When in Doubt Report, Report, Report…

It’s bound to happen…professionals make mistakes.  Some of those mistakes may lead to a professional malpractice claim while others may go unnoticed, never to be heard of again.  Given that most professionals cannot predict the future nor speak for their clients, professionals must timely report each mistake to her malpractice carrier pursuant to the applicable reporting deadlines because the policy may require it.  Even those mistakes that seem inconsequential must be reported. The risks of failing to do so can prove to be costly.

We have previously warned of the risks of failing to closely read and follow the requirements of an insurance policy.  For those that missed these warnings, or need a refresher, here’s yet another example. Earlier this month, a law firm learned the hard way the consequences of failing to report a seemingly simple error and saw its coverage yanked after a federal appeals court concluded that the law firm failed to provide timely notification to the carrier.

Allegedly, the firm botched a real estate transaction for its client, a potential buyer, by mis-filing the sales contract and failing to deliver it to the seller.  At the time of its error, the firm failed to notify Bar Plan Mutual Insurance because it was confident that any potential claim lacked merit.  When the professional malpractice suit followed, Bar Plan Mutual declined coverage citing a policy provision that required the firm to give notice of circumstances that could give rise to a claim as soon as the firm was aware of potential malpractice.

On appeal, the Seventh Circuit upheld Bar Plan Mutual’s denial of coverage and ruled that the policy required the firm to notify the carrier of potential claims at the time it committed the error.  The court specifically rejected the firm’s argument that it did not believe immediate notification to Bar Plan Mutual was required because it thought it would prevail in the underlying suit despite its misfeasance.  The court said that the likelihood of success on the merits is immaterial when considering reporting obligations. The appropriate inquiry was whether the firm had reason to believe that its error could result in a legal malpractice claim.

This decision exemplifies that professionals continue to misinterpret, fail to read and/or ignore the applicable requirements in their professional malpractice claim. Needless to say, professionals purchase insurance products with the expectation that coverage will apply when needed. To increase the likelihood of coverage, however, professionals must be familiar with their contractual obligations regarding notification and other pertinent clauses within an insurance contract.