The Seventh Circuit Bars Malpractice Coverage for an Insured Law Firm Despite the Firm’s Subjective Belief That it Represented its Client Correctly


    In Koransky, Bouwer & Poracky, P.C. v. The Bar Plan Mutual Ins. Co., No. 12-1579 (7th Cir. Apr. 2, 2013), the Seventh Circuit affirmed summary judgment against an Indiana law firm and in favor of its malpractice insurer, as the firm’s notice of claim to the insurer was untimely.  This ruling highlights the difference between an objectively reasonable expectation of a malpractice claim, which gives rise to a duty to report the possible claim to the carrier; and a lawyer’s subjective belief that he did not commit malpractice, which belief is no barrier to a client bringing a malpractice claim.

    While representing the would-be buyer of a pharmacy located in Ohio, the firm failed to deliver its client’s fully executed contract to the seller, and the seller sued to declare the contract never formed given the lack of delivery.  The contract called for Ohio venue and for Ohio law to govern, and Ohio law does not require delivery for a contract to become enforceable.  The seller filed suit in Alabama seeking a declaration under Alabama law, and Alabama law requires delivery.  The Alabama court rejected the buyer’s motion to dismiss, then the buyer then threatened the firm with a malpractice suit.  (Ultimately, the Alabama court declared that the contract never formed.)

    After the firm tendered the claim under the firm’s current malpractice policy, the insurer declined coverage.  As is common in malpractice policies, the policy in question covered acts or omissions that happened prior to the policy’s period only if, among other things, the policyholder “had no basis to believe that such Insured had committed such an act or omission.”  Further, as is also common, the policy excluded coverage if the policyholder knew “of any circumstance, act or omission that might reasonably be expected to be the basis of that Claim.”  Both provisions rendered the firm’s claim untimely:  prior to the current policy’s period, the firm was aware of the buyer and seller’s dispute and was aware that the dispute centered on the firm’s lack of delivery, but the firm did not give the insurer any notice until the former policy expired and the current one incepted.

    After the seller repudiated its acceptance but prior to the firm’s current policy, one of the firm’s lawyers apologized to the seller for not sending the signed contracts, writing:  “This whole situation is my fault and not the fault of my client.”  In the Seventh Circuit’s view, this correspondence, coupled with the client’s insistence that the seller stick with the deal, meant that a reasonable attorney in the firm’s position “would realize that his client might bring a malpractice claim against him because, as a result of the attorney’s mistake, Seller was refusing to complete the negotiated sale.”  And, the Seventh Circuit reasoned, the fact that shortly afterwards the seller filed suit (again, before the current policy) meant that it had no intention of honoring the agreement, so the firm “knew, beyond doubt, . . . that [its] failure to deliver the executed contract may result in a claim against it for malpractice.”

    The firm argued that it should not have to report every error, no matter how trivial.  Yet, the Seventh Circuit concluded, however difficult it may be to figure out which acts might “reasonably be expected” to lead to a malpractice claim, “this case is not a close one.”

    A few features of this case are remarkable.  The courts held that during the prior policy’s period, the firm had a reasonable basis to believe that it committed malpractice even though:

    • Though it knew of the seller’s refusal to perform because of the firm’s failure to deliver and was represented by other lawyers in both Ohio and Alabama, the client did not express unhappiness with the firm until after the Alabama court refused to dismiss the case.  Then it seemed inevitable that the buyer would lose.
    • Until the Alabama court refused to dismiss, it seemed plain that there was an enforceable contract governed by Ohio law.

    Importantly, it did not matter whether the firm actually committed malpractice.  It only matters that the Alabama court was “the only thing standing between it and a probable malpractice claim.”  The Seventh Circuit’s reasoning suggests that when a lawyer’s act or omission is the basis of a dispute between the lawyer’s client and another party, a malpractice claim should reasonably be expected, no matter how strong the client’s case may seem.

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