by Chris Graham and Joseph Kelly

Pelagatti v. Minnesota Lawyers Mutual Ins. Co., Case No. 11-7336 (E.D. Pa. June 26, 2013)

Plaintiff lawyer filed suit against its legal malpractice insurer claiming a breach of the duty to defend and bad faith.

Plaintiff renewed his annual legal malpractice policy from 2003-2010. In response to insurer’s “Firm Information Verification Form” which stated:

“There have been changes to the Firm Name, Schedule of Lawyers or significant changes to the previously submitted application information or the firm is aware of a claim(s) or circumstances that could reasonably result in claims or disciplinary actions that have not been reported to Minnesota Lawyers Mutual. The undersigned will provide immediate written notification on this form or an attachment describing the changes, claims, potential claims and disciplinary actions to Minnesota Lawyers Mutual before accepting the quotation.”

Plaintiff responded by listing his firm’s name change, but didn’t discuss mention any potential claims.

The Policy states:

“WE will pay, subject to OUR limit of liability, all DAMAGES the INSURED may be legally obligated to pay and CLAIM EXPENSE(S), due to any CLAIM, provided that:

(1) the CLAIM arises out of any act, error or omission of the INSURED or a person for whose acts the INSURED is legally responsible;

(2) the act, error, or omission occurred on or after the PRIOR ACTS RETROACTIVE DATE and prior to the expiration date of the POLICY PERIOD;

(3) the CLAIM results from the rendering of or failure to render PROFESSIONAL SERVICES;

(4) the CLAIM is deemed made during the POLICY PERIOD; and

(5) the CLAIM is reported to US during the POLICY PERIOD or within 60 days after the end of the POLICY PERIOD.

The Policy also states that a claim is made when “an INSURED first becomes aware of any act, error or omission by any INSURED which could reasonably support or lead to a demand for damages.”

In July 2006, Tondalia Cliett retained plaintiff for a wrongful death and survivorship action relating to her son’s death on an unsupervised beach the previous month in New Jersey. Plaintiff didn’t advise Cliett that he wasn’t licensed to practice law in New Jersey.

Plaintiff filed suit in New Jersey District Court against against Ocean City, NJ in September 2006. Ocean City moved to dismiss for failure to timely place the city on notice as required by the New Jersey Tort Claims Act (“NJTCA”). Plaintiff filed a motion for leave to file a late notice of claim. The District Court converted the city’s motion to dismiss into a motion for summary judgment and granted it. Plaintiff filed a motion for reconsideration, withdrew that motion, and then appealed to the Third Circuit. The Third Circuit dismissed the appeal as untimely because it was more than 30 days from the district court’s final order. Plaintiff then moved the District Court to reinstate his motion for reconsideration. The District Court denied that motion and stated that plaintiff should’ve filed a new motion but couldn’t now because it would be untimely. The Third Circuit affirmed that denial. Plaintiff, in October 2009, informed Cliett that the appeals didn’t succeed.

In February 2010, Cliett filed a legal malpractice suit against plaintiff alleging negligence for not complying with the NJTCA. Plaintiff notified his legal malpractice insurer which refused to defend because of untimely notice and because notice wasn’t given when plaintiff found out Cliett’s claim was dismissed in 2006 for failure to follow the NJTCA. Cliett was granted summary judgment and plaintiff then filed suit against its insurer.

Defendant moved for summary judgment. Plaintiff argued in pertinent part that its insurer failed to prove that it was prejudiced by plaintiff’s untimely notice. The District Court rejected that argument stating:

“Although Pennsylvania law requires that insurers demonstrate prejudice in order to deny coverage under some types of policies […]”; and

“Whether Plaintiff violated the terms of the Policy by failing to timely report a claim is determined under a hybrid subjective/objective test. [citation omitted]. Defendant must establish two factors in order to satisfy this two-pronged test: (1) that Plaintiff was aware of a given set of facts; and (2) that a reasonable attorney in possession of those facts would have believed that those facts could support or lead to a demand for damages. Id.; see Policy 1. Under this two-pronged approach, the Court “consider[s] the subjective knowledge of the insured and then the objective understanding of a reasonable attorney with that knowledge.” [citation omitted.”

Here, plaintiff’s knowledge of a potential claim when he applied for insurance satisfied the subjective part of the test and the objective part of the test was met because a reasonable attorney would’ve reported the claim in its application.
The District Court thus granted insurer’s motion for summary judgment.