Failure to Advise Insurer of Potential Claim Defeats Coverage

Lawyer Must Report All “Potential” Claims of Malpractice When Applying for E&O Insurance

Almost all legal malpractice insurance policies issued in the last 40 years have been claims-made policies that only respond to claims made during the effective dates of the policy. As a result, insurers demand that when a lawyer applies for insurance he or she must disclose all known and potential malpractice claims. Failure to report a potential claim will deprive the lawyer of coverage if a claim is actually made after the policy is issued.

In Elizabeth A. Ruiz, Personal Representative of the Estate of Marcia A. Paul V. the Bar Plan Mutual Insurance Company, No. ED106926, Missouri Court of Appeals Eastern District Division Four (September 3, 2019) Elizabeth A. Ruiz (“Ruiz”) appealed the trial court’s grant of summary judgment in favor of The Bar Plan Mutual Insurance Company (“The Bar Plan”) on her claim filed on behalf of the estate of Marcia A. Paul (“Decedent”).

THE MALPRACTICE JUDGMENT

Ruiz brought her claim against The Bar Plan to collect on a legal malpractice judgment entered in favor of Decedent against The Bar Plan’s insured, Charles H. Steib (“Steib”). Steib renewed a claims-based professional liability insurance policy with The Bar Plan (“the Policy”) effective in 2009. In the Policy, coverage for claims based upon conduct occurring before the issuance of the Policy was conditioned on Steib notifying The Bar Plan, at the time of the Policy renewal application, of any act or omission that he had a basis to believe might give rise to a claim against him. The trial court determined that the Policy did not afford coverage for Ruiz’s legal malpractice claims because Steib did not report Decedent’s potential malpractice claims against Steib to The Bar Plan when he reapplied for insurance coverage.

ARGUMENTS

Ruiz contended that Steib fully complied with the Policy’s notice requirements because he reasonably believed no malpractice claim could be brought against him on behalf of Decedent following Decedent’s death.

THE BAR PLAN POLICY

Steib, through his law firm, submitted a Policy renewal application to The Bar Plan in December 2008. It provided that it: “is a condition precedent to coverage under this Policy that all Claims be reported in compliance with Section VII. CLAIMS, Paragraph A.” The policy also provided that under Section III Exclusions, Exclusion L expressly excluded coverage for any claim based upon or arising out of “[a] Claim against an Insured who before the Policy effective date knew, or should reasonably have known, of any circumstance, act or omission that might reasonably be expected to be the basis of that Claim”

In the December 2008 Policy renewal application, Steib affirmatively denied that his firm or any attorney or employee in the firm had knowledge of any incident, circumstance, act or omission, which may give rise to a claim not previously reported. Steib then sought and recovered attorneys’ fees against Decedent’s estate for his representation of Decedent in the declaratory judgment action.

ANALYSIS

When Decedent sought to collect on the settlement, Intermed filed a declaratory judgment action seeking a ruling that Dr. Pastrana’s liability policy did not cover Decedent’s claims. Steib, representing Decedent, did not properly respond to Intermed’s statement of uncontroverted facts.

Because of Steib’s error, Decedent was unable to continue her efforts to collect on the $750,000 medical malpractice judgment against Dr. Pastrana.

Ruiz’s Legal Malpractice Judgment

On November 3, 2009, Ruiz filed a lawsuit against Steib on behalf of Decedent’s estate alleging legal malpractice resulting from Steib’s representation of Decedent during the Intermed declaratory judgment action. The Bar Plan terminated coverage due to Exclusion L and the insuring agreement. The Bar Plan explained that prior to the Policy period, Steib had reason to know—but had not notified The Bar Plan—that Decedent might have brought a claim against Steib due to his mishandling of the Intermed declaratory judgment action.

This appeal must be resolved by answering one fundamental question: Did Steib, when completing his Policy renewal application with The Bar Plan in December 2008, have reason to know that Decedent might have a basis for bringing a legal malpractice claim against him due to his failures in the Intermed declaratory judgment action? If answered in the affirmative, then Steib’s failure to report the potential claim in his renewal application precludes coverage.

The ultimate question is what a reasonable attorney purchasing this policy would expect to be covered and excluded from coverage. The notice requirement of a policy defines the limits of the insurer’s obligations. The notice requirement is material, and of the essence of the contract. Exclusion L explains that the Policy does not afford coverage for any claim based upon or arising out of “[a] [c]laim against an [i]nsured who, before the Policy effective date knew, or should reasonably have known, of any circumstance, act or omission that might reasonably be expected to be the basis of that [c]laim.”

Reporting potential claims is the default expectation under claims-made policies, because claims-made policies place special reliance on notice. Steib failed to comply with the mandatory requirements of a court rule and consequently lost a dispositive motion that lost his client the benefit of a $750,000 judgment.

Importantly, even if Steib subjectively believed his pleading error was not one that might give rise to a malpractice claim, under the objectively-reasonable-attorney standard, Steib’s subjective belief does not release him from his duty to report the potential claim under the Policy’s insuring clause. Steib’s error was clear and unmistakable error.

Having found that a reasonable attorney in Steib’s position would have reason to know that his failure to adhere to the requirements of the rule in the Intermed declaratory judgment action might give rise to a legal malpractice claim.  Ruiz contended that the fact that a malpractice claim is not assignable coverage should exist. However, it does not logically follow that a claim cannot survive because the case law development in Missouri clearly informed members of the bar of the expansive reach of the survival statute long before 2008.

Even if an attorney subjectively believes there is a good-faith defense to a potential legal malpractice claim, a claims-made policy does not excuse failing to put the insurer on notice of that claim. The case law relating to the assignability of legal malpractice claims simply provides no reasonable basis for Steib to have concluded that his client’s death protected him from a legal malpractice claim by his client’s estate.

Because Decedent’s death had no impact on the viability of the potential legal malpractice claim against Steib, the Policy’s insuring clause and Exclusion L prohibit coverage. The law simply does not allow a court to hold the Bar Plan liable for Steib’s failure to adhere to the notice requirements of the policy renewal application.

ZALMA OPINION

Claims-made policies are different and require the insured to be honest and forthcoming when applying for the insurance. The application is usually made a part of the policy and the representations made in the application to be warranties that must be absolutely true. Attorney Steib played fast and loose with his insurer and, as a result, appropriately lost coverage for the suit brought by Ruiz. She is not without a remedy, she can always execute on Steib’s assets.


© 2019 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  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. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Over the last 51 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Excellence in Claims Handling Courses From Experfy.com

The Excellence In Claims Handling program provides everything a person or entity presenting a claim needs to effectively present the claim and provides the insurance claims person with everything he or she needs to properly represent the insurer.

The insured, risk manager, or corporate counsel will be able to present a first party property claim – whether a fire, theft, or windstorm or some other insured against cause – with little difficulty and professionalism and present a sworn proof of loss acceptable to an insurer.

The insurance claims person completing the course will be able conduct a thorough investigation of the policy and claim. The insurance claims person will also be able to assist an insured to fulfill all of the promises made by the insured to the insurer and the insurer to provide the indemnity promised by the insurance policy.

The series of courses was designed so that the student can obtain the needed information easily while he or she sits down in the morning for a first cup of coffee or any other time in the day in short, easy to consume lessons. For instance “Insurance and Claims” is made up of three modules and 27 lectures while “Investigating the Property Claim” is made up of four modules and 65 lectures. You can review each course, each module and each lecture at the links below.

Each person completing the course will be able to claim that he or she is a professional first party property claims person ready to provide excellence in claims handling and be ready to resolve any claims problem that arises for the benefit of the insurer and the policy holder.

Insurance and Claims: https://www.experfy.com/training/courses/insurance-and-claims

Investigating the Property Claims: https://www.experfy.com/training/courses/investigating-the-property-claim

Insurance Law: https://www.experfy.com/training/courses/insurance-law

Solving Claims Problems: https://www.experfy.com/training/courses/solving-claims-problems

About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
This entry was posted in Zalma on Insurance. Bookmark the permalink.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.