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Navigating Rule 21: Professional liability insurance for interim administrators

 

by Alec Fruin   |   Michigan Bar Journal

 

Effective Sept. 1, 2023, the Michigan Supreme Court introduced a regulatory update known as Rule 21 regarding interim administrator planning for attorneys in private practice. The rule is designed to protect the interests of an attorney’s clients through the appointment of interim administrators, who play a crucial role in managing and overseeing business operations during a transitional phase within the firm. Rule 21 mandates that interim administrators obtain professional liability insurance to provide coverage for duties performed while acting for the affected attorney.

UNDERSTANDING RULE 21 AND ITS IMPLICATIONS

Interim administrators are appointed to temporarily protect an affected attorney’s clients and interests. An “affected attorney” refers to an attorney who is temporarily or permanently unable to practice law due to the circumstances described in MCR 9.301(A). Rule 21 mandates that interim administrators must obtain and retain professional liability insurance to protect themselves from the potential consequences of any alleged errors, omissions, or professional negligence while performing the duties of an interim administrator.

COVERAGE SOLUTIONS FOR INTERIM ADMINISTRATORS

As it pertains to interim administrators, lawyers’ professional liability insurance — commonly known as errors and omissions (E&O) insurance — is intended to provide coverage against claims arising from the performance of their duties. While each professional liability policy varies based on the language set forth by the insurance company, there are commonalities where coverage for interim administrators may be afforded. The following are scenarios where interim administrators would look for coverage to respond:

  1. The interim administrator is a current attorney of the affected attorney’s firm. In this scenario, coverage is likely to respond for the interim administrator under the definition of an insured as an employee of the firm, which would be the named insured on the policy.
  2. The interim administrator is not a current attorney of the affected attorney’s firm. This scenario applies to solo practitioners with no other attorney at the firm. The interim administrator appointed to manage the firm’s transition is likely to be provided coverage under the definition of an insured on the affected attorney’s policy. Thus, the interim administrator would essentially be acting as an employee of the firm and look to be afforded coverage to the extent that the affected attorney was provided under the policy.
  3. The affected attorney does not have professional liability insurance. If the interim administrator has a professional liability insurance policy, coverage may extend for their duties performed on behalf of the affected attorney’s firm per the definition of professional (legal) services.
  4. Neither the affected attorney nor the interim administrator has professional liability insurance. In this scenario, there are two types of professional liability policies that may afford coverage solutions: E&O and miscellaneous professional liability insurance. As referenced previously, E&O insurance may look to extend coverage to the interim administrator in addition to the policy’s intent to cover legal services provided. A miscellaneous professional liability policy in the name of the interim administrator may provide coverage for the duties provided; however, this policy would not cover any legal services being provided.

PROFESSIONAL LIABILITY IN THE EVENT OF A CLAIM

Interim administrators may be vulnerable to claims alleging negligence or inadequate performance which could result in financial loss to the organization. The insurance policy is intended to respond with coverage for legal costs to defend a claim regardless of the validity or grounds. However, indemnity (damages and settlements) payments will not be afforded for intentional acts as outlined in the exclusions section of the policy. Additionally, in the event of a covered claim, the policy would provide compensation for indemnity. Decisions regarding the status of a covered claim are made on a claim-by-claim basis by the insurance company.

CONFIRM COVERAGE WITH YOUR INSURANCE AGENT

It’s advisable to reach out to your current professional liability insurance agent and ensure that your insurance company provides coverage for the duties as an interim administrator. During this process, make sure that your agent possesses comprehensive knowledge and expertise in the realm of lawyers’ professional liability, including a deep understanding of the different potential risks involved.

CONCLUSION

Michigan’s Rule 21 has ushered in a new era of accountability for interim administrators, emphasizing the need for professional liability insurance to provide comprehensive protection against potential risks. This insurance coverage is intended to not only shield individuals serving as interim administrators, but also provide peace of mind and ensure the confidence and security needed to perform their roles effectively and lead a seamless transition.

Disclaimer: This publication is not intended to confirm coverage for any claim that arises or to commit to coverage on behalf of any in­surance company, but simply highlight potential coverage solutions for interim administrators.


 

Law Practice Solutions is a regular column from the State Bar of Michigan Practice Management Resource Center (PMRC) featuring articles on practice, technology, and risk management for lawyers and staff. For more resources, visit the PMRC website at www.michbar.org/pmr/content or call our Helpline at (800) 341-9715 to speak with a practice management advisor.