No Coverage for Claims Arising from Failure to Appeal Adverse Decision

Applying Massachusetts law, a Massachusetts federal court has held that no coverage was available under two claims-made policies because the insured knew before policy inception that a client would bring a claim when the insured failed to perfect an appeal of an adverse zoning decision. Gandor v. Torus Nat’l Ins. Co., 2015 WL 6043621 (D. Mass. Oct. 15, 2015). In addition, the court held that a former client’s suit for failure properly to insure a former associate did not allege a professional service because it involved the running of a business rather than the practice of law.

A former firm client filed two lawsuits against the insured law firm partner and associate stemming from the associate’s failure to perfect properly an appeal of an adverse zoning decision. Before the inception of the first claims-made policy, the associate handling the appeal wrote a memo to the partner in which he described a “fatal error” he made when representing the client and his notification to the client of the “mistake.” The partner then wrote to the client, asserting that the firm did not commit malpractice and requesting a release from the client in exchange for refunding previously paid legal fees. In policy year one, the client filed suit against the associate and the firm for legal malpractice which was settled for an assignment of the insureds’ rights under the policy. In policy year two, the claimant filed suit against the partner for failing to purchase appropriate legal malpractice insurance for the former associate. The claimant settled the second suit in exchange for an assignment of the partner’s rights under the second policy.

The court held that no coverage was available for the first suit because the insured had prior knowledge that a claim could be made before the inception of the first claims-made policy. The policy precluded coverage for claims if, at the effective date, the insured “could have reasonably foreseen that such wrongful act might be expected to be the basis of a claim.” The court held that, before the inception of the policy, the insureds could have reasonably foreseen a claim because the associate admitted to the partner that he made a “fatal error” in the representation and the partner offered to refund fees in exchange for a release because the client “was making a claim of malpractice.”

The court also held that no coverage was available for the second lawsuit made in policy year two for two reasons. First, the court held that the second lawsuit was deemed made during the first policy because it was “related” to the first lawsuit made during policy year one. The two lawsuits were related because the wrongful conduct—namely, mistakes in appealing the zoning decision—were “identical” in both lawsuits. No coverage was available under the first policy for the second lawsuit because the insureds had prior knowledge that the client might bring a claim. Second, even if the second lawsuit was not related to the first lawsuit, the court held that the second lawsuit was not covered because it did not involve the provision of professional services. In the second lawsuit, the claimant alleged that the partner was liable because he failed to obtain appropriate legal malpractice insurance for the associate, which was “not the result of rigorous intellectual training” and pertained “to the running of a business rather than the practice of law.”

Finally, the court held that, because there was no coverage under the two policies for the two claims, the insurer did not commit bad faith in violation of Section 93A of the Massachusetts code.