Reporting Claims |
By Thomas P. Sukowicz, Hinshaw & Culbertson LLP
It is important to realize that your decision as to whether and when to report a claim to your legal malpractice carrier can have significant coverage implications. For example, most claims-made policies require that the company be provided written notice of the claim within a specified time and during the policy period. Many provide extended coverage, but only if you comply with the requirement that you have given notice during the policy period of the facts or circumstances that might give rise to the claim.
If you become aware of a reportable incident or situation, notify your professional liability carrier immediately. The importance of this cannot be understated. Failure to give timely notice of a claim may result in the loss of coverage. In states such as New York, for example, courts strictly construe the notice requirements under policies and the law treats certain conditions of an insurance policy as conditions precedent to coverage. Prejudice to the insurer is not required to deny coverage for late reporting.
Under some policies, the insured is required to report circumstances that may give rise to a claim. A 2002 New York federal decision concerned a lawyer who handled a medical malpractice action which was dismissed in January 1999, for failing to timely produce expert reports. A year later the dismissal was affirmed and then in autumn 2000, a motion for leave to appeal to the New York Court of Appeals was denied. In October 2000 he reported the risk of a malpractice claim, which did not occur until February 2001. Although his notice of the actual claim was timely, the earlier circumstances of the January 1999 dismissal were not reported "as soon as practicable" as required under his policy. The court ruled that the denial of coverage was proper under these circumstances. Sirignano v. Chicago Insurance Co., 192 F.Supp.2d 199 (S.D.N.Y. 2002).
Even if the insured gives timely notice of a possible claim, there may also be a requirement that notice of the actual malpractice suit be timely given. A 2001 New York federal decision concerned a lawyer who provided notice of a possible claim, but when served with the actual complaint and summons, he delayed two months in forwarding them to the insurer. The court found that the insured lawyer did not comply with the requirement that he timely forward the complaint and summons to the insurer, and as a result, coverage was properly denied. Again, the court noted that because compliance was a condition precedent to coverage, the insurer need not show that it was prejudiced. The court also held that the insured lawyer's belief that the insurer already had the papers did not suffice to satisfy the notice requirement. Mark A. Varrichio and Associates v. Chicago Insurance Co., (Not reported in F.Supp.2d) (S.D.N.Y. 2001) 2001 WL 1524475.
Disclosures of claims and circumstances that could give rise to a claim are also required in applications for insurance. One law firm's failure to report a circumstance of which it became aware after the application was submitted, but before the policy issued resulted in the loss of coverage.
A District of Columbia law firm applied for coverage, answering negatively to questions in the application about (1) a present claim, (2) claims within the last five years or (3) any circumstances that could result in a claim. The application also required reporting "any changes in the information" submitted. A few days after the application was submitted, the law firm received a letter from an attorney on behalf of trust beneficiaries, threatening to sue one of the firm's attorneys for legal malpractice. The threat was not communicated to the insurer and the policy issued. The day after coverage was bound, the insurer was informed of the threat. The insurer sought to rescind the policy, claiming the policy would not have issued had these facts been known.
The court held that rescission was proper in this case, notwithstanding the fact that the information provided at the time of the application was accurate. The law firm learned of a possible claim and did not report that information to correct its application. Under Virginia law, the suppression of a material fact is a false representation. It was irrelevant whether the facts in the claim letter were true. The letter threatening a malpractice suit constituted notice to the law firm of a potential claim. The court also held that the reasonableness of the need to disclose is based on an objective standard, not the law firm's subjective evaluation that an occurrence or circumstance need not be reported. Minnesota Lawyers Mutual Insurance Co. v. Hahn, 355 F.Supp.2d 104 (D.D.C. 2004).
An insured who receives any notice of even a potential or theoretical claim near the end of a policy period should report it to all insurers who are potentially on the risk. The risk of one report too many is less than the risk of lost coverage.
For example, in a California case, an attorney had a "claims made and received" legal malpractice insurance policy with a policy period that ended on midnight, Sunday, February 28, 1999. Thereafter, the attorney had coverage with another insurer not identified in the record. The first insurer had not offered the attorney an extended reporting period, which would have allowed him to notify it after the period of coverage had ended of a claim made within the period of coverage.
On Thursday, February 25, 1999, a former client of the attorney filed a malpractice suit against him but did not immediately serve him with the complaint and summons. On that same day as the complaint was filed, a reporter at a legal journal called the attorney to ask for his reaction to the suit. The attorney thought the call was a possible prank or as hearsay regarding a potential claim, and ignored it.
The attorney then left for a weekend vacation, returning Tuesday, March 2. On the day he returned, he read an article in the same legal journal describing the malpractice suit that was filed against him. He immediately notified the insurer of the claim, but coverage was denied because he had not reported the claim during the policy period. (The attorney also notified his subsequent insurer of the malpractice suit, but that insurer denied coverage on the theory that the reporter's telephone call gave the attorney a "basis" to believe that his representation of a client would lead to a claim.)
In the coverage litigation, the first insurer obtained summary judgment based upon the lack of a report of the claim during the policy period. The court also noted that the attorney had not been offered the chance to buy an extended reporting period endorsement that would have given him an additional time to report any claim after the coverage period had ended. In the court's view, the attorney could not have prevailed if he had been offered but rejected a chance to purchase an extended reporting period endorsement since he would then be seeking a benefit for which he had not paid.
On appeal, the court stated that the case was one of first impression in which the late report of a claim "was made a de minimus time after the expiration of the policy and the insured had not been given the opportunity to be protected under an extended claim-reporting endorsement." Concluding that the reporting requirement was a condition precedent to coverage, the court relied on California's common law rule that conditions to contracts can be excused if equity requires it, and reversed the summary judgment that had been entered in favor of the insurer.
The fact that this court found a way out from "one of the worst nightmares" that an insured can face does not mean that other insureds will necessarily be as lucky. The court specifically noted that it was not holding that a notice-prejudice rule, under which an insurer must prove prejudice in order to deny coverage for a late-noted claim, was generally applicable to such policies. To the contrary, the court made clear that an insured who wishes to qualify for an equitable excuse of conditions precedent, must act with great diligence or suffer the consequences. Root v. American Equity Specialty Insurance Company, 130 Cal.App.4th 926, 30 Cal. Rptr. 631 (2005).
When reporting a claim or incident that may give rise to a claim, give the insurer as much information as possible regarding both the incident and the coverages. Some carriers require written notice of claims and provide claim forms for that purpose. Others require that you report the claim by telephone to persons designated to take claims. However you report the claim, keep a record of that report in case there is ever a question about when and how you reported the claim.
What kinds of things must be reported? Read your insurance policy carefully to be aware of its particular reporting requirements. While the provisions of particular policies may vary, the basic feature that triggers operation of the claims-made coverage (i.e., the making of a claim) remains unchanged. Identifying a claim or potential claim, however, is not always a simple task. A client's or successor counsel's notification to you of a perceived error, describing a resulting injury and making a demand that you take immediate remedial action clearly constitutes a claim. Other obvious examples are a blown statute of limitations and the late filing of a Subchapter S election.
The following circumstances may be considered claims by a professional liability carrier and require reporting:
Lawyers who become aware that they have made (or may have made) a mistake sometimes feel sorry for the client and want to admit liability or promise to make things right. It is important to remember that a malpractice claim is more than just a mistake. It involves elements of damages and proximate causation. There are defenses that might preclude a finding of malpractice even if a mistake was made. So it is often inaccurate for a lawyer to conclude that he or she has committed malpractice just because an error was made.
While the fiduciary relationship requires a full disclosure to the client of all matters within the scope of a lawyer's employment, at least one court has held that it does not require him to tell the client that the client has a cause of action against him. Fortune v. English, 226 Ill. 262 (1907).
Sometimes it is not clear whether a particular incident is likely to give rise to a claim or when a claim or a circumstance that may give rise to a claim must be reported. If you have questions such as these, contact your professional liability policy or your insurer.