Legal Malpractice

Prior Knowledge and Legal Malpractice Insurance

By (Andrew Lavoott Bluestone)

Whether attorney for Plaintiff or for defendant, each practitioner in the Legal Malpractice field has either a professional or personal interest in legal malpractice insurance.  No one, whether prosecuting or defending legal malpractice cases wants to lose or have coverage excluded, and attorneys do not want to have coverage lost for the defendants in a legal malpractice case.

Here is a blurb from McGuire Woods on prior knowledge exclusions in legal malpractice insurance:

"Professional liability and D&O insurers regularly rely on "prior knowledge exclusions" to restrict coverage. These exclusions apply if the insured knew, prior to commencement of the policy period, that the activity in which it was involved would result in a claim against it. Typically, cases involving prior knowledge exclusions turn on the extent of the insured's knowledge of the risk of a claim and whether that knowledge is sufficient to bar coverage.

Recently, in Executive Risk Indemnity Inc. v. Pepper Hamilton LLP, 865 N.Y.S.2d 25, 2008 N.Y. App. Div. Lexis 6885 (N.Y. App. Div. Sep. 23, 2008), the New York Supreme Court, Appellate Division construed a "prior knowledge" exclusion very narrowly in a declaratory judgment action involving a dispute over coverage for alleged legal malpractice. The court held that in order to apply the exclusion to claims against a law firm based on the wrongful conduct of the firm's client, the insurer must prove not only that the law firm had knowledge of its client's misconduct, but also that the firm participated in the client's wrongful conduct in such a way that it believed that it might be subject to liability for that conduct.

The coverage dispute arose from Pepper Hamilton's representation of Student Finance Corporation, which financed student loans and then securitized and resold them to investors. In March 2002, Student Finance's principal told a partner in the law firm that the company had been using its own reserve accounts to make forbearance payments for overdue loans. By covering up defaults, Student Finance allegedly made its securities more attractive to investors.
 

Full post as published by New York Attorney Malpractice Blog on November 19, 2008 (boomark / email).