United States: Seventh Circuit Requires Notice At Early Signs Of Potential Suit Under "Claims Made" Policy

Insurance Coverage Case Advisory, Issue 42

In Koransky, Bouwer & Poracky, P.C. v. The Bar Plan Mutual Insurance Co., No. 12-1579, 2013 WL 1296724 (7th Cir. Apr. 2, 2013), the Seventh Circuit, applying Indiana law, held that coverage under a professional liability "claims made" policy was precluded where the policyholder provided the insurer with notice at the time a malpractice suit was filed, as opposed to when the policyholder was first aware of the facts giving rise to the suit.

The malpractice claim arose from the actions of a law firm in the representation of a purchaser of several Rite Aid stores.  Id. at *1.  An associate at the firm accidentally misfiled one of the purchase contracts and failed to deliver an executed copy of the contract to the seller.  Id.  Having not received an executed copy of the sale contract, the seller decided on February 22, 2007 to rescind its signature and declare the agreement null and void.  Id.  The next day, the associate who misfiled the contract attempted to remedy the situation.  He sent an email stating the "whole situation" was his fault and asking the seller to withdraw the cancellation notice.  Id.  The seller declined.  Id. at *2. 

Lawsuits then proceeded in two jurisdictions, Alabama and Ohio, regarding the validity of the purchase agreement.  Id. at *2.  The law firm asserted that it "had no reason to think that the deal was truly doomed because it had on good authority—a former Alabama Supreme Court Justice—that the Alabama court would not exercise jurisdiction, and Buyer's Ohio counsel informed [the firm] that the contract was enforceable because Ohio law does not require delivery."  Id. at *6.  Thus, the firm did not notify its professional liability insurer of the lawsuits.

The firm finally notified its professional liability insurer of the issue in August 2007, when the purchaser filed a formal notice of claim against the firm.  Id. at *3.  The insurer denied coverage because the firm "had learned of the facts underlying the claim in February 2007" and should have reported it during the applicable policy period, which ended in April 2007.  Id.  The coverage litigation ensued.

The law firm contended that it was entitled to coverage because, among other reasons, it notified the insurer of the claim when the actual malpractice claim was made.  Id. at *4.  The insurer asserted that notice was untimely because the firm knew of the potential claim in February or March 2007, during the prior policy period, and failed to report it.  Id. at *5.  The Seventh Circuit sided with the insurer.

More particularly, the Seventh Circuit determined that the law firm's professional liability policy in place in August 2007, when the claim was reported, controlled.  Id. at *5.  The policy required the firm to notify the insurer during the policy period "of a specific incident, act, or omission . . . which may give rise to a Claim."  Id. (quoting policy). Further, the policy precluded coverage for acts or omissions predating the policy period if the law firm knew or should have known that the acts or omissions "might reasonably be expected" to be the basis of a claim.  Id. (quoting policy language).  The court determined that the provisions required notice "not when the law firm has received an actual claim, but when it became aware of an 'act or omission' which 'may give rise to a Claim.'"  Id. 

The court held that the firm failed to comply with the notice provisions, despite multiple opportunities to do so.  The court reasoned that the firm should have provided notice after the initial request for rescission and admission of misfiling because"[a] reasonable attorney in [the law firm's] position would realize that his client might bring a malpractice claim against him."  Id. at *6.  However, even if the initial exchange were not enough to require notice, the filing of the first underlying lawsuit in Alabama required the firm to provide notice.  Id.  The court concluded that:  "No matter how we construe the record, it is clear that a reasonable attorney would have recognized that his failure to deliver the contract, in light of the communications and legal activity that quickly followed, was an omission that could reasonably be expected to be the basis of a malpractice claim."  Id.

The Koransky decision underscores the importance of timely notice of potential claims – not just actual claims – under claims made policies.  A policyholder who waits too long to notify its insurer of a potential claim can suffer significant adverse consequences.

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