KNOW YOUR REPORTING OBLIGATIONS UNDER YOUR LEGAL MALPRACTICE POLICY
By David A. Grossbaum, Esquire

David is a partner in the Boston and Providence offices of Hinshaw & Culbertson LLP. He represents lawyers in legal malpractice cases, represents insurers in coverage disputes, and lectures on risk management for lawyers. He can be reached at 617-213-7003 and at dgrossbaum@hinshawlaw.com

If there is one thing you need to know about your legal malpractice policy it is the reporting requirements for potential claims and actual claims. Although many lawyers understand that they must immediately report actual claims and lawsuits brought against them, they do not realize that they must also report any circumstances of which they are aware and that may result in a claim or suit against them. The failure to immediately report these potential claims will result in lawyers losing the coverage they counted on and paid for. The good news is that you can avoid this problem if you understand the policy and the insurance application.

Where Does It Say That I Have To Report Potential Claims?

The notice provisions of many policies require that the insured give notice of all circumstances that would reasonably be expected to give rise to a claim. Even if the policy only requires that the insured give notice of a "claim," some policies define a "claim" to include circumstances that the insured should reasonably expect will result in a claim.

Additionally, your original application for the policy, and each renewal application will inquire whether any insured is aware of circumstances that would reasonably be expected to be the basis of a claim. The applications require the insured to make inquiry of all "insureds" under the policy before answering this question. The extent to which you will have to poll former partners, associates, and employees about potential claims they might be aware of will depend upon your policy's definition of "insured" and the actual questions in the application.

What Is A "Potential" Claim?

Most policies do not define a reportable potential claim, beyond phrases such as "any act which could reasonably be expected to be the basis of a claim." Courts have interpreted these phrases many times and have found them unambiguous. A "claim" is usually defined to mean a demand for money or services, and might also include the filing of a disciplinary complaint.

The standard for determining whether an insured should have been aware of a potential claim is often a combination objective/subjective one: the court first looks to see what information the lawyer actually (subjectively) possessed, and then determines whether an objectively reasonable insured would have recognized the potential for a claim based on this information. Thus, even if you were not conscious that your conduct would likely result in a claim, you might have a reporting obligation if a "reasonable insured" would have foreseen a claim based on the same information you had.

Among the circumstances where courts have found that the insured should have foreseen a claim are the following:

• The lawyer realized that he had failed to file tax forms or notices by a particular deadline;
• The client threatened to sue if the lawyer did not cure a problem;
• The client expressed his dissatisfaction with the result of a case and that he believed the lawyer was responsible;
• The lawyer was aware that he had breached one of the state disciplinary rules in his business dealings with a client; and
• The client loses a case in the trial court because of some act or omission that was within the lawyer's control, such as a failure to make an objection, failure to designate an expert or otherwise respond to discovery requests, spoliation of evidence, failure to prosecute, or failure to file within the statute of limitations.

In other words, if you know you may have committed some act of professional negligence, or if your client thinks you have, you are required to report the incident. Do not delay giving notice because you might be able to remedy the situation, or because you have appealed the adverse decision against your client. There may still be damages incurred by your client if you are unsuccessful, or if there is a long delay in the case, or the client incurs additional legal fees to fix the problem. The fact that you believe any claim would be frivolous is not an excuse for failing to give notice; the insurer has a "duty to defend" even frivolous claims and prefers to know in advance about any potential claims. The fact that your present close relationship with the client makes you certain he or she would never sue is no excuse for not reporting. The client may feel very different about you if your error causes them a monetary loss.

This does not mean that every disagreement or problem with work for a client"must be disclosed, if a claim is not reasonably on the horizon. The lack of a bright time test, however, strongly favors reporting too much, not too little.

What Happens If I Do Not Report a Potential Claim?

The consequences of failing to report a potential claim are dire. Coverage can be lost in at least two different ways.

First, the failure to disclose a potential claim on the application or renewal application will give the insurer the right to rescind the policy in its entirety if the misrepresentation is material. This means that the policy will be void from its inception (called void ab initio) and it will be as if the policy was never issued and you will get a refund of your premium. If this occurs, there will be no coverage for any claims or for any insureds, even those who did not know about the potential claim. Typically the insurer does not have to show that the lawyer intended to mislead the insurer, but only that the omitted information was important for the insurer to assess the risk it was underwriting when it issued the policy.

Second, most "claims made" policies do not cover any act, error or omission if you could reasonably have foreseen, when you bought the policy (or sometimes when the very first policy was issued if it has been continuously renewed thereafter by the same carrier) that you had breached a duty or that a claim would be made. If you did have a reasonable basis to believe that your conduct might be the basis of a claim, or constituted a breach of duty, the insurer can disclaim coverage for the matter.

Should I Give My Carrier a "Laundry List" Of Every Case I Ever Worked On?

If you are aware of a potential claim, almost all policies allow you to report these to the insurer. Once you do so, you will have coverage under that policy for any claim or suit that is later brought. These clauses, called "discovery clauses," usually require that certain types of information be provided, such as the name of the potential claimant, a description of the specific circumstances, and the potential damages involved. The insurer usually assigns the matter a claim number, reserves its rights (if appropriate) and codes the claim as an incident until a claim occurs. At this point, the current insurer will be responsible for the claim even if you have switched insurers by the time the claim or suit is later brought against you.

Nonetheless, it is important that you do not over- react and "laundry list" your insurer with notice of every matter or client you ever worked on "just to be safe." Not only will you then have to report each of these matters separately to any new insurer, you may make yourself very unattractive to your insurer at renewal, and to any other future insurers. Instead, keep the "reasonable insured" standard in mind.

Sending your insurer a "laundry list" can create another problem. The majority of the polices in the market today have language that excludes coverage for any potential claims that have been reported to a prior insurer. Once you have reported a potential claim to your carrier, no future policies or carriers will cover that matter if a claim is ultimately made. At the same time, this "laundry list" of potential claims may not satisfy the "discovery clause" of the prior carrier (for example, if the specific circumstances of the potential claim were not disclosed). If this happens you may not have coverage under any policy.

What Happens To My Premium and Coverage If I Do Report Potential Claims?

How your premium is affected by the reporting of potential claims varies significantly from insurer to insurer. The effect on your premium of reporting potential claims depends a great deal upon the experience and underwriting background of the insurer's staff, and guidelines established by the insurer. The report of potential claims could affect the price and availability of coverage. But this should not dissuade you from reporting potential claims, since, if you do not, you risk losing coverage for the claim when it is made.

What Should I Do To Avoid A Loss of Coverage?

Never rely upon your application or renewal application as the sole means of reporting potential claims. If your policy requires notice of these, follow the directions in the policy for giving notice to the claims department. All too often the first notice of a claim is on a renewal application. Remember, your application goes to the underwriting department, and some courts have held that notice of a potential or actual claim on an application does not comply with the notice requirements of the policy.

In order to minimize coverage problems and assure compliance with your policy and application:

• Make sure all insureds (including employees) are aware of the reporting requirements.
• Work to foster an attitude that encourages the discussion of potential problems sooner rather than later.
• Develop and implement a simple, clear system for the reporting of circumstances, including a central coordinator, how the information is to collected, who is to be copied, and who is to follow-up.
• At the time of application, circulate a questionnaire asking every insured as defined by the application and policy to state whether they are aware of any potential claims, sign the form, and return it to the person signing the application.

Whatever short term gain there is in failing to acknowledge a potential claim to your insurer or your colleagues in the firm, this will be dramatically out-weighed by the anger, embarrassment and financial loss in the event the claim is made and there is no coverage for it. These days there are very few insureds who can boast that they have never had a claim brought against them. Consequently, it is more important than ever to understand your contract to make sure there is insurance coverage when you need it.