A “Tail” Insurance Tale

Mortgage Grader, Inc. v. Ward & Olivo, LLP, 438 N.J. Super. 202 (App. Div. 2014).  In the legal malpractice context, a “tail” insurance policy is one that “provides insurance coverage for malpractice that occurs during the claims-made policy coverage period but is reported after the claims-made policy has lapsed.”  This involved a legal malpractice claim against the defendant LLP and its two named partners that was made after the firm had ceased practicing law and had begun winding up its affairs, and after the firm’s claims-made policy had expired.  Defendant Ward sought summary judgment on the grounds that he could not be liable for the alleged malpractice of his former partner, Olivo, under N.J.S.A. 42:1A-8c, which provides that a partner in an LLP is protected against from liability for the acts of another partner.  Alternatively, Ward argued that plaintiff had failed to follow the procedures of the Affidavit of Merit statute, N.J.S.A. 2A:53A-27, by serving Ward with an affidavit of merit.  Plaintiff responded that because the LLP had not purchased a “tail” policy, a violation of Rule 1:21-1C(a)(3), the LLP designation was to be stripped away, so that the entity would then become a general partnership.  In a general partnership, partners are liable for each other’s acts.  Plaintiff also asserted that it had substantially complied with the Affidavit of Merit statute by serving an affidavit of merit on Olivo and the LLP.

The Law Division found that if the Affidavit of Merit issue were the only one, Ward would have been entitled to summary judgment.  But that court agreed with plaintiff about the effect of the LLP’s failure to purchase a “tail” policy and therefore denied summary judgment.  Ward appealed, and the Appellate Division reversed, agreeing with Ward on both issues.  Reviewing the legal issues presented de novo, Judge Fasciale wrote for the panel.

Judge Fasciale found that the plain language of N.J.S.A. 42:1A-8c “clearly expresses the Legislative intent that the partners of an LLP are shielded from liability for a fellow partner’s acts.”  Nothing in that statute or in Rule 1:21-1C(a)(3) authorized a court to strip that protection away when an LLP fails to purchase a “tail” policy.  Rule 1:21-1C(a)(2) lists the sanctions that are available for violations of Rule 1:21-1(c), allowing “the Supreme Court to terminate or suspend the [LLP]’s right to practice law or otherwise to discipline it.”  In promulgating Rule 1:21-1C(a)(2), “the Court did not include as a sanction the conversion of an LLP into a GP, thereby removing the protection afforded to a partner in an LLP” against liability for the acts of other partners.  Nor did the Rule authorize any lower court to impose a sanction of any kind.  Though Judge Fasciale concluded that this result was compelled by the plain language of the statute and the Rule, he went on to review the Committee report that underlay the statute and determined that that report reinforced the panel’s conclusion.

In a footnote, Judge Fasciale observed that whether Ward and Olivo should be punished for failing to purchase a “tail” policy might be an issue for a disciplinary authority such as the Office of Attorney Ethics, the Disciplinary Review Board, or a District Ethics Committee.  But the Law Division had no power to do what it had done here.   

The Appellate Division agreed with Ward on the affidavit of merit issue as well.  The Affidavit of Merit statute requires that a professional malpractice plaintiff “shall … provide each defendant” with an affidavit of merit.  Plaintiff’s failure to serve Ward with its affidavit of merit or to demonstrate substantial compliance under the criteria stated in Ferreira v. Rancocas Orthopedic Assocs., 178 N.J. 144, 151 (2003), was fatal.