Prior Knowledge Exclusion Bars Coverage Because Failure to Comply With Statute of Limitations Could Reasonably Be Expected to Be the Basis of a Claim

The U.S. District Court for the Southern District of Georgia, applying Georgia law, has held that a prior knowledge exclusion bars coverage as a matter of law because the insured should have known that a failure to comply with a statute of limitations could reasonably be expected to be the basis of a claim. ALPS Prop. & Cas. Ins. Co. v. Edenfield, 2022 WL 4098516 (S.D. Ga. Sept. 7, 2022).

The insureds, an attorney and her current and former law firms, represented a school employee against her employer. In August 2016, the employee received Equal Employment Opportunity Commission (EEOC) right to sue letters and retained the insured attorney. The attorney filed a lawsuit against the school in November 2016 (the EEOC Action). In December 2016, the school’s attorney emailed the insured attorney informing her that the EEOC Action was untimely. Subsequently, in October 2017, the court dismissed the EEOC Action with prejudice because it was filed outside the statute of limitations. While the EEOC Action was pending, the employee retained the insured attorney to represent her in a workers’ compensation action against the school (the WC Action). In May 2019, the court denied workers’ compensation benefits to the employee.  

In April 2019, the insured attorney completed an application to obtain professional liability insurance from the insurer, which required disclosure of “each potential fact, circumstance, act, error, or omission” “that could reasonably be expected to be the basis of a claim against any current or former Attorney in the Firm or any Predecessor Firms, regardless of the merit of such claim.” The application further stated that “any claim arising from or in connection with any claim, suit, fact, event, circumstance, act, error or omission disclosed or that should have been disclosed in response to the claim history section of this application will be excluded from coverage under the Policy” (the Prior Knowledge Exclusion). The attorney completed a second application the following year, which requested the same information. The attorney did not disclose the EEOC Action in either application.

In April 2020, new counsel for the employee sent the insureds letters demanding insurance information and raising concerns regarding representation in the EEOC Action. In February 2021, the employee sued the insureds, alleging “legal malpractice, breach of fiduciary duty, breach of contract, negligent misrepresentation, and more regarding her EEOC and WC claims.” The insureds sought coverage for the malpractice action, which the insurer agreed to defend under a reservation of rights while seeking a declaration that it had no duty to defend.

The court granted the insurer’s motion for summary judgment in part, concluding that the Prior Knowledge Exclusion barred coverage relating to the EEOC Action. The court concluded that the insured attorney “reasonably should have known that her error – failure to comply with a statute of limitations – constituted a Wrongful Act under the [] Policies and could have formed the basis of a Claim.” Therefore, the insureds “undisputedly had notice of this error, if not by December 3, 2016 (when [counsel] emailed her arguing the EEOC suit was clearly time-barred), then at the latest by October 31, 2017, when the Court dismissed [the] suit[.]” In addition, the court concluded that the insured attorney’s former law firm failed to comply with the policy condition that “Notice of the Claim or the Wrongful Act was not given nor required to be given to any other insurer prior to the Effective Date,” as, under “[t]he plain and unambiguous terms of [the firm’s prior professional liability insurance] . . . [the policies] would have covered [the law firm] for the EEOC claim if an Insured had reported [it].”

The court, however, concluded that the insurer was required to defend the malpractice action as it relates to the WC Action because “the EEOC Claim and WC Claim here are not connected temporally, logically, or causally” and therefore do not constitute “Related Professional Services” and a single “Claim” under the policy. The Court reasoned that “[t]he EEOC Claim was related to pay disparities, not physical injuries, and the WC Claim was related only to a physical injury that occurred as the result of a student altercation at the school.” Therefore, “[t]he Court finds the two claims were independent injuries raised in independent suits, and therefore finds they are not derived from related professional services.”