Imagine the law firm's surprise when its legal malpractice insurance carrier not only denied coverage for a claim, but also sued it in a declaratory judgment action seeking a judicial determination of "no coverage." This is the kind of thing that an attorney or law firm might expect if the claim involved intentional misconduct or activities outside the rendition of professional services. Yet this is what happened with a recent garden-variety legal malpractice claim.
In Fleming, Ingram & Floyd, P.C. v. Clarendon National Underwriters Co., one of the firm's partners conducted a review of the firm's pending cases and discovered some that might involve potential malpractice. One in particular involved a personal injury lawsuit against a hotel. From the review, it appeared that the associate handling the matter failed to sue the proper defendant.
As a general practice, undertaking internal audits like this one is an effective risk management techniqueespecially if the law practice permits associates to directly handle and/or supervise cases.
One important word of caution is appropriate. Currently, the Georgia Supreme Court is considering the degree to which internal reviews and/or communications about matters that may involve a potential claim are protected by an attorney-client privilege, if at all. Until the court rules, it is particularly important that law firms follow the protocols outlined in Judge Stephen Dillard's opinion in Hunter, Maclean, Exley, & Dunn v. St. Simons Waterfront, LLC., Case No. A12A0716, (Ga. Ct. App. 2012). For a more complete outline of the specific recommended steps, go to "Protect internal communications," Daily Report, Aug. 21, 2012, http://tinyurl.com/8j22q6a.
In Fleming, the partner called the firm's legal malpractice insurer to discuss the instances of potential malpractice discovered during the audit, including the specific case involving the failure to name the proper defendant. During that conversation, the insurer advised that there was no need to provide written notice at that time. About three months later, the insurer canceled the firm's policy. The law firm did purchase an extended reporting period (or tail coverage) for claims arising out of acts occurring during the policy period.
Avoid the gap
Anytime an attorney faces the prospect of interrupted coverage it is important to make sure to avoid any gap in coverage. There are two ways to do this. First, as in this case, the firm should purchase tail coverage to protect it from claims made after the expiration of the policy based on acts that occurred before the expiration of the coverage. Second, the firm should purchase prior acts coverage from its new insurer extending back to before the inception date of the new policy. Generally, this combination provides the best alternative for ensuring coverage of reported claims (under the expiring policy), reported but not yet made potential claims (under the expiring policy), and unreported and not yet made claims for conduct before the cancellation date (under both the tail coverage and the prior acts coverage).
After the cancellation of the policy, the Fleming law firm met with its client, who asked whether she would receive money from her lawsuit. Consistent with its ethical obligations, the firm fully disclosed the situation and then said: "Either your case is going to survive through court, or you're going to get it from our malpractice carrier should the judge throw it out. … One of those ways, you're going to recover." As reflected in "What to do when mistakes happen," Daily Report, June 20, 2011, http://tinyurl.com/bu4szmc, this statement is probably one step further than the firm needed to go. After all, legal malpractice involves more than just a mistake.
In any event, the law firm then wrote the insurer describing the situation and stating "this may be a claim." When the legal malpractice claim was later filed, the insurer denied coverage and filed a declaratory judgment lawsuit against the law firm. After a trial, a jury returned a verdict in favor of the law firm. The court then addressed the coverage issues in deciding post-trial motions.
Actual and potential claims
In situations like this, there are two kinds of claims with two different kinds of notice and reporting requirements. First, there are actual claimswritten demands for money or services. Virtually all legal malpractice insurance policies require immediate written notice of actual claims made during the policy period as a condition of coverage.
For attorneys and law firms, this means one important thing: when a claimi.e., a demand for money or servicesis made, immediately report it in writing to the insurer exactly as specified in the legal malpractice policy. Typically, the policy will specify to whom such notice should be given, along with the mailing address. If there is a telephone number, use it. The key is to get confirmation of the insurer's receipt of the notice of the claim, preferably with a confirmed claim number.