Who Should be Protected the Attorney or the Client?

By Michael Zoller, Esq.
mzoller@pashmanstein.com

The New Jersey Supreme Court recently granted certification in the case of Mortgage Grader Inc. v. Ward & Olivo LLP, John Olivo and John Ward to address the question of who should bear responsibility for a legal malpractice claim when a law firm allows its insurance coverage to lapse during dissolution.  The Trial Court held that when the law firm fails to maintain the malpractice insurance required by Court Rule 1:21-1 it reverts to being a general partnership and individual partners of the law firm can all be personally liable for the malpractice committed by one partner.  On appeal, the Appellate Court reversed the Trial Court by holding that the law firm organized as a limited liability partnership does not revert to a general partnership when it fails to maintain its legal malpractice insurance.  Now the Supreme Court will settle the issue.

The question presented by Mortgage Grader is one of importance to both clients and attorneys.  Court Rules allow attorneys to practice in corporations, companies and partnerships that all provide limit personal liability protection.  If an attorney commits malpractice only the individual attorney and the firm itself may be held financially responsible.  The aggrieved client cannot personally pursue other attorneys in the firm.  The tradeoff for this limited liability protection is that the firm must maintain at least a specified amount of malpractice insurance so that there is a pool of money for the client to potentially collect against.  The circumstances of Mortgage Grader appear to have highlighted a loophole in the insurance coverage in return for limited liability protection paradigm.

In Mortgage Grader, the plaintiff retained the law firm of Ward & Olivo, LLP to represent it in several patent infringement suits.  John Olivo was responsible for handling the cases on behalf of Mortgage Grader.  When Mortgage Grader realized that it had entered into unfavorable settlements due to advice from Olivo it sued the firm and its two named partners for malpractice.  Normally, the firm’s malpractice insurance would provide a pool for Mortgage Grader to potentially recover from, but in this case no insurance was available because prior to the claim being made, Ward & Olivo had dissolved and instead of purchasing a tail policy to provide coverage for claims filed after dissolution, the firm had allowed its insurance policy to lapse.

It is Mortgage Grader and the Trial Court’s opinion that since Ward & Olivo chose to not purchase a tail policy while it was still winding up its affairs, Mortgage Grader should be able to recover against whatever assets of the firm still exist and both Olivo and Ward individually.  This approach provides more protection to Mortgage Grader because it creates a bigger pool of money for it to potentially recover from.  It is Ward and the Appellate Court’s opinion that even though Ward & Olivo did not purchase a tail policy to maintain insurance coverage, Ward should still be afforded liability protection and Mortgage Grader should only be allowed to potentially recover against whatever assets of the firm still exist and Olivo individually.  This approach provides protection to Ward because Mortgage Grader will not be able to potentially recover from his personal assets.

The question before the Supreme Court boils down to who should be protected: the client who engages a law firm under the assumption that malpractice insurance is in place to protect it should something go wrong or the attorney who chose to not purchase tail insurance when he dissolved his firm?  The answer the Supreme Court provides has the potential to affect all attorney-client relations going forward so it bears watching from both sides of the aisle.

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