Legal Malpractice Insurance: No Coverage For Fines Against Your Client Due To Your Wrong Advice

PenaltiesThe Federal Trade Commission (FTC) announced that Leucadia National Corporation has agreed to pay $240,000 in civil penalties to resolve allegations that it violated federal pre-merger reporting laws by failing to report a conversion of its ownership interest in Knight Capital Group, Inc.


According to the FTC “in July 2013, Knight Capital consolidated with another financial services company, GETCO Holding Company, LLC to become KCG Holdings, Inc. That transaction converted Leucadia’s ownership interest in Knight Capital into nearly 16.5 million voting shares of the new entity, KCG Holdings, worth approximately $173 million.”

The FTC filed a complaint charging that Leucadia was required by law to report the transaction to U.S. antitrust authorities under the Hart-Scott-Rodino Act, which require parties to “notify the FTC and the Department of Justice of large transactions above certain dollar thresholds that affect commerce in the United States and otherwise meet the statutory filing requirements.”

Failure to Report

The FTC announcement stated that “Leucadia did not report the transaction, according to the complaint, because it thought that it qualified for an exemption applicable to institutional investors. Although Leucadia consulted experienced HSR counsel in connection with the transaction, their counsel erroneously concluded that the exemption applied. Leucadia made a corrective filing in September 2014, acknowledging that the acquisition was reportable under the HSR Act.”


Although “Leucadia relied on the advice of counsel, the FTC determined to seek civil penalties because…Leucadia had previously violated the HSR Act in 2007, which led to a corrective filing in 2008.”

Note: the HSR Act provides that “any person, or any officer, director, or partner thereof, who fails to comply with the Act’s provisions shall be liable to the United Stated for a civil penalty of not more than $10,000 for each day during which such person is in violation of the Act.” (Paragraph 31). Leucadia’s filing was about 425 days late, which would yield a maximum fine of $4.25M.

Legal Malpractice

Assuming Leucadia’s assertion that it relied on faulty advice from counsel in failing to report the transaction to the FTC on time is true, it would be entitled to seek reimbursement from counsel for the penalties levied against it.

One way to do that would be to file a legal malpractice claim. If it did, would the law firm’s malpractice insurer indemnify it, i.e., reimburse Leucadia for the $240,000 penalty that it paid?

Legal Malpractice Insurance

If the law firm admitted to providing the faulty advice, it’s malpractice policy would hopefully respond, because all elements of a legal malpractice claim would have been satisfied: an attorney-client relationship existed, so the attorney owed a duty to Leucadia; the attorney breached that duty by misinterpreting the law; Leucadia’s incurred damages as a result, i.e., the $240,000 penalty; and the attorney’s improper advice was the proximate cause of Leucadia’s damages.

(Since the FTC stated that Leucadia’s prior violation of the HSR Act led it to seek civil penalties  for this violation, that can be argued to be a contributing cause, but if the attorney had given the proper advice, the FTC wouldn’t have levied a penalty.)

Unfortunately, legal malpractice policies wouldn’t cover this claim, i.e., the policy of Professionals Direct, which is owned by Hanover Insurance Co., a major legal malpractice insurer, excludes coverage for “any claim for fines, sanctions, penalties, punitive damages or any damages resulting from the multiplication of compensatory damages”.

Further, while the policy of CNA, the largest legal malpractice insurer, contains no such exclusion, the insuring agreement states that the insurer 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.” The words in bold type are defined in the policy: “Damages do not include: B. civil or criminal fines, sanctions, penalties or forfeitures, whether pursuant to law, statute, regulation or court rule.”

Gap in Coverage

The intent of legal malpractice policies is to not cover penalties levied against a law firm. In this case, the penalties were levied against the firm’s client, yet the wording of the policies excludes coverage.


A law firm that handles matters that expose its clients to government penalties, should request that its malpractice policy be endorsed to provide coverage for claims that may arise out of those matters; this would entail altering the wording of that part of the policy that excludes coverage, i.e., an exclusion or the definition of “damages”.

Final Note

This coverage issue would be moot if Leucadia’s attorney was working for a law firm that has a Self-Insured Retention (SIR) of $250,000 or greater per claim on its malpractice policy, as many large firms do, because an insurer won’t handle a matter, and thus won’t make a coverage determination, until the SIR has been exhausted.

If the amount in question here, $240,000, fell within antitrust counsel’s SIR, then the law firm would handle the matter itself, and decide whether or not to reimburse Leucadia.

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