Attorney’s Prior Knowledge Bars Coverage for Client’s Malpractice Claim

The United States District Court for the Northern District of Ohio, applying Ohio law, has granted summary judgment in favor of an insurer, holding that an insured attorney could reasonably have expected a claim where he received a letter addressed to multiple parties indicating that the attorney’s former client was represented by new counsel, who was retained to prosecute claims for damages “as applicable.”  Gonakis v. Medmarc Cas. Ins. Co., 2017 WL 1355653 (N.D. Ohio Apr. 13, 2017).

An attorney represented a client in a real estate transaction involving the client’s sale of an apartment building.  After the building purchaser breached the purchase agreement, the attorney’s client sent the attorney and five others a letter indicating that the client had hired counsel to prosecute claims for damages arising from the transaction and the related foreclosure action “as applicable.”  The letter also instructed all recipients to forward a copy of the correspondence to their respective professional liability carriers.  The attorney reviewed the docket in the foreclosure action and concluded that he was not the client’s intended target and that the client’s letter did not apply to him.

Following receipt of the client’s letter, the attorney applied for professional liability insurance coverage, but did not disclose the client’s letter in connection with the application.  The insurer subsequently issued a professional liability policy to the attorney. The policy’s insuring agreement stated that the insurer would provide coverage in connection with a claim provided “that no Insured knew or should have known of facts that reasonably could have been expected to result in a claim prior to the effective date of this policy.”  The policy also provided that a claim was deemed made “when the Insured first receives information of specific circumstances involving a particular person or entity that could reasonably be expected to result in a claim.”  Finally, the policy included a prior knowledge exclusion, which stated that the policy did not apply to any claim “involving any circumstance, act, error, or omission . . . that occurred prior to the continuous coverage effective date, if on that date, the Insured knew or believed, or had reason to know or believe, that the circumstance, act, error, or omission might reasonably be expected to result in a claim.”

After the professional liability policy was issued, the client filed a malpractice action against the attorney.  The insurer denied coverage, arguing that the claim was first made before the policy incepted when the attorney received the client letter because, at that point, the attorney had “information of specific circumstances involving a particular person or entity that could reasonably be expected to result in a claim.”

In the coverage litigation that followed, the attorney argued that the policy afforded coverage because, before the policy incepted, he did not reasonably expect that the client would sue him, and, after the lawsuit was filed, he timely reported the claim to the insurer during the policy period.

The court rejected the insured’s position.  The court first noted that, based on language of the policy, the pertinent inquiry was whether the attorney was aware of facts that “reasonably could have been expected to result in a claim.”  The court determined that, even if it liberally construed that language, a reasonable insured would have expected a malpractice claim after receiving the client’s letter because it indicated that the client was represented by new counsel and that the claims for damages would relate to the real estate action in which the attorney had represented the client.  The court also noted that the letter was addressed to all recipients equally and made no exceptions for the attorney. Finally, the court observed that the attorney’s subjective beliefs about the merits of a malpractice claim against him were irrelevant.  The court concluded that, because the letter was received several weeks prior to the policy’s effective date and the attorney could reasonably have expected a claim, the policy did not afford coverage for the client’s lawsuit.