Legal Malpractice

Legal Malpractice Insurance and Notice to Insurers

By (Andrew Lavoott Bluestone)

A newly decided appellate case, Executive Risk Indem. Inc. v. Pepper Hamilton,    LLP  2008 NY Slip Op 07044 Decided on September 23, 2008 Appellate Division, First Department
Saxe, J.  turns on the question of when a law firm must notify its insurer [or re-certify upon renewing the insurance] that there are no claims lurking against them, or whether they have a reasonable belief that there may be a claim against them which must be reported to the carrier.

"The law firm Pepper Hamilton and one of its members, W. Roderick GagnÉ, were [*3]deprived of millions of dollars in professional liability insurance coverage purchased by the firm, by the order of the motion court declaring that the three excess insurance carriers have no obligation to indemnify the firm. The court reasoned that because the law firm knew of misconduct on the part of its client, and of the likelihood that claims would be made against the firm itself based upon its representation of that client while the misconduct took place, it had an obligation to inform the insurers of its knowledge of the misconduct and its concern that it might be subject to suit as a result when applying for coverage or for renewal of coverage. As to two of the insurers, the court precluded coverage under the policies' "prior knowledge" exclusions, and as to the third, it held that the insurer was entitled to rescission of the policy effective the year the claims were made. "

"We disagree with the motion court's broad view of the nature and extent of the acts, errors or omissions and the type of knowledge to which the prior knowledge exclusion may be applied.

The two-step analysis set out in Coregis Ins. Co. v Baratta & Fenerty, Ltd. (264 F3d 302, 306 [3d Cir 2001]) should be used to determine whether the exclusion applies. In Coregis, the Third Circuit employed what it referred to as a "mixed subjective/objective standard" to determine whether a professional liability policy's similarly-worded exclusion applied. That standard asks first the subjective question of whether the insured had knowledge of the relevant facts, and second, the objective question of whether a reasonable lawyer would foresee that those facts might be the basis of a claim.

The primary focus of our analysis here is the objective requirement that there be a basis on which to reasonably expect a claim against the law firm. Notably, it has been held that this prong of the test "does not require that the insured actually form such an expectation [that a suit or claim will result]" (Colliers Lanard & Axilbund v Lloyds of London, 458 F3d 231 [3d Cir 2006]), but that a reasonable person would expect the claim. By the same token, even if the evidence establishes as a matter of law that the insured has formed a subjective belief that a suit may ensue based upon some other party's misconduct, that does not alone establish the existence of objective facts which would support the conclusion of a reasonable professional that the insured will be subjected to professional liability claims.

Here, while evidence strongly suggests that defendant GagnÉ and other firm members subjectively either believed or feared that the firm might be subjected to professional liability [*7]claims by entities claiming injury as a result of SFC's conduct, his or the firm's subjective belief that a suit may ensue based upon SFC's misconduct is not enough. Pepper Hamilton's knowledge of SFC's actions, and of its own legal work related to SFC's operations, may have provided objective evidence that SFC might be sued and supported a concomitant suspicion that those with claims against SFC might seek relief against SFC's law firm as well. But we find nothing in the record constituting objective evidence permitting a reasonable professional to conclude that Pepper Hamilton itself did anything that would subject it to suit or other claim. Certainly, no wrongful conduct on Pepper Hamilton's part is established as a matter of law so as to entitle the insurers to summary judgment declaring that the firm knew or should have known that a claim might be made against the firm.

The underlying claims against counsel arise out of an alleged securities fraud scheme by the firm's former client, Student Finance Corporation (SFC) and its principal, Andrew Yao. SFC was in the business of financing loans to students in trade schools, primarily truck driving schools; it then pooled the loans into certificates or securities that it sold to investors, using private placement memoranda prepared by Pepper Hamilton. Another client of Pepper Hamilton, Royal Indemnity Company, provided credit risk insurance for the pooled loans."
 

Full post as published by New York Attorney Malpractice Blog on September 24, 2008 (boomark / email).