| Liberty Ins. Underwriters Inc. v Corpina Piergrossi Overzat & KlarLLP |
| 2010 NY Slip Op 08790 [78 AD3d 602] |
| November 30, 2010 |
| Appellate Division, First Department |
| Liberty Insurance Underwriters Inc., Respondent, v CorpinaPiergrossi Overzat & Klar LLP et al., Appellants. |
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Order, Supreme Court, New York County (Charles E. Ramos, J.), entered June 23, 2009, which,upon the parties' respective motions for summary judgment, granted plaintiff insurer's (the insurer)motion for summary judgment and declared that it is not obligated to defend or indemnify defendantattorneys (the attorneys) in an underlying action for legal malpractice, unanimously modified, on the law,to deny the insurer's motion, and otherwise affirmed, with costs.
The insurer argues that it is not obligated to defend or indemnify the attorneys because, prior to theeffective date of the first legal malpractice policy issued by the insurer to the attorneys in July 2004, theattorneys had a reasonable basis to foresee that a former client would make a claim against them, andthat coverage is therefore excluded under the policy's "Known Claims or Circumstances" clause. Inrelevant part, the clause excludes coverage for "any claim arising out of a wrongful act occurring priorto the policy period if . . . you had a reasonable basis to believe that you had breached aprofessional duty, committed a wrongful act, violated a Disciplinary Rule, engaged in professionalmisconduct, or to foresee that a claim would be made against you."
The underlying legal malpractice action arose out of the attorneys' representation of the formerclient in connection with a medical malpractice claim for personal injuries allegedly caused byvaccinations administered to the former client in 1991 when he was an infant. More specifically, themalpractice complaint alleges that the attorneys failed to meet a three-year deadline for filing a claimunder the federal National Vaccine Injury Compensation Program (42 USC § 300aa-10 etseq. [the NVICP or the program]), and that their failure both foreclosed compensation under theNVICP and barred any civil actions for damages, including a medical malpractice action. Theunderlying representation apparently began in August 1993; it ended when the attorneys, withoutbringing an action, resigned from the representation in June 1994 after the three-year NVICP deadlinehad expired. In December 2006, the former client's attorney advised the attorneys by letter that he hadbeen retained to prosecute a legal malpractice claim based on their failure to file a NVICP claim. Theattorneys promptly notified the insurer of this letter, and the insurer has been representing the attorneysin the underlying legal malpractice [*2]action under a reservation ofrights.
In arguing that the attorneys had a reasonable basis for foreseeing a claim by the former client, theinsurer relies on a letter to the former client's father written in October 1993 by an associate employedby the attorneys. The associate confirmed a prior conversation in which he advised that an "importantdeadline" was approaching in January 1994. That is, after stating that the former client "may be entitledto compensation under the terms of the Vaccine Injury Compensation Program," the associate statedthat "[i]n order to make a claim under this program, the petition must be filed within 36 months from thetime symptoms first appeared." The associate requested complete copies of all applicable medicalrecords "[i]n order to prepare a proper petition." In arguing the absence of any such reasonable basis,the attorneys stress what is not said in the associate's letter and rely on a June 1994 letter, written byone of the attorneys to the former client's father. That letter, which makes no mention of the NVICP,"confirm[ed]" a prior discussion in which the father had been advised that the attorneys "cannotrepresent your son in this potential medical malpractice action." The letter did not explain why the firmcould not represent the former client, but went on to state that, assuming the information provided bythe father was correct, the "statute of limitations will expire on January 22, 2001, based upon the statuteof limitations of medical malpractice actions on behalf of infants." This shows, the attorneys argue, thatthey did not know that the failure to file a claim under NVICP would preclude a state court medicalmalpractice action. Because they did not know otherwise until after the inception ofcoverage—when they received the December 2006 claim letter—they maintain that theknown-claims exclusion does not apply.
The parties agree that the burden is on the insurer to show the applicability of the known-claimsexclusion and that a two-pronged test governs the applicability of the exclusion. Under that test, thecourt "must first . . . consider the subjective knowledge of the insured and then theobjective understanding of a reasonable attorney with that knowledge" (Executive Risk Indem. Inc. v Pepper HamiltonLLP, 13 NY3d 313, 322 [2009] [construing Pennsylvania law] [internal quotation marksomitted]). More particularly, the first prong requires the insurer to show the insured's knowledge of therelevant facts prior to the policy's effective date, and the second requires the insurer to show that areasonable attorney "might expect such facts to be the basis of a claim" (id.; see alsoColliers Lanard & Axilbund v Lloyds of London, 458 F3d 231, 237 [3d Cir 2006] [construingNew Jersey law]).
The attorneys do not dispute the insurer's contention that the knowledge of the associate must beimputed to them. Nor do they dispute that the letter establishes that the associate knew both of NVICPand of a requirement that a petition be filed within three years of the first appearance of symptoms "[i]norder to make a claim under this program." Their contention is that the letter does not establish that theyalso knew that the failure to file a timely administrative claim under the program had the additional legalconsequence of foreclosing any civil action for damages. As a matter of logic, this contention is plainlycorrect. The associate, of course, may have known this fact about the law, but the letter does notestablish that he did know. Nor did anything else submitted in support of the insurer's motion establishthat the associate (or any attorney at the firm) knew this legal fact. It may be that a competent attorneywho became aware that making a claim under the program required a petition to be filed within adeadline would make sure he knew all the legal consequences of not meeting that deadline. What acompetent, or reasonable, attorney would have known, however, is far from dispositive of the questionof what the attorneys in fact knew.[*3]
The inference that the attorneys did know that the failure to filea petition in accordance with the NVICP would preclude a civil action for damages may be areasonable one. The evidentiary support for that inference includes the fact that the statement in theJune 1994 letter that the attorneys could not undertake the representation is unexplained. Moreover,the attorneys' assertion in their letter to the insurer after learning of the malpractice claim that they "wereonly investigating a medical malpractice claim," rather than an administrative claim, is at odds with theassociate's request for copies of all medical records "[i]n order to [file] a proper petition [under theprogram]." Regardless of whether the inference is reasonable, it is not inescapable and it cannot be thebasis for granting summary judgment to the insurer (Branham v Loews Orpheum Cinemas, Inc., 8 NY3d 931, 932 [2007][all favorable inferences must be drawn in favor of party opposing summary judgment]).
The insurer unpersuasively argues the irrelevance of the attorneys' reasonable expectation of aclaim as a result of not filing a petition under the program. Contrary to its contention, the attorneys'insistence on the relevance of their actual ignorance of the legal consequences of not filing does not"entirely remove" the objective component of the test. Rather, the most that can be said is that in somecases the subjective prong of the test will be dispositive; the insured's lack of knowledge will make itunnecessary to consider the objective prong.
The insurer also objects that the attorneys "are in essence seeking to be rewarded for theirignorance . . . in connection with the medical malpractice action for which they wereretained." The "reward" of coverage, however, is the necessary and intended consequence of a testwith a subjective component. The insurer is in essence objecting to the practical reality that enables it tosell any malpractice coverage, including retroactive coverage on a claims made basis. To obtainprotection from the consequences of their ignorance is a key reason why attorneys purchase andinsurers are able to sell malpractice insurance. A purely objective test would provide insurers with fargreater protection against the risks of both "adverse selection" (see generally Simpson v PhoenixMut. Life Ins. Co., 24 NY2d 262, 268-269 [1969]) and outright fraud. But if attorneys had to runthat gauntlet to obtain coverage, they would have little or no reason to buy malpractice insurance. Afterall, the promised retroactive coverage would be illusory if it could be denied solely because areasonable attorney would have known at the time of the act or omission that a malpractice claim couldbe made (cf. Colliers Lanard, 458 F3d at 242 ["retroactive coverage for professionalerrors would be illusory if such coverage could be denied on the ground that a reasonable professionalwould have known that the error had been committed prior to obtaining the policy"]).
Nor does the attorneys' position require insurers to provide coverage whenever the insured raises aclaim of ignorance. The claim of ignorance might not be credible and the insurer, perhaps aided bydiscovery into the insured's handling of other cases, may be able to refute it. Moreover, ignorance at thetime of the malpractice is not sufficient to entitle the insured to coverage. Rather, subject to theapplication of the objective prong, the insured will not be entitled to coverage if its ignorance isdispelled before the beginning of the policy period. Thus, as the attorneys concede, the exclusion wouldapply if they had learned at any time prior to the beginning of the policy period that the failure to file apetition under the program would foreclose a civil action for damages. In addition, although an attorneymight not know that a particular act or omission would result in the dismissal of the client's claim, theattorney might know (or be unable to deny knowing) that some adverse consequence would or waslikely to result. In such a case, regardless of whether a malpractice claim was reasonably foreseeable, a[*4]reasonable attorney with that more limited knowledge might believenonetheless that the attorney "had breached a professional duty, committed a wrongful act, violated aDisciplinary Rule, [or] engaged in professional misconduct." Indeed, as discussed below, the insurermakes a similar argument. For this additional reason, we disagree with the insurer's argument that theattorneys' position on the subjective prong "eviscerates" the objective prong.
Despite making that very argument, the insurer contends that "any reasonable lawyer withknowledge of the facts admittedly known to [the attorneys] would believe that the failure to timely file aclaim [in accordance with the NVICP] would have some consequences and could lead to a malpracticeclaim against the lawyer." This fallback position also is unpersuasive. The reasonable lawyer whobelieved that not filing a petition under the program would affect only what he believed his client did notwant, an administrative remedy, certainly would not expect to be a defendant in a malpractice actionalleging that no civil action could be prosecuted because that petition had not been filed. Mereknowledge of "some consequences" is inconsequential. The attorneys' knowledge of the banality thatactions have consequences does not provide "a reasonable basis to believe that [they] had breached aprofessional duty, committed a wrongful act, violated a Disciplinary Rule, [or] engaged in professionalmisconduct."
Just as we cannot draw against the attorneys the inference that they did know the actualconsequences of not filing a petition under the program, we cannot draw against the insurer theinference that they did not know. For that reason alone, we reject the attorneys' argument that theircross motion for summary judgment should have been granted. To avoid confusion, we address brieflythe attorneys' contention that "a mistaken belief that a professional did not commit malpractice issufficient to avoid the [known-claims-or-circumstances] exclusion." Suffice it to say that if a reasonableattorney with the subjective knowledge of the insured would expect a claim against the insured on thebasis of the facts known to the insured, coverage would be excluded regardless of any belief that noprofessional standards were violated.
Finally, the attorneys argue that the insurer should be estopped from disclaiming coverage becausethey have been prejudiced by the insurer's delay in disclaiming. This argument is meritless as the insurerhas never disclaimed coverage and has been defending the underlying malpractice action from theoutset under an undisputedly timely reservation of rights (see O'Dowd v American Sur. Co. ofN.Y., 3 NY2d 347, 355 [1957]). Concur—Sweeny, J.P., McGuire, Renwick andAbdus-Salaam, JJ.