A 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, who was 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,
https://lawyersinsurer.com/wp-content/uploads/2016/04/LPL-Policy-Form-Darwin-National.pdf
19 See note 10 above.