$850K Malpractice Verdict in the Case of the Missing Expert Report

Legal Malpractice Expert Report

The New Jersey Law Journal reported that a Passaic County jury awarded $850,000 to the plaintiff in a legal malpractice case whose attorney failed to obtain an expert report.

Underlying Case

Plaintiff Aref Abuhadba hired Thomas Doerr of Berman Sauter Record & Jardim in December, 2010, to sue various contractors who allegedly designed and built a retaining wall on his property that cracked and bulged right after it was completed, and had to be shored up. The wall was intended to facilitate construction of a residence on a mountaintop lot in Totowa, NJ.

Doerr filed suit on Abuhadba’s behalf in March 2011, but allegedly failed to take any steps to secure expert reports by the agreed-on deadline, or for months afterward.

That led to the court granting defendants’ motion for summary judgment.

Abuhadba’s effort to vacate the summary judgment failed.

Firm Disbands

Berman Sauter shut down after Abuhadba lost his case, but before he sued it.

The firm is also a party to another malpractice suit—Berman, Sauter, Record & Jardim v. Robinson. That suit began as a fee dispute, but one of the defendants filed a counterclaim alleging that Sauter negligently handled a real estate matter.

The case achieved notoriety in legal circles, due to a dispute over whether the same judge could preside over it at both the trial court and appellate levels. The NJ Supreme Court ruled that he wasn’t precluded from doing so. The case is scheduled for a retrial on May 1.

Malpractice Claim

Abuhadba filed a malpractice suit against Attorney Doerr and the Berman Sauter firm, after it had disbanded.

Their defense was that an expert repeatedly promised to produce his report, but failed to do so. However, Doerr claimed all his interactions with the expert were by phone, so there was no correspondence to support that claim.

The jury obviously didn’t believe the firm’s defense. The $850,000 it awarded Abuhadba is the amount that he stood to recover in the legal malpractice case, according to his attorney, and he’ll seek interest and a fee award, pursuant to Saffer v. Willoughbywhich permits fee shifting in legal malpractice cases.

The verdict was covered by Berman Sauter’s malpractice insurance policy.

Analysis

This appears to be an open-and-shut case of legal malpractice, so why was it tried, i.e., why was ‘good money thrown after bad’ defending an apparently unwinnable case?

Since the firm’s malpractice insurer paid the verdict, it also provided a defense. So why didn’t the defense counsel it retained evaluate the case early on as unwinnable, and recommend that it be settled?

Alternatively, if that did happen, and the insurer agreed, but the firm refused to consent a settlement, which is required by all legal malpractice policies, then why didn’t the insurer cite the “hammer clause”, whereby if a firm refuses to agree to a settlement recommended by the insurer, it must pay out-of-pocket any indemnity + defense costs over that amount that the insurer incurs.

It’s unlikely that if Berman Sauter’s insurer did send it a “hammer clause” letter, that the firm, which as noted, had already disbanded, would’ve withheld its consent to a settlement.

By allowing the case to be tried, the insurer and the firm may both be exposed to a fee shifting award (the insurer’s exposure depends on how much, if anything, is left on the per claim limit of the firm’s malpractice policy, after payment of the verdict and defense counsel’s fees).

Most importantly, why didn’t the attorney either retain an expert or tell the plaintiff that he couldn’t find one, and then withdraw from the case?

$9M Malpractice Verdict Against IP Firm Spawns Battle Over Insurance Coverage

Malpractice Insurance Professional Liability

A small technology company, fearful that it may be unable to collect a $9M malpractice judgment that it won from an IP law firm, urged an appeals court to rule that the firm has a $10 million malpractice policy to cover the award.

Underlying Case

We previously wrote about Protostorm, LLC, which in 2000 invented an online game that enabled real-time delivery of targeted ads to players, and tracking and reporting of those ads’ effectiveness.

The company hired the now-defunct Arlington, VA law firm of Antonelli Terry Stout & Kraus (ATS&K) in 2000 to obtain a patent on its invention, only to discover in 2007 that the USPTO had deemed its patent application “withdrawn”, and no patent had been awarded.

Protostorm sued ATS&K and several of its attorneys in 2008, and was awarded $6.975M in compensatory damages and $1M in punitive damages by a jury in 2014. District Court Judge Chen later added over $1M in pre and post-judgment interest to the award, and denied defendants’ post-trial motion to set aside the verdict.

Defendants appealed to the Second Circuit, which denied the appeal, and upheld the District Court’s award to Protostorm.

 Malpractice Insurance

During litigation of the underlying case, it was revealed that ATS&K had a legal malpractice insurance policy with Minnesota Lawyers Mutual (MLM), which would cover the matter.

That policy incepted in October 25, 2006, and had “prior acts coverage” retroactive to before ATS&K was retained by Protostorm. However, while it provided a limit of $10 million for acts occurring during that or future policy periods, i.e., on or after October 25, 2006, the limit for acts occurring before then was $5M.

Insurer Files Suit

In October, 2015, Protostorm, concerned about being able to collect its award, filed a motion – which the District Court approved – to register the judgment in federal district courts, state courts in California, Florida, Texas, etc., “and in such other jurisdictions as Protostorm may determine…that the judgment debtors’ assets have been or may be found”. It subsequently registered the judgment in Minnesota.

That prompted MLM to file a declaratory judgment action in Virginia federal court, seeking a ruling that its coverage was limited to $5M.

Per MLM’s filing, “Protostorm’s (motion) stated that there were substantial insurance coverage issues, including issues relating to the amount of ATS&K’s available insurance limits, and indicated an intention to litigate…Prior to this time, neither Protostorm nor anyone else had asserted that any controversy existed with regard to insurance limits.”

In other words, MLM’s position from the time it was notified of the claim had been that its coverage obligation was limited to $5M, because ATS&K’s failure to apply for the patent occurred in 2001 – 2003, i.e., before October, 2006, and it wasn’t aware of any opposition to that position, until Protostorm filed its motion to register the judgment in other jurisdictions.

Faced with the possibility of litigation over its policy limits, MLM filed a pre-emptive lawsuit, asking the court to intervene by granting its motion for summary judgment that its coverage obligation was limited to $5M.

“The only negligent acts that caused damages occurred prior to January 2003, since after that date, nothing anyone did made any difference — the loss of patent rights was irremediable…Any ‘concealment’ of any such damage after 2003 was in no way the cause of the harm to Protostorm. Thus, as a matter of law, under the limits of liability endorsement, the policy limits for the Protostorm claim were $5 million.” 

It further argued that:

  • It was undisputed that the absolute due date for ATS&K to file a patent application before Protostorm lost its patent rights was Sept. 27, 2001. The firm could have filed a new patent application at the very latest by 2003, but didn’t.
  • Throughout its litigation with ATS&K, Protostorm never asserted that any of its damages came from anything other than the loss of its right to patent its invention, which occurred between 2001 and 2003. Since MLM’s policy clearly stated that the limit for any claim arising out of action before October, 2006, was $5M, that limit must apply to Protostorm’s claim.
  • Protostorm had argued during the trial that ATS&K’s concealment of its malpractice began in 2001 and continued through 2008, and the jury did find that the firm had concealed its mistakes, and thus awarded Protostorm punitive damages.

    However, this concealment rose directly from ATS&K’s failure to file the correct patent application, which indisputably occurred before October, 2006.
  • Even if concealment of malpractice could constitute a claim that arose during the coverage period, it’s considered to be a dishonest act, which is excluded from coverage.

Protostorm Responds

Protostorm, presumably having been assigned ATS&K’s rights under the policy, filed its own motion for summary judgment, which claimed that ATS&K’s policy provides up to $10 million in coverage.

“…the undisputed facts establish that the underlying lawsuit meets the definition of ‘claim’ under the policy, and while the lawsuit undeniably arises in part from acts, errors and omissions occurring before Oct. 25, 2006, the lawsuit also undeniably arises in part from acts, errors and omissions occurring after that date.”

Protostorm disputed MLM’s position that ATS&K’s wrongful acts occurred between 2001 – 2003, arguing that the jury in the underlying case determined that ATS&K had continued to represent Protostorm until 2007, and its claim was based in large part on ATS&Ks conduct during those years, i.e., it’s failure to communicate with Protostorm, and its failure to disclose that the application did not protect Protostorm’s patent in the U.S. As a result, $10M in coverage should be available under MLM’s policy.

Court Ruling

U.S. District Judge Cacheris ruled in MLM’s favor, granting its motion for summary judgment that the policy it underwrote for ATS&K had a limit of $5M, not $10M.

The court found that the $5M limit applied, because Protostorm’s claims predated the increase to a $10M policy limit in October 2006. “Based on the evidence presented to the jury and the jury’s verdict, all of the elements necessary for the accrual of the malpractice cause of action were present by early 2003, at the latest.”

Further, the judge stated that a recent Virginia Supreme Court decision clarified that the phrase “arising out of” an act, error or omission in an insurance policy was to be broadly construed, i.e., there needed to be a particular fact that had a causal relationship with a cause of action. In this case, there was: the cause of action arose out of ATS&K’s failure to prosecute the patent, which occurred at the very latest in 2003. Even if the firm continued to cause harm — like concealing the status of the patent — the very first acts started while the $5 million policy applied.

Judge Cacheris rejected ATS&K’s arguments that the higher limit applied, because the claims did not truly arise until after the firm’s representation of Protostorm ended after October 25, 2006.

He agreed with MLM’s attorney, who stated during oral argument: “A claim comes into being when there’s damage…It doesn’t get continued for purposes of a clause like this in a policy because there’s more damage in the future.”

The judge opined that courts have typically rejected arguments that the terms of a malpractice insurance policy can be stretched if the attorney keeps representing the wronged client. “Several cases interpreting claims-made insurance policies have reached the same conclusion when faced with the argument that the continuation of an attorney-client relationship carries the malpractice claim into the temporal scope of the policy’s coverage.”

Appeal

Protostorm appealed Judge Cacheris’ decision to the Fourth Circuit.

In their opening brief, Protostorm and ATS&K asserted that the Judge applied an improperly narrow interpretation of the phrase “arising out of”, which flouts Virginia precedent establishing that the phrase requires only that an act have some substantial connection with a legal cause of action.

They further argued that the judge ignored evidence presented in the underlying case that established that ATS&K engaged in misleading conduct after Oct. 25, 2006, when  the limit of its policy with MLM increased to $10M.

“In the malpractice lawsuit at issue here, but for Protostorm’s repeated elicitations of evidence in the [district court] concerning acts, errors and omissions that allegedly occurred in 2007 and 2008, Protostorm would have lost the claim — i.e., the lawsuit— and the one cause of action asserted within it.”

“The applicable limit under the policy is [$10 million] because Protostorm’s claim arises, in part, from acts, errors and omissions that occurred after October 25, 2006.”

Analysis
The appeals court will almost certainly affirm the District Court’s ruling, because the plain meaning of “arising out of” is “come into being”, and Protostorm’s claim against ATS&K “came into being” when ATS&K failed to designate the US for patent protection, when it filed the patent application.

In that case, Protostorm will be faced with trying to collect a judgment of over $9M (including post-judgment interest, which is continuing to accrue), when defendants’ sole collectible asset appears to be its malpractice insurance policy, which has a $5M per claim limit.

However, the news is much worse that that for Protostorm, because ATS&K’s insurance policy almost certainly has “eroding limits”, which means defense costs are subtracted from the per claim limit, which leaves that much less to pay any settlement or judgment.

Since this matter spanned nearly nine years, and included a trial and appeal, total defense costs are likely between $2 million and $3 million.

If we split the difference, and use $2.5 million as a benchmark, then there’ll be $2.5 million left on ATS&K’s $5 million policy to satisfy the judgment.

Further, as mentioned in Part III of our coverage of the underlying case, ATS&K essentially shut down in April, 2015, so it doesn’t have ongoing cash flow. Further, its assets have likely been removed, Protostorm failed in its attempt to have ATS&K attorneys Brundidge and Bailey declared jointly and severally liable for the judgment, and Protostorm has no recourse against ATS&K’s former equity partners. 

Therefore, unless Protostorm is able to uncover additional collectible assets, it’ll likely have to settle for the $2.5 million left on ATS&K’s policy, which will be further reduced by its attorneys’ contingency fee, and its own fees and costs.

The bottom line is that Protostorm will wind up with about $1.5 million. That’s not an inconsiderable sum, given that all of it will apparently go to Peter Faulisi, Protostorm’s co-founder, and the only individual plaintiff, but it will likely seem to be a frustratingly small payoff, given the size of the judgment, not to mention the potential royalties that might’ve been earned, if Protostorm had been awarded a patent.

Legal Malpractice: Parties Settle Claim Against John Fahy Following His Suicide

Legal Malpractice John FaheyA legal malpractice claim filed against late attorney John Fahy and his former firm, and a lawsuit filed against them by their malpractice insurer, which sought to deny coverage for the claim, were resolved via mediation on February 26th.[1]

Underlying Claim

Vivien Thorsen was an insurance agent for Secaucus, NJ-based The MacCormack Agency from 2003 until January, 2010, when she was terminated. Her lawsuit alleged that company president Frank MacCormack, Jr., began sexually harassing her soon after her employment began. She claimed that she didn’t tell him to stop until 2006, because she feared she might lose her job, but he continued to harass her even after she told him to stop.[2]

 Fahy Representation

Thorsen retained John Fahy, then senior partner of Fahy Choi, LLC, to represent her shortly after she was terminated.

Her complaint alleges:

• In May, 2010, Fahy told her that he had filed suit on her behalf.
• During the next three years, Fahy repeatedly asked her for help in drafting interrogatories, told her about pending depositions that he said were continuously postponed, and advised her of settlement conferences.
• In January, 2013, he stated that the defendants had agreed to a $1.2 million settlement.
• During the following months, Fahey claimed to be arranging to obtain payment, and on July 11, 2013, advised her that a check was en route to his office.
On July 12, 2013, the last time she heard from Fahy, he left her a voicemail that said he had “good news”.[3]

Death

On July 17, 2013, Fahey was found dead under a railroad trestle in East Rutherford, NJ, with “a single gunshot wound to the head, fired with a handgun.” [4] It was ruled a suicide.

It’s unclear why Fahey took his own life, but shortly before he died, the NJ Supreme Court ordered that he be temporarily suspended and pay a $500 sanction for failing to comply with a fee arbitration award. It vacated the order after his death.[5]

 Malpractice Claim

Thorsen claims that after learning of Fahey’s death, she requested her settlement check from his firm, but was told by Managing Partner Benjamin Choi that there was no check, and Fahey hadn’t filed suit on her behalf. Further, the statute of limitations on her claim had expired in January, 2012, denying her the opportunity to sue her former employer.

Thorsen alleged that Fahy didn’t do any of the work he claimed to have done, and covered it up with “lies, fabrications and misrepresentations”. [6]

She sued his estate, Fahy Choi, LLC, attorney Choi, and several firm employees for malpractice on November 4, 2013.

A Fahy family spokesman called the lawsuit “opportunistic” and “despicable”. An attorney representing Thorsen’s former employer said Thorsen’s claim was “baseless, meritless and desperate.”[7]

Thorsen’s lawyer replied “it hurt me to file this lawsuit…Mr. Fahy was an icon in Bergen County, and I feel deeply sorry for his widow. But we have a client with serious complaints.”[8]

He said that he filed suit only after settlement discussions held over several months proved unsuccessful.

Thorsen also sued Totowa, NJ solo practitioner James Perconti, who represented The MacCormack Agency, and met with Fahy about Thorsen’s claim in May, 2010. She alleged fraudulent concealment, spoliation and civil conspiracy, because he failed to obtain her employment records, and told her new lawyer that none existed, although they had previously been promised.

Perconti, who is also a municipal court judge, said that he never heard from Fahy after their meeting in 2010, and called the allegations against him “absurd, ludicrous, unprofessional and without merit.”[9]

Thorsen claimed that experts valued her claims against her former employer at about $7 million – $10 million, including punitive damages.

Legal Malpractice Insurer Sues To Deny Coverage

Darwin National Assurance Co. was Fahey Choi’s legal malpractice insurer from August 1, 2012 – August 1, 2013, and was notified by the firm of Thorsen’s claim on July 31, 2013.

Darwin filed a declaratory judgment action in Newark federal court on November 27, 2013, seeking a ruling that it didn’t have to defend or indemnify Fahey Choi, et al, for Thorsen’s claim, because of its policy’s Prior Knowledge Condition. That Condition disallows coverage if any Insured knew about the wrongful act on which the claim is based, or could foresee that it might result in a claim, prior to the inception date of its first policy with Darwin.[10]

Darwin asked the court to rule only that the Condition was valid and enforceable, not on what John Fahy knew or when he knew it.

Defendant Thorsen filed a counterclaim, and Darwin and all defendants filed cross-motions for summary judgment.

U.S. District Judge Esther Salas granted Darwin’s motion for partial summary judgment, and denied defendants’ motion, rejecting all of their arguments:

Defendants’ contended that the court should abstain from hearing the case, because the U.S. Supreme Court ruled in Burford v. Sun Oil Co., that abstention is proper when federal court review would interfere with a state’s policy-making.

However, Salas ruled that abstention “is appropriate only in…exceptional and limited circumstances… This case involves insurance contract interpretation… (which) Federal courts in this Circuit routinely engage in…”[11]

II. Defendants’ argued that the Prior Knowledge Condition of Darwin’s policy was ambiguous, and should thus be construed in their favor, because it applied only if a firm knew of a potential claim “prior to the inception date of the first policy issued by the Insurer if continuously renewed”, which Fahy Choi’s policy wasn’t: Darwin insured the firm for just one year.[12] (emphasis added)

However, Salas ruled that “Defendants’ proposed interpretation…leads to an absurd result: a claim arising from a known prior wrongful act would be covered where the policy was not continuously renewed, but would not be covered where the policy was continuously renewed.”[13]

III. The judge rejected defendants’ arguments that public policy mandated that Darwin cover Thorsen’s claim to protect “innocent” insureds: 14]

  • She refused to expand the New Jersey Supreme Court’s 2003 decision in Lawson v First American Title Ins. Co., in which it ruled that the insurer must cover an “innocent” partner, even though another partner’s misrepresentations were sufficient to rescind the policy, because Darwin wasn’t seeking rescission, a “remedy (that) engenders an extreme result.”

Instead, Darwin sought only to deny coverage for Thorsen’s claim, so “the potential for harm to the public…and…innocent insureds envisioned by the Lawson court is simply not present here.”

  • She noted that no New Jersey case was directly on point, but predicted that a state court would deem the Prior Knowledge Condition in Darwin’s policy applicable to Thorsen’s claim, despite the public policy concerns raised by defendants, because “Courts in this district have enforced prior knowledge provisions that exclude coverage as to all insureds, including innocent ones”.
  • She stated that Darwin’s policy wasn’t improperly narrow, noting that it offered coverage to “innocent” insureds.

IV. Salas declined to mandate coverage based on the Appellate Division’s 2014 ruling in DeMarco v. Stoddard, which prohibited voiding coverage for an innocent party, because the state Supreme Court reversed DeMarco, and even if it hadn’t, that decision concerned policy rescission, whereas Darwin, as noted, sought only to deny coverage for Thorsen’s claim.

“…Taken to its logical end, the rule advocated by defendants Thorsen and the estate …would (prohibit) most contract-based denials of coverage… (because) almost all legal malpractice victims are ‘innocent’ in the sense that they have nothing to do with the wrongful rendering of legal services giving rise to the legal malpractice action… (The) effect would be a requirement that legal malpractice insurers cover all claims, despite the presence of express language excluding particular claims, which would make insuring the risk of malpractice economically impossible.”[15]

Settlement

The settlement reached at the mediation held on February 26th resolved all claims.

The settlement terms and the identity of the contributors weren’t disclosed, but Thorsen’s lawyer called Darwin National “the heavy lifter.”[16]

He added: “It was a tragic case…You just can’t fathom what was going through Mr. Fahy’s mind at the time.”[17]

Malpractice Insurance Coverage Analysis

The Prior Knowledge Condition is in the Insuring Agreement of Darwin’s policy:

“…It is a condition precedent to coverage that the Wrongful Act upon which the Claim is based occurred…
1. during the Policy Period; or
2. on or after the Retroactive Date and prior to the Policy Period, provided that…prior to the inception date of the first policy issued by the Insurer if continuously renewed, no Insured had any basis (1) to believe that any Insured had breached a professional duty; or (2) to foresee that any such Wrongful Act or Related Act or Omission might reasonably be expected to be the basis of a Claim against any Insured;” [18] (emphasis added).

As noted, Darwin argued that the Prior Knowledge Condition applied to Thorsen’s claim, because John Fahy knew he had breached his professional duty to her prior to 8/1/12, the inception date of Fahy Choi’s first policy with Darwin. Defendants countered that the Condition didn’t apply, because Fahy Choi’s policy wasn’t “continuously renewed”. The judge ruled that Darwin’s was the only “reasonable interpretation”, and the Condition thus applied.

The larger point is that every claims-made policy has a Prior Knowledge Condition, because no insurer intends to cover a claim arising out of a known prior wrongful act, i.e., one that a firm was aware of prior to the inception date of the first policy the insurer issued to it. Otherwise, attorneys could remain uninsured until they committed a wrongful act, and then rush to buy a policy before their client filed a claim.

To prevent that, every malpractice insurer’s application requires a firm to disclose any known claim, or any known wrongful act that could lead to a claim. If the firm discloses a known claim or wrongful act, and later seeks coverage for it, the insurer can deny cover-age under its policy’s Prior Knowledge Condition. If the firm doesn’t disclose it – as Fahy Choi failed to do with Thorsen – and later seeks coverage for it, as Fahy Choi did, then the insurer can either deny coverage under the Prior Knowledge Condition, as Darwin did, or seek to rescind the policy, due to material misrepresentation.

Darwin didn’t seek to rescind Fahy Choi’s policy, presumably because of the NJ Supreme Court’s ruling in Lawson v. First American Title Ins. Co., mentioned above. In that case, Wheeler, Lawson’s partner in a three-lawyer firm, made material misrepresen-tations in the malpractice insurance application he submitted on the firm’s behalf, which helped it obtain coverage. The court granted the insurer’s request to void the policy for Lawson, Wheeler, and the firm, but not for Snyder, the third lawyer, whowas an “innocent insured”. [19]

If Darwin had sought rescission, it would’ve had to show that Fahy Choi’s failure to disclose Thorsen’s potential claim on its application was material to Darwin’s offer of coverage, i.e., if it had been disclosed, Darwin would’ve declined to offer coverage, or offered different terms, such as a policy endorsement that excluded coverage for any claim made by Thorsen.

If Darwin had sought rescission and succeeded, then it wouldn’t have had to cover John Fahy’s estate for Thorsen’s claim, but it would’ve had to cover any other Fahy Choi defendant that the court deemed an “innocent insured”, i.e., one who didn’t and shouldn’t have known about John Fahy’s representation of Thorsen.

Darwin avoided that outcome by seeking only to deny coverage for Thorsen’s claim, a strategy that succeeded because of its policy’s Prior Knowledge Condition.

That gave Darwin leverage in negotiating a settlement with Thorsen and the Fahy Choi defendants, which it apparently decided was more cost-effective than continued litigation.

End Notes

[1] Gialanella, David , “Malpractice Litigation That Followed Fahy Suicide Settles”, New Jersey Law Journal March 1, 2016, http://www.njlawjournal.com/id=1202751085564/Malpractice-Litigation-That-Followed-Fahy-Suicide-Settles

2 Markos, Kibret and Akin, Stephanie, “Client’s lawsuit claims Fahy, former Bergen prosecutor, misled her about legal action”, The Record, November 5, 2013 http://www.northjersey.com/news/client-s-lawsuit-claims-fahy-former-bergen-prosecutor-misled-her-about-legal-action-1.581175

3 See note 1 above.

4 DeMarco, Jerry, “Former Prosecutor Fahy Suicide Victim”, Daily Pilot, 07/17/2013

http://rutherford.dailyvoice.com/police-fire/former-prosecutor-fahy-suicide-victim/637354/

5 See note 1 above.

6 See note 2 above.

7 Ibid.

8 Ibid.

9 See note 1 above.

10 See “DARWIN NATIONAL ASSURANCE COMPANY, Plaintiff, v FAHY CHOI, LLC, et al., Defendants. United States District Court District of New Jersey. Civil Action No. 13-7197 (ES) (JAD) OPINION”, https://ecf.njd.uscourts.gov/doc1/119110490994 (subscription required)

11 Ibid.

12 Ibid.

13 Ibid.

14 Ibid.

15 Ibid.

16 See note 1 above.

17 Ibid.

18  Darwin National Assurance Company, “Lawyers Professional Liability Insurance Policy” September, 2008,

http://lawyersinsurer.com/wp-content/uploads/2016/04/LPL-Policy-Form-Darwin-National.pdf

19 See note 10 above.

Legal Malpractice Insurance: Why Your Premium Doubles In The First Five Years

Legal Malpractice Insurance: Why Your Premium Doubles In The First Five Years

Many attorneys are surprised when, a year after buying their first malpractice insurance policy, their renewal pre-mium rises 20% – 30%, even though there was no material change in their practice, and they didn’t incur a claim. 

This post will explain why that hap-pens, not just at the first renewal, but also at the second, third, and fourth.

All legal malpractice and other professional liability policies are “claims-made”, whereby coverage is triggered by the filing of a claim against the insured lawyer or other profes-sional, i.e., the lawyer must have insurance in place on the date that the claim is made, for it to be eligible for coverage.

One of the least understood aspects of claims-made insurance policies is ‘step-rating’, which insurers implemented in recognition of the fact that there’s usually a lag of several years between the time an attorney commits an error and the time the client makes a claim. Step-rating allows insurers to match the premium they charge to the risk of a claim being made.

With step-rating, the premium is relatively in low the first year of a claims-made policy, i.e., an attorney’s first year with a firm, because there’s little risk that the attorney will incur a claim, i.e., handle a case and make an error and have the client file a claim all during the one-year policy period. This is true whether an attorney just passed the bar or has been practicing for decades with other firms.

After the first year, the premium increases in each of the next four years, to match the increasing risk that the attorney will incur a claim. This increased risk is due to the at-torney’s increasing “prior acts” exposure, which refers to malpractice claims that arise out of work done prior to the current policy period.

In an attorney’s first year with a firm, i.e., Year 1, there’s no prior acts exposure, because the attorney hasn’t done any work for the firm in past years that may result in a claim. Further, as noted, the work the attorney does during the first year is unlikely to result in a claim being filed during that year.

In Year 2, there’s a year of prior acts exposure from Year 1’s work; in Year 3, there’s two years of prior acts exposure, etc.

Step-rating increases stop after Year 5, because an attorney’s prior acts exposure stops increasing, as the statute of limitations tolls on cases from three and four years ago, which offsets the risk of a claim arising out of more recent cases. Thus, the overall risk of incurring a malpractice claim remains more or less constant after Year 5, and remains that way for as long as the attorney remains with the firm. That obviates the need – or justification – for further step-rating increases.

In other words, an attorney with, say, 30 years of prior acts exposure, has about the same malpractice claims risk as an attorney with six years of prior acts exposure, be-cause they have about the same probability of incurring a malpractice claim, i.e., very low, because few malpractice claims are filed 6 – 30 years after an attorney makes an error.

Here’s an example of step-rating:

Year 1 – 50%______________

Year 2 – 60%__________________________

Year 3 – 72%___________________________________

Year 4 – 86%___________________________________________

Year 5 – 100%_________________________________________________

Here, the Year 1 premium is 50% of the “ultimate” step-rating premium, i.e., a 50% dis-count, which is reduced each year as the attorney’s prior acts exposure increases. As noted, after five years, the prior acts exposure reaches equilibrium, and the attorney is considered to be “mature”, so the increases stop.

Note: each insurer uses different step-rating factors, which may differ from those shown above. Some insurers even spread the increases out over six or seven years. However, as a guideline, most insurers’ step-rating increases will cause an attorney’s premium to increase 2 – 3 times over the first 5 – 6 years that he/she works for a firm, independent of other factors that affect the premium, i.e., the policy limits and deductible, the firm’s  practice areas, revenues, claims history, etc., and macroeconomic factors, such as in-flation and interest rates. Also, keep in mind that most insurers calculate a premium for each of the firm’s attorneys and a premium for the firm, and blend them to get the final premium.

While step-rating applies to all attorneys, solo practitioners buying their first malpractice policy will especially notice the increases, particularly in the first three years (Steps 2 – 4), when the increases are larger and the base premium is smaller, but won’t be affected by them again after five years, i.e., once they’re considered to be “mature”.

Conversely, a multi-lawyer firm will experience a step-rating increase in its premium for each attorney who’s in year 2 – 5 with the firm. Therefore, if it adds new hires every  year, it’ll incur a step-rating increase every year, since barring a mass exodus of recent hires, at least one of its attorneys will always be in year 2 – 5 of his/her tenure with the firm. However, if most of the firm’s attorneys are “mature”, and thus not subject to a step-rating increase, then the step-rating increase it does incur may not be noticeable amid the other factors that affect the premium.

So, if you’re a solo practitioner, expect a 20% – 30% increase in your malpractice insur-ance premium in each of the first five or six consecutive years that you’re covered, solely due to step-rating, although as noted, your actual premium may increase more or less than that if your practice areas, policy limits, etc., change.

If you’re an owner of a multi-lawyer firm, expect a step-rating increase in your premium in any year in which your roster includes one or more attorneys who’ve been with the firm for less than six years, although it’s effect will be diluted by your “mature” attorneys, i.e., those who don’t receive a step-rating increase.

You can see a visual representation of step-rating in the diagram at the top of the page. The premium increases each year in years 2 – 5, as the prior acts exposure increases. 

The Retroactive Date, which is the inception date of the first malpractice policy the firm  purchased and has renewed each year without interruption, never changes, but the prior acts exposure increases by one year each year the policy is renewed. As noted, that drives the premium increase in years 2 – 5. As also noted, step-rating increases stop after five years, because the risk of incurring a claim levels off, as the SOL tolls on older matters.

Your legal malpractice policy has a Retroactive Date for the firm, and for each attorney the firm subsequently hired. The Retroactive Date for the firm and every attorney who’s with it on the day it buys its first malpractice policy, is the inception date of that policy, as long as it renews it without interruption. For all attorneys hired after that, it’s their date of hire.

Your insurer uses these dates to calculate any applicable step-rating increase when it determines your firm’s renewal premium.

Keep in mind that if your firm switches malpractice insurers, it’ll lose all of its prior acts coverage, unless the new insurer offers it the same Retroactive Date that’s its prior insurer did. Insurers do this routinely, because otherwise firms wouldn’t switch insur-ers, but your firm needs to make sure that its new insurer does so.

Finally, consider increasing your firm’s policy limits as its Prior Acts exposure increases, i.e., when you renew your policy for Year 3. This is especially important if you chose a minimum limit policy in Year 1, as your firm will have ‘outgrown’ it by Year 3.  

Legal Malpractice Insurance: Avoid Gaps in Coverage

Legal Malpractice Insurance Coverage GapWe previously explained how a claims-made coverage gap can occur when a law firm switches insurers.

Another type of claims-made coverage gap can occur if attorneys are lax in re-porting a claim to their insurer.

This is due to the fact that the term “claims-made” is a misnomer, because most such policies are actually “claims-made and reported”, which means that the claim must be made against you during the current policy period, i.e., while you have a policy in effect with that insurer, and you must re-port the claim to your insurer during same policy period in which it was made, i.e., your current policy period.

This language from Aspen Insurance Company’s legal malpractice policy is typical:

I. INSURING AGREEMENTS
A.
Coverage

The Company will pay on behalf of the Insured all sums in excess of the deductible that the Insured shall become legally obligated to pay as damages and claim expenses as a result of a claim first made against the Insured and reported in writing to the Com-pany during the policy period…(emphasis added)

This means that if you had a policy in effect from, i.e., January 1, 2015 – January 1, 2016, received a claim on the December 31, 2015, and reported it to your insurer on January 2, 2016, the insurer could deny coverage, since you didn’t report the claim during the policy period in which you received it. That’s true even if you renewed your policy with that insurer.

Many insurers avoid this problem by allowing a grace period to report claims after the end of the policy period, usually 30 or 60 days. For example, here’s the language in CNA’s policy:

CONDITIONS
A. Notice

1. Notice of Claims

The Insured, as a condition precedent to the obligations of the Company under this Policy, shall as soon as reasonably possible after learning of a Claim give written notice to the Company during the policy period of such claim. The Company agrees that the Insured may have up to, but not to exceed, sixty (60) days after the Policy expiration to report a claim made against the Insured during the policy period if the reporting of such claim is as soon as reasonably possible. (Emphasis added)

The grace period applies whether or not you renew your policy.

Other insurers handle the problem by including a “continuous coverage” clause in their policy, which applies only to insureds that renew with the insurer:

if any Insured gives written notice of a Claim to the Company…during the Policy Period of any subsequent policy issued to the Named Insured as a result of continuous and un-interrupted coverage with the Company, any Claim subsequently made against any Insured shall be considered to have been first made during the Policy Period the In-sured first became aware of a Potential Claim”. (Emphasis added)

In other words, if you received a claim during your current policy period, you can report it without penalty during the next policy period, if you renewed your policy. However, these “continuous coverage” policies are often only issued to large law firms, which usually have a large deductible or self-insured retention.

So, if your policy is claims-made and reported, and has neither a grace period nor a con-tinuous coverage clause, your insurer could deny coverage if you report a claim even one day after the end of your policy period.

Further, the courts (properly) treat each policy like a self-contained unit, even if it’s been renewed for many years, and would likely affirm any denial of coverage based on a claim being reported after the policy in which it was received, even if it was just one day  late.

For example, in A.B.S. Clothing Collection, Inc. v. Home Ins. Co. (1995) 34 Cal.App.4th 1470, 1476-78 [41 Cal.Rptr.2d 1667], the court ruled that the renewal of an insurance policy is a separate and distinct contract from the prior policy, not a continuous contract, “unless there is clear and unambiguous language showing the parties intended to enter into one continuous contract.”  In other words, the courts won’t find that a continuously renewed policy is a ‘de facto’ continuous contract.

This clearly creates a potential gap in coverage for attorneys whose policy doesn’t have either a grace period or continuous coverage clause. However, insurers rarely, if rarely, exploit it, because denying coverage to a firm merely because it reported claim a day or two after the policy period ended, would make for terrible customer relations, and would generate “pushback” from brokers, because it exposes them to an E&O claim from their client.

That notwithstanding, the solution to avoiding a claims-reporting gap is to promptly re-port all claims or potential claims to your insurer,. However, sometimes a lawyer com-mits an error but believes that it can be fixed, or that the client won’t actually file a claim, and doesn’t report it to the insurer, because s/he’s afraid that doing so will increase their premium.

Further, many lawyers believe that if they maintain continuous coverage with the same insurer, they can report a claim in the policy period after they received it (within reason, i.e., a couple of days into the new period, if they received it in the last few days of the prior period).

However, as shown above, this isn’t true.

The safest action is to report all potential claims to your insurer right away. However, if you think you can resolve a potential claim without involving your insurer, then at least check your policy’s claim reporting requirements before you do so, i.e., determine if your insurer allows a grace period to report claims after the policy period ends. If so, then you can try to resolve the matter yourself, but make sure that if you can’t, you report it to your insurer before the grace period expires.

If your policy lacks a grace period, and you receive a potential claim near the end of your policy period, the prudent thing to do is to report it to your insurer before the end of your policy period. You can still try to resolve it with the client on your own, or even hope it just “goes away”, but be sure to protect yourself by reporting it before your policy expires.

Legal Malpractice Insurer Sues To Void Firm’s Policy Over Undisclosed Claim

Legal Malpractice Insurance

Malpractice Insurance Professional Liability

Law360 reported that Westport In-surance Corp. filed a lawsuit in Penn-sylvania federal court on 2/29/16, seeking to rescind a legal malpractice policy it issued to 150-lawyer firm Stevens & Lee PC, because the firm withheld material information from its malpractice insurance application.

Westport, which is owned by Zurich-based insurance giant Swiss Re, and is one of the US’ largest legal malpractice insurers, alleges that on the Securities Law supplement that was part of Stevens & Lee’s application, it “denied that any of its sec-urities clients had a claim or allegation of fraud, negligence or breach of duty asserted against it.” 

However, Westport claims that the firm failed to disclose an October 2011 class action suit accusing its now-bankrupt client AgFeed of making materially false and misleading statements to investors about its financial condition.

Westport issued a policy to Stevens & Lee in December, 2012, which had a $10M limit and an endorsement providing $5M coverage for punitive damages. However, if it had “been made aware of the class action securities lawsuit filed against AgFeed, it would have issued the policy under different terms and conditions”, i.e., a 29% higher premium, and no endorsement providing coverage for punitive damages.

Westport learned of the securities lawsuit when Stevens & Lee sought coverage for an adversary proceeding filed against it last July  in Delaware bankruptcy court, by the Trustee that represents the AgFeed Liquidating Trust, which was established by AgFeed’s Chapter 11 plan.

The suit claims that Buchanan Ingersoll & Rooney PC, Stevens & Lee PC, and attorney William Uchimoto failed to provide advice that would have alerted AgFeed and its board to a $239 million accounting scheme perpetrated by its China-based operations, which “materially and proximately caused harm to AgFeed, its investors and its creditors.”

The Trustee alleges that if the firms had properly advised Agfeed’s board of the ‘red flags’ raised by the Chinese units’ financial reports, it could have remedied and reported either the financial irregularities or the misleading data that was later provided to the SEC and investors.

Uchimoto was AgFeed’s outside general counsel from 2008 through January 2010, while working at Buchanan Ingersoll & Rooney, and took the account with him to Stevens & Lee.

According to the Trust’s complaint, AgFeed was created through a reverse-merger of a China-based hog and feed producer and a Nevada shell company, in September, 2010. “The use of the reverse-merger device allegedly allowed China-based businesses to raise money on U.S. stock exchanges and was utilized by Uchimoto and a notorious stock promoter (Wey).”

The Trust also alleges that by merging with the Nevada shell company, AgFeed was able to raise money based on financial statements that showed inflated profits. Former prin-cipals of the company allegedly used a variety of methods — such as faking in-voices for sales of feed and nonexistent hogs — to inflate its revenue from its China operations from 2008 through 2011. This led to action against the company by federal securities regulators, which resulted in an $18 million settlement.

Further, the Trust claims that Uchimoto and Stevens & Lee were aware that AgFeed’s published financial numbers might be inaccurate, and in some instances were inten-tionally false, as AgFeed’s China-based managers sought to inflate company earnings and stock prices.

However, rather than helping AgFeed mitigate the problems, Stevens & Lee and Uchi-moto allegedly told the board that “it should not disclose the fact that AgFeed had re-ceived credible evidence that its Chinese management had been keeping two sets of books and the false book had been used to generate the financial statements upon which the investing public relied.”

Westport is defending Stevens & Lee against the AgFeed Trust’s allegations under a reservation of rights. As noted, in late February it sued to void the policy.

“Because Stevens & Lee knew when it submitted the [policy’s] securities supplement to Westport that it contained false information, Westport seeks leave to rescind the policy so that the policy is void ab initio and of no force and effect,” the complaint said.

Alternatively, the insurer is asking the court for a declaratory judgment that it has no duty to defend or indemnify Stevens & Lee or Uchimoto for the claims filed against them by the Trust.

“The Trust’s lawsuit alleges that Uchimoto’s malpractice in representing AgFeed began before he started working at Stevens & Lee, and that Uchimoto knew or should have known of the claimed malpractice. Disputes exist between Westport, Stevens & Lee and Uchimoto regarding whether Westport has a duty to defend and indemnify them for the claims asserted in the Trust’s lawsuit,” the complaint said.

Analysis

#13 of Westport’s Securities Law Supplemental Application asks:
“To Applicant’s knowledge, has any securities or securities related client of the firm: Had any claim or allegation of fraud, negligence, or breach of duty asserted against it?”

It likely asked this question because such claims can lead to legal malpractice claims by the client against the firm, for not “keeping it out of trouble”.

Stevens & Lee apparently answered this question “No”, and Westport issued the policy, which included an endorsement providing $5M dollars of coverage for punitive damages, which otherwise wouldn’t be provided, because of this language in its legal malpractice policy:

I. INSURING AGREEMENTS
A. The Company shall pay on behalf of any INSURED all LOSS in excess of the deductible…

III. DEFINITIONS
 K. “LOSS” MEANS the monetary and compensatory portion of any judgment, award or settlement, provided always that LOSS shall not include:
   3. punitive or exemplary damages;

However, the firm’s “No” answer to #13 was apparently inaccurate, because, as noted,  Westport’s complaint alleges that the firm failed to disclose the October 2011 class action lawsuit against its client AgFeed.

Westport’s attempt to void the policy will rely on this provision:

V. CONDITIONS
 S. ENTIRE AGREEMENT

By acceptance of this POLICY, all INSUREDS reaffirm as of the effective date of this POLICY that (a) the statements in the application(s) and all information communicated by the INSUREDS to the Company, and all INSUREDS’ agreements and represent-ations, are true and accurate, (b) this POLICY is issued in reliance upon the truth and accuracy of such representations which are material to the Company’s issuance of this POLICY…

In other words, if the insured firm’s representations are untrue, then the insurer should be allowed to “unissue” the policy.

Note that Westport’s policy language isn’t as strong as that found in other legal mal-practice policies, such as CNA’s:

V. CONDITIONS
  L. Entire contract
  By acceptance of this Policy the Insured agrees that:

   4.the misrepresentation of any material matter by the Insured or the Insured agent
will render this Policy null and void and relieve the Company from all liability herein.

If the court won’t allow Westport to terminate the policy, it seeks to have the court relieve it of any obligation to continue defending the firm, because the Trustee’s suit alleges that “Uchimoto’s malpractice in representing AgFeed began before he started working at Stevens & Lee, and that Uchimoto knew or should have known of the claimed malpractice”.

The implication is that the firm didn’t disclose this on its application, which if true, means it made a second misstatement on its application, because Section III, #11 of the appli-cation asks:

A. After inquiry of each lawyer, is the Applicant, its predecessor firms or any lawyer pro-posed for this insurance aware of any fact or circumstance, act, error, omission or per-sonal injury which might be expected to be the basis of a claim or suit for lawyers or title agents professional liability?  

B. If yes, what is the total number of these potential claims?
*You must complete a claims supplement for each potential claim.

The law firm apparently didn’t complete a potential claims supplement for Uchimoto’s representation of AgFeed, because if it had, Westport would almost certainly have added a “Specific Claims Exclusion” endorsement to the policy, excluding coverage for any future claim arising out of Uchimoto’s representation of AgFeed. 

Conclusion

If the court denies Westport’s bid to terminate the policy, and denies its declaratory judgment motion that it shouldn’t have to cover Stevens & Lee and Uchimoto for the Trustee’s claim, will it have to cover them, or will it have other grounds for denying coverage?

Westport’s complaint alleges that the malpractice “began before (Uchimoto) started working at Stevens & Lee”, which was March, 2010, according to his LinkedIn profile.

It also states that Westport’s policy with Stevens & Lee began in December, 2012. However, the firm undoubtedly had coverage before that – it was founded in 1928 – and it wouldn’t switch from its former legal malpractice insurer to Westport unless Westport offered it prior acts coverage back to the date offered by its prior insurer, which likely was the date of its first continuous coverage, i.e., 20 or more years ago. This is also called “full prior acts coverage”.

Therefore, Westport couldn’t deny coverage to the firm based on the wrongful act(s) occurring prior to the inception of its coverage, given that it’s retroactive to many years ago, well before Uchimoto’s alleged malpractice in representing AgFeed.

However, while Stevens & Lee is covered for acts occurring years ago, each individual lawyer is generally covered only as far back as his/her first day of employment, which for Uchimoto was in March, 2010.

Therefore, if he committed malpractice prior to that, as Westport alleges, based on the AgFeed Trustee’s complaint, then he wouldn’t be covered under Stevens & Lee’s policy with Westport, but he would be covered under the policy of his prior firm, Buchanan, Ingersoll & Rooney, which employed him from 2/08 – 2/10, and is a co-defendant in the Trustee’s suit. This is because in legal malpractice policies, the definition of “Insured” includes ex-employees.

So, if the court denies Westport’s bid to terminate the policy, and denies its declaratory judgment motion that it shouldn’t have to cover the Trustee’s claim, then it will have to defend Stevens & Lee in this matter, and possibly indemnify it, but it wouldn’t have to defend or indemnify Uchimoto.

Legal Malpractice: Parental Child Abduction Leads to $1.4M Verdict

Family Law MalpracticeLater this year, the New Jersey Supreme Court will issue its ruling in Innes v. Marzano-Lesnevich, et al, on the issue of whether a non-client who prevails in a legal malpractice action can recover legal fees.[i]

The court heard the matter last October. Marzano-Lesnevich’s attorney, and The New Jersey State Bar Association, which participated as amicus, urged the court not to expand on its 1996 ruling in Saffer v. Willoughby that clients who prevail in a legal malpractice action may recover their legal fees.

Marzano-Lesnevich’s lawyer argued “a lawyer does … owe a duty to a non-client and can be sued, but to now expose the attorney on top of that for attorneys’ fees is going too far.”[ii]

Justice Barry Albin countered “logic, fairness and public policy”[iii] suggest that non-clients should be able to recover counsel fees if they’re the victims of their adversaries’ lawyers’ malpractice.

The court’s ruling will conclude a saga that spans 11 years and two continents.

Custody Dispute and Abduction

In 2004, Peter Innes and Maria Jose Carrascosa, who were divorcing, got into a custody dispute over their five year-old daughter, Victoria.[iv]

During the dispute, Carrascosa, a native of Spain, took Victoria there without Innes’ consent, in violation of their co-parenting agreement, and ignored a court order to bring her back.

She was able to take Victoria to Spain, because a few weeks after signing the co-parenting agreement in October, 2004, she fired her divorce lawyer, who was holding the child’s passport in trust, and he sent it with the rest of his file to her new divorce lawyer, Marzano-Lesnevich, who gave it to Carrascosa during a meeting in December.

Carrascosa took Victoria to Spain in January, 2005, and she has been raised there by Carrascosa’s parents ever since. Innes petitioned a Spanish court to have Victoria returned to the US[v], but his petition was denied, as were his appeals. The Spanish court also ordered Victoria to remain in Spain until she turns eighteen.

The last time Innes saw his daughter was in Spain, in autumn, 2005[vi]. He testified that he hasn’t gone back to Spain, because fourteen criminal complaints had been filed against him there, and three were still pending. He denied committing any crime, or abusing Carrascosa or Victoria, but believed he would be unjustly accused and imprisoned if he went back, given the wealth and position of Carrascosa’s family, and the notoriety of the case, which has been covered by Spain’s media, and sparked demonstrations when American and Spanish judges met in Spain to discuss Victoria’s return to the US.

Innes also testified that he has been unable to maintain a relationship with Victoria, as Carascosa’s family refuses delivery of the Christmas and birthday gifts he sends her. He posts messages for her on victoriainnes.com, a website he maintains.

Divorce and Incarceration

Carrascosa, who is an attorney admitted to practice in the European Union, returned to New Jersey without Victoria in 2006 for her and Innes’ divorce trial.

That August, the court awarded Innes sole custody of Victoria, and ordered Carrascosa to return her to the US, but she failed to comply.

She was arrested in December, 2006, and held until 2009, when she was convicted of willful interference with child custody, and sentenced to 14 years in prison. She was paroled in 2014, and then held in Bergen County Jail until April, 2015[vii], on a contempt of court charge, for violating the order to return her daughter to the US.

She was released after Innes, who has since remarried and now has a young son, wrote to the court saying he was not opposed to her release, if she returns to Spain to be with their daughter.

Legal Malpractice Lawsuit, Trial, and Appeal

Innes sued Marzano-Lesnevich and her firm for his and Victoria’s emotional distress, alleging that Carrascosa used the released passport to “abduct”[viii] Victoria.

The firm filed 3rd-party complaints against Innes’ divorce attorney and Liebowitz, Carrascosa’s prior divorce attorney, but both were dismissed.

It also filed a motion for summary judgment, arguing that Marzano-Lesnevich had no duty to Innes, because she didn’t know the child’s passport was being held in trust, she was never asked to become the trustee of the passport, and the trusteeship remained with Liebowitz, who is named as trustee of the passport in the co-parenting agreement.

Her attorney/partner argued “we had no right to not turn over the passport to the mother”, who was the custodial parent.[ix] The court denied the motion, ruling that “defendants owed a duty to Innes”.[x]

At trial, a jury awarded Innes just over $1.4M: $700,000 for his emotional distress, $424,000 for his daughter’s, and $292,332 in interest and attorneys fees.

Marzano-Lesnevich and her firm appealed the lower court’s denial of their motion for summary judgment, and the jury award. The appeals court upheld the lower court’s denial of the motion, and Innes’ award for emotional distress, interest, and attorneys’ fees, but threw out his daughter’s award, because “there was simply no testimony regarding her emotional distress, meaning the jury’s award was based upon speculation”.[xi]

Innes responded: “Because she is…in Spain, I could not offer any proof of her emotional harm. (But)…a 4-year-old child, who is taken from her father, is certain to have been emotionally harmed”.[xii]

Marzano-Lesnevich then appealed Innes’ award to the New Jersey Supreme Court, which granted review only on the issue of whether Innes can recover his legal fees.

Declaratory Judgment Action

While the Supreme Court was deciding if it would hear Marzano-Lesnevich’s appeal, Innes sued her firm’s legal malpractice insurer to collect his judgment. However, the court granted the insurer’s motion for summary judgment, ruling that its policies don’t cover Innes’ claim, because (1) “it was first made prior to the policies’ term”, and (2) the policy excludes coverage for errors and acts the law firm “could have reasonably foreseen…might become the basis of a claim or suit”.[xiii]

As a result, Innes must collect his judgment, which totals $833,815 in damages + interest, directly from Marzano-Lesnevich and her firm.

Based on the court filings and ruling, this appears to be the sequence of events:

  • The firm didn’t have malpractice insurance when it released the passport in December, 2004.
  • In January, 2006, the firm received a letter from an attorney representing Innes “in an action against your firm”[xiv] (he sued in October, 2007).
  • The firm applied for malpractice insurance in September or October, 2006, but didn’t disclose the letter from Innes’ attorney, or that it had released the passport, or that the child was taken to Spain, even though the application asked if a claim had been made against any of the firm’s attorneys in the past five years, or if any of them knew of any act or error that might lead to a claim being made against them.
  • The first malpractice policy the firm bought after releasing the passport covered errors or omissions it committed only during the policy period, which was 10/23/06 – 10/23/07, i.e., it didn’t cover Prior Acts, which are errors or omissions committed before a policy’s inception date.
  • The firm didn’t seek coverage for Innes’ claim from its malpractice insurer, so Innes sought a declaratory judgment that he was a third-party beneficiary of the firm’s policies, and they covered his claim.
  • The insurer filed a counterclaim, seeking a declaratory judgment that its policies didn’t cover Innes’ claim.

Lessons Learned

I. Law practice risk management:

A. A co-parenting agreement that prohibits a child from traveling abroad unless both parents consent, should include safeguards that prevent any “shenanigans” regarding the child’s passport, i.e., it should specify procedures to be followed if the passport is entrusted to the attorney of one of the parents, and that attorney stops representing the parent.

B. Communication between new, prior, and opposing counsel is vital. Liebowitz should have contacted Innes’ attorney as soon as Carrascosa fired him, and Marzano-Lesnevich, as soon as he found out that she was Carrascosa’s new attorney, and arranged to be replaced as trustee of the child‘s passport.

Failing that, Marzano-Lesnevich should have contacted Innes’ attorney about replacing Liebowitz as passport trustee, as soon as she reviewed the co-parenting agreement.

Instead, Marzano-Lesnevich gave the passport to Carrascosa, and later claimed that this was permissible, because the co-parenting agreement “was moot”, i.e., “it had been repudiated by both parties immediately.”[xv] In that case, she should have contacted

Innes’ attorney about either revising or terminating it.

II. Legal malpractice:

Non-clients can sue attorneys for malpractice. According to attorneys McAvoy and Schnake, “while a lawyer typically does not owe a duty of care to non-clients, an attorney may owe a fiduciary duty to persons, though not strictly clients, (who)…relied on the attorney’s professional capacity.”[xvi]

In this case, the appeals court held that “it was entirely foreseeable that (Carrascosa’s) possession of the daughter’s passport would facilitate her ability to move from the country…giving the passport to the wife was a breach of (Marzano-Lesnevich’s) duty.”

III. Legal malpractice insurance:

The money that Marzano-Lesnevich and her firm saved by not buying malpractice insurance until after releasing the passport, is a fraction of the $833K judgment they owe Innes, which their malpractice insurer would have been obligated to pay, if they had been properly insured.

However, legal malpractice insurance is a claims-made and reported policy, not an occurrence policy, like auto or property insurance, so to trigger it, you must be insured on the date you commit an error, and the date a claim is made against you due to that error, and the date you report that claim to your insurer.

Since you can’t predict any of those dates in advance, and you may not even know you made an error until incurring a claim months or years later – as happened to Marzano-Lesnevich – the only way to always be covered is to buy malpractice insurance when you first open your practice, and renew it every year that your practice remains open.

As long as you do so, your coverage will be retroactive to the inception date of your first policy, i.e., you’ll get another year of Prior Acts coverage with each renewal. Then, if you’re sued for work you did on or after the inception date of your first policy, and before the inception date of your current policy, and you report the claim to your insurer during your current policy period, then your Prior Acts coverage will obligate your insurer to protect you (subject to policy exclusions, etc.)

Conversely, if you don’t renew your policy one year, then you’ll lose all of your Prior Acts coverage; the next policy you buy will cover any errors or omissions you commit only on or after the inception date. For example, if a firm was insured from Jan. 1, 2000 – January 1, 2016, but didn’t renew or buy Extended Reporting Period coverage, then starting at 12:01 AM on January 1, 2016, it would no longer be insured for claims arising out of errors or omissions it committed before then. Even if it bought coverage on Jan. 2, 2016, that policy would cover it only for any errors or omissions it commits between that date and Jan. 2, 2017.

End notes

  1. Booth, Michael, “Justices Mulling Counsel Fees For Non-Clients In Legal Mal Cases”, NEW JERSEY LAW JOURNAL, October 27, 2015, http://www.njlawjournal.com/id=1202740852518/Justices-Mulling-Counsel-Fees-for-NonClients-in-Legal-Mal-Cases?slreturn=20151024210721#ixzz3q7M2ubPP
  2. Id.
  3. Id.
  4. Zaremba, Justin, “Insurance Doesn’t Have to Pay $1.4M Over Law Firm’s Mistake in Custody Dispute”, NJ ADVANCE MEDIA, September 14, 2015,

http://www.nj.com/bergen/index.ssf/2015/09/dad_whose_child_was_illegally_taken_to_spain_loses.html

  1. See PETER INNES and VICTORIA SOLENNE INNES, by Her Guardian PETER INNES, Plaintiffs–Respondents, v. MADELINE MARZANO–LESNEVICH, ESQ., and LESNEVICH & MARZANO–LESNEVICH, Attorneys At Law, i/j/s/a, Defendants–Appellants/Third–Party Plaintiffs, v. MITCHELL A. LIEBOWITZ, ESQ., PETER VAN AULEN, ESQ. and MARIA JOSE CARRASCOSA, Third–Party Defendants, DOCKET NO. A–0387–11T1, http://caselaw.findlaw.com/nj-superior-court-appellate-division/1662710.html
  2. Id.
  3. Kibret, Markos, “Mother in bitter Bergen County child-custody case is freed after 8 years in jail”, THE RECORD, April 24, 2015, http://www.northjersey.com/news/mother-who-moved-child-to-spain-during-custody-battle-released-from-bergen-county-jail-1.1318448
  4. See note 5 above.
  5. Gallagher, Mary Pat, “Matrimonial Firm to Go on Trial for Allegedly Aiding in Child’s Abduction”, NEW JERSEY LAW JOURNAL, July 6, 2010

http://www.law.com/jsp/article.jsp?id=1202463246952&Matrimonial_Firm_to_Go_on_Trial_for_Allegedly_Ai ding_in_Childs_Abduction (found on http://www.bringseanhome.org/forums/index.php?topic=3315.10;wap2)

  1. See note 5 above.
  2. Sampson, Peter J., “Court hands win, loss to Hackensack law firm, Hasbrouck Heights dad seeking girl’s return from Spain”, THE RECORD, April 8, 2014, http://www.northjersey.com/news/court-hands-win-loss-to-hackensack-law-firm-hasbrouck-heights-dad-seeking-girl-s-return-from-spain-1.857685
  3. Id.
  4. See “PETER INNES, Plaintiff, v. SAINT PAUL FIRE and MARINE INSURANCE COMPANY and TRAVELERS COMPANIES, INC., Defendants. United States District Court, D. New Jersey. Civil Action No. 12-234”, http://www.leagle.com/decision/In%20FDCO%2020150915A38/INNES%20v.%20FIRE
  5. Id.
  6. See note 5 above.
  7. McAvoy, Terrence P., and Schnake, Katherine G., “Non-Client Awarded Damages for Emotional Distress”,

Lawyers for the Profession® Alert, May 20, 2014, citing Innes v. Marzano-Lesnevich v. Leibowitz, 435 N.J. Super 198, 87 A.3d 775 (April 7, 2014), http://www.hinshawlaw.com/newsroom-publications-alerts-591.html

Legal Malpractice Insurance: You Don’t Know What Kind Of Law You Practice, And It’s Raising Your Premium

Legal Malpractice InsuranceIf you tell a thousand lawyers they don’t know what kind of law they practice, one will likely chuckle; the other 999 will grimace, scowl, or maybe bite you. But as a legal malpractice insurance broker who reviews applications every day, I can tell you that many lawyers really don’t know, as these examples attest:

I. The Securities Lawyer Who Should’ve Invested In a Better Job Description

 A “Big Law” firm attorney who was opening a solo practice, wrote “100%” next to “Securities Law” on the practice areas grid of his application. However, he answered “not applicable” to the questions on the securities law supplemental application, which ask about capital-raising transactions, mergers and acquisitions, etc., that an attorney has worked on.

As a result, we advised him that it may be possible to reclassify his practice, which would save him money, because securities lawyers pay among the highest legal malpractice insurance premiums. For example, while most lawyers pay between $2,000 and $4,000 for a policy with a $1M limit, we had recently procured coverage for a solo securities lawyer who focuses on debt and equity placements: the best quote for a policy with $1M limit was $6,500. The attorney’s silence upon hearing this suggested that this was much more than he had budgeted.

Fortunately, further discussion revealed that his solo practice would be limited to providing regulatory advice to investment funds. We had him change his practice area on his application to “Other – 100%”, and describe his practice on his firm’s letterhead.

This enabled us to procure a policy for him that had a $1M limit for $5,100.

II. The Debt Collection Law Firm That Owed an Explanation

A debt collection law firm had its malpractice insurance non-renewed due to “high claims frequency”.

A local insurance agent sent its application to several major malpractice insurers, all of whom declined to offer a quote. The agent then told the firm that it would have to obtain coverage in the “hard-to-place-risks” market, where the premiums are 50% – 100% higher.

This led the firm’s founder to send us its application. Its malpractice claims history consisted of four lawsuits and three incidents (potential claims) in the last seven years, for which its insurer’s payout + reserve for future payouts was nearly double the amount the firm had paid in premiums. Malpractice insurers clearly wouldn’t view the firm as a good risk.

However, there was good news amid the bad: the four lawsuits were brought by individual debtors, who sued the firm under the Fair Debt Collection Practices Act (FDCPA), while the three incidents involved commercial debtors, who can’t sue under the FDCPA. Further, the last FDCPA claim had been filed three years ago, and all three incidents involving commercial debtors had occurred since then. This suggested a change in the firm’s practice.

The firm’s founder confirmed that he began de-emphasizing consumer debt collection in favor of commercial debt collection after the last FDCPA claim was filed. Currently, the practice was 80% commercial debt collection v. 20% consumer, the opposite of what it had been three years ago.

In other words, this wasn’t a debt collection firm, but a commercial debt collection firm. It thus had little exposure to FDCPA claims, which are the biggest malpractice risk for debt collection lawyers.

We had the firm fill out the application of the only major legal malpractice insurer that distinguishes between consumer and commercial debt collection, and procured a policy for it that provided the same coverage as its non-renewed policy for a 2% increase in premium.

III. The Business Law Firm That Had No Business Describing Its Practice the Way It Did

A Business Law firm sent us what appeared to be a routine application: its practice was a mix of business entity formation; small, private company purchases/sales; commercial litigation, and general business law, i.e., drafting and negotiating commercial contracts.

Further, it reported no malpractice claims history, no suits against clients for unpaid fees, and acceptable risk management procedures, i.e., regular use of engagement letters, dual-calendar docket control, a conflict-of-interest avoidance system, etc.

Given the firm’s the risk profile, and the fact that its current policy was expensive relative to the coverage it provided, we anticipated that we would be able to procure a policy for it that provided more coverage for a lower premium…until we discovered this sentence on its website: “we’ve handled complex business matters worldwide, and have affiliates in some of the world’s busiest and most exotic locales”.

This was news to us, because according to the firm’s application, the most exotic locale that it practiced law in was Cleveland. Further, the complexity of international law practice can increase a small firm’s malpractice claims risk so much that many insurers will either add a surcharge to the premium or decline to offer a quote.

When we explained this to the firm’s managing partner, he stated that it hadn’t worked on an international matter in several years, and didn’t expect to in the near future, so the statement on its website was similar to “puffery”.

We explained that malpractice insurers would regard any information on the firm’s website as indicative of its current practice, and recommended that it remove any non-current information.

Once this was done, we procured a policy for the firm that provided a 50% increase in policy limits for a 16% lower premium.

 

Curtis Cooper is a legal malpractice insurance broker, and principal of Lawyers Insurance Group Broker For Great Law Firms, in Washington, DC, which helps law firms optimize their malpractice coverage. He can be reached at 202-802-6415 or ccooper@lawyersinsurer.com.                                                                                                                                                                        

Legal Malpractice Insurance: Reimbursing Over-billed Clients Isn’t Covered, No Matter What You Call It

Legal Malpractice Insurance: Over-Billing By Any Other Name Isn’t CoveredAttorney Karen Rubin of Thompson Hines wrote a post about Edward T. Joyce & Assocs., P.C. v. Professionals Direct Insurance Co. (PACER identification required for access), a case in the Northern District of Illinois, in which the court held that the Joyce firm’s legal malpractice insurer didn’t have to indemnify it for attorneys’ fees that the firm was ordered repay due to its misconduct, because the policy excluded coverage for sanctions.

Fee Dispute and Arbitration

According to attorney Thompson, “the Joyce Firm represented more than 100 individuals and entities as plaintiffs under a contingent fee agreement.  After obtaining an arbitration award against the insolvent defendant, the Joyce Firm hired additional co-counsel to help…pursue a claim against the defendant’s insurer”, which resulted in an $8.6 million settlement.

“Plaintiffs, however, disputed the amount and basis of the Joyce Firm’s fees arising from that settlement, and also disputed who was responsible for paying the additional co-counsel’s fees. Plaintiffs demanded arbitration, seeking, among other things, “equitable disgorgement.”  The arbitrator found several instances of misconduct on the part of the Joyce Firm…(and) determined that “as a sanction,” it had to pay 25 percent of the co-counsel’s fees, or about $150,000.”

The firm “was also ordered as ‘a sanction’” to repay the plaintiffs more than $405,000 in fees that it had previously collected as “contingent hourly fees” under an attempt that it made to modify the original fee agreement “by adding a provision for an hourly contingent fee.”

The law firm appealed, but “the trial court confirmed the arbitration award, the court of appeals affirmed, and the state supreme court denied a petition for leave to appeal.”

Malpractice Insurer Denies Coverage

The Joyce Firm’s legal malpractice insurer refused to indemnify it, i.e., to pay the sanctions that the arbitrator awarded to plaintiffs, due to an exclusion in its policy for “any claim for fines, sanctions, penalties, punitive damages or any damages resulting from the multiplication of compensatory damages”. Note: the words in bold type are defined in the policy; damages means “monetary judgments, awards or settlements unless otherwise excluded.”

Declaratory Judgment

The Joyce Firm responded by filing a declaratory judgment action against its insurer, arguing that despite the arbitrator’s use of the term “sanction”, he meant disgorgement, as he found that the firm did not intend to violate the law or the rules of ethics. (Recall that the plaintiffs in the underlying case demanded “equitable disgorgement” from the firm.)

The district court rejected that argument, citing the arbitrator’s “stated imposition of sanctions,” and the state court of appeals’ affirmation of the arbitration award, which “expressly and repeatedly referred to the damages award as a sanction.” It granted summary judgment in favor of the insurer.

LESSONS

Law Firm Risk Management

Attorney Thomson points out thatModel Rule 1.5(b) requires that once agreed to, any change in the basis or rate of the fee must be communicated to the client. That was apparently not carried out adequately in this case, providing one of the implicit bases for the arbitrator’s award against the firm.”

Clearly, any firm that attempts to modify a fee agreement during an engagement, doesn’t get the client’s approval – as apparently happened to the Joyce firm – but bills the client as if it had approved the modification, is inviting a fee dispute that it’s unlikely to win.

Usually, the client refuses to pay the fees, the firm sues to collect – if pre-suit collection attempts are unsuccessful, and the amount is large enough – and the client then files a counterclaim for malpractice. This case differs in two respects: the client paid the Joyce firm’s modified fees, i.e., the contingent hourly fees, probably because it didn’t want to jeopardize the underlying case, which was a wise decision, considering it obtained an $8.6M judgment, and the fee dispute was arbitrated, likely due to an arbitration clause in the engagement letter between the Joyce firm and its client.

However, the outcome was as expected: the client contested the unapproved fees, and prevailed.

Legal Malpractice Insurance

Ironically, even if the court had accepted the Joyce firm’s argument that the arbitrator meant “disgorgement”, rather than “sanctions”, there still wouldn’t have been any coverage, because its legal malpractice policy also excludes coverage for “any claim for legal fees, costs, or disbursements paid or owed to you.” The arbitrator ordered the firm to repay $405,000 “in fees it had previously collected” from its client, which is clearly a “claim for legal fees…paid or owed to you”.

The bottom line is that any demand for reimbursement/disgorgement of fees, even if it’s couched as “sanctions”, as in this case, won’t be covered by a legal malpractice policy, either because of an exclusion like that contained in the Joyce firm’s policy, or because of the definition of “Damages”, as in the Markel Insurance Company’s policy: “Damages means compensatory judgments, settlements or awards, but does not include punitive or exemplary damages, fines or penalties, sanctions, the return of fees or other consideration paid to the Insured…”

 

Legal Malpractice Insurance: The Prior Acts Conundrum

Legal Malpractice Insurance: The Prior Acts Conundrum

All legal malpractice and other pro-fessional liability policies are “claims-made”, whereby coverage is trig-gered by the filing of a claim against the insured lawyer or other profes-sional, i.e., the lawyer must have in-surance in place on the date that the claim is made, for it to be eligible for coverage.

However, such policies are more ac-curately called “claims-made and re-ported”, which means that the claim must be made against you during the current policy period, i.e., while you have a policy in effect with that insurer, and you must report the claim to your insurer during same policy period in which it was made, i.e., your current policy period.

Further, with basic claims-made and reported coverage, the wrongful act underlying a claim must also have occurred during the current policy period.

Prior Acts Coverage

To be covered for claims arising out of wrongful acts that occurred prior to the current policy period, a firm must have Prior Acts coverage, a/k/a Retroactive coverage, which covers alleged malpractice committed before the current policy’s inception date.

Prior Acts coverage is essential, because malpractice claims generally aren’t filed until 1 – 4 several years after the alleged wrongdoing. Without it, the firm’s current policy – the one it has in place when it receives the claim – won’t provide coverage, since the wrongful acts that gave rise to the claim occurred before the inception date.

Every claims-made policy has a Prior Acts or Retroactive Date, which is usually on the Declarations (first) page of the policy. Insurers won’t provide prior acts coverage when a firm buys its first malpractice policy, so for that policy, the Prior Acts Date will be the same as the policy inception date. However, once a firm buys a policy and renews it without letting it lapse, its insurer will offer it prior acts coverage back to the inception date of its first policy, i.e., in the firm’s second year of coverage, it’ll have one year of prior acts coverage, in its third year, it’ll have two years of prior acts coverage, etc.

Then, if the firm is sued for work it did on or after the inception date of its first policy, and before the inception date of its current policy, and it reports the claim to its insurer during its current policy period, its Prior Acts coverage will obligate its insurer to protect it (sub-ject to policy exclusions, etc.)

Conversely, if a firm doesn’t renew its policy one year, then it’ll lose all of its Prior Acts coverage; the next policy it buys will cover any errors or omissions it commits only on or after the inception date. For example, if a firm was insured from Jan. 1, 2000 – January 1, 2016, but didn’t renew or buy Extended Reporting Period coverage, then starting at 12:01 AM on January 1, 2016, it would no longer be insured for claims arising out of er-rors or omissions it committed before then. Even if it bought coverage on Jan. 2, 2016, that policy would cover it only for any errors or omissions it commits between that date and Jan. 2, 2017.

Prior Acts Coverage Gaps

However, even if a firm has Prior Acts coverage, gaps can occur that will leave it unpro-tected if it incurs a claim.

This claim scenario that we discussed previously illustrates how a coverage gap is cre-ated if a firm switches insurers: the Great law firm bought a legal malpractice policy from Big Insurer effective January 1, 2012 – December 31, 2012, and renewed it for January 1, 2013 – December 31, 2013, and January 1, 2014 – December 31, 2014, but switched to Huge Insurer on January 1, 2015.

A Great lawyer represented client Smith from February 15, 2013 – May 1, 2014. On March 5, 2015, Smith notified the Great firm that he planned to sue it for malpractice. The firm reported the claim to Big Insurer on March 9, 2015.

Will Big Insurer provide coverage?

Previously, we presented three conditions that must be met for a claim to trigger cover-age under a claims-made policy:

1) The wrongful act(s) that gave rise to the claim must have occurred on or after the policy’s retroactive date – the date you began uninterrupted coverage with your insurer. 2) The claim must be made against you during the current policy period, i.e., while you have a policy in effect with that insurer.
3) You must report the claim to your insurer during same policy period in which it was made, i.e., your current policy period.

Let’s apply them to this scenario:

Condition #1: the wrongful act(s) that gave rise to the claim occurred between February 15, 2013 – May 1, 2014, the period of representation, which is after the policy’s retro-active date of January 1, 2012. Pass.
Condition #2: the claim was made on March 5, 2015, which was after the Great firm had terminated its coverage with Big Insurer. Fail.
Condition #3: The Great firm reported the claim to Big Insurer on March 9, 2015, which is after it had terminated its policy. Fail.

Can the Great firm obtain coverage by reporting the claim under the 60-day grace per-iod that most insurers allow after a claims-made policy is terminated? No, because this would’ve allowed it to report this claim by March 2, 2015, but it didn’t report it until March 9, 2015. Fail.

Conclusion: the claim isn’t covered under Great firm’s legal malpractice policy with Big Insurer.

It then reported the claim to its new carrier, Huge Insurer; will it provide coverage?

Let’s apply the three-condition test:

Condition #1: the wrongful act(s) that gave rise to the claim occurred between February 15, 2013 – May 1, 2014, the period of representation, which is before the Great firm’s policy’s retroactive date of January 1, 2015, its first date of coverage with Huge Insurer. Fail.

Conclusion: no coverage.

The Great firm thus has no coverage for this claim under either its prior or current pol-icy, so it will have to fund its defense and any monetary settlement out of its and/or its partners’ assets.

Avoiding Prior Acts Coverage Gaps

Here’s how the firm could have avoided this coverage gap:

I. Buy an Extended Reporting Period (ERP) endorsement from its former insurer (Big Insurer), which would allow it to report claims for 1 – 5 years or in perpetuity after ter-minating its coverage, depending on which option it buys.

The endorsement “applies only to claims first made against you and first reported to us on or after the policy termination date” – December 31, 2014 in this example – and “the claim (must arise out of) an act or omission occurring prior to the end of the Policy Per-iod”, – again, December 31, 2014 – and on or after the policy’s retroactive date – Janu-ary 1, 2012 in this example.

What would’ve happened if the Great firm had bought the ERP endorsement, even for one year?  Let’s apply the 3-condition test:

Condition #1: the wrongful act(s) that gave rise to the claim occurred between Febru-ary 15, 2013 – May 1, 2014, the period of representation, which is after the policy’s retro-active date of January 1, 2012. Pass.
Condition #2: the claim was made on March 5, 2015, after the Great firm’s policy ter-mination date of December 31, 2014, but the 1-year ERP extends the period in which the policy will cover claims made against it to January 1, 2015 – December 31, 2015. Pass.
Condition #3: The firm reported the claim to Big Insurer on March 9, 2015, which be-cause it bought the ERP, is within the allowable reporting period of January 1, 2015 – December 31, 2015. Pass.

Conclusion: assuming no policy exclusions, etc., apply, this claim is covered under the Great firm’s legal malpractice policy with Big Insurer.

However, ERP coverage is expensive, typically 125% of the annual premium for a one year ERP, rising to 300% for a perpetual ERP.

Also, whatever limit is left on the expiring policy carries over to the ERP. If/when that limit is exhausted by defense costs and indemnity payments made by Big Insurer to resolve malpractice claims, the Great firm will have no further coverage under that policy, even if it bought a multi-year ERP that still has years to go. In other words, buying an ERP doesn’t buy fresh policy limits.

Further, the Great firm would still have to buy a policy to cover it for any malpractice that it commits after 12/31/14.

II. Buy Prior Acts coverage from its new carrier, Huge Insurer, which resets the policy retroactive date to before the inception of coverage, i.e., back to when the Great firm first had continuous coverage, which is January 1, 2012, when it bought its first legal malpractice policy from Big Insurer.

This would be the retroactive date of its policy with Huge insurer, if it bought Prior Acts coverage; without Prior Acts coverage, the policy’s retroactive date would be the same as its inception date: January 1, 2015.

Now let’s apply the 3-condition test to the above claim scenario:
Condition #1: the wrongful act(s) that gave rise to the claim occurred between Febru-ary 15, 2013 – May 1, 2014, which is on or after the policy’s retroactive date of January 1, 2012. Pass.
Condition #2: the claim was made on March 5, 2015, during the current policy period of January 1, 2015 – December 31, 2015. Pass.
Condition #3: The firm reported the claim to Huge Insurer on March 9, 2015, which is during the same policy period in which it was made. Pass.

Conclusion: the Great law firm is covered for this claim is under its policy with Huge Insurer, subject to any policy exclusions, etc.

Further, Prior Acts coverage costs less than an ERP, and is generally the better choice for law firms that switch malpractice insurers.

Note: Insurers won’t provide Prior Acts coverage unless the insured attests that it’s un-aware of any pending claims against it, or of any incidents that could lead to a claim, i.e., an adverse outcome or a missed statute of limitations. If it is aware of a pending or po-tential claim, it must disclose that on its application, and the new insurer won’t cover it.

Thus, Huge Insurer would deny coverage for the above claim if client Smith had threat-ened to sue the Great firm for malpractice prior to 1/1/15, Great’s first day of coverage with Huge, or if the Great attorney who worked with Smith knew before that date that he/she had made an error that could result in Smith making a claim.

In either case, the Great firm should have immediately reported Smith’s threatened suit or the attorney’s error to Big Insurer, its malpractice insurer at the time.

Known v. Unknown Prior Acts

Keep in mind that even if you switch insurers and the new insurer gives you Prior Acts coverage back to the inception date of the first policy you ever purchased, it will cover only unknown prior wrongful acts, not known prior wrongful acts, i.e., those that a firm knew about before the inception date of its first policy with that insurer.

Every claims-made policy has a Prior Knowledge Condition, which excludes coverage for ‘known prior wrongful acts’.

Here’s an example from Darwin National’s policy:

“…It is a condition precedent to coverage that the Wrongful Act upon which the Claim is based occurred…

  1. during the Policy Period; or
  2. on or after the Retroactive Date and prior to the Policy Period, provided that…prior to the inception date of the first policy issued by the Insurer if continuously renewed, no Insured had any basis (1) to believe that any Insured had breached a professional duty; or (2) to foresee that any such Wrongful Act or Related Act or Omission might reasonably be expected to be the basis of a Claim against any Insured;” (emphasis added)

Without such a policy provision, attorneys could remain uninsured until they committed a wrongful act, and then rush to buy a policy before their client filed a claim.

To prevent that, every malpractice insurer’s application requires a firm to disclose any known claim, or any known wrongful act that could lead to a claim. If the firm discloses a known claim or wrongful act, and later seeks coverage for it, the insurer can deny cov-erage under its policy’s Prior Knowledge Condition. If the firm doesn’t disclose it, and later seeks coverage for it, then the insurer can either deny coverage under the Prior Knowledge Condition, or seek to rescind the policy, due to material misrepresentation.

To protect your firm, report all actual and potential claims to your current insurer before the policy period ends, and you switch to the new insurer.

However, there’s no protection against a rogue partner who doesn’t disclose a potential claim. This creates a gap in coverage if the firm switches insurers, even if it gets full prior acts coverage from the new insurer.

We’ll illustrate using the above example, whereby the Great law firm bought three one-year legal malpractice policies from Big Insurer for January 1, 2012 – December 31, 2015, then switched to Huge Insurer on January 1, 2015.

A Great lawyer represented client Smith from February 15, 2013 – May 1, 2014. On October 4, 2014, Smith notified his Great lawyer that he planned to sue it for malprac-tice.

However, the attorney didn’t tell anyone at the firm about it, so it was never reported to Big Insurer before the firm’s last policy with it terminated on 12/31/14, and it wasn’t re-ported on the firm’s application to its new carrier, Huge Insurer.

On 4/1/15, Smith sued the Great firm, but Big Insurer denied coverage, since its policy with firm had expired on 12/31/14, and the firm didn’t renew. Huge Insurer denied cov-erage, even though the wrongful acts had occurred after the firm’s Prior Acts date of 1/1/12, because Smith’s attorney knew about the potential claim on 10/4/14, before the inception date of its first policy with Huge, which was 1/1/15, i.e., it was a known prior wrongful act, and was thus excluded by the policy’s Prior Knowledge Condition.

The firm would be covered if it had bought an ERP (‘tail’ coverage) from its former insurer, but as noted, that costs much more than buying prior acts coverage from the new insurer, so few firms do it.

That’s the Prior Acts conundrum: a gap in coverage can occur even if a firm has full Prior Acts coverage, if a rogue attorney hides a potential claim.