The United States District Court for the District of South Carolina, applying South Carolina law, has held that multiple clients’ claims against an accountant and his former firm constitute a single claim under a professional liability policy because they are logically connected to the accountant’s loss of faculty from Parkinson’s disease.  CAMICO Mutual Insurance Co. v. Jackson CPA Firm, No. 15-cv-1823, 2016 WL 7403959 (D.S.C. Dec. 22, 2016).  The Court also applied a known claims endorsement to limit the total recovery available to the clients because the firm “might reasonably have expected” a potential claim before the policy’s effective date.

The accountant was diagnosed with Parkinson’s disease in 2006 but continued to serve clients until August 2011.  During that period, the accountant missed deadlines, incurred penalties and interest, and lost tax savings on behalf of multiple clients due to negligence stemming from loss of faculty.  By the end of 2010, the accounting firm had become aware that the accountant had lost over $20,000 in tax savings for a business client.  It also began to discover issues with the accountant’s services for other clients.  In January 2013, the accounting firm received a letter from an attorney representing multiple firm clients, in which the attorney formally alleged that the accountant had committed malpractice.

The firm held a series of claims-made-and-reported policies with the same carrier.  The firm first reported the business client’s lost tax savings issues to the carrier in September 2011, during the January 28, 2011 to January 28, 2012 policy period.  The policy defined claim to include “two or more Claims arising out of . . . Multiple Acts, Errors or Omissions in rendering Professional Services.”  Multiple Acts, Errors or Omissions was defined to include all acts, errors or omissions that are “logically or causally connected by any common fact(s), circumstances, situation, transaction(s), event(s), advice or decision(s).”  The policy also stated that a single per-claim limit “applies to a Claim arising from Multiple Acts, Errors or Omissions, regardless of the number of claimants, lawsuits, or Insureds involved.”

The $1 million per-claim limit was subject to a known claims endorsement stating that, if the insured became aware of a potential claim in the twelve months prior to the policy’s effective date, coverage would be limited to the lesser of $100,000 or 25% of the per claim limit (the “Known Claims Endorsement”).  The policy defined a “potential claim” as “an event or circumstances that any Insured might reasonably expect would be the basis for a Claim.”

Based on the insureds’ December 2010 knowledge of the issues with the business client, which was during the twelve months prior to the policy’s inception, the insurer took the position that the Known Claims Endorsement was triggered and therefore the claim was subject to a reduced $100,000 limit of liability.  On behalf of the insured, the insurer settled the business client’s claim.

The other impacted clients filed three separate lawsuits against the accountant and the firm in South Carolina state court, in which they alleged negligence and wrongful concealment of the accountant’s disease.  The insurer defended the insureds under a reservation of rights, and later filed a declaratory judgment action in federal court to determine its obligations under the policy.  In the coverage action, the insurer contended that all of the matters against the accountant and firm constituted a single claim subject to the Known Claims Endorsement.  The insureds disputed that position, contending that the insurer breached the policies and acted in bad faith.

Following a bench trial, the Court held that all of the claims against the insureds constituted a single claim subject to the Known Claims Endorsement and $100,000 limit of liability.  First, the Court noted that the endorsement was triggered because the phrase “might reasonably expect” in the definition of potential claim “sets a low threshold” satisfied by knowledge of the business client’s loss in 2010.  The Court rejected the insureds’ argument that the endorsement was inapplicable because the insureds subjectively did not think that a claim would be raised.  The Court reasoned that the word “reasonably” injects an objective standard under which the test is whether a reasonable person would have anticipated a claim in late 2010.

Second, the Court held that the remaining clients’ claims were related to the business client’s claim and therefore also were subject to the same $100,000 limit.  Relying on other federal decisions in the state and in the Fourth Circuit, the Court concluded that the policy’s definition of Multiple Acts, Errors or Omissions was “unambiguous and expansive,” and “links claims that share even a single logically connective fact, circumstance, or situation.”  Under this broad standard, all of the clients’ claims were related because the accountant’s disease and subsequent loss of faculty played a causal role in all of the matters.