent infringement, has no vicarious liability claim against the firm’s other partner, John Ward, for Olivo’s alleged malpractice, the court said. Mortgage Grader, based in Laguna Niguel, California, entered into settlement agreements related to the infringement claims that gave rise to allegations of malpractice. In June 2011, Ward & Olivo dissolved and entered into a windup period while collecting outstanding legal fees and paying taxes.

The firm’s claims-made policy ran through Aug. 8, 2011. In October 2012, Mortgage Grader filed a malpractice suit against the firm, Olivo and Ward, alleging malpractice by Olivo in relation to the settlements. Mortgage Grader served an affidavit of merit on Ward & Olivo and Olivo but not on Ward.

Ward moved to dismiss, arguing that he could not be held vicariously liable, and that he had not been served with an affidavit of merit. The judge hearing the motion concluded that the lapse of the firm’s malpractice insurance policy relegated the firm to a general partnership and, therefore, Ward could be found vicariously liable. The Appellate Division reversed in 2014, and Mortgage Grader appealed. At the Supreme Court, Mortgage Grader asserted that Olivo’s termination of the attorney-client relationship in May 2012, nine months after his firm’s malpractice insurance lapsed, dictated that the firm should have purchased so-called tail coverage for the windup period. Ward, for his part, argued that a mandate to purchase tail coverage would require coverage perpetually into the future, since the six-year statute of limitations would not apply to representation of a minor or the drafting of a will.

Under R. 1:21-1C, adopted in 1996, a law firm organized as an LLP must carry at least $100,000 in insurance for each attorney employed, Justice Faustino Fernandez-Vina wrote for the court. The rule was intended to protect partners from lawsuits premised on vicarious liability, but common sense and public policy dictate that partners should not be allowed to seek shelter behind the liability shield of an LLP when they have not maintained malpractice insurance, Fernandez-Vina wrote.

Full article: www.njlawjournal.com