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Legal Malpractice Insurance: Don't Tell? Don't Cover!

Liberty Surplus Insurance Corporation, Inc. v. Nowell Amoroso, P.A.
189 N.J. 436, 916 A.2d 440 (N.J. 2007)

NJ Underlying matter: Malpractice Insurance coverage

Student Contributor: Evan Michael Hess

Facts: Plaintiff is the malpractice insurance carrier of the Defendant law firm in a Declaratory Judgment action. During the law firm’s  representation of one of its clients, it did not timely file the client’s Complaint. The Client got a judgment for $400,000 which was reversed due to the untimely filing. Shortly after the dismissal, the Defendant applied for malpractice insurance with the Plaintiff. On the application for insurance, Defendant answered “no” to a question whether it had “a reasonable basis to believe that it had breached a professional duty or to foresee that a claim would be made against" it. The policy was issued. Afterwards, a malpractice action was started by the client against the law firm. It tendered the defense of the malpractice action to the carrier. The carrier disclaimed coverage alleging that the law firm reasonably knew of the possibility that it might be sued for malprctice when it submitted the application for insurance. The carrier filed a declaratory judgment action against the law firm seeking to deny coverage. The law firm cross-moved for coverage. Both parties filed motions for summary judgment.

Issue: Can a malpractice insurance carrier deny coverage to an insured law firm when on its application for insurance the firm answers “no” to a question asking whether the firm had subjective knowledge of any circumstance, act, error or omission that could result in a legal malpractice claim ? Here, the application was submitted before the law firm was sued by the former client.

Ruling: The Supreme Court upheld the Appellate Division’s ruling that denied coverage to the law firm:

1) The law firm could not have subjectively believed that it had not breached any professional duty. It was reasonable to foresee that the client that had lost their $400,000 judgment would bring a malpractice claim against the law firm.

coverage, under the policy, was conditioned not only on foreseeing a possible malpractice claim, but also on the insured having no reasonable basis to believe that any deviation from a pertinent standard of care had occurred.

Lesson: You can never report a claim to your carrier early enough–As soon as you know it might turn into a malpractice claim.  Some lawyers choose to wait until there is objective proof of a claim–when they are served with a malpractice complaint. But if you have a subjective basis to know that you may have made a mistake and that it can reasonably turn into a later malpractice claim, it makes sense to report it sooner rather than later– during your policy period and on any application for renewal. Otherwise, you run the risk of no coverage for that claim. You may want to forego reporting a claim if your policy deductible is big enough to cover the claim.

Editor’s Note:  In  NJ, a recent trial court ruling required a lawyer who practices as a professional corporation, LLC or LLP,  and who must carry malpractice coverage under Court Rule 1:21:-1A,B and C, to report all claims and to cooperate in the defense of the claim so as not to deprive the client of the benefit of mandatory insurance coverage.

Liebling v. Garden State Indemnity  337 N.J.Super. 447, 767 A.2d 515 (App.Div. 2001)

NJ Underlying matter: Malpractice Insurance coverage

Student Contributor: Joshua D. Aronson

Facts:  The plaintiff, an attorney, filled out an application for professional liability insurance with the defendant.  The plaintiff answered "no"  to a question asked on the application regarding whether or not the plaintiff was “aware of any circumstances, or any allegations or contentions as to any incident which may result in a claim being made against the firm?”  The defendant claims the plaintiff lied on the application due to the fact that he should have known there was a good chance that his client Barrett would bring a malpractice claim against him.  The malpractice claim stemmed from the plaintiff failing to timely amend a complaint to add a defendant, which ultimately caused Barrett’s case to be dismissed.

Issue: Was the plaintiff aware, or should have been aware, of any potential malpractice claims against him when he applied for the professional liability insurance with the defendant?

Ruling:   The court ruled that no attorney in the same circumstances as the plaintiff would have felt safe from a malpractice claim and that the plaintiff did not honestly believe that he was safe.  Any attorney should have been aware of the statutory time limits surrounding filing an amended complaint and because of this the plaintiff should have been aware a malpractice claim could be imminent.   Therefore, the plaintiffs answer in the application was knowingly false, and the defendant is entitled to a rescission of the policy on the grounds of equitable fraud.

Lesson:  When filling out an application for personal liability insurance, an attorney in good faith, must reasonably believe that he has no potential malpractice claims against him or else the completion of the application may be considered fraudulent justifying the denial of coverage when the malpractice claim materializes.

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Posted in: Insurance, New Jersey