6th Circuit Addresses Prior Knowledge Defense Under Legal Malpractice Policy

In its recent decision in Schwartz Manes Ruby & Slovin, L.P.A. v. Monitor Liability Managers, LLC, 2012 U.S. App. LEXIS 12236 (6th Cir. June 15, 2012), the United States Court of Appeals for the Sixth Circuit, applying Ohio law, had occasion to consider the issue of whether prior to the inception of a policy, the insured reasonably could have foreseen that a claim would be made.

Schwartz Manes involved coverage for alleged legal malpractice under a professional liability policy.  The Schwartz Manes law firm (“SMRS”) represented an individual in connection with a property dispute.  After having failed to appear at a scheduled trial in 2005, judgment was entered against SMRS’ client.  The client later retained a second firm, which after reviewing SMRS’ file, wrote SMRS by letter dated June 15, 2008 to inquire as to why the firm failed to appear at the trial, particularly since its file contained a notice for the trial.  On July 10, 2008, after undertaking an internal investigation, SMRS advised its insurance agent of a potential claim, but the agent apparently never forwarded this information to anyone else.  On July 24, 2008, Carolina Casualty Insurance Company issued to SMRS a legal malpractice policy for the period June 29, 2008 to June 29, 2009. SMRS was later sued for malpractice in January 2009.

The Carolina policy contained the following insuring agreement:

This Policy shall pay on behalf of the Insured all Damages and Claims Expense that the Insured shall become legally obligated to pay, arising from any Claim first made against an Insured during the Policy Period and reported to the Insurer in writing during the Policy Period or within 60 days thereafter, for any Wrongful Act, provided that prior to the inception date of the first Lawyers' Professional Liability Insurance Policy issued by the Insurer to the Named Insured, which has been continuously renewed and maintained in effect to the inception of this Policy Period, the Insured did not know, or could not reasonably foresee that such Wrongful Act might reasonably be expected to be the basis of a Claim.  (Emphasis supplied.)

Carolina disclaimed coverage to SMRS on the basis that prior to its policy’s June 29, 2008 date of inception, SMRS knew and reasonably could have foreseen that a claim would be made relating to its alleged malpractice.  On motion for summary judgment, the United States District Court for the Southern District of Ohio agreed, holding that SMRS’ knowledge of the potential claim prior to the issuance of the Carolina policy negated Carolina’s duty to defend or indemnify.

On appeal, the Sixth Circuit observed that the question of whether SMRS could reasonably foresee that a Wrongful Act “might reasonably be expected” to be the basis of a claim required both a subjective and an objective analysis.  The subjective part of the analysis inquired into what facts SMRS knew of prior to the policy’s date of inception.  The objective analysis, on the other hand, inquired into whether a “reasonable insured” in possession of similar facts, would have expected a claim.

SMRS argued that the phrase “reasonably be expected” was necessarily ambiguous, and that it was not clear whether the claim only be a possibility, or whether the phrase should be interpreted more narrowly to claims that are “probable.”  The court concluded that it need not determine whether the phrase is ambiguous, “because even under a more favorable interpretation, a reasonable insured would have expected a malpractice claim …  against SMRS to be reasonably probable.”  It was the court’s opinion that a reasonable insured having knowledge of the underlying judgment resulting from SMRS’ failure to appear at the trial, would have realized that a claim was “reasonably probable.”

As a secondary argument, SMRS argued that only that aspect of the malpractice claim relating to its failure to appear at the trial should be precluded.  SMRS argued that other aspects of underlying plaintiff’s claim, such as failure to assert certain defenses, should not be precluded from coverage SMRS could not have predicted such aspects of the suit prior to the date of the policy’s inception.  The court rejected this argument, finding that there was no way to meaningfully divorce SMRS’ failure to attend the trial from other aspects of the alleged malpractice.  The court further held that the policy’s “related wrongful act” language precluded such a parsing of claims, observing:

… Section IV(K) of the Policy also excludes coverage for "Related Wrongful Acts." The Policy defines "Related Wrongful Acts" as "Wrongful Acts which are logically or causally connected by reason of any common fact, circumstance, situation, transaction, casualty, event or decision." SMRS's alleged failure to comprehensively research and litigate Kissel's lawsuit and potential countersuit against her step-mother is certainly logically connected to its alleged failure to attend her trial in the same matter.

Thus, the Sixth Circuit upheld the lower court’s grant of summary judgment in Carolina’s favor.