A law firm’s failure to disclose a potential claim on its insurance application may act as a waiver of coverage. Lloyd’s of London recently argued that coverage did not apply to a California based law firm in a multi-million dollar legal malpractice action. According to Lloyd’s, the professional liability insurance policy contained an exclusion for claims the firm knew or reasonably should have known about prior to the effective date of the policy. At the time the law firm procured the policy, an attorney from the insured entered into a tolling agreement extending the statute of limitations on a potential malpractice claim. This pre-claim was not disclosed on the insurance application. That spells trouble.
The plaintiff eventually filed suit against the insured and sought $7 million in damages. When the insured reporting the claim to Lloyd’s, the carrier moved for summary judgment arguing it is not obligated to provide coverage in light of the law firm’s failure to disclose the malpractice claim on the insurance application. The motion for summary judgment is currently pending.
Professional liability matters has sung this tune before: any professional, including law firms and lawyers, must be entirely forthright with its insurance carrier. The risk is to imperil potential coverage. This does not just require timely reporting of claims, but also adequately disclosing the presence of pending or potential malpractice claims. All professionals must develop internal reporting guidelines to communicate potential claims to management (without fear of repercussions) to ensure that professional liability coverage applies in the event of a suit.