This may be a misunderstood concept for claims-made insureds or just wishful thinking. Just because an insured has a claims-made policy at the time that a claim is reported does not mean that there will be coverage for that claim.
Wait doesn’t a claims-made policy mean if the claim is ‘made’ and reported during the policy period the insurer should provide coverage? All claims-made policies have a prior-acts date and a prior knowledge clause of some type. To see if there is coverage for the reported covered act, the policy requires that has to have ‘occurred’ after the prior acts date. But also the insured had no ‘prior knowledge’ of the wrongful act prior to being written by the insurer at inception.
In Allied World Ins Co v Lamb McErlane PC, Allied world sought a declaratory judgement that the Allied World Attorney Malpractice policy did not provide coverage for the reported claim. The law firm had received a judgement against them in an underling case for $557,001. The law firm had submitted a claim for this judgement to Allied World.
The Allied World policy was effective on June 2016 and expired on June 2017. The insured actually had received notice of the claim in May 2015 when the beneficiaries filed a letter notifying Lamb McErlane of a potential claim. The insured law firm argued that the claim had actually occurred on March 2017 when the law firm was found liable for the net loss on an estate of $557,001.
The Allied world policy’s ‘insuring agreement’ contains the following language:
“It is a condition precedent to coverage under this Policy that any Wrongful Act upon which a Claim is based occurred:
1. during the Policy Period; or
2. on or after the Retroactive Date and prior to the Policy Period, provided that all of the following three conditions are met:
(b) prior to the inception date of the first policy issued by the Insurer if continuously renewed, no Insured had any basis (1) to believe that any Insured had breached a professional duty; or (2) to foresee that any fact, circumstance, situation, transaction, event or Wrongful Act might reasonably be expected to be the basis of a Claim against any Insured; and”
The court found that:
“The firm’s argument is an attempt to rewrite the policy to permit a claim only after an insured is faced with a viable cause of action in a formal legal proceeding. Although the beneficiaries were precluded from bringing a malpractice claim directly against Lamb McErlane in the estate proceedings, they were permitted to object to excessive legal fees already paid by the estate. They not only did so, they notified Lamb McErlane of their objections to Lamb McErlane’s legal work……
Because the claim for which Lamb McErlane seeks coverage was first made in the May 2015 letter, it arose before the Allied World policy period began 11 months later in June 2016. I will grant Allied World’s motion for judgment on the pleadings.”
Other insurers have told me that one of the most common reasons for denying coverage on an attorney malpractice claim is ‘prior knowledge’.