Talk to Your Team Before Applying for Malpractice Insurance

Here’s a malpractice insurance tip: when your policy comes up for renewal, ask everyone in the office if they know of any potential problems that should be reported on the application.

Otherwise, the silence of just one person could jeopardize coverage for the entire firm.

For a cautionary lesson, look no further than New Jersey, where an appellate court allowed a malpractice insurer to rescind a policy because the insured firm had not reported a potential problem.

In completing its malpractice renewal application, the firm answered “no” in response to a question asking “whether any member of the firm knew of any circumstance, error, or omission that could result in a professional liability claim against the firm or its members.”

At the time, however, a partner had indicated he was worried about his exposure in connection with a client who was being prosecuted for securities fraud. In a deposition, the lawyer testified that he was concerned about claims against him because “things happened, lawsuits get filed and people get sued,” according to the opinion.

Significantly, that deposition testimony came nine months before the renewal application was signed.

The attorney and his firm were subsequently sued by the client for malpractice. The insurer denied coverage on the grounds that the firm knew the suit was likely, but failed to disclose this knowledge in the renewal application.

“Although the attorney did not admit to having specific knowledge of a legal malpractice claim, the court reasoned that any claim against him as an attorney would likely result in a claim with his liability insurance carrier,” reports Seth Laver and Michael Luongo of Professional Liability Matters. “Accordingly, the court concluded that the firm made a material misrepresentation in its insurance application when it omitted knowledge of a potential lawsuit, which justified the insurer’s denial of coverage.”

The decision underlines the importance of full disclosure when applying for insurance coverage, say Laver and Luongo.

Lawyers Mutual Reporting Requirement

From the Lawyers Mutual website:

Your Lawyers Mutual policy requires you to report any act or omission that might reasonably lead to a claim against you. That is a broad requirement. You must report both actual and potential claims.

Some problems, such as blown deadlines, clearly must be reported. Other obvious triggers: default judgment entered against your client; missed statute of limitation; missed lien in a title search; case dismissed because the wrong party was named; case dismissed because of improper service; threatening or complaining letter from client; State Bar grievance filed.

Other situations are less obvious. Remember, though, that you must report both meritorious and groundless claims. Even though you haven't yet been sued, you must still report it. When in doubt, report.

The earlier an incident is reported, the more likely it can be repaired or mitigated. Lawyers Mutual has a Claims Repair team that has an excellent track of remedying mistakes and mitigating damages.

Sources:

• Ironshore Indemnity Inc. v. Pappas & Wolf LLC (Superior Court of New Jersey, Appellate Division # A-0959-16T1) https://www.executivesummaryblog.com/files/2018/05/Ironshore_v__Pappas__Wolf_LLC.pdf
• Professional Liability Matters http://professionalliabilitymatters.com/2018/06/04/secrets-are-no-fun-especially-when-it-comes-to-malpractice-coverage/
• Lawyers Mutual http://www.lawyersmutualnc.com/how-to-report-a-claim