Coverage Denied for Failing to Report

Obtaining malpractice insurance is an essential component of risk management for professionals. But, the obligations continue beyond the purchase. Like any contract, both sides are bound to comply with the contractual terms: the insurer and the insured. Accordingly, professionals must take the time to familiarize themselves with the scope of policy coverage and specific policy exclusions.  Failure to fulfill the requirements of a policy provision could mean the loss of coverage and individual exposure.

The Indiana Court of Appeals recently issued an opinion addressing the effect of an attorney malpractice policy exclusion requiring that the attorney give notice of reasonably foreseeable liability claims. In that case, an attorney submitted discovery responses on behalf of his client, but the adversary claimed that the responses contained false statements and moved for dismissal. When counsel did not respond to the motion for dismissal, the case was dismissed.

The attorney’s professional liability policy was renewed on a yearly basis.  The attorney signed a renewal application after the underlying lawsuit had been dismissed.  The policy included an exclusion for claims that relate to facts that the insured reasonably should anticipate would be the basis of a claim.  The insured attorney, however, did not identify the dismissal of the underlying action as an event that could trigger a liability claim.

The following year, the attorney’s former client filed a legal malpractice claim based on the dismissal of the underlying civil lawsuit.  The attorney notified his insurer of the complaint, but coverage was denied on the grounds that the attorney failed to give notice of the dismissal when he renewed his policy. The parties moved for summary judgment on the coverage issue, and the trial court entered an order holding that the attorney was entitled to insurance coverage.

On appeal the court noted that the insurance policy required the attorney to notify his insurer during the policy period if he became aware of a specific incident or act that could give rise to a claim.  The court interpreted the notice requirement as a limit of the insurer’s obligation under the policy and that failure to give notice could relieve the insurer of its duty to defend and indemnify.  The court continued that the attorney’s failure to correctly respond to discovery in the underlying lawsuit and the trial court’s subsequent dismissal of the case could reasonably be expected to trigger a malpractice claim.  Thus, because the attorney failed to given notice to his insurer of a potential claim as required, the court concluded that he was not entitled to coverage under the professional malpractice policy exclusion.

Attorneys and other professionals must remain cognizant of any acts or omissions that are likely to lead to potential claims.  Depending on the particular exclusions included in their malpractice policies, failure to give notice of foreseeable lawsuits could mean the professional may be held personally responsible for the costs of defense. There is no clear line here so when in doubt, perhaps the best guess is to err on the side of over-reporting or, at the very least, consult with your insurance broker.

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3 Comments

  1. Beth Whitney

    Another pitfall to avoid related to this: if you make a material mistake but the client says “don’t worry about it”, definitely report that potential claim to your carrier asap. Many courts have found that just because your client said they wouldn’t sue you doesn’t relieve you of the duties to report to your carrier. Better safe than sorry!

  2. Thank you for a Very easy to understand explanation of a sometimes confusing issue. Seth, I fully agree, better to report early than face a declination because you didn’t. Also appreciate the reminder to read the questions you are answering on the application. Everyone in the firm should be asked to answer the claim questions before the firm returns the application for renewal. It IS really important to understand your policy before you need it. Too often policies are purchased on price only without any attention to the coverage beyond limits and deductible.. Be wary if your agent tells you “these policies are all the same” …

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