Lessons Associated with the Professional Liability Insurance Application

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All professionals who maintain professional liability insurance are familiar with the insurance application.  When completing the application, professionals must make decisions regarding the type and amount of coverage, and the costs for the premium and deductible. Moreover, the professional must provide information that the insurance company’s underwriter will rely upon to weigh the risks of insuring that professional.  Notably, many PL applications request historical information regarding threatened or potential litigation. This question, perhaps more than others, has led to significant coverage issues and presents a risk management concern.

This seemingly innocuous question taken from a standard Miscellaneous Professional Liability Insurance Application is often misunderstood and may lead to coverage litigation: Is the Applicant aware of any fact, circumstance, situation, error or omission that can reasonably be expected to result in a claim against the Applicant?

This question is chock full of risk. Take for example the recent decision issued by the Illinois Appeals Court in Illinois State Bar Association Mutual Ins. Co. v. Gold, Gold, & Couling, et. al., No. 08 CH 16782 (Ill. Ap. Ct., Aug. 7, 2013).  There, the court considered whether an angry letter from a client should have been included in an attorney’s professional liability insurance application as a “potential claim.” The court eventually concluded that coverage should apply but that the attorney was on the hook for his attorney’s fees in pursuing the coverage decision.

The underlying issue began in 2004 when a client wrote to his lawyer and expressed “great displeasure” with the attorney’s handling of a lawsuit. Nonetheless, the client continued to engage the attorney to perform further work on his behalf.  When the attorney obtained new liability insurance two years later, the attorney did not include the angry client letter in the “potential claim” section of the application.  In 2007, the client sued the attorney for legal malpractice. When the attorney notified his professional malpractice insurance carrier, the company denied coverage and initiated a declaratory judgment action.

The Appeals Court held that coverage should apply but that the carrier had no obligation to reimburse the attorney for his fees in pursuing the coverage dispute.  The court reasoned that the 2004 letter informed the attorney that the client considered going to war, but it did not “state a clear and unmistakable intent to bring a claim for professional malpractice.”  The court found that the policy did not require the attorney to inform the insurer of every client who “expressed some dissatisfaction with the attorney’s service.”

Sure, professionals need not disclose every angry encounter with clients but professionals must be careful in responding to questions about potential claims. To avoid coverage surprises, professionals should err on the side of caution when completing an insurance application (and in reporting claims during the term of a policy). Otherwise, professionals run the risk of facing a denial of coverage or footing the bill for a lengthy coverage dispute.