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I have previously used this space to remind lawyers that they must immediately notify their current firms about any potential claims or actual claims in order to preserve their insurance coverage.  But in this age where lawyers move from firm to firm like never before, they must also give such notice to any new firm that is hiring them, and also to their former firm, where they were practicing when the alleged malpractice occurred. 

Why does a lawyer have to worry about giving notice to any new firm or any former firm?  The reason is that any insurer who might have coverage for the claim has to get prompt notice.  The insurer for the new firm might cover a claim for malpractice committed at a prior firm if the malpractice continues at the new firm or if the new firm’s policy specifically covers lawyers for work they did at a previous firm.  If a lawyer knows about a potential problem when he is hired by a new firm, the failure to disclose the problem to the new firm’s insurer might bar coverage under the new firm’s policy. 

On the other hand, if a lawyer leaves a firm and later learns about a potential or actual claim arising from work he did at that prior firm, he must immediately notify the prior firm’s insurer.  The insurer for his new firm may exclude work he performed at another firm. 

Three recent cases illustrate the problem, and provide some insight into how lawyers and firms can minimize this risk.  In one case, the innocent law firm lost coverage because a partner knew about potential claims before he joined the firm and did not disclose these when the new firm applied for insurance coverage.  In another case, the firm lost coverage because a former partner was served with a claim letter involving work he performed at the firm, but he delayed in telling the former firm.  Finally, a lawyer who left the firm without telling his former partners about a string of dismissed cases forced that firm to engage in litigation with its insurer in order to get coverage. 

A. The Dark Secrets of the New Partner
In Minnesota Lawyers Mutual Insurance Company v. Hancock, 600 F.Supp.2d 702 (E.D. Va. 2009), two solo practitioners, Hancock and Dalton, merged their practices into one, called Dalton Hancock.  The two lawyers decided to add Hancock to Dalton’s existing policy.  Hancock submitted a “new lawyer” form to Dalton’s insurer and represented that he was “unaware of any incident which could reasonably result in a claim being made against” him. 
It turned out that Hancock’s representations were false.  Unbeknownst to Dalton, during the year prior to signing the application, Hancock had embezzled money from his clients in order to pay his overhead and operating expenses.  Hancock continued that practice at Dalton Hancock.  In the application for the renewal of the policy, Dalton continued to represent to the insurer at renewal time that there were no potential claims. 

Predictably, the clients finally caught up with Hancock and sued the firm.  The insurer was allowed to rescind the policy (which means it returned the premium and cancelled the policy) based on these material misrepresentations in the application.  Interestingly, the Court found that Dalton should have bargained for a different application question that only asked him for information “to the best of his knowledge,” rather than the question on the actual application, which asked for categorical representations. 

This problem is not limited to those rare situations where a partner is embezzling from clients.  It can also arise when a lawyer knows that he has failed to protect a client’s interests, or knows the client thinks so, and does not disclose this to the carrier for the firm he is joining.  It might be that the lawyer is continuing to harm the client by not correcting the problem at the new firm, or perhaps the policy at the new firm provides coverage to him for acts occurring before he joined the firm.  If he would otherwise have coverage for the claim that is later made under the new firm’s policy, his failure to disclose the problem to the new firm’s carrier will give that carrier the right to deny coverage. 

B. The Failure of a Former Partner to Report a Problem or a Claim
A similar problem can arise when a former partner receives a claim for malpractice based on work he performed at his prior firm, but does not promptly tell the former firm and its insurer.  Berry & Murphy, P.C. v. Carolina Casualty Insurance Company, 586 F.3d 803 (10th Cir. 2009) (Colorado law).  Murphy, while working with Berry at Berry & Murphy, represented a plaintiff in a personal injury suit.  Murphy then left Berry & Murphy and joined another firm.  Although he took the plaintiff’s lawsuit with him, he soon withdrew. 

The case was later dismissed for Murphy’s failure to respond to discovery when he was at Berry & Murphy.  Although the client’s new counsel succeeded in getting the case reinstated, the client sent a claim letter to Murphy asserting legal malpractice.  Murphy sent the letter to his current firm’s insurer, but did not tell Berry or the Berry & Murphy insurer about the claim.  The client subsequently filed a legal malpractice suit against Murphy and Berry & Murphy. 

Because Murphy received the initial claim letter over a year prior to the effective date of the renewal policy that covered Berry & Murphy, that insurer disclaimed.  The court found that Murphy, as a former partner at Berry & Murphy, qualified as an insured under the policy covering Berry & Murphy’s malpractice.  Thus, Murphy had all the obligations of an insured, including the duty to promptly report claims.  The claim was not first made against an insured (Murphy) and reported to the Berry & Murphy insurer during the same one year policy period (the usual requirement in a claims made and reported policy), and there was no coverage.  While the court acknowledged the harshness of the result, it indicated that the terms of the policy were the ones to which the insured agreed and that the court was duty bound to enforce them. 

A similar problem arose in a recent Connecticut case, but the court rejected the insurer’s attempt to deny coverage.  Lawyers should not find much consolation in this result, as the firm still had to spend time and money litigating with its insurer.  In Maher & Williams v. ACE American Ins  Co., 2010 WL 3546234 (D. Conn. 2010), a partner, Sullivan, left just before the firm renewed its insurance policy.  Sullivan, it turns out, had been the attorney of record for various clients when their cases were dismissed.  He did not disclose any of these problems when he left the firm.

Consequently, the firm did not disclose these potential claims on the application for coverage, in response to a question asking whether any lawyer had failed to meet a deadline or was aware of any circumstances that “could result in a professional liability claim” against the firm or its lawyers.  The firm also sent a letter, representing that there were no changes in the application and that “any person to be insured does not have knowledge or information of any act, error or omission which might reasonably be expected to give rise to a claim against the applicant at some point in the future.” 

Three claims were later made against Sullivan, and involved only his wrongdoing.  They involved missed deadlines, leading to the dismissal of the clients’ cases.  The insurer argued that the application and letter did not disclose the dismissed cases and this entitled the carrier to rescind the policy or otherwise triggered an exclusion.  After lengthy and no doubt expensive coverage litigation, the court found coverage for the firm. 

C. Lessons Learned
These cases point out the very difficult issues that arise when claims or potential claims are known by lawyers before they join a firm, or after they leave one, and do not disclose these.  Firms looking to hire mobile lateral partners invariably perform due diligence.  Mostly this involves looking at the new partner’s book of business: client lists and collected fees.  Firms do not always dig deeply into client problems that might be brewing (or if they do ask, they might not get an honest answer). 

Although it is a lot to ask for new hires to disclose potential claims, the consequences of not doing so will certainly end the honeymoon at the new firm if a surprise claim is not covered.  In addition, if the lateral partner notifies the insurer for his prior firm at the time he leaves, that insurer would likely be on the hook, as well.  Any new hire due diligence questionnaire must inquire about potential claims and hiring partners should ask pointed questions about these.

As to getting former partners to promptly notify the prior firm of problems they know about when they leave or claims they receive after they leave, this requires frequent communication, especially at the time the prior firm renews its policy.  Because partners do not often leave on good terms, these communications may be difficult to have.  A former partner might also be concerned that he will be asked to personally pay any deductible under his prior firm’s policy.  One way to address this issue is for the prior firm to agree that it will pay the deductible if problems or claims are timely reported.  Part of the communication should also convey that any claim arising from work at the former firm may only be covered by that former firm’s policy.  Therefore, the failure by the former partner to promptly disclose problems could result in both the prior firm and the former partner being uncovered. 

The best outcome is for all parties to have insurance coverage.  New hires and former lawyers need to make sure they promptly disclose problems and claims in order to ensure this.   

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 dgrossbaum@hinshawlaw.com

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