Court ruling indicates claims made policy language ambiguous

A recent San Diego Superior Court ruling serves as a potential warning to legal malpractice insurers to review policy language to ensure their claims made policies can’t be more broadly construed as occurrence policies.

In a ruling handed down in late January, the court found exclusions in a claims made policy issued by Lawyers’ Mutual Insurance Co. (LMIC) rendered the policy ambiguous since it could be reasonably interpreted as an occurrence policy.

At issue in the ruling was the policy’s definition of a claim. It excluded claims reported by the insured prior to the effective date of the policy or potential claims known to the insured prior to the effective date of the policy.

The court concluded, “logic dictates that in some, and perhaps many, instances an attorney will be aware of an act, error or omission upon which a claim, whether anticipated or unanticipated by the attorney, is later based.” Thus, the court concluded, the “exclusion of claims as contended by LMIC here would effectively turn LMIC’s claims made policy into an occurrence policy for some claims.”

Guy Kornblum of San Francisco’s Guy Kornblum & Associates represented the insured in the case, Kenneth Sigelman. Sigelman is a San Diego-based physician and plaintiffs lawyer who also served as chair of the medical malpractice committee of the Consumer Attorneys of California in 2004.

LMIC, which insured Sigelman since 1987, sought reimbursement from Sigelman for $1.2 million plus interest to cover the cost of defending and settling legal malpractice claims brought against Sigelman during the 2004-2005 policy year.

LMIC argued those were not claims first made during the applicable coverage period because Sigelman had knowledge of acts, errors and omissions that led to the claims both before the application for renewal coverage was completed and before the policy’s effective date.

LMIC’s attorney, Kenneth Katel, a Los Angeles partner at Musick, Peeler & Garrett, said from his client’s perspective, the policy language isn’t the issue. Rather, it’s whether statements made by Sigelman on his application for coverage were truthful. Katel said LMIC is evaluating whether to appeal the ruling finding the policy is “not sufficiently conspicuous, plain and clear to be enforceable.”

“The issue had to do with whether or not he knew when he filled out the application he had committed malpractice,” Katel contended. “He admitted [in court] he knew he committed malpractice. Given that admission, he was obligated to disclose it to the insurance company when he filled out the application.”

The court held Sigelman answered truthfully on his application when asked if he had knowledge of “any error or omission or any disagreement with the client which might reasonably give rise to a claim or suit against him or her or against the applicant law firm.” Sigelman attested he did not. The court also found the question itself is “somewhat ambiguous and is subject to the interpretation of the reader.”

Relying on an insured’s subjective response on a policy application question regarding circumstances that might potentially result in a malpractice claim is the crux of the problem, said Donn McVeigh, principal consultant and managing director of Oakland-based Creative Risk Concepts International.

Indeed, it arguably verges on speculation. Some unhappy clients might contemplate bringing a malpractice claim. But how can an attorney subjectively disclose in good faith which clients might actually file a claim? he indicated.

The conundrum extends to other professional liability coverages. “This question concerning prior acts that might lead to a claim is found on almost all E&O policies as well as D&O policies,” McVeigh said.

McVeigh said a redrafting of both LMIC’s application and policy language might be in order. But he cautioned “a perfect solution will never be found” because an attorney’s determination of whether or not he faces a potential malpractice claim absent any conclusive evidence to the contrary will always be subjective.”

Kornblum maintained the LMIC policy language is problematic and compels LMIC to revise it. “It’s clear they are on the horns of a dilemma, because if they continue to use the policy they’ve got now, they’re going to be subject to more claims of ambiguity,” he said. Kornblum added given the ruling, LMIC could face bad faith claims from insureds if they tried to enforce the exclusion at issue in the case.

“The policy’s 20 years old; it’s clearly outdated; it’s clearly not well written and the judge told them that, so I think they’re obliged to rewrite it otherwise they’re going to get in some real trouble,” Kornblum said.

Thus far, however, LMIC has given no indication it intends to revisit its legal malpractice policy language and didn’t respond when asked if it planned to do so. According to the Web site of the Burbank-based mutual insurer, it was formed in the mid-1970s amid an availability crisis in legal malpractice coverage for California attorneys.