Malpractice Insured Must Report all Potential Claims
When a probate lawyer committed malpractice, she knew she had committed malpractice, and did not report that fact to her insurer at renewal, she knew that her insurer properly denied her claim for defense and indemnity. The plaintiff, suing her, obtained a large judgment and elected (perhaps because the lawyer was judgment proof) to sue the insurer to collect the judgment rather than attempting to get the judgment paid by the lawyer. The lawyers for the plaintiffs learned and important lesson, only sue an insurer if you can prove coverage.
In John N. Thomson, v. Hartford Casualty Insurance Company, United States Court of Appeals, Sixth Circuit, 2016 WL 4036403, No. 15-1501 (July 28, 2016) the trustees and beneficiaries of the Vitello family trust sued Kathleen King O’Brien, a Michigan lawyer, for malpractice. O’Brien sought coverage from her malpractice insurer, Hartford Casualty Insurance Company, which denied her claim because she had failed to timely notify Hartford of the foreseeable possibility that the Vitello trust would pursue a malpractice claim against her.
In 1998, Silverio and Anna Vitello hired Kathleen King O’Brien, a trusts-and-estates lawyer, to establish a family trust for the benefit of the Vitellos’ four children. The trust agreement named O’Brien as independent trustee. In that role, she was responsible for managing the trust’s sole asset, a life-insurance policy bearing a face value of $1 million, payable on the death of Silverio or Anna, whoever died later. In the meantime, the policy required Silverio and Anna to pay an annual premium of $25,000.
After Silverio passed away in 2001, Anna became unable to pay the annual premium. The Vitellos’ life insurer, Lincoln National, agreed to modify the policy so that Anna would pay only $7,800 per year towards the premium, while Lincoln drew the rest from the equity the Vitellos had already put into the policy. O’Brien established an automatic monthly electronic funds transfer from Anna’s bank account to pay the modified premium.
The Vitellos’ equity in the insurance policy eventually dried up. In July 2008, Lincoln sent O’Brien a notice informing her that the policy would lapse unless Anna’s monthly payments were tripled. O’Brien did not act on the notice. In November 2008, Lincoln sent O’Brien another notice, informing her that the policy would lapse unless Anna made an $8,684.30 payment to Lincoln by December 12, 2008. O’Brien informed neither Anna nor the Vitello children of the pending lapse.
The policy thereafter lapsed, and Lincoln denied O’Brien’s belated efforts to reinstate it. Several months later, in May 2009, Anna filed a petition in state probate court to remove O’Brien as trustee. In her petition, Anna complained that “O’Brien has refused to provide Anna Vitello with a copy of the Trust Agreement,” and that O’Brien had “not conveyed sufficient information to [Anna] for [Anna] to determine the status of the [life insurance] policy and what options may be available to prevent any lapse.” The trust eventually obtained another, more expensive life-insurance policy that carried a lower face value.
RENEWAL OF THE POLICY
In June 2010, O’Brien—who had maintained continuous malpractice insurance coverage through Hartford Casualty Insurance Company since 1994—applied to renew her malpractice insurance policy. O’Brien herself specified in the application that the “retroactive date” of the policy was September 3, 1994, and that the “proposed coverage effective date” of the new policy was September 3, 2010. In a section labeled “underwriting questions,” the application asked O’Brien whether she was “aware of any act, error or omission that could result in a professional liability claim being made[.]” O’Brien answered “no[.]”
Finally, the application carried a disclaimer—marked “IMPORTANT”—warning O’Brien that, “[t]o avoid loss of coverage, it is imperative that all known circumstances, acts, errors, omissions, or personal injuries which could result in a professional liability claim against you … be reported to your present insurer within the time period specified in your present policy. All known claims and/or circumstances are specifically excluded by The Hartford, should coverage become effective.”
Hartford thereafter renewed O’Brien’s policy for a “policy period” running from an “effective date” of September 3, 2010 until an end date of September 3, 2011, and with a “retroactive date” of September 3, 1994.
In May 2011, Thomson and the Vitello trust’s beneficiaries sued O’Brien in Michigan probate court for malpractice and breach of fiduciary duties. O’Brien faxed the complaint to Hartford, which declined to indemnify her after concluding that, as of the effective date of her insurance policy (September 3, 2010), O’Brien could have foreseen (and did not disclose on her application form) that she would be subject to a malpractice claim for her performance as independent trustee of the Vitello trust. O’Brien and the plaintiffs later agreed that O’Brien would assign her indemnity claim against Hartford to the plaintiffs and would “not oppose” the plaintiffs’ case in state probate court; in exchange, the plaintiffs promised to seek collection of any state-court judgment only from Hartford. The Michigan probate court entered a $770,065.42 judgment for the plaintiffs after a one-hour bench trial.
Michigan courts enforce an insurance contract’s “clear and precise” terms as they are written. The terms of O’Brien’s malpractice insurance policy were straightforward: Hartford agreed to indemnify O’Brien for any “damages” stemming from a “claim first made against” the proposed insured. The contract expressly disavowed indemnification for claims arising from an act or omission where the insured, “[a]s of the effective date of [the contract], … knew or could have foreseen that such act, error, [or] omission … could result in a ‘claim[.]” ’ And when the contract took effect in September 2010, O’Brien had every reason to foresee that her nonfeasance as trustee of the Vitello trust—nonfeasance that resulted in her forced resignation in May 2009—might give rise to a malpractice claim against her.
The plaintiffs contend that this proviso creates “uneven” coverage for Hartford’s insureds, and suggest that it works an unfair result because O’Brien had “seamless, uninterrupted” insurance coverage with Hartford under earlier insurance contracts. Plaintiffs’ But under O’Brien’s identical 2008-09 contract with Hartford, O’Brien could have obtained coverage for liabilities arising from her nonfeasance by immediately notifying Hartford of the acts and omissions that led to her resignation as trustee. And had she done so, the contract would have covered any later claim as a claim made within the policy period, “regardless of when such ‘claim’ [was] actually made.” O’Brien was denied coverage because she failed to report her nonfeasance, not because she and Hartford entered into an “uneven” insurance contract.
When Anna Vitello petitioned the state probate court to remove O’Brien, she specifically asserted that O’Brien had failed to provide Anna with “sufficient information … to determine the status of the [life-insurance] policy and what options may be available to prevent any lapse.” The petition also made clear that any “lapse of the policy” would result in a “tremendous loss of value to the Trust and its beneficiaries.”
As the district court correctly pointed out, these very allegations “formed the basis” for the successful malpractice claims that the plaintiffs later filed in state court. Soon after the Vitellos presented these allegations to the probate court, O’Brien resigned her position as trustee. Any reasonable lawyer would have known that this course of events bore the seeds of a malpractice claim.
Lawyers, as a category, have extremely high belief in their own skill. Even when they make a stupid error and are told so by a client who filed a suit removing the lawyer as a trustee for misfeasance, will still not report such a fact as a potential claim, regardless of how obvious as was the claim in this case. That hubris defeated the coverage available to Ms. O’Brien.
Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
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