Legal Malpractice Tip: Liability Coverage – Prior Knowledge Provision
by Paul Fellman, Esq. – (610) 557-1977 x106 – pfellman@gibperk.com
It’s a fact that mistakes happen and, even when they don’t, an unhappy client may try to sue you. That’s why this month’s tip deals with protecting yourself after the fact rather than avoiding the claim in the first place.
Maintaining professional liability insurance is not required in Pennsylvania, though it is highly recommended. Remember: Pennsylvania Rule of Professional Conduct 1.4 requires lawyers to inform new clients in writing if the lawyer does not have professional liability insurance of at least $100,000.00 per occurrence, and $300,000.00 in the aggregate per year.
Purchasing insurance is only one step in protecting yourself. There are many points between applying for coverage and submitting a claim at which you can jeopardize the coverage you’ve purchased. We’ll focus on the application process –
Applications for professional liability insurance contain something called the Prior Knowledge Provision. This Provision is often covered by the following question: “Is the applicant or attorney for whom coverage is sought aware of any act, error, omission, or incident that might reasonably be expected to result in a claim or suit being made against them?”
Failure to adequately disclose prior acts or omissions can lead to denial of coverage. Under Pennsylvania law, courts apply a two-step analysis when considering a prior knowledge provision in an insurance policy. The first step is a subjective evaluation in which the court determines what facts the insured actually knew prior to the effective date of the policy. The second step is an objective determination, which asks whether a reasonable attorney equipped with the facts known to the insured would have reason to know that a claim (or suit) might be made against him. If the insured had actual knowledge of facts that might reasonably have been expected to give rise to a claim against him, the insurer may then deny coverage pursuant to the prior knowledge provision.
In Zavodnick, Zavodnick, and Lasky, LLC v. National Liability & Fire Ins. Co., the U.S. District Court for the Eastern District of Pennsylvania recently granted summary judgment to an insurer in a declaratory judgment action. There, the attorneys represented their client in a third-party liability claim for bodily injuries sustained in the course of employment. The third-party claim was settled, but the attorneys failed to secure written confirmation from the workers’ compensation carrier that it would waive its right to credit the proceeds against future compensation benefits. The attorneys argued that the adjuster verbally agreed to the waiver. Since it was a Delaware compensation case, the IAB heard testimony and issued a decision finding no waiver. In its decision, the IAB squarely placed fault on the claimant’s attorneys for failure to secure the waiver in writing.
The IAB’s decision was issued on May 25, 2016. On August 16, 2016 the attorneys completed an application for professional liability insurance. The attorneys responded “no” to the question regarding prior acts and omissions. The attorneys were later sued for malpractice by their former client. The insurer denied coverage in the malpractice action based on the Prior Knowledge Provision of the Policy.
The attorneys filed a declaratory judgment action. The issue presented was whether the attorneys were required to disclose on the insurance application form the possibility of a claim or lawsuit against them from the former client. The attorneys argued that (given the facts known to them) a reasonable attorney would not have reason to know that the clients might file a malpractice claim. The attorneys testified that the clients did not express dissatisfaction with their representation, never became hostile, requested a reduction in fees, or threatened a lawsuit. The court rejected this argument in the context of the objective analysis, reasoning “an attorney’s subjective belief, based upon his relationship with his client, that the client would not bring a malpractice suit, is irrelevant to this objective analysis.”
Accordingly, attorneys completing applications for professional liability insurance should answer the Prior Knowledge question after conducting both a subjective and objective analysis. First, ask yourself what facts are known to you regarding acts and omissions in your practice. Next, without regard for the nature of your relationship with the client, consider whether an independent attorney reviewing those facts would expect a claim against the attorney-applicant.
It may be tempting to answer “no” based on your relationship with the client. However, you may be throwing your premiums away in the event that you’re wrong and the client sues you. At that point, you’ll be out-of-pocket for the premiums and have no benefit of coverage.
Do you have questions about the prior knowledge provision, or a potential legal malpractice claim? Feel free to contact Paul Fellman at (610) 557-1977 ext. 106, or by email at pfellman@gibperk.com.
