The statute of repose is an often overlooked piece of law. When it comes to claims of malpractice, it can have some serious implications. This past legislative session, the Tennessee General Assembly changed the statute of repose. The new legislation impacts the time frame to file lawsuits against lawyers and accountants. This change brings to mind the importance of such dates.
The law, which impacts work done after July 1st, 2014, enacts a five year statute of repose for malpractice suits. The law’s text explains that “if a plaintiff discovers that a cause of action exists after five years from the date on which the act or omission giving rising to the claim occurred, the plaintiff will be barred from bringing her cause of action. The statute of repose, however, will not apply in situations where the defendant engages in fraudulent concealment. Id. When a plaintiff establishes fraudulent concealment, the suit shall commence “within one (1) year after discovery that the cause of action exists.” 2014 Tenn. Pub. Ch. No. 618.
This law has many important implications. Many accountants don’t sleep well at night until this time passes. More importantly, it impacts the insurance purchasing of a firm. Mergers and acquisitions are common. So are sole practitioners retiring, joining a larger group, or even dropping their insurance because it becomes too expensive.
The statute of repose tells a firm that the work done in the past needs to be considered when an event necessitates a change in the insurance. Dropping insurance altogether is dangerous, as lawsuits can be brought on work done years ago. Even if a firm has done little to no work in the recent months, claims for past engagements can still surface.
When a firm shuts a practice down, the statute of repose impacts how long of a “tail” needs to be purchased. A “tail” is a term for an option that allows a policy holder to report claims to the insurance company in the future even though a policy is no longer being purchased. the “tail” only covers work done prior to the date the “tail” is purchased, however. Since a “tail” costs more the longer the firm is allowed to report malpractice lawsuits, the duration of the tail should match the statute of repose.
While Tennessee just ruled on their statute, it is outside the scope of this post to explain all the states and their laws. We encourage each firm to engage with a lawyer who can explain the statutes in each of the jurisdictions the accounting firm practices in. This will allow each firm to make decisions based on their exact situations.
As a firm considers how to best run their practice and mitigate their risks, it is important to implement a comprehensive risk management structure. Contact us to discuss items to include in that structure