Lawyers Professional Liability - Unreported administrative error results in disclaimer of coverage

In Minnesota Lawyers Mut. Ins. Co. v. Baylor & Jackson, PLLC, No. 10-2701 (D. Md. Apr. 3, 2012), the District Court granted summary judgment to the insurer, holding that the insurer is not liable to defend or indemnify the defendant law firm under an LPL policy.  The Court awarded summary judgment based on the finding that any reasonable lawyer would have been worried about a malpractice claim after summary judgment had been awarded in the underlying action based on the insured law firm's administrative error in submitting an unexecuted affidavit in opposition to a motion for summary judgment.

This matter arose out of the insured law firm's representation of a client who was involved in a dispute concerning various agreements as to the funding of litigation against the United States and the allocation of any proceeds from that litigation.  That dispute resulted in a lawsuit in the Circuit Court for Baltimore City, before Judge Kaplan, in which the insured law firm represented the defendant. Judge Kaplan awarded summary judgment to the plaintiff in that action, in part because the defendants never contested the validity of the underlying agreement.  One of the defendants tried to contest the validity in his opposition to the plaintiff's motion for summary judgment, but he failed to submit either an affidavit or a sworn statement to support his contention, and Judge Kaplan disregarded his argument. In the subsequent coverage action, the District Court noted that the record indicated that an unexecuted affidavit had been attached to the opposition memorandum in error, and at the ensuing hearing in August, 2006, Judge Kaplan refused either to allow the defendant to execute the affidavit or to testify to the contents of the affidavit despite his presence at the hearing.  The total damages awarded to the plaintiff in that action was about $2.6 million, and the judgment was affirmed on appeal in 2009.  The appellate court also observed that the defendants opposition to summary judgment was not supported by any sworn evidence as required by Md. Rule 2-501.  The appellate court noted that the failure to properly place facts in dispute affected the arguments on all the counts.

The insured law firm had placed Minnesota Mutual on notice as soon as it they had received the appellate court's opinion on July 9, 2009.  The former client filed a malpractice suit in August, 2009.  Although Minnesota Mutual initially defended, presumably under a reservation of rights, it eventually withdrew from the defense and disclaimed coverage.  This was because the insurer had concluded that the insured law firm should have reported the potential claim during the policy period of August 1, 2006 to August 1, 2007, because it was during that time that the firm "first became aware of facts which could have reasonably supported the claim asserted against it . . . ."  Minnesota Mutual filed a declaratory judgment action to establish its lack of liability for the defense and indemnification of the insured law firm in the legal malpractice action.

The Minnesota Mutual policy was a claims made and reported policy.  It stated, among other things, that a claim is deemed made when "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." The Policy definition of "CLAIM(S)" also provided, in part, that it means "An act, error or omission by any INSURED which has not resulted in a demand for DAMAGES but which an INSURED knows or reasonably should know, would support such a demand."

The District Court, in awarding summary judgment to Minnesota Mutual, found that "the act, error, or omission giving rise to the Underlying Defendants' malpractice claim occurred on August 11, 2006, when [the insured law firm] . . . filed the opposition to summary judgment without supporting evidence."  Maryland employs an objective standard for evaluating the reasonableness of an insured's actions in relation to the obligation to notify an insurance company of a potential claim.  An insured's notice obligation accrues when the circumstances known to the insured at that time would have suggested to a reasonable person the possibility of a claim.  The District Court found that:

Thus, any reasonable lawyer faced with a motion for summary judgment could simply have read Maryland Rule 2-501 and known that an unexecuted affidavit does not satisfy the Maryland standard for summary-judgment practice. [The insured law firm] . . .  reasonably could have become aware, probably acutely aware, of that during the motions hearing when Judge Kaplan refused to let [the client] . . .  either execute the affidavit or provide testimony at the hearing. . . . It certainly should have become aware of its shortcoming when Judge Kaplan rendered his opinion on August 22, 2006, specifically pointing out the absence of admissible evidence from the opposition that could possibly establish a genuine dispute of material fact. Any reasonable lawyer would have read Judge Kaplan's opinion with alarm as to what it meant to him or her personally. Any reasonable lawyer would have been worried it could lead to a malpractice claim. At that point, a claim was deemed made under the 2006 Policy. And at that point, [the insured law firm] . . .  had to report the claim during the 2006 Policy term in order for it to be a covered claim. Consequently, [the insured law firm's] . . .  failure to report it during the 2006 Policy term precluded coverage.

The Court rejected the insured law firm's argument that it had no reason to give notice to Minnesota Mutual in 2006 because Judge Kaplan's grant of summary judgment was based upon multiple alternative grounds, only one of which was the lack of an affidavit.  The Court reasoned that any reasonable lawyer would have been aware that Maryland appellate courts may affirm a summary judgment on any one of several alternative grounds, and thus, the insured law firm risked appellate affirmance solely on the basis of the firm's malpractice.

The District Court also found that an alternative ground for finding no coverage was that the insured law firm in 2007 failed to report on its application for renewal of its Minnesota Mutual policy, "any INCIDENT which could reasonably result in a claim being made against the firm or a member of the firm". The Court found that the failure to report this incident until July 9, 2009 could have been reasonably regarded by Minnesota Mutual as a material misrepresentation, and the insurer was entitled to decline coverage under the 2009 policy on the ground of material misrepresentation.  

Finally, the District Court rejected the insured law firm's argument that Minnesota Mutual could not show actual prejudice due to late notice, under Md. Ins. Code sec. 19-110.  The District Court concluded that under the language of the Minnesota Mutual policy, the time for reporting was no mere "notice provision", but was incorporated into the definition of coverage and therefore became a condition precedent to coverage.  Consequently, the insured law firm's failure to report the claim within the policy term or extended reporting period amounted to a failure to perform a condition precedent to coverage.  The 2006 policy expired by the time the claim was reported to the insurer, and so coverage was never triggered for this incident.  Thus no breach of the 2006 policy occurred and the insurer is not required to show actual prejudice in order to disclaim coverage under Section 19-110.  Even if the insurer were required to show prejudice, the Court found that it could have easily done so by showing it had been excluded from the post-summary judgment and appellate proceedings which were the only opportunities in which the insurer could have had to fashion a request for relief.