Making the Nightmare Worse

/ 09.Sep, 2014
A legal malpractice action is a nightmare.  The nightmare can be exacerbated by a denial of insurance coverage.  Attorneys should be careful not to take actions which may result in the denial of coverage by their professional liability insurance carriers.  One of the most common reasons for denial of coverage is failure to identify potential claims on policy applications.  Two recent cases exemplify this nightmare upon a nightmare situation.frustration-md In Blum Collins LLP, et al. v. NCG Professional Risks, Ltd., et al., No. 2:12-cv-08996 (C.D. Cal. July 31, 2014), the United States District Court for the Central District of California granted summary judgment in favor of the insurer in a coverage action arising out of a legal malpractice claim.  The insurance carrier denied coverage because on the policy application the attorney denied knowledge of “any circumstances, allegations, tolling agreements or contentions as to any incident which may result in a claim being made against the Applicant or any of its past or present Owners [or] Partners. . . .”  However, prior to filling out the policy application the attorney entered into a tolling agreement with a former client so the client could “evaluate her assertions of malpractice and her potential damages.”  The court found the attorney had notice of circumstances which might result in a claim being made.  The former client is seeking approximately $7 million in the legal malpractice action. In Chicago Insurance Company v. Paulson & Nace, PLLC, et al., No. 12-2068 (D.D.C. April 10, 2014), summary judgment was granted in favor of a professional liability insurance company in a declaratory judgment action.  The declaratory judgment action was brought after the attorneys were sued for legal malpractice following the dismissal of an underlying medical malpractice action.  In July 2007, after the underlying medical malpractice action was dismissed as untimely, the attorneys applied for a claims-made professional liability policy.  The policy application asked: “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 employed lawyer of the firm?”  The attorneys answered: “no.”  The attorneys did not inform the insurance company of the potential of a claim arising from the dismissal of the medical malpractice action until May of 2009, nor did they inform their prior insurance carrier of the potential claim.  A jury awarded $4 million on the legal malpractice claim, but that amount was subsequently reduced to $1.75 million. The importance of reporting potential claims and not making false statements on professional liability insurance applications cannot be overstated.  As a profession we pay a significant amount money for the protections our professional liability insurance provides; making sure we have that protection when we need it should always be a high priority. –Josh J.T. Byrne, Esquire