Verdicts

Insurer Must Defend Firm Against Client Claim

New York's Appellate Division has held that a trial court erred in granting summary judgment to an insurer that claimed it was not required to defend or indemnify a law firm in an underlying legal malpractice action that stemmed from an inoculation injury claim. Liberty Insurance Underwriters Inc. v. Corpina Piergrossi Overzat & Klar LLP, — N.Y.S.2d —-, 2010 WL 4825892 (N.Y.A.D. 1 Dept.), 2010 N.Y. Slip Op. 08790.

The law firm was accused by a former client of legal malpractice for failure to timely file a claim concerning his vaccine-related injuries in accordance with the rules of the federal National Vaccine Injury Compensation Program, 42 USC ” 300aa-10 et seq. (the NVICP). The attorneys had taken on the client's medical malpractice case in connection with his 1999 vaccine-related injuries, but failed to make a NVICP claim on his behalf within the three-year deadline for doing so. This failure proved catastrophic, as it foreclosed the injured claimant's chance for compensation under the NVICP and barred any civil actions for damages, including a medical malpractice action. The law firm sought defense and indemnification from its insurer. The insurer replied that it was not obligated to defend or indemnify the attorneys because, prior to the effective date of the first legal malpractice policy issued by the insurer to the attorneys in July 2004, the attorneys had a reasonable basis to foresee that this former client would make a claim against them; coverage for such known claims was excluded under the policy's “Known Claims or Circumstances” clause. In relevant part, the clause excluded coverage for “any claim arising out of a wrongful act occurring prior to the policy period if … you had a reasonable basis to believe that you had breached a professional duty, committed a wrongful act, violated a Disciplinary Rule, engaged in professional misconduct, or to foresee that a claim would be made against you.” Based on this contract language, Supreme Court, New York County (Charles E. Ramos, J.), granted the insurer's motion for summary judgment, declaring that it was not obligated to defend or indemnify the attorneys.

On appeal, the parties agreed that the burden was on the insurer to show the applicability of the known-claims exclusion, and they agreed that a two-pronged test governed the applicability of the exclusion. Under that test, the court “must first … consider the subjective knowledge of the insured and then the objective understanding of a reasonable attorney with that knowledge.” Executive Risk Indem. Inc. v. Pepper Hamilton LLP, 13 NY3d 313, 322 (2010). Thus, the insurer was required to show the insured's knowledge of the relevant facts prior to the policy's effective date, and also had to show that a reasonable attorney might expect such facts to be the basis of a claim. Here, the court found that the insurer failed to prove that the attorneys knew prior to obtaining insurance that they should file a NVICP claim or risk their client's loss of the right to bring future claims. The court was not persuaded by the insurer's argument that interpreting the law in this way rewards attorneys for their own incompetence through their failure even to recognize that they had such legal duties. Stated the court, “The 'reward' of coverage ' is the necessary and intended consequence of a test with a subjective component. The insurer is in essence objecting to the practical reality that enables it to sell any malpractice coverage, including retroactive coverage on a claims-made basis. To obtain protection from the consequences of their ignorance is a key reason why attorneys purchase and insurers are able to sell malpractice insurance. A purely objective test would provide insurers with far greater protection against the risks of both 'adverse selection' ' and outright fraud. But if attorneys had to run that gauntlet to obtain coverage, they would have little or no reason to buy malpractice insurance. After all, the promised retroactive coverage would be illusory if it could be denied solely because a reasonable attorney would have known at the time of the act or omission that a malpractice claim could be made.” For this and other reasons, the Appellate Department therefore reversed.

Insurer Must Defend Firm Against Client Claim

New York's Appellate Division has held that a trial court erred in granting summary judgment to an insurer that claimed it was not required to defend or indemnify a law firm in an underlying legal malpractice action that stemmed from an inoculation injury claim. Liberty Insurance Underwriters Inc. v. Corpina Piergrossi Overzat & Klar LLP, — N.Y.S.2d —-, 2010 WL 4825892 (N.Y.A.D. 1 Dept.), 2010 N.Y. Slip Op. 08790.

The law firm was accused by a former client of legal malpractice for failure to timely file a claim concerning his vaccine-related injuries in accordance with the rules of the federal National Vaccine Injury Compensation Program, 42 USC ” 300aa-10 et seq. (the NVICP). The attorneys had taken on the client's medical malpractice case in connection with his 1999 vaccine-related injuries, but failed to make a NVICP claim on his behalf within the three-year deadline for doing so. This failure proved catastrophic, as it foreclosed the injured claimant's chance for compensation under the NVICP and barred any civil actions for damages, including a medical malpractice action. The law firm sought defense and indemnification from its insurer. The insurer replied that it was not obligated to defend or indemnify the attorneys because, prior to the effective date of the first legal malpractice policy issued by the insurer to the attorneys in July 2004, the attorneys had a reasonable basis to foresee that this former client would make a claim against them; coverage for such known claims was excluded under the policy's “Known Claims or Circumstances” clause. In relevant part, the clause excluded coverage for “any claim arising out of a wrongful act occurring prior to the policy period if … you had a reasonable basis to believe that you had breached a professional duty, committed a wrongful act, violated a Disciplinary Rule, engaged in professional misconduct, or to foresee that a claim would be made against you.” Based on this contract language, Supreme Court, New York County (Charles E. Ramos, J.), granted the insurer's motion for summary judgment, declaring that it was not obligated to defend or indemnify the attorneys.

On appeal, the parties agreed that the burden was on the insurer to show the applicability of the known-claims exclusion, and they agreed that a two-pronged test governed the applicability of the exclusion. Under that test, the court “must first … consider the subjective knowledge of the insured and then the objective understanding of a reasonable attorney with that knowledge.” Executive Risk Indem. Inc. v. Pepper Hamilton LLP , 13 NY3d 313, 322 (2010). Thus, the insurer was required to show the insured's knowledge of the relevant facts prior to the policy's effective date, and also had to show that a reasonable attorney might expect such facts to be the basis of a claim. Here, the court found that the insurer failed to prove that the attorneys knew prior to obtaining insurance that they should file a NVICP claim or risk their client's loss of the right to bring future claims. The court was not persuaded by the insurer's argument that interpreting the law in this way rewards attorneys for their own incompetence through their failure even to recognize that they had such legal duties. Stated the court, “The 'reward' of coverage ' is the necessary and intended consequence of a test with a subjective component. The insurer is in essence objecting to the practical reality that enables it to sell any malpractice coverage, including retroactive coverage on a claims-made basis. To obtain protection from the consequences of their ignorance is a key reason why attorneys purchase and insurers are able to sell malpractice insurance. A purely objective test would provide insurers with far greater protection against the risks of both 'adverse selection' ' and outright fraud. But if attorneys had to run that gauntlet to obtain coverage, they would have little or no reason to buy malpractice insurance. After all, the promised retroactive coverage would be illusory if it could be denied solely because a reasonable attorney would have known at the time of the act or omission that a malpractice claim could be made.” For this and other reasons, the Appellate Department therefore reversed.