No Need for a Law Firm LLP to Have “Tail” Insurance, Says the Supreme Court

Mortgage Grader, Inc. v. Ward & Olivo, LLP, 225 N.J. 423 (2016).  Justice Fernandez-Vina issued an opinion in this legal malpractice appeal today, his first opinion in quite some time, due to his illness. It is good that he is back in action.

This was an appeal from the Appellate Division’s published opinion, 438 N.J. Super. 202 (App. Div. 2014), which was discussed here.  There, the Appellate Division held that the defendant law firm, a limited liability partnership (“LLP”), need not have purchased “tail” malpractice insurance, which would have covered the firm for claims made during the time that the firm was dissolving and winding up its affairs or thereafter.  Its failure to carry such insurance did not convert the LLP to a general partnership whose partners could be sued individually, as plaintiff here sought to do.  The Supreme Court affirmed that result, applying the de novo standard of review since interpretation of both a court rule, Rule 1:21-1C, and a statute was involved.

Justice Fernandez-Vina found that the plain language of Rule 1:21-1C did not require tail insurance.  That rule permits attorneys to practice as an LLP provided that they carry insurance for claims made “arising out of the performance of professional services by attorneys employed by the limited liability partnership in their capacity as attorneys.”  That language “ties the mandate to carry malpractice insurance to damages from the performance of ‘professional services.’  We find no indication that the administrative activities characterizing a windup are included within that term.”

Because Rule 1:21-1C calls for compliance with the Uniform Partnership Act (“UPA”), N.J.S.A. 42:1A-1 to -56 (except where inconsistent with court rules), Justice Fernandez-Vina turned to consideration of the UPA as well.  After carefully explaining the UPA’s provisions regarding the winding up of affairs of an LLP, he concluded that a law firm LLP does not perform legal services in the windup period and “therefore no acts of malpractice could be committed during this period.”  The UPA thus confirmed that the law firm was not required to carry malpractice insurance for that period.

Finally, Justice Fernandez-Vina addressed the trial court’s conversion of the LLP to a general partnership for its failure to carry the insurance.  Rule 1:21-1C allows only the Supreme Court to impose a sanction for failure to carry insurance, so the trial court could not properly have done that.  Moreover, the types of sanctions that can be “imposed through the court rules” do not include conversion of a law firm from one form to another.  Nor does the UPA afford a mechanism for doing that.  For all those reasons, the trial court’s action was improper, as the Appellate Division had likewise concluded.

Justice Albin, dissenting in part, would have required LLP’s to carry insurance during their lives and for six years after their dissolution, and he urged that Rule 1:21-1C be amended to so provide expressly.  He noted that other jurisdictions do not allow an LLP’to avoid liability to clients if the LLP does not have insurance, and argued that “[t]he trade-off for the liability shield of Rule 1:21-1C is that the attorneys operating as an LLP must maintain malpractice liability insurance.”

Justice Fernandez-Vina disagreed.  He cited several “[p]ractical considerations and public policy concerns” in support of the majority’s view.