Executive Risk Indemnity Inc. v. Pepper Hamilton LLP, 865 N.Y.S.2d 25 (2008)
Brief Summary
A lawyer’s duty to report potential claims to a liability insurer requires both objective and subjective knowledge of potential liability, and this liability must be based on the lawyer’s own misconduct rather than the client’s misconduct.
Complete Summary
Law firm Pepper Hamilton represented Student Finance Corporation (“SFC”) during a time when SFC allegedly committed securities fraud. After SFC declared bankruptcy, the bankruptcy trustee brought claims against Pepper Hamilton alleging, inter alia, complicity in SFC’s fraudulent scheme. Pepper Hamilton’s excess insurers sought relief in state court from indemnifying the firm. The insurance policies at issue did not apply to any claim “arising out of any act, error, or omission committed prior to the inception date of the policy which the insured knew or should have known could result in a claim, but failed to disclose to the [insurer] at inception.” 865 NYS 2d at 29 (emphasis added).
The motion court granted summary judgment for the insurers because Pepper Hamilton’s attorneys — who had subjectively believed or feared that the firm could be liable for its representation of SFC — failed to inform the insurers of this potential liability.
The appellate court reversed because the motion court both applied the wrong standard for determining an insured’s knowledge and misconstrued the contract language. The court first noted that determining an insured’s knowledge of a potential claim is both a subjective and objective inquiry. The insured must subjectively believe that it is potentially liable, and liability must be foreseeable to a reasonable lawyer based on the facts available to the insured. The court held that the objective prong of this test could not be met on summary judgment because there was no objective evidence to which the reasonable lawyer standard could be applied. The court also re-construed the contract language, which called for the insured to disclose knowledge of a potential claim based on any “act, error, or omission.” The court held that this language referred to acts, errors or omissions committed by the insured rather than the insured’s client. As the court noted:
We reject the suggestion that the prior knowledge exclusion applies when the knowledge possessed by the insured is that it drafted documents that the client then used to further its scheme. In our view, the policy cannot be properly read to require Pepper Hamilton to notify its potential insurers of its client’s misconduct and its own recognition that it may be subjected to legal claims brought by those injured as a result of its client’s misconduct. It is not enough that the firm has adverse information about a client; the firm must have itself acted improperly, so as to have itself created the possibility of a professional liability claim against it. Id. at 30-31.
Significance of Opinion
This opinion focuses on the difference between a law firm’s knowledge of the risk of getting sued per se and knowledge of the risk of getting sued for allegedly improper acts.
This alert has been prepared by Hinshaw & Culbertson LLP to provide information on recent legal developments of interest to our readers. It is not intended to provide legal advice for a specific situation or to create an attorney-client relationship.
Register Now for the Eighth Annual Legal Malpractice & Risk Management Conference
March 4-6, 2009
The Westin Chicago River North Hotel
320 North Dearborn
Chicago, Illinois
Attend the industry's premier annual event focused on current and important developments in the law and litigation of malpractice claims, legal malpractice insurance and risk management strategies. Each conference panel examines recent case law and significant developments throughout the last year. One and one-half days will be devoted to legal malpractice (March 4-5), and one and one-half days will be devoted to risk management (March 5-6). The conference will be held in Chicago at The Westin Chicago River North Hotel.
Earn up to 13.75 hours of CLE credit including up to 5.50 ethics credit!
Conference Topics
Legal Malpractice Sessions (March 4-5)
• Guess Where You Are Being Sued — Bankruptcy Court
• What You Need to Know About Developments in Litigating Legal Malpractice Claims
• Beyond the Basics — Selecting and Using Expert Witnesses
• Insurance Law — Prior Knowledge and Additional Negligence Claims
• Statutory Causes of Action — Consumer Protection Statutes
• Can I Say What Really Happened?
• Stump the Panel
Legal Malpractice/Risk Management Cross-Over Sessions (March 5)
• In the Spotlight — The Exposure of Patent Lawyers
• The Insurance Marketplace
• How to Mitigate Your Damage Exposure as a Defendant
Keynote Address (March 5)
• The Debate Over the Billable Hour: A Rigorous Look at Competing Law Firm Profitability Models
Risk Management Sessions (March 5-6)
• The General Counsel Forum
• Plaintiff’s Perspective — Red Flags and Selection Criteria
• Risk Management and Electronic Advertising — Websites and E-mail
• Going, Going, Gone: Lawyers Who Leave and the Firms Left Behind
• On the Horizon — MJP, Alternative Business Structures, and Alternative Billing
Registration Fees
$1,300 for the Entire Conference — March 4-6
$925 for the Legal Malpractice Sessions Only — March 4-5
$925 for the Risk Management Sessions Only — March 5-6
Discounts (maximum 15% discount)
Returning registrants receive 5% off the conference price
Multiple registrants receive 15% off when another colleague from the same company registers (one full paid registrant required)
For more information, please visit www.LMRM.com or click here to Register Online Now! To speak with the Conference Planner, Katherine McCormack, please call 312-704-3329.
|