Koransky, Bouwer & Proacky, P.C. v. The Bar Plan Mut. Ins. Co.
(7th Cir. (Ind.) Apr. 2, 2013)
The Seventh Circuit recently affirmed a ruling that left a law firm without insurance coverage for a malpractice claim arising from a sales transaction gone awry. The court held that the firm’s failure to disclose the potential lawsuit to its malpractice insurer precluded coverage.
The plaintiff law firm represented a potential buyer in the purchase of four Rite Aid drugstores in Ohio. Three of the four sales closed without incident. The seller notified the plaintiff law firm that it was rescinding its offer with respect to the fourth sale after the law firm, which had obtained a contract signed by the buyer and seller, misfiled the contract and failed to deliver it to the seller. Shortly thereafter, in February 2007, a firm associate emailed the seller and claimed responsibility for the error. The seller, however, continued to refuse to move forward with the sale and, instead, filed an action in Alabama state court seeking a declaration that no contract had been formed.
Following the Alabama court’s ruling that no contract had been formed because the executed contract was never delivered to the seller, the firm’s client notified it that he was considering a malpractice claim. The firm immediately notified their malpractice insurer. The insurer denied coverage, however, concluding that (1) the firm should have reported the incident prior to the expiration date for its 2006-07 policy; and (2) the policy’s exclusion for any “Claim against an Insured who before the Policy effective date knew, or should reasonably have known, of any circumstance, act or omission that might reasonably be expected to be the basis of that Claim” applied.
The firm and insurer both moved for summary judgment in the ensuing declaratory judgment action. The district court granted the insurer’s motion for summary judgment and denied the law firm’s motion. On appeal, the Seventh Circuit rejected the firm’s argument that the policy did not require it to notify the insurer until the firm actually received a malpractice claim. The court held that the policy’s discovery clause required the firm to notify the insurer within the policy period in which the firm first becomes aware of an act or omission that “may give rise to a claim.” (emphasis added). The court also found that the policy’s notice requirement is not too burdensome where a “case is not a close one” in terms of whether an incident may result in a claim. The court went on to find that a reasonable attorney would have recognized that his failure to deliver the sales contract, in light of the communications and legal activity that quickly followed, was an omission that could reasonably be expected to be the basis of a malpractice claim.