Should More Law Firms Buy Insurance Against Rainmaker Exits?
The firm's unusual move may not be a good fit for everyone, but it introduces an approach worth considering.
December 17, 2019 at 05:30 AM
6 minute read
In 2014, leadership at Am Law 200 firm Buckley Sandler undertook a thorough assessment of the risks facing law firms. In response to the effort, the firm elected to take out insurance coverage on several top rainmakers, looking to ward against the consequences of their voluntary departure.
The move proved to be an unusual one.
"If you're an insurance company, that's a pretty risky bet," says Michael Verde, a partner and general counsel at Katten Muchin Rosenman.
Verde himself was surprised to read about the coverage taken out by the firm now known as Buckley when it became public as part of litigation between the firm and its insurer, Oxford Insurance Co.
"The ethics rules are set up to allow maximum portability," he explains. That makes traditional commercial insurance companies wary of underwriting policies to protect against the movement of talent in an industry where it's a core principle.
Buckley ultimately had to turn to the "captive" insurance market, setting up an insurance entity that it owned to protect against not only the loss of seven key employees, but also data breaches, legislative and regulatory changes, and political risks.
North Carolina-based Oxford, which specializes in alternative risk management, established the captive for Buckley, creating a format where the firm's captive is on the hook for 20% of any claim, and the other captives in its wider network pay the remaining 80%.
Buckley said that $1.1 million of its total $6 million premium went toward the "key employee" coverage, on a policy that promised to pay a maximum of $12 million total and $6 million for each incident.
But collecting hasn't been easy. The firm is locked in a fight with Oxford in North Carolina state and federal courts over the exit of founding partner Andy Sandler. Buckley says Sandler's voluntary "retirement" triggered the policy. Oxford responds that he was forced out and it has no obligations to the firm.
A spokesman for Buckley declined to comment for this story, but the firm's insurance experience offers a snapshot of why this particular variant of "key employee" coverage is rarely seen in the legal world. Even in other industries, policies of this ilk tend to protect firms against the consequences of the untimely death of top earners, rather than the repercussions of their decision to retire or seek a better opportunity elsewhere.
"It's more common with closely held corporations, and to a lesser extent with public corporations," says Dan Struck, a partner in the insurance and litigation practice groups at Culhane Meadows Haughian & Walsh.
There's nothing that stands in the way of law firms taking out what is essentially a life insurance policy on top earners. Priyanka Prakash, a business finance expert at small business-focused Fundera, says these policies can start at as low as $1,000 per year, well below the $1.1 million paid by Buckley. That puts them within the reach of small firms.
And some large firms do have similar policies on a few top earners. Now-defunct LeClairRyan had life insurance on founding partner Gary LeClair and president emeritus Micheal Hern, according to a recent bankruptcy filing. The chief operating officer at an Am Law 100 firm revealed that his firm has policies covering two rainmakers with large books of business. "It's purely a death benefit," he says.
Nonetheless, for many other large firms, the flow of revenue is more diversified, and the loss of one or two partners won't make an immediate difference.
"Frankly, we don't have a single lawyer whose departure would wreak havoc upon our financials," says Tom Paradise, the general counsel at 950-attorney Fox Rothschild.
Along those same lines, according to Verde, Katten follows the famous quote often attributed to Charles De Gaulle: "The cemeteries are filled with indispensable men."
But at smaller firms, where any given partner is more likely to be responsible for a larger share of the revenue stream, succession planning is often overlooked. Brad Barkin, who advises law firms on coverage at Embroker, says that although many of these firms have leaders who are simply unaware of the option, others believe they're invincible: "They don't think they will ever go away."
With law firm leaders unaware of, indifferent to, or dismissive of taking out death benefits on top earners, however commonplace the move might be elsewhere in the business world, it seems a stretch for them to embrace more niche products, even if their availability is growing. Hence, it's no surprise that Buckley is the outlier here, with a million-dollar policy sourced outside of the traditional marketplace.
In a legal marketplace marked by increasing mobility, in which partners command eight-digit books of business, there's a certain logic to Buckley's maneuver, especially when the coverage is situated within a larger strategy for mitigating emerging risks.
But expect a different sort of logic to strike the decision-makers who are first learning about this type of policy in the context of a firm that shelled out over $1 million in premiums and has since hired expensive lawyers at McGuireWoods and Williams & Connolly as part of its bid to collect.
If a firm is panicked that it can't overcome the exit of a key partner, it's not too late to dive into strategies to put its eggs in more than one basket.
"There's no question that building strong firms starts with strong, committed, talented partners," says Michael Ellenhorn, co-CEO and general counsel at Decipher, a consultancy that advises law firms on talent acquisition and risk. "Growing firms need to be extraordinarily careful about who they bring into their partnerships."
That might be harder work than hunting down a specialty insurance broker and writing a large check. But it doesn't look like "key employee" coverage is going to be anyone's silver bullet.
Email: [email protected]
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