Legal Ethics Corner

Ethics Corner is designed to present ethical issues that practitioners might well face on a daily basis. It is a service of the Legal Ethics Committee of the San Diego County Bar Association for SDCBA members.

Limited Liability Partnerships - Insurance Requirements

Many law firms decide to incorporate or to form Limited Liability Partnerships for various reasons, including tax benefits, practice management, and administrative efficiency. A limited liability partnership that provides legal services in California is not entitled to limitation of liability for acts, errors, or omissions arising out of the practice of law unless the partnership has a currently effective certificate of registration from the State Bar. Every year, any law firm that is a limited liability partnership must file a report with the State Bar attesting that the organization has met and is in compliance with all statutory requirements of practicing within the parameters of a limited liability partnership. These reports must be signed under penalty of perjury by an officer or managing partner of the entity. Failure to submit a completed annual renewal and accompanying fees is cause of suspension and loss of status as a limited liability partnership. (State Bar Rule 3.174 - 176.)

An apparently frequently overlooked requirement of maintaining the privilege to hold a law firm out as a limited liability partnership, is the requirement to maintain adequate security. Specifically, a limited liability partnership must maintain insurance coverage subject to the requirements set forth in California Corporations Code Section 16956(a)(2). (State Bar Rule 3.177.) Limited liability partnerships shall maintain a policy or policies of insurance against liability in the total aggregate of not less than one million dollars ($1,000,000) in errors and omissions insurance coverage for partnerships with five or fewer licensed lawyers practicing in the firm (not necessarily partners), and an additional one hundred thousand dollars ($100,000) of coverage for each lawyer practicing within the limited liability partnership, up to a maximum requirement of seven million five hundred thousand dollars ($7,500,000) of coverage.

In the alternative to carrying errors and omissions insurance coverage, a limited liability partnership may maintain in trust or bank escrow, cash, bank certificates of deposit, U.S. Treasury obligations, bank letters of credit, or insurance or surety company bonds in the same aggregate amounts as if the partnerships has liability insurance coverage. If the limited liability partnership does not comply with the above referenced California Corporations Code, then each partner automatically guarantees payment of the difference between the maximum amount of security required for the partnership and the security actually provided. Significantly, neither withdrawal by a partner nor the dissolution and winding up of the partnership affects the guarantee of each individual partner.

As an alternative to any of the other requirements mentioned, a limited liability partnership can confirm with the State Bar that as of the most recently completed fiscal year of the partnership, it had a net worth equal to or exceeding fifteen million dollars ($15,000,000).

Lawyers currently practicing as partners in a limited liability partnership or who are considering joining such a firm should ascertain that the firm provides the requisite security under the State Bar Rules or risk being held personally accountable for the difference between such security and potential legal malpractice or breach of fiduciary duty damages a client of the firm might obtain following a successful lawsuit. Otherwise, so much for limiting one’s liability!

-Deborah Wolfe

**No portion of this summary is intended to constitute legal advice. Be sure to perform independent research and analysis. Any views expressed are those of the author only and not of the SDCBA or its Legal Ethics Committee.**