Attorneys responsible for firm management have likely become familiar with the annual application process for professional liability insurance. Among the litany of questions posed in the insurance application, one will usually find those relating to the firm’s knowledge of existing claims, or of “circumstances, acts, errors, or omissions that could result in a professional liability claim against any attorney of the firm or its predecessors irrespective of the actual validity of the claim.” The importance of an accurate answer to this question cannot be overlooked. The attorneys completing the application should require, and the brokers assisting them must insist, that the firm affirmatively inquire of all firm attorneys whether they are aware of any circumstances that could lead to a claim. Ignorance, willful or not, does excuse the failure to disclose a potential claim.
This is the unfortunate lesson learned by a law firm at the hands of the New Jersey Superior Court, Appellate Division in Imperium Ins. Co. v. Porwich, No. A-4717-12T4, No. A-4799-12T42015, 2015 N.J. Super. LEXIS 395 (App. Div. 2015). There, a small firm with three attorneys placed responsibility for completion of the firm’s professional liability insurance application with its senior member, and sole equity partner. Years prior to completion of the application at issue, a firm associate represented a personal injury plaintiff in a slip-and-fall matter. Although a Complaint was filed on the day prior to the expiration of the statute of limitations, it named a deceased party and the case was ultimately dismissed for lack of service. Moreover, the associate had ignored multiple communications from the client requesting a copy of his file. The associate was aware that his conduct had subjected himself and the firm to a malpractice claim.
Contemporaneous with these events, the firm’s senior partner completed the firm’s professional liability application and answered “No” to all questions regarding whether he was aware of any actual claims being made against the firm, and/or any circumstances that might lead to a claim against the firm. The policy was issued, and like any professional liability policy, it contained an exclusion for any claim based on “any act, circumstances, or event committed…prior to the policy period if, on or before the Effective Date, the Named Insured knew or could have reasonably foreseen that such act, circumstances, or event could give rise to a Claim against any of you.”[i]
Though the trial court held that the subjective knowledge of the lawyer completing the application was controlling in determining application of this exclusion, the Appellate Division disagreed and denied the firm a defense for the malpractice claim filed by the former client whose claim had been dismissed. The Court rejected the firm’s use of a “policy of not asking [the] associates if they were facing any possible professional liability claims,” and found it insufficient that the senior partner “believed that [the associates] would bring those matters to his attention.”[ii] Further, the use of the term “you” in asking whether the applicant was aware of the potential claim, was interpreted broadly to include all attorneys of the firm. As such, the associate’s knowledge was imputed to the firm, and defense and indemnity for the claim was denied.
The Appellate Division noted that its decision was based on the “distinctive facts” of the case, and that the law firm “was a small, three-person firm.”[iii] Notwithstanding this qualification, the implications of the opinion and its result are important to all firms regardless of size, and to the broker assisting any law firm with its LPL application. Basic e-mail technology provides easy means to poll firm attorneys regarding their knowledge of actual or potential claims. As such, firm size alone may not be a mitigating factor in failing to disclose a potential claim if the firm relies exclusively on self-reporting of potential claims. The failure to ask may doom coverage, or at a minimum result in an expensive battle with the insurer over coverage. Firm management, and the brokers representing the firm, must insist that the firm make a comprehensive and documented effort to poll the firm’s attorneys regarding knowledge of an actual or potential claim. The risk of jeopardizing coverage far outweighs the relatively minimal administrative burden in ensuring an accurate policy application.