No Coverage for Lawsuit Where “Claim” First Made at Time of Tolling Agreement

In a win for Wiley’s client, the Supreme Court of New York for New York County, applying New York law, has held that no coverage is available for a legal malpractice lawsuit because the “claim” was first made before the inception date of the policy when the underlying plaintiff requested a tolling agreement from the insured and independently because the prior knowledge condition precluded coverage. Allied World Assurance Co. (U.S.) Inc. v. Golenbock Eiseman Assor Bell & Peskoe, LLP, 2023 WL 7106431 (N.Y. Sup. Ct. Oct. 27, 2023).

The insured, a law firm, entered a tolling agreement in 2018 with its former client which sought, among other matters, “to preserve the [client’s] Claims – if any – until the final adjudication of” an underlying litigation against the client involving a transaction in which the firm represented the client. The client sued the firm in 2022. The firm sought coverage under its professional liability policy for the 2021-2022 policy period. The insurer agreed to defend the firm under a reservation of rights and filed a lawsuit seeking a declaration that there was no coverage under the policy because the “claim” was first made prior to the policy period at the time of the tolling agreement and the policy’s prior knowledge condition barred coverage. The insurer also sought a declaration that it was entitled to recoup any defense costs paid to the firm.

The court held that the client’s request for a tolling agreement constituted a “claim” first made prior to the policy period given that the definition of claim included “a request to toll or waive a statute of limitations” and rejected the firm’s argument that the tolling agreement failed to include sufficient detail to show it was seeking to hold the firm responsible for the same “wrongful act” as alleged in the lawsuit. The court explained that “[t]he parties had no relationship other than as attorney and client, and thus the only claim that reasonably could have been contemplated was one for a Legal Services Wrongful Act” and “[t]he terms of the Policy do not require that the Tolling Agreement spell out the proposed claims in detail.” The court also held that the prior knowledge condition had not been satisfied, as the firm “clearly knew, or should have known, that [the client] sought to preserve claims concerning [the firm’s] legal work [on the specified transaction] when it entered the Tolling Agreement” and that “a reasonable attorney would infer that [the client] had a legal malpractice claim in mind, sufficient to trigger an obligation to disclose that fact to a subsequent insurer.” While denying the insurer’s recoupment count without prejudice because it had not yet paid amounts under the policy, the court acknowledged that “an insurer who provides a defense subject to a reservation of rights may recoup defense costs if it is later determined that coverage was not required.”