Illinois Federal District Court Concludes Prior Knowledge Exclusion Precludes Coverage for Legal Malpractice Suit

In Cardenas v. Twin City Fire Insurance Company, No. 13 C 8236, 2014 U.S. Dist. LEXIS 132420 (N.D. Ill. Sept. 19, 2014), Judge Virginia Kendall of the Northern District of Illinois determined that the Prior Knowledge Exclusion in the subject legal malpractice insurance policies barred the insurer’s duty to defend.

The dispute between Twin City Fire Insurance Company (Twin City) and Maria Cardenas arose when Cardenas’ attorney, John Ambrose of Ambrose & Associates, unsuccessfully represented Cardenas in a civil rights action against the City of Chicago and a Chicago Police Officer.  The court dismissed the civil rights action when Ambrose failed to serve the police officer within 120 days, as required under FRCP 4(m).  Cardenas filed a malpractice case against Ambrose on February 15, 2012.  Ambrose immediately tendered the malpractice suit to Twin City, but Twin City refused to provide coverage because the Prior Knowledge Exclusion applied, and Ambrose violated the policy’s notice requirement.  Notably, Twin City had provided malpractice insurance to Ambrose and his firm between August 29, 2008 to August 29, 2012.

Without Twin City’s consent, Ambrose negotiated a $750,000 settlement with Cardenas and assigned to Cardenas all of his rights to the insurance policy.  Subsequently, Cardenas filed the subject action against Twin City to enforce the settlement agreement.  Twin City moved for summary judgment, alleging that it owned no duty to defend or indemnify Ambrose.

The Twin City policies required that Ambrose notify Twin City when he became aware of events that had a potential to lead to claims against him.  Additionally, the policies had a Prior Knowledge Exclusion which stated that the policy did not cover claims arising before the inception date of the policy “if the insured ‘knew or could have reasonably foreseen’ that the acts ‘might be expected to be the basis of a claim.’”

In determining the motion for summary judgment, Judge Kendall agreed that the February 15, 2010 federal district court opinion dismissing the civil rights action, and the July 21, 2011 Seventh Circuit opinion affirming the dismissal, put Ambrose on notice that a malpractice claim could be filed against him. Notably, both opinions squarely placed the blame for the dismissal on Ambrose.  Judge Kendall further reasoned that the Prior Knowledge Exclusion applied because, whether or not Ambrose subjectively believed a malpractice claim could arise, the language of the second part of Prior Knowledge Exclusion required the court to use an objective standard when viewing the possibility of a malpractice claim. Therefore, the question was “whether the facts that [Ambrose] did know could create the expectation in a reasonable attorney that a claim might be forthcoming.”  According to Judge Kendall, the facts clearly showed that Ambrose missed the deadline for serving the officer, and moreover, the scathing court opinions would apprise any reasonable attorney of the fact that a malpractice claim could be filed. Consequently, due to the Prior Knowledge Exclusion, Twin City did not have duty to defend Ambrose.