Legal malpractice insurer breached duty to defend, affirms 4th Circuit

In Minnesota Lawyers Mutual Insurance Co. v. Batzli, Nos. 10-1684, 10-1839, 10-1910 (4th Cir. Aug. 4, 2011)(unpublished), the 4th Circuit affirmed the trial court's denial of a post-trial motion for judgment as a matter of law, made by the insurer, that challenged the jury's verdict that the insurer breached its duty to defend under a legal malpractice policy. Although the decision was unpublished, the opinion is lengthy and also has a dissent by Circuit Judge Shedd.

The 4th Circuit found that there was sufficient evidence in the record for a reasonable jury to conclude that the insurer breached its policy.

The underlying legal malpractice claim arose from a drafting error in a property settlement agreement prepared in the client's divorce proceeding. Essentially, the client instructed the insured lawyer to seek the wife's interest in a family business during the settlement negotiations. After some negotiations, the insured believed he had negotiated a deal under which the wife would transfer her interest in the family business to the husband, however, the property settlement agreement he prepared had indicated that the husband would retain "his" interest in the family business, rather than "their" interest. This mistake came to light when the insured sent a follow-up document to the wife's lawyer to effect the transfer of the family business, to which the wife's lawyer responded that his client had not agreed to such a transfer. The wife's interest in the family business was worth over $400,000.

The insured disclosed his drafting omission to the husband, and the husband decided to go through with the property settlement and to move for correction of the agreement on the grounds of a scrivener's error.

In August, 2006, the insured filed a motion in the Circuit Court seeking correction of the scrivener's error, which was denied by the Court. The Virginia Court of Appeals affirmed this denial in May, 2008.

Around October, 2008, the insured's law firm renewed its legal malpractice policy with MLMIC. The policy included prior acts coverage but only if the insured had no knowledge of facts which could reasonably support a claim at the effective date of the policy. Also, coverage under the policy is conditioned on compliance with a notice requirement that requires the insured to give immediate written notice to the insurer in the event a claim; and that a claim is made whenever an act, error, or omission by any insured occurs which has not resulted in a demand for damages but which an insured knows or reasonably should know, would support such a demand.

In January, 2009, the husband filed a malpractice suit against the insured lawyer and his firm. The insured gave prompt notice of the suit to MLMIC, which denied coverage because the insured failed to comply with the notice requirement. The scrivener's error had been the subject of litigation since 2006.

In the district court, cross motions for summary judgment were denied because the there were genuine factual disputes between the parties as to whether it was reasonable for the insured to anticipate a claim by the husband.

At trial, the jury found for the insured and awarded damages of $8400, representing attorney's fees to date to defend the legal malpractice claim.

In response to MLMIC's post-trial motion, the district court reduced the damages award to nominal damages ($1), because the insured lawyer failed to provide evidence of the reasonableness of the fees, such as the nature of the services performed, the length of such services, and the applicable rates for such representation, and thus there was insufficient evidence to support the jury's award of damages.

However, the district court denied MLMIC's argument that the insured's notice of a claim by the husband was untimely as a matter of law, in large part because it was uncontested that the former wife would not have agreed to transfer her interest in the family business to the husband.

The parties thereafter filed cross appeals.

On appeal, the 4th Circuit acknowledged, as did the district court, that the test for whether the circumstances would give rise to a claim, for purposes of the notice requirement, was an objective one:

Failure to give timely notice will not be excused when the insured only subjectively concludes that coverage under the policy will not be implicated. Such a policy provision requires the insurer to be notified whenever, from an objective standpoint, it should reasonably appear to the insured that the policy may be involved.

The appellate court stated that the district court's decision was not that the insured did not need to notify MLMIC because any foreseeable claim would lack merit; instead, the district court determined that there was no reasonably foreseeable potential claim. The appellate explained that:

The distinction is perhaps confusing because both conclusions could potentially result from the determination that [the insured's] error caused no damage to his client. See Campbell v. Bettius, 244 Va. 347, 352, 421 S.E.2d 433, 436 (1992) ("In a legal malpractice action, the fact of negligence alone is insufficient to support a recovery of damages. The client must prove that the attorney's negligence proximately caused the damages claimed.").

Here, the wife had testified at trial that she would not have signed an agreement to transfer her interest in the family business to her husband. Thus, a reasonable jury could have determined that the insured lawyer could not have anticipated a demand for damages for "failing to procure that which was unprocurable." A reasonable belief that an insured's error caused no harm to the insured's client is relevant to whether an objectively reasonable person in the insured's position would expect his error to give rise to a claim for damages.

Accordingly, the 4th Circuit affirmed the ruling of the district court, finding that the jury had sufficient evidentiary basis to conclude that the insured reasonable thought his drafting error would not result in a claim until he learned from the husband that a legal malpractice suit would be filed.

Circuit Court Judge Shedd dissented, on the grounds that the insured admitted his error to his client in a letter, offered to bear the costs of the action in state court to try to correct the error, and in addition, the insured said that upon realizing the error, he felt sick about it and lost sleep over it. The insured knew that the wife's 20{ae673c0578537ac673c9bacf7e54c8adb105b1f3845655c2906dcf184a4e074c} interest in the family business was worth $440,000. Because the wife's interest in the family business was a non-marital asset, the divorce court did not have jurisdiction over it and the only way the husband could have received the wife's 20{ae673c0578537ac673c9bacf7e54c8adb105b1f3845655c2906dcf184a4e074c} interest was through the property settlement agreement, which the insured failed to properly draft. Thus, Judge Shedd would have reversed and entered judgment in favor of MLMIC.

[For practitioners, this opinion teaches the importance of providing timely notice of a potential claim to one's professional liability insurer. In addition, it teaches that a fee claim must be supported by an affidavit of fees and costs.]