Claims Reporting
by Phillip R. Zuber, Esq., Sasscer, Clagett & Bucher

Surprisingly few attorneys are familiar with the details of their professional liability policy. They assume that so long as they have a policy, any malpractice suit will be covered. That is what happened in Zuckerman v. National Union Fire Ins. Co.¹ The attorney failed to timely pursue a third-party claim growing out of a worker's compensation claim. When the client sued, the attorney thought the claim was of minimal value -- within his deductible. He hired his own counsel and eventually notified his malpractice insurer. Unfortunately, he was too late and had no coverage. In reality, whether there is coverage for a suit turns on when the attorney first expected that the client might make the claim and when that claim was reported to the insurer.

What is a "claims made" policy?

Professional liability insurance generally consists of "claims made" coverage. This type of coverage is very different from the more customary "occurrence" coverage in automobile and homeowner liability policies. Occurrence policies provide insurance against accidents that occur during the policy term, no matter when the claim is made. In contrast, a claims made policy provides insurance against claims first asserted during the policy term. If a claim is not reported during the policy term, it is not covered. It is the presentation and reporting of a claim that triggers coverage - not when the act or omission occurred (with some important exceptions).²

What is a claim?

An accident involves an easily identifiable event. It is far more difficult at times to pinpoint when a claim occurs.³ Many policies provide that a claim is first "made" when the attorney gains knowledge or becomes aware of "any act, error or omission which could reasonably be expected to give rise to a claim" under the policy.

What if the attorney knows about a possible claim before the policy goes into effect?

The failure to report a possible claim can have devastating consequences. The typical policy covers only those claims that are first made to the attorney and reported to the insurer during the policy term. It does not cover:

• claims reported to an insurer before the effective date, or
• acts or omissions prior to the effective date if the attorney⁴ knew or could have reasonably foreseen that such acts, errors or omissions might be the basis of a claim or suit.⁵
  
  

The attorney must report a possible claim during the policy term to trigger coverage. If the claim is not reported during the policy term, the policy expires and will never cover the claim.⁶ Subsequent policies will not cover the claim since those policies only apply to new claims.

The result — no coverage for the claim — is both disastrous and preventable.⁷ The holdings by several courts suggest that if the professional error is clear, the client need not complain, express dissatisfaction or threaten suit for the attorney to reasonably foresee that such acts might result in a claim. If the basis for a professional negligence claim is less clear or uncertain, client complaints can play an important role in putting the attorney on notice of the potential for a claim.

When should the lawyer "reasonably expect" that a client might make a claim?

The attorney must report any act or omission that is reasonably expected to give rise to a claim. There are no Maryland cases on when an attorney should "reasonably expect" that the client might make a claim. Cases from other jurisdictions, however, provide some guidance. Courts look to what the attorney actually knew and then whether a reasonable lawyer (objective standard) at that time would have had a basis to believe that a claim might be made.⁸ Because the test is objective (the reasonable lawyer), it does not matter what the attorney thought or expected.

When the client indicates a clear intent to make a claim.

A claim is reasonably expected when the client indicates his intent to assert a claim. It does not matter how frivolous the claim may be.⁹

In Stiefel v. Illinois Union Ins. Co., 452 N.E.2d 73 (Ill.App. 1 Dist. 1983), the attorney received a letter from the client clearly demonstrating an intent to assert a claim. He responded to the client with a detailed explanation of his actions. There was no further activity for thirteen months. Meanwhile, the insured applied for professional liability insurance, which covered claims "provided no insured had knowledge nor could have reasonably foreseen any circumstance which might result in a claim at the effective date." The Court held that there was no coverage.

Similarly, in General Acc. Ins. v. Trefts, 657 F.Supp. 164, 167 (E.D.Mo. 1987), the application asked, "Does any lawyer . . . know of any circumstances, act, error or omission that could result in a . . . claim against him . . .?" The Court held that the question applies to:

those circumstances when a client has given to the lawyer some indication through a complaint or expression of dissatisfaction with his services that a claim might or would be made.

When there is litigation implicating the attorney's conduct.

If there is litigation that questions the attorney's conduct, it is "reasonably expected" that a claim could result.

In Stream v. Aetna Cas. & Sur. Co., 608 So.2d 260 (La.App. 3d Dir. 1992), the policy excluded any "claim or circumstance" that should have been but was not listed in the application. The application contained the question: "Has the firm any reasonable basis to believe that a claim may be made against the Firm?" One of the insured attorneys had been a defendant in a lawsuit for several years involving his activities in a business venture. The Court concluded that the attorney was aware "that the facts at issue . . . might expose him, or the firm to professional liability" and therefore there was no coverage.

Tewell, Thorpe & Findlay, Inc. v. Continental Cas. Co., 825 P.2d 724 (Wash.App. 1992) involved an attorney who failed to note two easements on a title report and gave the title insurer incorrect information. When the client put the title insurer on notice, the title insurer wrote to the attorney that it might "implicate" him if the claim resulted in litigation. Five months later, Continental issued a professional liability policy to the attorney. Continental refused to cover the subsequent claim by the client because the policy excluded claims for acts or omissions before the effective date "if any insured on the effective date knew or could have reasonably foreseen that such acts or omissions might be the basis for a claim." In finding that there was no coverage, the Court observed:

The fact that Chicago Title was contesting its obligation to pay [the client's] claim under the title insurance policy raises at least the possibility that [the client] might look elsewhere at some point to make good his losses. The language of the exclusion clause also does not imply that the potential claims of which the insurance company must be informed or necessarily have merit . . . The foreseeability of a claim is distinct from the question of whether a foreseeable claim has any merit. This is not a case in which the claim was so obscure or groundless that it simply would not occur to the insured to report it.

Id. at 728.¹⁰

When there is a deterioration in client relations.

A deterioration in client relations when coupled with an attorney's experience may influence whether a claim is "reasonably expected."

In Professional Managers, Inc. v. Fawer, Brian, Mardy & Zatzkis, 799 F.2d 218 (5th Cir. 1986), the evidence revealed that just prior to the submission of the insurance application, firm members circulated memoranda regarding a possible suit against the client for legal fee. Some firm members observed that the client was likely to counterclaim for negligence and that the client was "looking to blame everyone." The client had also complained about the bill for services, about being kept informed of developments, and other issues. A meeting with the client ended "in a very acrimonious way." In analyzing the knowledge of the insured attorneys, the Court stated:

They were . . . both experienced and well regarded by the bar. They were also in a position to appreciate the difference between a client who simply asserts he has been overcharged and wishes a reduction in the fee and one who is so disgruntled that he may assert a claim for improper representation.

Id. at 224. The policy did not cover the claim because the attorneys "had knowledge of any circumstances which might result in a claim at the effective date of the . . . policy."

When attorney negligence is clear.

Clear negligence by an attorney carries a reasonable potential for a claim.

In Bellefonte Ins. Co. v. Albert, 472 N.Y.S.2d 635 (A.D., 1st Dept. 1984), the attorney did not file a wrongful death case within the statute of limitations. When the client's case was dismissed on statute of limitations, there was a real possibility of a claim. The Court held that the attorney was obligated to report the claim. The failure to report meant no coverage.

Summary

These four factors (intent to make a claim, litigation implicates attorney conduct, the client relations deteriorate and clear negligence) provide some guidance in determining when the attorney should report a claim. None of these cases, however, set forth any universal rule or test. What can be said is that if the professional error is clear, the client need not complain, express dissatisfaction or threaten suit for the attorney to reasonably foresee that such acts might result in a claim (as in the Bellefonte case of missing the statute of limitations). As the basis for professional negligence claim becomes more complex or clouded, the more client complaints play a role in putting the attorney on notice of the potential for a claim. Thus, if there are client complaints, it is not necessary that the complaints have merit or that the client pursue them (as in the Tewell and Stiefel cases).

You should carefully weigh these factors when deciding whether to report a claim. The decision has grave consequences. Since coverage may be at risk, err on the side of reporting a claim.

2. See generally, Mutual Fire, Marine & Island Ins. Co. v. Vollmer, 306 Md. 243, 252-56, 508 A.2d 130 (1986); many policies have a retroactive date. Claims relating to conduct before that date are excluded even if the claim is first presented during the policy term.

3. See, Stine v. Continental Cas. Co., 419 Mich. 89, 98-100, 349 N.W.2d 127 (1984).

4. The typical policy imputes knowledge of one partner or shareholder to all members of the firm.

5. Exclusions for previously known potential claims have been upheld as reasonable and appropriate. Truck Ins. Exchange v. Ashland Oil, Inc., 951 F.2d 787, 791 (7th Cir. 1992).

6. Maryland's late notice/prejudice statute (MD.ANN.CODE, Art. 48, § 482 (Repl. Vol. 1995)) does not apply to claims made policies. T.H.E. Ins. Co. v. P.T.P., Inc., 331 Md. 406, 628 A.2d 223 (1993). Once the policy expires, there is no continuing duty of performance. Thus, presentation of a claim after the policy expires is a nullity. In St. Paul Fire and Marine Ins. Co. v. House, 315 Md. 328, 554 A.2d 404 (1989), the Court held that there was claims made coverage under the particular policy language there if one of two events occurred during the policy term: the physician reported a potential claim or an actual claim was presented to the physician.

7. For the exclusion to make any sense, the prior conduct must qualify as a reportable claim under the previous policy. Otherwise, there would be a whole category of claims that would go uncovered: those claims that would be "unreportable" under the prior policy but excluded under the present policy because the insured could have reasonably expected that it might become the basis for a claim; see also, Lewis v. St. Paul Fire & Marine Ins. Co., 452 N.W.2d 386 (Iowa 1990).

8. Ehrgood v. Coregis Ins. Co., 59 F.Supp.2d 438 (E.D.Pa. 1998).

9. Even a contingent demand (e.g., if an appeal is unsuccessful, a claim will be made) can rise to the level of a reportable claim if the condition is certain, ascertainable and "agreed to by both parties." Rentmeester v. Wisconsin Lawyers Mut., 473 N.W.2d 160 (Wis.App. 1991).

10. See also, National Union Fire Ins. Co. v. Holmes & Graven, Chtd., 23 F.Supp.2d 1057, 1066 (D.Minn. 3rd Div. 1998) ("it defies belief . . . that [law firm] could not have reasonably foreseen that . . . clear drafting blunders" might be a basis for a claim given criticism and conclusion of Court in other proceedings).

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