On applying for insurance

J. Randolph Evans and Shari L. Klevens

Daily Report

02-26-2013

The worst possible time for a law practice to discover that there is a problem with its application for legal malpractice insurance is after a claim has been made.

Yet for many attorneys it is the first time that anyone in the law practice has actually focused on the specific questions in the application (and the implications of the answers). Unfortunately, by then, it is too late.

Legal malpractice insurance applications include many questions—all designed to assist insurers to evaluate and price the risk assumed under the policy. Generally, the applications seek different kinds of information.

First, there is the background data about the law practice, including type of practice, number of attorneys, and general information (such as the percentage of work performed in different practice areas). The answers to these questions provide important data for pricing the insurance.

Most of the time, law practices accurately report this data on initial applications for insurance. Unfortunately, the same is not true in renewals. Some firms simply "roll over" the data from prior applications year after year—even though the actual numbers may change as the law practices changes.

Differences between the application and reality can be problematic. An important first step is to consider every application as if it is the first application.

Next, there are the claims data questions. Generally, these questions seek information about prior claims, known claims and potential claims. The failure to accurately respond to these questions can have a direct impact on whether coverage will be available in the event of a claim.

Prior claims

"Has anyone proposed for insurance had a claim made against them?" Obviously, prior claims can affect insurability or pricing. But attorneys should not assume too much. Rather than the mere existence of a prior claim, today's insurers are likely to be more interested in how long ago the claim was, and whether the law practice has addressed any underlying problems.

On the other hand, if a legal malpractice insurer is only learning about a prior claim after a new claim is made, a host of other, more complicated issues arise. Usually the insurer will question whether it would have issued the policy had the firm accurately disclosed the prior claim.

Georgia law allows an insurer to rescind a policy based on a law firm's material misrepresentation in its application that affected the insurer's decision to underwrite the risk. Upon rescission, the policy is void and no longer applies to any other claims that may be asserted—including the new claim. It is a risk that is just too large to assume.

The safer course is to always include every prior claim on every application for insurance. Some attorneys believe that if the prior claim was meritless, or resulted in "no payment," then they need not disclose it. That is not the case. Every prior claim—regardless of resolution—should be included in the application.

Known claims

Legal malpractice insurers ask if the law practice is aware of any pending or known claim. The effect of failing to disclose known claims is direct and immediate. For the expiring policy, the failure to report the claim means that the law practice will not have coverage. Both the notice and the reporting provisions of legal malpractice policies require law practices to provide notice and report claims as soon as law firms learn of them.

For the next policy (for which the application is being submitted), the knowledge of the claim prior to the inception of the new policy will preclude coverage for it. Legal malpractice policies typically include some terms and exclusions aimed at eliminating coverage for any claim of which the insured had prior knowledge. Separately, Georgia law can preclude coverage of claims of which an insured is aware prior to the policy based on the "known loss" doctrine.

The failure to disclose a known claim in an application involves significant risk with little reward. An undisclosed claim could provide the basis for an insurer's attempted rescission of the legal malpractice policy should a different claim—likely a more serious claim—come along. It is a risk that is just too great.

Potential claims

Most legal malpractice policies also include this question:

"After inquiry of each lawyer, is the Applicant, its predecessor firms or any lawyer proposed for this insurance aware of any fact or circumstance, act, error, omission or personal injury which might be expected to be the basis of a claim or suit for lawyers professional liability?"

This is one of the most difficult and important questions in any application for legal malpractice insurance. After all, in today's litigious world, virtually every representation could be the basis for claim —especially if things happened during the representation that did not turn out exactly as the client wanted or expected.

In accurately responding to this question, consider the "what" and the "who."

What potential claims to disclose

The most important step in responding to this question is to make sure that the answer matches precisely what the law firm has reported to its insurance company. Although the exact boundaries of what "might be expected" or "could give rise to a claim" vary according to the facts and circumstances of each situation and the attorney involved, the impact of including a claim does not.

So, if a potential claim is listed in the application for a new policy, it should be reported as a potential claim under the expiring policy. This means that while it may not be covered under the new policy (as a pre-inception date loss), it should be covered under the expiring policy. If the law firm decides that the matter does not rise to the level of reporting under the expiring policy as a potential claim, it similarly does not rise to the level of disclosure in the application. Consistency is critical.

In evaluating whether the facts or circumstances merit disclosure as a potential claim, there are both a subjective and an objective component. The subjective component depends on what the attorney actually knows. The objective component requires disclosure of facts or circumstances that a reasonable attorney would realize might lead to a claim.

Who must answer?

The key language here is: "after inquiry of each lawyer." Other times, it is "persons proposed for coverage." In either situation, as this language suggests, the question requires an inquiry of every other attorney in the firm or every person proposed for coverage. Specifically, the question involves inquiry of attorneys other than those involved in actually completing the application. (For example, in a recent case, Axis Insurance Co. v. Farah & Farah, P.A., 2013 WL 216067 (11th Cir. Jan. 18, 2013), the Eleventh Circuit held that "persons proposed for coverage" even extends beyond present members of the firm and includes lawyers previously associated with the firm who were insured under the policy.)

So, be careful and get it right. No law practice wants to discover it has a problem with its application after a claim comes.

J. Randolph Evans and Shari L. Klevens are the authors of Georgia Legal Malpractice Law, published by Daily Report Books. J. Randolph Evans is a partner in McKenna Long & Aldridge's Atlanta office, where he is the chairman of the financial institutions practice. shari l. klevens is a partner in McKenna Long & Aldridge's Washington office and is the managing chairwoman of the firm's law firm defense practice.