When a partner leaves, the most contentious issue may be the potential loss of clients and employees. Paul Lurie, an attorney at Schiff Hardin, Chicago, and the author of Ownership Transition: Options and Strategies (published by the American Council of Engineering Companies), says noncompete laws vary by state. But generally it’s illegal for a partner to solicit an existing client before he or she leaves the firm. On the other hand, if a client decides to terminate the contract with the former firm after the partner leaves, the partner isn’t held liable for interfering with the contract. The same rule applies to employees, unless negotiations dictate otherwise.
Exiting partners also need to be clear about their liability for completed projects. Frank Musica, a risk management specialist at Victor O. Schinnerer & Co, Chevy Chase, Md., says that if the old firm continues its professional liability insurance, the departing partner is typically covered for everything he or she did while at the firm. But if the remaining partners discontinue their policy, the one who left is unsafe. They might, for example, buy a cheaper policy that doesn’t provide retroactive coverage. Or, unbeknown to the ex-partner, they could let coverage lapse until they get the office going again.
“The exiting partner could purchase coverage for a new practice, but it probably won’t reach back to what he did with the other firm,” Musica explains. In another scenario, if the partners are discontinuing the entity and going their separate ways, they often will pitch in to pay for a tail policy that covers claims on past work. Their new insurance will cover for new efforts, and the insurance they buy together will cover for old work.
