Category: Lawyers Malpractice Digest


Why do smart people risk millions by failing to report claims and potential claims timely to their insurers?

June 9th, 2014 — 3:29pm

by Christopher Graham and Joseph Kelly

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Introduction: We read lots of cases about professional liability and D&O insurance. We’ve handled quite a few of them as well. Many involve policyholders losing coverage because they fail to take a simple step–namely, promptly tell their insurer about a claim or circumstance that may lead to a claim. Sometimes, as in the case discussed today, the problem arises when switching insurers, when the policyholder doesn’t report a circumstance to it’s existing insurer and fails to disclose it in an application to a new insurer.

The policyholder, as in today’s post, also may lose coverage under “prior knowledge” wording, by having a “reasonable basis to believe” that someone would bring a claim. Although there’s some conflicting decisions, the issue most often is determined based on what an objectively reasonable person would have concluded based on the facts then known, rather than what the policyholder says was its belief.

With the consequences potentially being severe, why do so many policyholders fail to report? Do they forget about their policy? Do they fail to read them? Do their brokers fail to educate them? Do they really believe a claim or circumstance is no big deal? Are they in a state of denial–hoping a circumstance will blow over and won’t result in a claim, that a claim will be dropped, that they can fix things, or that they can resolve the matter for small dollars on their own?

Some policyholders especially should know better. We had one post not long ago here where even an insurer failed to report! And today’s post is about a law firm.

Whatever the reason, failing to report can cost a policyholder big bucks. There’s really not a lot to lose by reporting. And potentially huge consequences when you don’t, as you’ll see in today’s post. Moral of the story: regardless of whether you think the matter is no big deal, report it to your insurer promptly!

One more point covered in this post: at the very end, we address the lawyers’ argument that insurer waited too long to reserve rights on a “prior knowledge” defense, another issue frequently arising in coverage litigation, usually argued as waiver and estoppel. Here the court rejected the argument, but only after deciding DC law controlled so a fairly unique Virginia statute requiring an insurer to notify a “claimant” and its counsel of the insured’s breach was inapplicable. For claims people, take heed of that statute for Virginia claims. Your duty under a liability insurance policy may be to communicate about coverage with a claimant and its counsel as well as the insured.

The story: Larry Lawyer handles medical malpractice cases. One day in 2004 a Mom and Dad ask the firm to consider bringing a medical malpractice case for their Minor Daughter. After having surgery to correct scoliosis, she became a quadriplegic. Very tragic.

Larry practices in DC. But he’ll have to sue for malpractice in Virginia. He has an associate, Lucy Lawyer, a Virginia Bar Member, who will help.

Larry’s firm files the malpractice complaint in July 2006, four days before the limitations period expires. Although required under Virginia law, the complaint doesn’t name Mom and Dad as “next friend” parties suing for Minor Daughter. That omission will become a very big problem.

Nearly three months later, in October 2006, Larry’s firm files a new complaint naming Mom and Dad as next friends. But that’s after the limitations period has expired.

About four months later, in February 2007, the court dismisses the first complaint because it didn’t include Mom and Dad as Minor’s next friends.

About four months thereafter, in June 2007, the court dismisses the newer complaint, including Mom and Dad as next friends, as too late. It’s barred by the statute of limitations. Larry’s law firm meanwhile is about a month away from renewing its professional liability insurance policy.

The firm on July 18, 2007 applies to Amy Underwriter’s company, which would be a new insurer for the firm. As typical, Amy’s application asks Larry’s firm to disclose what problems may be brewing. Although Larry knows the court dismissed Minor Daughter’s medical malpractice claims as untimely, Larry answers “no” to the following application question:

Having inquired of all partners, officers, owners and employed lawyers, are there any circumstances which may result in a claim being made against the firm, its predecessors or any current or past partner, officer, owner or the employed lawyer of the firm?

And neither Larry, nor anyone else reports the dismissal to the firm’s existing professional liability insurer as a circumstance that may result in a claim. See where this is going? Big hint: Nowhere good for Larry or his firm!

So with the application looking clean, Amy Underwriter binds coverage for Larry’s firm effective July 24, 2007 to July 24, 2008.

Ten days after the effective date, the court issues it’s order memorializing its June decision dismissing Mom and Dad’s next friend complaint as time-barred. Larry’s firm appeals.

Larry’s Firm gets through the whole policy year without Minor Daughter suing. The appeal of the dismissal of the malpractice claim is still pending. Larry’s firm still hasn’t reported a circumstance to Amy. Amy Underwriter meanwhile renews the policy for another year, effective July 24, 2008.

As is typical for professional liability policies, the insuring agreement conditions coverage on the absence of prior knowledge of a potential claim. Here’s the wording:

The Company will pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as Damages for Claims first made against the Insured and reported to the Company during the Policy Period or Extended Reporting period, as applicable, arising out of any negligent act, error, omission or Personal Injury in the rendering of or failure to render Professional Services for others by an Insured covered under this policy. Provided that such Professional Services or Personal Injury happen:

A. during the Policy Period; or

B. prior to the Policy Period provided that prior to the effective date of the first Lawyers Professional Liability Insurance Policy issued by this Company to the Named Insured or Predecessor in Business, and continuously renewed and maintained in effect to the inception of this policy period:

2.. The Named Insured, any partner, shareholder, employee, or where appropriate the Named Insured’s management committee or any member thereof, had no reasonable basis to believe that the Insured had breached a professional duty or to Reasonably Foresee that a Claim would be made against the Insured…

“Reasonably Foresee” was defined as, among other things: “incidents or circumstances that involve a particular person or entity which an Insured knew might result in a Claim or suit prior to the effective date of the first policy issued by the Company to the Named Insured, and which was not disclosed to the Company.”

Larry’s Firm in May 2009 non-suited Mom and Dad’s remaining claims not dismissed earlier.

With the policy expiring July 24, 2009, Larry’s firm finally reports Minor Daughter’s potential claim to Amy’s company. Connie Claims by letter generally reserves rights and appoints defense counsel to investigate. This is over two years after dismissal of Minor Daughter’s medical malpractice suit as untimely. Larry later will claim he never received the letter.

The Virginia Supreme Court in December 2009 finally disposes of Minor Daughter’s claims as untimely. Mom and Dad then retain new counsel who in January 2011 tells Larry’s firm he’s taking over.

A year later, there’s still no suit against Larry’s firm or any of it’s lawyers. So good news for everyone. But the bad news: there’s still time for Minor Child to sue.

About this time, January 2012, Connie Claims supplements her general reservation of rights letter to Larry’s firm, stating her company “reserves its rights to deny coverage for [a potential legal malpractice suit] to the extent that an insured had a reasonable basis to believe that a professional duty had been breached or to ‘reasonably foresee’ that a ‘claim’ would be made against the insured before [the firm’s] policy incepted on July 24, 2007.”

Then two months later, it finally happens: Minor Daughter, no longer a minor, sues Larry’s firm and the lawyers for legal malpractice in allegedly blowing the limitations period for daughter’s medical malpractice claim. Connie’s company defends them, subject to a reservation of rights.

But it also sues the lawyers for a declaration that there’s no duty to defend or coverage otherwise, joining Minor Child as a party. So the lawyers now have two big problems: Minor daughter’s legal malpractice suit and coverage litigation they have to pay to defend and which may mean they have no insurance for Minor Daughter’s serious legal malpractice suit.

Connie’s company claims the firm and lawyers had a “reasonable basis to believe” or to “Reasonably Foresee” that Minor Daughter would bring a claim as early as February 2007, when the court dismissed the first malpractice complaint for failing to include Mom and Dad, and no later than June 2007, when the court dismissed the second complaint, including Mom and Dad, as time-barred.

Larry’s firm argues that there was no reason to believe they breached a professional duty regarding Minor Child because the error leading to dismissal was merely a “misnomer;” they also couldn’t reasonably have foreseen Minor Child’s malpractice claim before Connie’s company’s policy inception on July 24, 2007.

Then more bad news: a jury awards Minor Child $4 million on her malpractice claims against the lawyers. The court reduces the award to $1.75 million. But if Connie’s company wins and the judgment stands, Larry’s firm will be stuck paying Minor Child.

The prior knowledge decision: In Chicago Insurance Co. v. Paulson & Nace, PLLC, et al, Case No. 12-2068 (ABJ) (D. D.C. April 10, 2014), a case generally along these lines, a court granted a summary judgment for the insurer on a prior knowledge defense and against the lawyers and Minor Child.

The court found that the lawyers “had a reasonable basis to believe that they had breached a professional duty to [Minor Defendant] no later than the date of the Virginia court’s ruling on June 18, 2007 . . . [,when the court dismissed the second complaint.]” It explained that resolving the issue “is an objective inquiry that asks what a reasonable attorney would have done in the same circumstances.”

Then it went on:

[T]he [lawyers] filed a medical malpractice complaint on behalf of [Minor Child] in 2006 that did not comport with the Virginia Code requirement that a minor must sue by a “next friend.” . . . The statute of limitations on [Minor Child’s] claim expired before the attorney defendants were able to correct their mistake, and thus their error became fatal to [Minor Child’s] claims.

Further: “The [lawyers’] efforts to minimize the seriousness of their naming mistake are unavailing: not only did this last-minute ‘misnomer’ cost [Minor Child] the right to bring her medical malpractice claim in court, but also it led a Virginia jury to find the [lawyers] liable for legal malpractice.”

The court’s decision was based on wording providing that the Named Insured and certain related parties had “no reasonable basis to believe that the Insured had breached a professional duty . . . .” It was not based on the phrase, “Reasonably Foresee that a Claim would be made against the Insured.” The court explained that “whether the [lawyers] ‘reasonably foresaw’ [Minor Child’s] claim appears to be a subjective inquiry, as it looks to ‘incidents or circumstances … which an Insured knew might result in a Claim or suit.'” “But because the policy is worded in the alternative, requiring that an insured have ‘no reasonable basis to believe that [it] had breached a professional duty or to Reasonably Foresee’ a future claim, . . . , what the [lawyers] subjectively knew at the inception of the [policy] does not control when, objectively, they should have recognized the professional error.”

The court also rejected lawyers’ argument that insurer couldn’t win without expert testimony, explaining “this question is not ‘so distinctly related to some science, profession, or occupation as to be beyond the ken of the average layperson,” which is when expert testimony is a must under DC law.

The waiver and estoppel decision: The court initially decided that it didn’t need to address whether the insurer lost the ability to raise its prior knowledge defense for failing to comply with a “requirement under Virginia law that, when a liability insurer ‘discovers a breach of the terms or conditions of the insurance contract by the insured, the insurer shall notify the claimant or the claimant’s counsel of the breach … within forty-five days’ of either the insurer’s discovery of the breach or of the claimant’s claim. Va. Code § 38.2-2226 (2013).” DC rather than Virginia law applied in part because that’s where the law firm was located and policy issued. This statute isn’t what’s typically found in the various states. So claims people, beware if you have liability claims in Virginia.

The court then rejected the lawyers’ argument that the insurer waived or was estopped from raising the prior knowledge defense because of appointing counsel for the lawyers without specifically raising the prior knowledge defense earlier. According to the court: “It is undisputed that [insurer] could have discovered the facts underlying its ‘prior knowledge’ defense in March of 2010 [(just after the Virginia Supreme Court affirmed dismissal of Minor Child’s medical malpractice claims)], but it did not do so until November 2011 . . . , and did not reserve its rights with respect to that defense until January 13, 2012.”

“But D.C. law required [insurer] to reserve its rights before ‘undertaking the defense’ of the [lawyers] ‘against a litigious assertion of an unprotected liability.'” And “Given that [Minor Child] did not file her legal malpractice claim until March 13, 2012, exactly three months after [insurer] reserved its ‘prior knowledge’ defense, the timing of [insurer’s] reservation of rights notice met this requirement of D.C. law.”

The court also rejected applying waiver and estoppel because it found the lawyers’ suffered no prejudice from the delay in the insurer raising “prior knowledge.” According to the court:

[T]he twenty-two months that elapsed between the earliest date on which [insurer] could have become aware of its prior knowledge defense (March 8, 2010) and the date on which it issued its reservation of rights (January 13, 2012) did not prejudice [lawyers] because [insurer] had taken no actions that “hampered or harmed” the [lawyers’] “ability to defend [themselves].”

The court found no evidence supporting lawyers’ argument that they could have notified their prior insurer had this insurer raise “prior knowledge” sooner.

Conclusion: This was a terrible result for the lawyers. Big judgment. No coverage. No matter what they may have thought when the court dismissed Minor Child’s malpractice suit, they should have reported a circumstance or potential claim to their existing carrier before the policy term ended and switching carriers. Then when claim later arose, that insurer presumably would have stepped up. They also should have disclosed the reported circumstance to their new insurer in applying for coverage. Even if you think a court got it wrong or you can fix things, report. Otherwise you may wind up like these policyholders. You pay a good premium to make sure you have protection. Do what you need to do to assure it responds when you need it.

Tags: District of Columbia, professional liability, legal malpractice, lawyers malpractice, prior knowledge, notice of circumstance, notice of potential claim, “no reasonable basis to believe,” objective standard, subjective standard, waiver, estoppel

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Your professional liability insurer says you’re uninsured because someone else lied in your firm’s insurance application. Are you doomed?

April 19th, 2014 — 8:25pm

by Christopher Graham and Joseph Kelly

Illinois

You’re a partner in a legal or other professional services firm. Or maybe you’re a director of a non-profit or private corporation. Your firm buys professional liability insurance. Or your non-profit or private company buys D&O insurance. There’s an application. And someone other than you answers the application questions, signs the application, and submits it to the insurer. You don’t review the application. Insurer issues a policy. Then there’s a claim against you. Insurer says “Sorry, no coverage. Your application included a materially false answer. We rescind.” You say, “But, I didn’t know the answer was false. I’m innocent!” You also say, “There’s wording making the contract severable as to each insured. You can’t rescind as to me. I’m innocent!”

If you read this blog regularly, you saw this scenario in our December 2013 blog post here about Illinois State Bar Association Mutual Ins. Co. v. Law Office of Tuzzolino and Terpinas, 2013 IL App. (1st) 122660 (Nov. 22, 2013). There, an Illinois appeals court held that the innocent insured, an attorney, wins, because of wording deemed to provide contract severability and the common law innocent insured rule.

Here is the legal malpractice policy “severability” wording that made the difference:

The APPLICATION, and any addendum or supplements and the Declarations, are the basis of the Policy. They are to be considered as incorporated in and constituting part of this Policy. The particulars and statements contained in the APPLICATION will be construed as a separate agreement with and binding on each INSURED. Nothing in this APPLICATION will be construed to increase the COMPANY’S Limit of Liability.

Recently, however, the Illinois Supreme Court agreed to review the appeals court decision. Presumably it will consider (1) whether there’s a separate contract between insurer and each insured, non-rescindable as to the innocent insured and (2) whether under the common law, the insurer can rescind a professional liability policy as to an innocent insured.

For partners in professional services firms and directors of non-profits and private companies severability is critical. You don’t want to learn you’re uninsured because a bad apple misrepresented material facts to the insurer.

Years ago it was not unusual for insurers to rescind D&O policies based on material misrepresentations in insurance applications, even for public companies and banks. Rescission was common following bank failures in the 1980’s. That could mean innocent D&O’s were uninsured because of misrepresentations someone else made.

Thereafter severability clauses became common in D&O policies. Later you saw separate Side A policies just for directors and officers, independent director policies, and non-rescindable public company D&O policies. With capacity and competition, insurers issued new policies for non-profit and private company boards based on renewal or other applications requiring little disclosure. Rescission in the D&O insurance world as a practical matter has not been much of a risk, in our experience. (Hey, readers. Do you agree? Please comment.)

But rescission is still an issue every insurance purchaser and broker should consider. Get the application answers right. But consider severability and, better yet, a non-rescindable policy. The common law innocent insured doctrine isn’t something to count on.

Stay tuned to this blog for our report on further developments in this important case.

Tags: Illinois, legal malpractice insurance, professional liability insurance, D&O insurance, management liability insurance, rescission, innocent insured doctrine, severability

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D&O insurer must defend PI lawyers hit with class action alleging false TV and internet ads

April 7th, 2014 — 1:53pm

by Christopher Graham and Joseph Kelly

Rhode Island

You may think it’s just big law firms carrying D&O insurance. Kevin LaCroix of the D&O Diary reported here, for example, about Dewey LeBoeuf’s supposed $50 million in D&O insurance from three insurers. But out of Rhode Island, we have a case addressing D&O insurance for a small firm focused on personal injury and disability claims. That case, Rob Levine & Associates, Ltd. v. Travelers Casualty and Surety Company of America, C.A. No. 13-560-M (D. R.I. Feb. 3, 2014), addressed the policy’s professional services exclusion.

For the D&O underwriter of professional services firms, a goal is to assure your policy doesn’t insure risk you’d expect the professional liability insurer to insure. So your policy includes a professional services exclusion. For an insurance buyer, you’d expect some coordination between policies. But where’s the line between professional services and business risks for a professional services firms? How about advertising for professional services?

There are a lot of lawyers doing TV ads. Ever watch day time TV? First it’s auto wrecks. Then it’s nursing homes. Then it’s asbestos. Then it’s divorce. We will get you the money you deserve! Now, back to Maury Povich! Banner ads on the internet. Same things. Ever drive from Chicago to Detroit. Got to love lawyer billboards near the Indiana line and approaching the City of Detroit! We live in a great country!

One day you issue a duty-to-defend D&O policy to a law firm advertising heavily on the TV and internet. The firm’s catch phrase is “Call a Heavy Hitter® Today!”” Two former clients hit the firm with a multi-count complaint. One count is labeled “Class Action Deceptive Trade Practices.” The former clients allege the lawyers “‘deceptively advertise in all media in Rhode Island'” and “‘gave the false impression to [clients] and presently give the false impression to future clients that [they] have special expertise in personal injury cases and disability cases and will recover more money than other Rhode Island lawyers.'”

Lawyers deny wrongdoing and say defend us. You say, “Sorry. Our ‘Legal Services Exclusion’ applies to ‘Loss for any Claim based upon or arising out of any Wrongful Act related to the rendering of, or failure to render, professional services.'” You cite Rhode Island cases applying “arising out of” broadly. You cite non-Rhode Island cases construing “professional services” broadly. Allegations of misleading advertising are “inextricably intertwined with the rendering of professional services.”

Lawyers say the deceptive practices count alleges misleading statements “‘related to advertising, not the actual rendering of legal services.'” “‘[R]elated to the rendering of, or failure to render, professional services,'” for the D&O Policy, means “‘the actual performance of acts incident to particular professional services[,] [f]or example, . . . gathering medical records, negotiation of a settlement, filing complaints, and preparing discovery responses.'” The Wrongful Act was the “making misleading statements in advertisements.'” It wasn’t rendering legal services.

What does the court say? Lawyers win! Summary judgment! Insurer must defend. The count was about deceptive advertising, not about providing professional legal services. Further:

What seems clear from the plain language of the exclusion is that it was meant to exclude claims commonly referred to as malpractice claims, as opposed to claims arising from the business side of running a legal business. The policy in question here was a Directors and Officers’ policy, not a legal malpractice policy

Applying the exclusion to allegations about future clients, moreover, would ignore the word “render” in the exclusion. The lawyers didn’t render any services to future clients. Applying the exclusion here also would render the D&O policy meaningless. The firm’s business is “related to the rendering of … professional services.”

The opinion doesn’t address the multiple other counts in the complaint, including whether the lawyers malpractice insurer defended them. Nor is the firm’s commercial general liability advertising injury coverage addressed. That coverage generally is limited to “Offenses” including “misappropriation of advertising ideas,” “disparagement,” and “infringing upon another’s slogan.” So it’s not for consumer claims about buying a product or service based on an allegedly deceptive ad.

The opinion also doesn’t address whether the firm purchased D&O and professional liability insurance from the same insurer. Coverage presumably would be coordinated most effectively were that true. And there’s also presumably less risk of insurers claiming a coverage gap and pointing fingers at each other.

Comments on what insurers market this product for small law firms and frequency of purchases are encouraged.

Tags: Rhode Island, D&O, directors and officers liability insurance, management liability insurance, professional services exclusion, legal service exclusion, advertising, lawyers professional liability, lawyers malpractice, advertising injury

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Cheese heads may report claim after time limit under claims made and reported policy

April 7th, 2014 — 1:45pm

by Christopher Graham and Joseph Kelly

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Surprise! Words in a contract may not mean what they say. Even when they’re unambiguous. Or even if agreed by sophisticated parties. That’s particularly true for insurance contracts. And lately it’s super-double particularly true for claims made insurance contracts.

You saw that in our recent post about California and Maryland cases involving claims made policies with reporting requirements. Although insurance buyers failed to report claims timely under contract wording, judges didn’t care. Insurers must pay unless they show prejudice from delay, the judges ruled. California judges decided that way because of judge-made “common law.” And it’s California! Maryland judges decided that way because a statute required the result, they said.

Now in the land of cheese, beer, and brats, Wisconsin judges made a decision smelling like Limburger for Wisconsin claims made insurers. The case is Anderson, et al v. Aul, et al, Case No. 2013AP500 (Feb. 19, 2014). And the insurer loses on an untimely reporting defense even though the insured wasn’t even close to meeting the policy’s reporting requirement. The problem for the insurer: a statute trumped the policy wording.

This was a lawyers’ professional liability insurer. And the law firm insurance buyer was as sophisticated as you can get. There was no lack of clarity in the policy wording. Insurer’s policy cover warned: “THIS IS A CLAIMS MADE AND REPORTED INSURANCE POLICY. COVERAGE IS LIMITED TO LIABILITY FOR ONLY THOSE CLAIMS THAT ARE FIRST MADE AGAINST YOU AND REPORTED IN WRITING TO US DURING THE POLICY PERIOD.” Insurer’s declarations page warned: “This policy is limited to liability for only those claims that are first made against the insured and reported to the Company during the policy period.” Insurer’s insuring clause conditioned coverage on “claims first made against you and first reported to us in writing during the policy period.” And it also warned that “[y]our failure to send a written report of a claim or claim incident to us within the policy period shall be conclusively prejudicial to us.”

Despite those warnings, the law firm waited until 11 months after the policy period to report a claim. But who cares, says the court! Under WIS. STAT. § 631.81, “an insurer whose insured provides notice within one year of the time required by the policy must show that it was prejudiced and that it was reasonably possible to meet the time limit.” This law firm’s notice was within 11 months. No prejudice? Insurer as a matter of law loses, at least based on the reporting defense.

For a claim reported more than a year after the reporting time limit, a claims made and reported insurer likewise couldn’t simply rely on tardiness to deny coverage. Under the Wisconsin statute, “when notice is given more than one year after the time required by the policy, there is a rebuttable presumption of prejudice and the burden of proof shifts to the claimant to prove that the insurer was not prejudiced by the untimely notice.”

The Wisconsin law applied to all liability insurance policies. There was no distinction made between claims made and occurrence policies. Who knows whether the lawmakers knew or considered the differences between the policies. But it doesn’t matter. For Wisconsin insurance buyers, buy a round of Leinie’s, Schlitz, Hamm’s, or Old Style for everyone at your local tavern to celebrate your win!

Insurers say the reporting requirement isn’t there merely to allow timely investigation and defense. The reporting and claims made requirements are the essence of the insurance. Whether prejudice resulted from untimely reporting shouldn’t matter. The reporting requirement allows insurers to close their books on risk once the reporting period ends. It also allows for more effective product pricing.

Insurance buyers argue late notice should make no difference if the insurer isn’t harmed in its ability to investigate or defend. Their advocates convinced politicos in some states to pass laws saying so, including Wisconsin. Sometimes they get judges to in effect do the same.

So watch out insurance underwriters. You may not have what you think. Make sure you consider the possibility of a statute or judge-made law and price your product accordingly.

And watch out insurance purchasers. You may have something better than what your contract’s words say, though it’s still best to simply do what your contract says you should do, timely report!

Tags: Wisconsin, professional liability insurance, lawyers professional liability insurance, lawyers malpractice insurance, D&O insurance, directors and officers liability insurance, claims made and reported, claims made, late notice, prejudice, notice prejudice

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Trial judge rather than trial lawyer error leads to big verdict against immigration lawyer

April 4th, 2014 — 3:41pm

by Christopher Graham and Joseph Kelly

Illinois

Your client is a Chinese national convicted of domestic violence. The US Immigration and Naturalization Service wants to deport him. You represent him for 4 to 5 months. He replaces you. There’s an INS hearing. The judge denies his asylum request. He hires more lawyers. His domestic violence conviction is vacated. But he spends 2 years in INS detention before then. So he sues you for legal malpractice. He alleges emotional distress, humiliation, physical abuse, isolation, pain and suffering, loss of education and loss of income. Prison was no country club.

You notify your malpractice insurer. It retains counsel to defend you. Your lawyer moves for summary judgment: non-economic damages aren’t recoverable in an Illinois legal malpractice suit. Motion denied. Your lawyer moves to exclude evidence of non-economic damages at trial. Motion denied. Your former client presents evidence only on damages for emotional distress, loss of normal life, psychological damages, and cost of future psychological care. Your lawyer asks for a jury instruction that damages for noneconomic harm can’t be awarded. Motion denied. Your lawyer moves for a directed verdict. No, no and no, says court! And then . . .

The jury whacks you big time — $4 million, for the asylum seeker, your former client. And you get to pay, unless there’s enough insurance. Time for a new lawyer or two, you say–for post-trial and asset discovery proceedings. So you get one, paid by your insurer, and another, paid by you.

New lawyer moves for a remittitur, reducing the judgment to $1 million. Motion granted! Wow, this judge finally rules your way. That’s better than $4 million, but still a lot of $$$. And your former client rejects it. New lawyer moves for judgment notwithstanding the verdict or for a new trial. Denied. Back to normal. You appeal. Your former client appeals.

After the appeal plays out, you get relief: your former client had no right to noneconomic damages. The Illinois Supreme Court denies further review. All’s well that ends well?

Not quite. You’re unhappy. Time. Money. Heartache. A terrible experience. Blame your lawyer. You got blamed. It’s your turn. He told your insurer about settlement offers, but not you, you think. He had a conflict of interest because the insurer appointed him, you think. This should never have gone to trial. It should have settled. So what do you do? Hire a lawyer. Sue your trial lawyer. File a complaint. Amend. Amend. Amend.

But the court dismisses your amended complaints with prejudice. You appeal. More litigation. Who wins? Not you, says the court in a case generally along those lines known as Huang, et al v. Brenson, et al, Caes No. 1-12-3231 (1st Dist. Mar. 5, 2014).

Why? The verdict wasn’t your lawyer’s fault. It was the circuit judge’s fault. Your trial lawyer did the right things. Move for summary judgment. Move in limine. Move for a jury instruction limiting damages. Move directed verdict. He was right. Noneconomic damages aren’t recoverable for legal malpractice. The judge was wrong. And your trial lawyer didn’t do anything to contribute to the judge’s error. You were vindicated on appeal because of your lawyer’s efforts to preserve the damages issue in the circuit court. Based on the undisputed facts and as a matter of law, he didn’t proximately cause any harm you claim.

But what about the settlement offers he didn’t tell you about, as alleged in your amended complaint? Yes, a failure to communicate offers “is typically considered a breach of fiduciary duty.” But you must allege facts showing the breach was the proximate cause of the harm you claim. And you didn’t. You didn’t allege you were willing or able to pay the alleged settlement offers. Or that your insurer would have done so. Or that you could have forced your insurer to do so. You don’t even allege the demands were reasonable or facts showing they were reasonable. There are no facts alleged showing trial could have been avoided.

It’s over! And there’s no cause of action against judges who make mistakes. Even if they’re big ones. Judicial immunity!

Funny thing, this is the second case we’ve reported on recently (see here) where lawyers were sued, but escaped liability because it was the judge not the lawyer that erred.

Tags: Illinois, legal malpractice, lawyers malpractice, 2-615, 2-619, non-economic damages, proximate cause, judicial error, judge error, superseding cause, psychological injury, emotional distress, pain and suffering

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The tolling agreement trap for contribution claims in professional liability cases

April 3rd, 2014 — 5:59pm

by Christopher Graham and Joseph Kelly

Illinois

You’re a lawyer. Your client’s brother dies. Client is executor of brother’s estate and successor trustee of brother’s trust. You tell client he’ll need to file an estate tax return with tax man. There’s a deadline. You get an extension. It’s until August 16, 2006. But you don’t file. And there’s no further extension.

Client is very unhappy. He hires new lawyer. New lawyer files the return a year and five months after the deadline.

Client thinks about suing you. But he’s willing to hold off until the situation plays out with tax man. You say great. But new lawyer wants you to agree to toll the limitations period for suing you until September 21, 2009. You agree. Is there any complication? You don’t think so.

In March 2008, two weeks after you sign the tolling agreement, tax man assesses over $191,000 in late-filing penalties and interest against client’s brother’s estate. That’s a lot of bread, says client. Why didn’t you just file the return on time?

Client has the tolling agreement. So he doesn’t sue you right away. Instead he waits until September 18, 2009. That’s just three days before the tolling agreement extension for suit expires. And then on October 10, 2009 you’re served with summons and complaint. Yikes!

Client didn’t sue any accountants. Nor did client have a tolling agreement with any accountants. On September 19, 2011, two years and a day after client sued you, but less than two years after you were served, you sue two accounting firms for contribution. They’re the ones to blame, at least in part, so you say.

Is your contribution claim timely? You think so. So does your lawyer. But the accountants say you waited too long.

What does the court say? In Kadlec v. Sumner, 2013 IL App (1st) 122802 (Nov. 19, 2013), generally involving the scenario above, the accountants win, you lose!

Why? There’s an Illinois statute of limitations for contribution claims, namely, 735 ILCS 5/13-204(b). But it has two requirements. You met the first requirement, by filing your contribution claim within two years of the time client served you with the summons and complaint. See 735 ILCS 5/13-204(b) (“no action for contribution or indemnity may be commenced more than 2 years after the party seeking contribution or indemnity has been served with process in the underlying action”).

But, per the court, you didn’t meet the second requirement. And under that requirement, you could seek contribution from the accountants only if when your client sued you the time for your client to sue the accountants hadn’t expired. See Id. (“but only to the extent that the claimant in an underlying action could have timely sued the party from whom contribution or indemnity is sought at the time such claimant filed the underlying action”).

Why should the second requirement matter? Well, you’re really trying to get a jury or judge to allocate to accountants a share of responsibility for damages client may recover from you for the same late-filed estate tax return. If when client sued you, it was too late for client to sue the accountants, we’re not going to let you sue the accountants either – so say the Illinois law makers. The time limit for those claims passed. Allowing you to sue would defeat the purpose of the time limit. We’ll treat the situation differently only if client sued you within the time limit.

But when client sued you, why was it too late for client to sue the accountants? The two-year limitations period for client’s claims against accountants (725 ILCS 5/13-214.2(a)) began when the extended deadline for filing the estate tax return expired with no return filed–namely, on August 16, 2006. So client had until August 16, 2008 to sue the accountants. But client didn’t. Client didn’t sue you by then either.

But why did the accountants-claim limitations period begin running on the August 2006 tax filing deadline? Because, says the court, the limitations statute says claims against accountants must be filed “within 2 years from the time the person bringing an action knew or reasonably should have known of such act or omission.”

But how is it that on August 2006 the client knew or reasonably should have known of the accountants’ act or omission concerning the late filing? That was the same day the deadline passed with no filing. Why not when client learned of tax man’s assessment of penalties and interest, in March 2008?

Well, per the court, “the law is not that [client] must know the full extent of [its] injuries before the statute of limitations is triggered, Rather, [we] adhere to the general rule that the limitations period commences when [client] is injured, rather than when [client] realizes . . . the full extent of [the] injuries.” [internal quotations omitted]. Plus “damages, i.e., penalties, began to accrue for the estate immediately upon the failure to file the estate tax return.” This was different than a case against an accountant about a negligently prepared tax return, where tax man discovers the error upon reviewing the faulty return and gives taxpayer notice of a deficiency. There, the time to sue runs from taxpayer’s receipt of the deficiency notice. Here, client knew or reasonably should have known that “something was amiss” when the return filing deadline passed with no return filed.

Why was the tolling agreement a problem for you? By entering into the tolling agreement, you gave client more time to sue you. So by the time client sued you, in September 2009, the time for client to sue accountants, two years from the August 2006 filing return filing deadline, had passed. Under the Illinois contribution limitations period statute, that meant you couldn’t sue client for contribution. If you hadn’t agreed to toll the limitations period, client would have had to sue you earlier. And presumably it would have done so within the deadline for suing the accountants. So your contribution claim against them would have been timely filed.

Why were you having to sue the accountants anyway? Why didn’t the client sue them? The court thought the accountants shouldn’t have been sued at all: “Although this case is presented as a contribution case that was not brought within the applicable statute of limitations, we are troubled by the official record in this case which does not factually support a claim of any kind against the named third-party accounting firms.” “[T]here . . . is no proof that the accountants . . . were involved in the preparation of the estate tax returns . . . .” So that the contribution claim was late evidently made no difference. There was none to begin with.

Moral of the story: We’ve seen complications with tolling agreements before, in insurance claims as an example. See blog post here. You’d ordinarily expect a tort claimant to sue every potentially responsible party timely. Or include them in a tolling agreement. But that doesn’t always happen. And if it doesn’t and you’re sued, your contribution claim may be in jeopardy. Here it made no difference. There apparently wasn’t any claim against the accountants, per this court.

Tags: lawyer malpractice, attorney malpractice, Illinois, discovery rule, accountant malpractice, accounting malpractice, tolling agreement, contribution, tax malpractice, estate tax return, estate planning. statute of limitations, limitations period

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When is client’s instruction or position in prior proceeding a defense to a legal malpractice claim?

April 3rd, 2014 — 5:03pm

by Christopher Graham and Joseph Kelly

Illinois

You’re an attorney. Successful groom asks you to draft a pre-nuptial agreement. He likes bride. But he wants protection – just in case. Groom sends you a “basic framework”: in a divorce, wife gets $100,000/year for seven years, 50% of the value of primary residence, and 50% of marital assets; but she doesn’t get groom’s many pre-marital assets. You draft agreement according to framework. Bride and groom acknowledge terms are reasonable and voluntary assent. Bride consults her lawyer. Bride and groom sign. They get married. And they live happily ever after.

Not quite. Just over three years after the honeymoon wife sues for divorce. She pulls out her pre-nuptial and says, “We had a deal. No kids either. So this should be easy.”

Husband says to wife, “Not so fast.” And he says to you, “You mean I have to pay her $100,000 per year for seven years? Plus give her half the value of our house and half of the marital assets? And all of that just for a little over three years of not-so-wedded-bliss?” You say, “Well that’s what the agreement says. And you gave me the ‘framework,’ remember?”

Husband hires new lawyer. Husband challenges the validity of the pre-nuptial agreement. Wife seeks a declaratory judgment that agreement is enforceable.

Husband testifies by deposition. He says wife entered into the agreement in bad faith. She did not uphold her “side of the bargain” (Curious what that “side” was – but no details in opinion!) He was under extreme emotional distress when he signed. And the agreement resulted from fraud. But he doesn’t raise your negligence.

Eventually husband and wife settle. Both waive any maintenance claim. Husband pays wife $500,000 and $15,000 toward her lawyer fees. Wife gets the marital assets. The pre-nuptial agreement is revoked. Husband testifies at prove-up hearing that the settlement resolves all issues, he’s satisfied with and understands the terms, and they’re fair and equitable. The court enters a judgment dissolving the marriage.

Then husband sets his sights on you. A few months after the divorce judgment he sues you. You should’ve told him that signing the agreement was bad news! What kind of lawyer would let a guy agree to pay his wife $100 G’s for 7 years if they’re only married for a year or even 3 years? Not to mention the half the house and half the marital assets part of the deal. You should have raised adjusting the pay-out depending on duration of marriage.

You say you followed his instructions from his detailed framework. He’s a sophisticated guy. You’re entitled to rely on them. This is unfair. He’s equitably estopped from suing you for malpractice.

You also say in the pre-nuptial agreement he acknowledged the terms were reasonable and understood. He also acknowledged the divorce settlement and judgment were reasonable. And he failed to raise your alleged negligence in the divorce action. So he’s “judicially estopped” from claiming your negligence.

You also say it’s too late to sue. Wife sued for divorce in late 2008. He started his malpractice case in Spring 2011. There’s a two-year limitations period for suing Illinois lawyers. We’re done!

That sort of scenario generally played out in Palmich v. Kirsner, et al, 2014 IL App (1st) 122230-U (Jan. 21, 2014). Who wins?

Well, the trial court citing “judicial estoppel” said attorney wins. But the appeals court had another idea. And it’s not over yet. But client gets a chance to prove his case.

According to the appeals court, that client provided attorney the “basic framework” and signed the agreement didn’t mean attorney was off the hook. Nor did it matter that client failed to raise counsel’s negligence in the divorce action and agreed to a divorce settlement and judgment.

The “framework” didn’t negate any duty attorney had to advise client about the consequences of entering into the pre-nuptial agreement. Nor did client’s assent to the agreement bear on whether attorney fully advised client about whether the agreement as drafted was proper. Nor, as required for judicial estoppel, was the “framework” or client’s assent to the agreement a position taken in “judicial or quasi-judicial proceedings.”

Nor was client’s deposition testimony in the divorce proceeding, about why the agreement was invalid, totally inconsistent with client’s malpractice claim, as required for judicial estoppel. In the divorce action, client didn’t identify counsel’s negligence as a ground for invalidating the pre-nuptial agreement. But client also didn’t testify counsel properly advised him. So client said nothing in the divorce case that was inconsistent with claiming attorney malpractice in the malpractice case. It wasn’t even clear client knew of counsel’s “negligence” until after the divorce proceeding. Nor, in any event, was counsel negligence a legally sufficient ground for invalidating the agreement.

That client agreed to the divorce settlement and judgment including in his prove-up testimony didn’t judicially estop client from suing attorney for malpractice either. Judicial estoppel doesn’t apply because there was nothing inconsistent about client agreeing to the settlement and judgment and then claiming malpractice by counsel in failing to advise him properly about the pre-nuptial agreement.

This isn’t a case like Larson v. O’Donnell, 361 Ill. App. 3d 388 (1st Dist. 2005), overruled on other grounds by Vision Point of Sales, Inc. v. Haas, 226 Ill. 2d 334, 352 (2007), where husband was judicially estopped from claiming malpractice by attorney in misinforming him about obligations under a marital settlement agreement. Husband testified in the divorce proceeding that he understood his obligations under that agreement. In the malpractice case he claimed the opposite. So his positions in the malpractice and divorce cases were totally inconsistent. Judicial estoppel thus applied.

That client provided attorney the agreement framework also didn’t mean counsel escapes liability under an equitable estoppel defense. “To say that any duty [counsel] owed [client] in the course of his legal representation could be obviated by [client] detailing his wishes in the ‘basic framework’ document, would reduce [counsel’s] role to merely that of a scribe.”

That client sued counsel for malpractice more than two years after wife sued client for divorce didn’t matter either. Per the court, the malpractice limitations period began only upon the divorce judgment, just months before the malpractice suit. “[Wife’s] filing of the underlying divorce action in November 2008 was insufficient to compel a finding that [client] knew or should have known of [attorney’s] purported negligence at that time.”

Finally, that client’s allegations of duty, proximate cause, and damages were general didn’t mean client failed to allege a legally sufficient claim. The general allegation of duty was enough, though “barely” so:

[Client] specifically pled a general duty in that “[attorney] was required to exercise a reasonable degree of care and skill in the representation of his client.” Taking the allegation as true and viewing it in a light most favorable to [client], we find that the general element of duty was sufficiently pled. Thus, dismissal with prejudice was erroneous. By acknowledging that [client] sufficiently pled the existence of a general duty, we make no finding regarding the existence of a specific duty related to the duration of marriage. That determination will be made after the parties have been put to their proofs.

The allegations of proximate cause and damages similarly were “minimally sufficient”–but that was enough.

The appeals court decision may not be cited as precedent except in very limited circumstances. But it does include some useful lessons. There may be circumstances where a client can’t pursue a malpractice claim because of an inconsistent position in an earlier proceeding. But this wasn’t that circumstance. And just because a client provides drafting instructions, an attorney can’t simply follow them and expect he or she has nothing further to do. This client was unhappy because he thought his lawyer should have explained the consequences of this pre-nuptial agreement more thoroughly including other options. We don’t know the outcome. But if there’s a reasonable alternative option, it’s best to make sure the client knows about it.

Tags: Illinois, pre-nuptial agreement, family law, divorce, settlement agreement, legal malpractice, attorney malpractice, judicial estoppel, equitable estoppel, statute of limitations, duty, pleading duty, pleading proximate cause, 2-615, 2-619

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Attorney escapes malpractice liability: court, rather than attorney error in underlying PI case is cause of client’s injury

April 2nd, 2014 — 11:43pm

by Christopher Graham and Joseph Kelly

Illinois

You’re injured in a vehicle accident. The other vehicle is an Illinois Department of Transportation or “IDOT” truck. You hire an attorney a day after the accident. You claim neck, back, hip and buttocks pain. You see a chiropractor for pain. That’s the same day you hire attorney. You see a neurologist and pain management specialist. Your neck pain resolves. But other pain continues.

About five months after the accident you fall off a chair at work. You land on your arm. But your hips hit the floor. You claim the character of pain didn’t change before and after the fall.

You have two MRI’s. Both show the same damage, according to your chiropractor. One is before the chair fall. The other is after the fall. After the fall, you see an orthopedic surgeon. He acknowledges you complain of back, leg, and hip pain. About three months later, after pain becomes more severe, he does fusion surgery.

Your medical bills total $58,000, but most are for services after the chair fall.

Your attorney files a claim for you against IDOT with the Illinois Court of Claims. There’s a bench trial. You testify. Your chiropractor’s deposition comes in evidence. He testifies about the two MRI’s. Your pain management doctor’s deposition comes in evidence too. So do all your medical bills. But your orthopedic surgeon’s deposition is excluded. The court decides it wasn’t properly designated as an evidence deposition.

Two years later the court finds that as a result of IDOT negligence, you sustained damages before the chair fall in the form of medical expenses, lost wages and property damage. So it awards you $17,000. But it concludes medical costs incurred on and after the fall weren’t from the vehicle accident.

Your attorney petitions for rehearing and a new trial on damages. He argues the court erroneously assumed you injured or aggravated your back problems from the chair fall and then filed a workers’ compensation claim for the fall. Your attorney shows the only workers’ compensation claim was filed months before the chair fall, for injuries from the vehicle accident. Your attorney raises other points of error including, among other things, that there was no evidence you injured your back from the chair fall. But it was all for naught. And unfortunately for you, court of claims’ decisions generally aren’t subject to judicial review. And this one wasn’t one of the exceptions.

So what do you do? Well, you find another lawyer. And with that lawyer at the helm, you sue your personal injury lawyer for malpractice. It’s all his fault you say. He screwed up because your surgeon’s deposition was excluded. It wasn’t properly designated as an evidence deposition, said the court of claims. You would have gotten all your damages if only it came into evidence like it should have. There’s a bench trial. Experts testify on both sides.

Who wins? Attorney, says the trial court. Attorney breached no legal duty. Excluding your surgeon’s deposition wasn’t the proximate cause of your loss. You lost because the court of claims erroneously concluded the chair fall was a superseding cause. You appeal.

Who wins? Attorney wins again, says the appeals court in Green v. Papa, et al, Case No. 5-13-0029 (5th Dist. Feb. 5, 2014). The trial court got it right. As the court explained:

We cannot say that, more likely than not, [surgeon’s] testimony linking [client’s] surgery to the April 1998 car accident would have changed the decision of the court of claims. Nor can we say that, more likely than not, [his] testimony that it was “certainly possible” that the fall from the chair may have been injurious because of a predisposition to injury as a result of the automobile accident would have changed the outcome for [client] had it been admitted into evidence … It is clear from the judgment order that the court of claims was not cutting off [client’s] damages subsequent to [the chair fall date], because [surgeon’s] causation testimony was excluded, but rather because it erroneously believed that IDOT had somehow proved the fall from the chair was a superceding (sic) event … Because we find that the decision of the court of claims to exclude [client’s] medical damages beyond [chair fall date], was based on erroneous conclusions of facts and law on the part of the court of claims, over which we have no power, and not on the exclusion of [surgeon’s] testimony, we cannot say that the circuit court’s finding that [client] failed to prove proximate cause on her legal malpractice claim against [attorney] was against the manifest weight of the evidence.

Lesson for lawyers, especially in Illinois: Illinois has a peculiar rule distinguishing discovery from evidence depositions. There was an issue about how attorney noticed the surgeon’s deposition. And the transcript face page designated the deposition as a discovery rather than evidence deposition. Although there’s a rule for correcting transcript errors. nothing was done to change the transcript designation to evidence deposition. Attorney claimed he had an agreement with prior IDOT counsel to treat treating physicians’ depositions as evidence depositions. But new IDOT counsel disagreed. And there was nothing in writing. Attorney also argued it would make no sense for him to depose his client’s treating physician for discovery; he could have access to the physician any time. Attorney also said he suggested a trial continuance to client to do an evidence deposition, but client wanted to proceed; nothing was in writing and client said she didn’t remember such a conversation. All that mattered to the court of claims was the transcript designation as being for discovery.

Attorney ultimately won. But he still was sued. His insurer undoubtedly had significant legal fees for a trial and appeal. And maybe attorney paid a deductible. He sure had to spend time dealing with a suit, which could have been spent on work for fee-paying clients. And who wants to be sued. It all could have been avoided by making sure the deposition notice and transcript were designated as an evidence deposition.

Tags: Illinois, legal malpractice, proximate cause, evidence deposition

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Intended beneficiaries of gift may sue attorney for allegedly botching transfer documents

April 1st, 2014 — 11:08pm

by Christopher Graham and Joseph Kelly

Florida

You’re an attorney. Corporation by its sole shareholder retains you to transfer real estate. The transfer is intended as a gift. You draft a power of attorney. That power supposedly authorizes you to sign a deed conveying the real estate to transferees. Sole shareholder signs the power of attorney. You sign the deed. Thereafter shareholder dies. But then his widow proves the transfer was invalid. The power of attorney was invalid. Transferees are unhappy. They didn’t get their gift. They sue you. But how can that be? They didn’t pay your bill. You never agreed to represent them.

Who wins? Transferees in this Florida case at least alleged enough in a complaint to state a legally sufficient malpractice claim. See Dingle v. Dellinger, et al, Case No. 5D13-1725 (Fla. 5th DCA Feb. 7, 2014).

In Florida and most jurisdictions, including Illinois, attorneys generally owe no duty to non-clients. This is the so-called privity rule. But there are exceptions. Here, transferees alleged enough to qualify as third-party beneficiaries of the corporation’s agreement to retain attorney to prepare the power of attorney and prepare and sign the deed transferring the real estate to transferees.

Although the “privity requirement has been relaxed most frequently in will drafting situations,” “‘the third party intended beneficiary exception to the rule of privity is not limited to will drafting cases.'” As the court explained:

[Transferees] third amended complaint contains sufficient ultimate facts, which, if proved, show that they were the intended beneficiaries of [corporation’s] contract with [attorney and firm]. [Transferees] third amended complaint asserts that the primary intent of [corporation] in hiring [firm] was to directly benefit them. Accepting, without finding, the complaint’s allegations as true, there was no direct benefit to [corporation] or [shareholder], making this transaction similar to a gift or devise made in a trust or in a will. [Corporation] or [shareholder’s] intent was frustrated by the alleged negligence of [attorney and firm] in not preparing an enforceable quitclaim deed as they were contracted to do.

The court cited decisions from around the country allowing similar third-party beneficiary claims including Holsapple v. McGrath, 521 N.W.2d 711 (Iowa 1994), Speedee Oil Change No. 2, Inc. v. Nat’l Union Fire Ins. Co., 444 So. 2d 1304 (4th Cir. 1984), Admiral Merchs. Motor Freight, Inc. v. O’Connor & Hannan, 494 N.W.2d 261, 266 (Minn. 1992), Red River Valley Bank v. Home Ins. Co., 607 So. 2d 892, 896 (La. App. Ct. 1992), and Onita Pac. Corp. v. Trs. of Bronson, 843 P.2d 890, 896-97 (Or. 1992) (en banc).

Lesson for attorneys: If you botch a gift for a client the intended beneficiaries may sue you.

Tags: Florida, legal malpractice, duty, privity, non-client, gift, third party beneficiary, intended beneficiary

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For now, professional liability insurer’s coverage suit allowed despite insured’s protest that it would prejudice its malpractice suit defense

March 17th, 2014 — 2:06pm

by Christopher Graham and Joseph Kelly

Washington

You’re the D&O, professional liability, or other insurer with a duty-to-defend policy. Your insured is sued in tort. You defend under a reservation of rights. But you don’t believe there’s coverage. And you don’t want to have to continue paying for a defense. So you sue for a declaration of no coverage.

You’re the insured. You’ve been sued by a party claiming injury. Now your insurer sues you. So you have two suits to address and you’re not too happy. You’re also concerned your insurer’s suit will prejudice your defense in the tort suit. You believe insurer’s suit will address issues material to your liability in the tort suit. So you argue it should be stayed. You also claim it would be bad faith for insurer to pursue a coverage suit prejudicial to your tort suit defense.

Insurer argues its suit won’t prejudice your tort suit defense and that delaying resolution of coverage would require funding a defense that isn’t covered. What’s a court to do?

Well, one court, in Federal Ins. Co. v. Holmes Weddle & Barcott P.C., et al, Case No. C13-0926JLR (W.D. Wa. Nov. 14, 2013), deferred deciding on a stay until a legal malpractice insurer and insured law firm briefed three coverage issues. As explained: “It may be that all that is needed to decide this coverage action is to apply settled contract and insurance law to a set of admitted and undisputed facts.” This court wasn’t convinced law firm’s malpractice defense would be prejudiced by addressing those three issues.

Insurer already had moved for a summary judgment. And so “the court [could] simply examine that motion to determine whether it is possible to resolve this case without causing prejudice to [the firm].” Insurer’s motion “raise[d] several arguments that could potentially resolve the question of coverage without requiring the court to find facts of consequence to the malpractice action.”

The malpractice case was about how the firm handled a pre-policy period tort suit. Insurer argued the malpractice claim during the policy period and a motion for discovery sanctions in the tort suit were “Related Claims.” In discovery for the tort suit, firm produced an incomplete claim file. After client lost at trial, the court sanctioned firm and client, finding each “‘recklessly certified’ that the claim file was complete when in fact it was not.” Client’s claim against firm in part alleged malpractice by failing to produce the entire claim file. Resolving the “Related Claims” issue wouldn’t prejudice firm’s defense in the malpractice case because it “would require the court to examine only the proximity of the relationship between the post-trial [pre-policy period] sanctions motion and [client’s policy period] legal malpractice claim.” And “[t]his inquiry does not implicate questions of causation [in the malpractice suit], it only requires the court to compare two claims to determine whether they are ‘related’ as a matter of contract and insurance law.”

Insurer also relied on prior knowledge and application exclusions. Insurer’s argument “would require the court to examine only whether [firm] knew about facts prior to January 2012 that ‘might reasonably be expected to give rise to a claim.'” Relying on Carolina Casualty Ins. Co. v. Ott, No. C09-5540 RJB (W.D. Wa. Mar. 26, 2010), the court in a similar vein concluded “[t]his limited inquiry would not prejudice [firm] in the legal malpractice action.”

So it would allow insurer’s summary judgment motion to proceed on those issues and on whether the firm must reimburse insurer for defense fees. But the court left the door open for firm to object again.

If the firm believed insurer’s arguments may prejudice its defense, it would need “to point out in a very specific manner if and where it believes resolution of these issues will require findings that would cause prejudice to its defense in the malpractice action”

“[Firm] may file a cross motion for summary judgment if it wishes, but the court will expect [it] to safeguard its own interests by raising only issues and arguments that will not cause prejudice in the malpractice action.”

The court will resolve the case by summary judgment only if it wouldn’t prejudice firm’s defense. Otherwise it would stay the case. Insurer meanwhile would continue to defend firm under a reservation of rights. Firm also agreed to indemnify insurer for defense expenses, if there was no coverage.

The court appears to have struck a fair balance between insurer and firm’s interests. Stay tuned because we may see more from this court about issues important to D&O and professional liability insurers.

Tags: Washington, professional liability, legal malpractice, management liability, D&O, duty to defend, declaratory action, stay, related claims, prior knowledge, application exclusion, prejudice

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