If you have intellectual property insurance, you are obligated to provide your insurer with prompt notice of a potentially covered lawsuit. To meet this obligation, always keep in mind the mantra "tender early, tender often" and the warning that notice to an insurance broker may not constitute notice to an insurer. Adopting a "wait and see attitude" is the absolute wrong approach.

Even litigation which at first blush appears not to fall within coverage under standard form commercial general liability policies, or trigger a duty to reimburse attorneys' fees under pertinent directors and officers in errors and omissions policies, may develop in such a way that they may trigger a defense. Critically, in many jurisdictions, the duty to defend such "developing" claim cases may relate back to the first date of notice.1

IP Attorneys Are In A Unique Position To Highlight Potential Coverage

Under the applicable malpractice law prevalent in a majority of jurisdictions, an attorney must generally exercise the knowledge, skill and ability ordinarily possessed and exercised by other attorneys similarly situated.2 An attorney is liable for malpractice when his negligent investigation, advice, or conduct of his client's affairs results in the loss of a client's meritorious claims. An attorney has an obligation to be knowledgeable about pertinent law and perform diligent research and exercise informed judgment on the relevant issues.3 Here, there is no duty to discover and apply erroneous case law.4 An attorney, however, may be sued for malpractice for venturing into an unfamiliar area without the assistance of a specialist.5 He should advise his client of his uncertainties and let him make the decision.6

While an intellectual property attorney may not hold himself out to the community as a specialist in policyholder coverage issues, his retention as defense counsel puts him in a unique position to refer such a matter to competent coverage counsel or advise the client of the necessity to further investigate this issue. The legal issue is no different from that where a business attorney recognizes that the expertise of tax counsel is required to fully advise the client on his options. In such circumstances, while the business attorney need not possess the expertise to render advice on tax issues, he has a duty to inform his client of the client's need to pursue counseling in this arena. Typically, proof of a lawyer's failure to meet the applicable professional standard which he holds himself out as possessing is established by expert testimony.7

The applicable knowledge of a specialist in the intellectual property field may not include knowledge of the coverage implications of claims asserted against its insured. The existence of such duty is a question of law.8 Breach of the duty, however, is a question of fact. See Considine Co. v. Ace, Shattle, Hunt & Hager, 187 Cal. App. 3d 760, 765, 232 Cal. Rptr. 215 (1986).

A recent case, applying New York law, suggested limitations on this doctrine. In Darby & Darby, P.C. v. VSI International Inc., 678 N.Y.S.2d 482, 486 (1998), the court stated:

An attorney may be liable for malpractice if it is established that his or her conduct fell below the ordinary and reasonable skill and knowledge commonly possessed by a member of his or her profession.... Whether malpractice has been committed is ordinarily a factual determination to be made by the jury. . . . The plaintiff has failed to cite a single case supporting its contention that, as a matter of law, it did not owe the defendants a duty to inquire about their insurance coverage. The court has been unable to find any New York authority on this point. However, in a recent decision, the Supreme Court of California found that for the purposes of the statute of limitations on legal malpractice claims, the plaintiff manufacturer was deemed to have suffered "actual injury," when its law firm failed to investigate its insurance coverage or advise a manufacturer to notify its insurer of the underlying suit. (See, e.g., Jordache Enterprises, Inc. v. Brobeck, Phleger & Harrison . . . . ) It was implicit in the decision that, under certain circumstances, the failure of a law firm to inquire about its client's insurance is actionable.

This Court is persuaded that the plaintiff's failure to investigate the defendants' insurance coverage or alert them to the potential availability of insurance to cover their litigation expenses may have constituted legal malpractice. . . . [T]he issue of whether or not the plaintiff breached a standard of professional care and skill can only be resolved at trial.

This analysis was revisited in Darby & Darby, P.C. v. VSI International, Inc., et al., 701 N.Y.S.2d 50, 2000 N.Y. App. Div. LEXIS 356 (N.Y. App. Div. 2000):

In the absence of a factual assertion that the scope of the task for which counsel was retained specifically included inquiry into the nature and extent of its insurance coverage and whether it was applicable to the claim, the retention of counsel for the defense of such an action simply does not include any responsibility for assisting the client in determining whether sources exist from which to pay for that defense and any ultimate liability finding.

The court continued, "Nor does a lawyer's duty to advise his client as to all available causes of action or avenues of defense ... translate into a broad duty to inquire into all the client's insurance coverage." Id. at 51.

In Ross v. Briggs & Morgan,9 the court ruled in favor of a former client of Briggs & Morgan in a legal malpractice action. Briggs & Morgan was found to owe duties to its former client, Ross, arising from its failure to notify St. Paul or inform Ross of potential coverage for claims of deceptive trade practices and unfair competition based on allegations that "(1) Ross was a competitor; (2) Ross used advertising to pass himself off as Jaffe or as Jaffe's associate; and (3) Ross' actions actually confused patients about his affiliation with Jaffe."10

While the court in Darby & Darby makes clear that the duty to advise the policyholder of potential coverage extends to intellectual property counsel, general counsel for the policyholder may not be immune from involvement as well.11 Thus, the court found in Amerisure Insurance Co. v. Laserage Technology Corporation, 2 F.Supp. 2d 296 (W.D.N.Y. 1998) that the general counsel was at a law firm that purported to have insurance law as an area of expertise and employed approximately 70 attorneys. While the matter was referred to another firm by general counsel because of the firm's lack of patent litigation expertise, general counsel raised the potential of insurance coverage but summarily dismissed that possibility, stating: "No, of course not, it is patent litigation."

General counsel failed to note that the conduct of the policyholder alleged to give rise to liability was acts of defamation and disparagement arising from their wrongful telling of mutual or potential customers of the plaintiff patent owner that the competitor's product infringed patents that it arguably did not. It is indeed not uncommon for counterclaims arising out of patent infringement suits to raise fact allegations that fall within the personal injury and advertising injury coverage for libel, slander, and disparagement. Failure to provide notice even where it does not preclude the right to any defense may limit a client to recovery of only post-notice attorney's fees. California counsel should be attentive not only to the character of the claims in the complaint but also the counterclaim to assure that the benefits of any policies that exist are properly brought to bear.

It is a simple matter; if an attorney is asked to defend someone who has been sued, one of the things the attorney needs to say is, do you have insurance? It is not an issue of whether the lawyer is going to represent the client in any insurance matter, or that he is going to be hired to press the claim. The issue is whether the client is advised that the insurance matter should be investigated. Simply put, the issue is that the lawyer must take the initiative and question the client: "Do you have insurance that might be applicable?" and then see that the issue is investigated to ascertain the proper answer.

Clearly, if there was no potential liability for "failure to tender" as grounds for a legal malpractice claim, then the court need never have reached the divisive statute of limitations issue.

Footnotes

1 An insurer is well advised to provide a defense whenever they come into possession of information showing a potential for coverage. Stalberg v. Western Title Ins. Co., 230 Cal. App. 3d 1223, 1232, 282 Cal. Rptr. 43 (1991) (duty to defend continues throughout action against the insured); B & E Convalescent Center v. State Compensation Ins. Fund, 8 Cal. App. 4th 78, 92, 9 Cal. Rptr. 2d 894 (1992) (The duty to defend is determined "from all the information available to the insurer at the time of the tender of defense.").

2 Mallen & Levitt, Legal Malpractice, 45 A.L.R.2d 5 "Negligence in Preparing or Conducting Litigation," 28 Practical Lawyer No. 2, ABA Publication, p. 3 "Elements of Legal Malpractice Case Based on Litigation Errors."

3 Wright v. Williams, 47 Cal. App. 3d 802 (1975).

4 Sharpe v. Superior Court, 143 Cal. App. 3d 469 (1983).

5 Center Foundation v. Chicago Ins. Co., 227 Cal. App. 3d 547 (1991).

6 G. Heileman Brewing Co. v. Joseph Oat Corp., 848 F.2d 1415 (7th Cir. 1988), aff'd, en banc, 871 F.2d 648 (7th Cir. 1989) (applying Wisconsin law); Arana v. Koerner, 735 S.W.2d 729 (Mo. Ct. App. 1987); Horne v. Peckham, 97 Cal. App. 3d 404 (1979).

7 Wright v. Williams, 47 Cal. App. 3d 802, 810 ("We thus conclude that a lawyer holding himself out to the public in a profession specializing in an area of the law must exercise the skill, prudence and diligence exercised by other specialists of ordinary skill and capacity specializing in the same field.")

8 Ishmael v. Millington, 241 Cal. App. 2d 520, 525, 50 Cal. Rptr. 592 (1966).

9 520 N.W.2d 432 (Minn. App. 1994), reversed on other grounds, 540 N.W.2d 843 (Minn. 1995).

10 520 N.W.2d at 435. The Minnesota Supreme Court did not suggest that had coverage arisen, the failure to give notice could not be chargeable as legal malpractice. To the contrary, it noted:

If the plaintiff did actually incur legal fees of $175,000 in defense of a lawsuit, the principal thrust of which was the recovery of up to $100,000 in liquidated damages, we can understand his dismay at his lawyers' failure to tender defense of the action to his insurer . . . .
540 N.W.2d 843, 845 n.1.

11Notably, New York has a three-year statute of limitations under C.P.R.L. 214. Other jurisdictions such as California have a shorter statute, only one year.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.