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Claims-made lawyers liability insurance

By Rick E. Marsh
 
The Supreme Court of Ohio has mandated that all lawyers carry insurance or, in the alternative, specifically advise their clients that they do not carry liability or malpractice insurance.
 
When an attorney gets a communication from a client (or former client) indicating that the client believes that the lawyer committed malpractice and demands payment for damages allegedly sustained by the client, a claim has been made. It is now the obligation of the attorney to immediately report that claim to the insurance carrier. At that point, the claim has been made and reported, and coverage should be in order. A claim is usually defined as a demand for money due to professional negligence.
 
The problem arises when the lawyer receives a communication he or she perceives as something other than a claim. The lawyer’s perception of the communication may not be the same perception as the court at a later date, when the court has to determine and resolve a coverage dispute, and the issue is whether that communication was a claim. Thus, it behooves attorneys to report every questionable claim or potential claim. Once the attorney reports the potential claim to the insurance carrier, it does not matter when the lawsuit against the attorney is filed; the claim was “made” and reported within the policy period.
 
Some insurance carriers permit the insured to report the claim within a reasonable period of time or as soon as practicable after the expiration of the policy period. If a malpractice policy does not contain language that permits the lawyer to report the claim “within a reasonable period of time” or “as soon as practicable,” the lawyer who is insured on a calendar- year basis could have a claim made against him or her at 11:59 p.m. on Dec. 31 of the policy year, but obviously would not be able to report it until the next policy year.
 
The explanation and the reason that professional liability coverage for both doctors and lawyers is written on a claimsmade basis is the institution of the discovery rule with regard to the statute of limitations. In the case of former Ohio State University football Coach Woody Hayes, a sponge left in Coach Hayes after routine abdominal surgery was not discovered until more than one year following the end of the physician-patient relationship, the discovery rule permitted a claim to be made.
 
With lawyers, the discovery rule applies as well; a lawyer drafting a deed in 2013 may make a mistake that may not be discovered by anyone until years later when someone involved in the real estate transaction attempts to convey the property.
 
Because of the discovery rule and because a claim could be made 20, 30 or 40 years after the mistake was made, insurance companies, due to the effect of inflation, discovered that they were paying claims based on the increase in cost of living 20, 30 or 40 years after they received a premium based on the cost of living and rate of inflation at the time the policy was issued. In other words, insurance companies were charging a premium based on the value of the dollar, the cost of living and the rate of inflation in the year 1970 and paying out claims based on the value of the dollar, the cost of living and the rate of inflation in the year 2012. Thus, the advent of the claims-made policy.
 
When an insured motorist collides with another insured motorist, the negligence is known immediately and while the full extent of the damages may not be known, underwriting that loss is much simpler than underwriting the loss that occurs in 2013 based on a mistake in 1972 and a premium was charged in 1972, based on the value of a 1972 dollar.
 
Because lawyers are insured on a claimsmade basis, it is possible for a lawyer to have never had a gap in coverage and still not have coverage for a claim. In other words, the lawyer had continuous coverage and was covered by a professional liability policy in the year that the claim was reported and in the year the claim was made, but these events did not occur within the same policy year.
 
I have had two cases, one about 15 years ago that went to trial and another one that I am handling now, in which a lawyer had professional liability insurance during the entire time that the events that led to the claim took place, but still had no coverage for the claim.

Example A

Lawyer A, a member of a small firm, was insured as a member of the firm by XYZ Insurance Company on an annual basis and no claims had been made up to a point in time.

XYZ Insurance Company, during the policy year, informed Lawyer A and his law partners, that XYZ Insurance Company was not going to write lawyers professional insurance in the future and Lawyer A and his law firm would have to find other coverage.

During the year that Lawyer A and his partners were covered by XYZ Insurance Company, Lawyer A received a letter from Lawyer C, representing a former client of Lawyer A, and that letter indicated that Lawyer C, now representing the former client, was “looking into” the matter of Lawyer A’s representation of the client.

That letter was received early in the calendar year, and the policy was written on a calendar year basis. More than six months went by without any further contact with Lawyer C who had written the letter informing Lawyer A that the matter of Lawyer A’s representation of this particular client was being “looked into.”

Lawyer A did not report this letter to XYZ Insurance Company, as Lawyer A did not believe this was a claim, but someone simply looking into a matter, which it appeared to Lawyer A, had been dropped.

Lawyer A and his partners, at the beginning of the next calendar year, were insured by ABC Insurance Company and in obtaining that policy, did not tell ABC Insurance Company about the letter from Lawyer C for the same reasons that Lawyer A did not report such letter to XYZ Insurance Company.

Of course, about four or five months into the calendar year when Lawyer A and his fellow lawyers were insured by ABC Insurance Company, a lawsuit was filed by the former client, represented by Lawyer C who had written the letter, demanding substantial damages. Both XYZ Insurance Company and ABC Insurance Company denied coverage.

To be a covered claim, the claim had to have been both made during the policy period of either ABC Insurance Company or XYZ Insurance Company and to have been reported to the carrier whose coverage was in effect at the time the claim was made. Lawyer A, when he was sued, reported the claim to ABC Insurance Company, and ABC Insurance Company promptly denied coverage indicating that the claim had been made during the previous year during the policy period when Lawyer A was covered and insured by XYZ Insurance Company. When Lawyer A reported the claim to XYZ Insurance Company, XYZ Insurance Company indicated that they had no coverage because while the claim may have been made during their policy period, it was not reported to them.

I represented Lawyer A and we filed a declaratory judgment action against XYZ Insurance Company claiming that the letter was not, in effect, a claim that had to be reported to the carrier. The court found to the contrary and there was no coverage for Lawyer A and his law firm.

Fortunately, the case wound up with a defense verdict, but it cost Lawyer A approximately $30,000 to win the case.

Example B

Perhaps a sadder case than the case involving A is the case involving Lawyer B. Lawyer B, like Lawyer A, had no gap in coverage and he too was insured during the first policy period by XYZ Insurance Company and then became insured by ABC Insurance Company.

Lawyer B’s agent, who was also a friend of his, reported to Lawyer B that he could replace the XYZ policy with the same amount of coverage in ABC Insurance Company, and the coverage was going to cost Lawyer B $300 less with ABC Insurance Company.

What Lawyer B had seemingly forgotten was that a mistake had been made and acknowledged by him with regard to some pleadings in a case and his efforts to rectify that mistake over an extended period of time, including taking an appeal, had failed.

Lawyer B apparently thought that during this appeal process he would get the matter reversed so he never reported the incident to XYZ Insurance Company and by the time he got sued for legal malpractice, he was now insured by ABC Insurance Company and had saved $300 in premium.

Neither carrier is currently providing a defense or coverage and while that issue remains unresolved, Lawyer B is now footing the bill for the defense of the matter and may not be indemnified by either XYZ or ABC Insurance Companies.

The moral of this story is that if for any reason you have to change carriers, before you do, make sure that any potential claims have been reported to the current carrier. Also, when you make application for the new coverage, provide ABC Insurance Company with information regarding any potential claim that might have been made during the previous policy year.

If a client communicates anything to you that indicates that he or she is upset with your handling of the matter and because the client is upset because of the handling of the matter the client feels that you committed malpractice, report that to your insurance company regardless of how lacking in substance the claim may be.

With many carriers, simply reporting a claim so that they can log it in and record it, as being reported, will not result in an increase in premium.

Even if a lawyer has been insured with the same company for a number of years, he or she may have changed the limits from time to time, and the insurer has reinsurance treaties that change from time to time. A carrier may pick up and cover a claim that was made during the second policy period but conceivably should have been reported during the first policy period, but may do so only under the limits that were in existence for the first policy period and not the higher limits that were in existence for the second policy period. A carrier might wish, if it were only the carrier’s decision to make, to pick up and provide coverage for a claim for an insured where the claim was reported in one policy period and made in another but may not do so due to a change in the reinsurance treaties.

Lawyers are getting sued more and more often by unhappy clients simply because the lawyer got a bad result in a case in which the client’s expectations did not match the result, whether realistic or not. Sometimes, the lawyer gets sued when the lawyer told the client that the case would be lost but that the punishment, fine or negative result would not be as severe as it turned out to be.

Whatever you do, in terms of shopping for insurance, keep in mind the examples involving Lawyers A and B, and decide whether it is worth changing insurance carriers to save $300.

Author bio
Rick E. Marsh is a partner at Lane, Alton & Horst, LLC in Columbus. Marsh’s practice focuses on litigation, with an emphasis on casualty and insurance defense, and he has defended approximately 200 legal malpractice claims.  
 

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