SEPTEMBER 2013 BAD FAITH CASES: INSURER CORRECTLY DENIED COVERAGE WHERE ATTORNEY FAILED TO PROVIDE TIMELY NOTICE UNDER CLAIMS MADE MALPRACTICE POLICY (Philadelphia Federal)

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An attorney-insured brought suit against his legal malpractice insurer alleging breach of contract and bad faith for denying coverage under his claims-made policy where the insurer alleged the attorney failed to provide timely notice of the claim. In 2006, the insured undertook representation of a client in a wrongful death action after the client’s son drowned on an unsupervised beach in Ocean City, New Jersey. The insured failed to file the proper Notice of Claim under the New Jersey Tort Claims Act, and then failed to timely appeal the denial of his motion to file late notice.

These failures precluded the client from pursing the wrongful death action, and the case was dismissed in late 2006. The client filed suit against the insured on February 3, 2010. The insured was served on February 23, 2010, and provided the insurer with notice of the suit one week later.

The insurer denied coverage because the insured failed to give the insurer timely notice of the claim and the claim was not filed within the relevant claims period. The insurer specified the claim arose in 2006 when the client’s claim was dismissed and the insured became of aware of the failure to comply with the relevant statute of limitations.

On June 7, 2011, the Superior Court granted summary judgment in favor of the client in her legal malpractice action.

On November 2, 2011, the insured filed suit seeking declaratory judgment and damages based on the insurer’s alleged breach of contract and bad faith denial of coverage.

The court first considered whether the carrier had breached its contract with the insured. The policy stated a claim was to be made when “an INSURED first becomes aware of any act, error or omission by any INSURED which could reasonably support or lead to a demand for damages.”

Under a claims-made policy, the insurer establishes a breach of the notice provision by demonstrating “(1) that Plaintiff was aware of a given set of facts; and (2) that a reasonable attorney in possession of those facts would have believed that those facts could support or lead to a demand for damages.”

In reference to the first prong, the court found the insured was aware: that his client’s initial suit and subsequent appeal were dismissed due to failure to comply with the statute of limitations and a failure to file a timely appeal; the insured was knowingly practicing law in New Jersey without a license; the insured did not report these circumstances to the insurer despite the policy requiring him to do so; and, the insured was aware of the existence of a potential claim at the time he reapplied for insurance.

Under the second prong, the court relied on precedent which established a reasonable attorney would believe a failure to comply with a statute of limitations would expose the attorney to a possible legal malpractice suit. Furthermore, the court found the insured and his client had discussed the possibility of the client suing him. Having satisfied both prongs of the test, the insurer was justified in refusing to indemnify the insured.

The court further found on the bad faith claim that, not only was the insurer justified in denying coverage, the insurer had provided the insured with a letter specifically detailing its reasoning for denying coverage and the provisions of the policy it asserted the insured violated. The insured was not able to produce any evidence to rebut the insurer’s reasons for denying coverage, and therefore his bad faith claim failed as a matter of law.

Date of Decision:  June 26, 2013

Pelagatti v. Minn. Lawyers Mut. Ins. Co., No. 11-7336, 2013 U.S. Dist. LEXIS 90041 (E.D. Pa. June 26, 2013) (Robreno, J.).

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