Short answer
When an architecture firm splits up, professional liability coverage for existing and past projects does not automatically follow the architect who performed the work.
The insurance treatment depends on the legal entities involved, who contracted for the work, which firm continues operating, what happens to existing projects and contracts, and how the professional liability policy defines insureds and prior professional services.
There is no universal answer, so both partners should address the insurance arrangements before the split is finalized.
What should you determine about the existing firm?
Start with the company that currently holds the projects and professional liability policy.
Determine:
- Who owns the existing legal entity
- Whether the entity will continue operating
- Who owns the existing contracts
- Whether projects are being transferred
- Whether the firm’s name will change
- Whether the professional liability policy will remain in force
These details help establish which entity performed the professional services and which entity continues to have responsibility for the firm’s existing work.
For example, if one partner keeps the existing company, that does not necessarily mean every project designed by both partners automatically becomes the responsibility of the partner who leaves. The contracts, entities, and insurance policy need to be reviewed together.
What happens when one partner starts a new firm?
If the departing architect establishes a new company, that company will generally need professional liability insurance for its future professional services.
The new firm’s coverage is a separate consideration from the professional liability exposure created by work performed through the original company.
A project that an architect helped design while working for the original firm does not necessarily follow that architect to the new company for insurance purposes.
The new entity’s policy needs to be reviewed for how it treats prior professional services, predecessor entities, and any work the new firm is assuming.
Who covers projects designed by both partners?
This is one of the questions that should be addressed before the separation.
Suppose two architects designed a commercial building together through their original firm. Five years later, one partner leaves and establishes a new practice while the other keeps the original company.
The fact that both architects worked on the project does not by itself determine which entity’s insurance will respond to a later claim.
Questions include:
- Which company signed the contract?
- Which entity provided the professional services?
- Which entity owns the project contract?
- Will the original company continue?
- Is the project being transferred to another entity?
- Does the existing professional liability policy remain in force?
- How does the policy define insureds and former partners?
The answers should be documented before the split rather than left to be determined after a claim arises.
What happens to claims from old projects?
Historical projects can continue to create professional liability exposure after the partners separate.
The original firm’s professional liability policy should be reviewed to determine how it treats:
- Former partners
- Former members
- Former employees
- Prior professional services
- Predecessor entities
The policy’s definition of an insured can be particularly important when a former partner is later involved in a claim arising from work performed while they were part of the firm.
Whether the former partner remains an insured for those services depends on the policy language.
What if the original firm closes?
If the original firm shuts down entirely, the insurance considerations can change again.
The firm should review what happens to its professional liability coverage before terminating the policy. An Extended Reporting Period, commonly called tail coverage, may be one option for qualifying claims arising from professional services performed before the policy ended.
An ERP generally extends the time available to report qualifying claims. It generally does not provide coverage for new professional services performed after the policy terminates.
Whether an ERP is appropriate depends on the firm’s policy, historical professional services, available coverage, and circumstances surrounding the closure.
What happens to the departing partner’s new practice?
The departing partner’s new firm generally needs professional liability coverage for professional services it performs after the separation.
The new firm should not assume that its policy automatically covers professional services performed through the former firm.
If the new company will continue working on projects that began under the original firm, the broker and carrier should review how those projects and prior services will be treated.
The new firm’s policy, the original firm’s policy, and the underlying contracts may all need to be considered.
What should both partners document before the split?
The cleanest time to address the insurance questions is while both parties still understand the firm’s history and can document what happened.
At a minimum, review:
- Which entity performed each project
- Which company contracted with each client
- Who owns the existing contracts
- Which entity will continue operating
- Which projects are being transferred
- Who will perform remaining services
- What happens to the original firm’s professional liability policy
- How the policy treats former partners and prior professional services
- Whether the original firm will need an Extended Reporting Period
- What professional liability coverage the new firm needs
The legal allocation of liabilities and contractual obligations should be handled with the firm’s attorney. The insurance treatment should be coordinated with the firm’s broker and carrier.
Those issues are related, but they are not the same.
Example: Two architects separate after five years
Two architects have operated a firm together for five years. During that time, they completed several projects and have several active projects underway.
They decide to separate. One architect keeps the existing company. The other forms a new architecture practice.
Before the separation, they identify which entity holds each contract, which projects will remain with the existing company, and which projects may be transferred. They also ask their broker to review the existing professional liability policy and discuss how it treats former partners and prior professional services.
The departing architect separately arranges professional liability coverage for the new practice.
If the original firm will close instead, the partners also discuss whether an Extended Reporting Period is available for qualifying claims arising from the firm’s previous work.
The exact insurance arrangement depends on the policies, entities, contracts, and facts involved.
Don’t wait until after the split
An architecture firm split can affect more than ownership and branding. It can raise questions about professional services performed by the old firm, contracts held by the original entity, ongoing projects, and coverage for former partners.
Address those questions before the separation whenever possible.
Your attorney should handle the legal allocation of liabilities and contractual obligations. Your insurance broker should coordinate with the carrier regarding how the policies apply.
Keeping those roles separate helps the partners address both the legal and insurance sides of the transition.
Related Questions
Does professional liability insurance follow an architect when they leave a firm?
Not necessarily. Coverage depends on the policy’s definition of an insured and how it treats professional services performed while the architect was with the original firm.
Does a departing partner’s new firm cover projects from the old firm?
Not automatically. The new firm’s policy, prior-acts provisions, predecessor entity provisions, contracts, and the circumstances of the project should be reviewed.
What happens to E&O insurance if one partner keeps the architecture firm?
The existing firm’s policy should be reviewed to determine how it applies to the continuing entity, existing projects, and the departing partner’s prior professional services.
What happens if both partners close the original architecture firm?
They should review how the firm’s historical professional liability exposure will be handled before terminating the policy. An Extended Reporting Period may be an available option.
Can a former partner still be covered for work performed before leaving?
Potentially. The policy’s definition of Insured or Insured Person and any provisions addressing former partners or former personnel determine how coverage applies.
Should both partners talk to the insurance broker before separating?
Yes. Reviewing the entities, contracts, projects, policy terms, and planned operations before the split gives the broker and carrier an opportunity to address the insurance arrangements before the transition occurs.