No Coverage for Malpractice Action Alleging Undisclosed “Wrongful Acts” Pre-Dating Policy’s Effective Date

Applying Nevada law, the United States District Court for the District of Nevada has concluded that a legal malpractice policy did not apply where the insured attorneys sought coverage for alleged Wrongful Acts known to the insureds taking place before the Policy’s effective date that they should have foreseen would be the basis of a claim and which were not disclosed in the application for insurance.  Alps Prop. & Cas. Ins. Co. v. Kalicki Collier, LLP,  2021 WL 1032290 (D. Nev. Mar. 17, 2021).  The court also allowed the insurer to recoup the legal fees it had previously paid in defense of the underlying claim.

The insured attorneys represented a woman in a family trust dispute.  In the course of the representation, they failed to advise their client that a statute of repose had run and barred recovery for her claims, and, as a result, the client was unable to recover.  The client subsequently filed a malpractice action against the attorneys, and they in turn sought coverage from their insurer.

In the ensuing coverage litigation, the insurer filed a motion for summary judgment.  The insurer argued that coverage under the policy was barred because coverage applied only if “[a]t the Effective Date of this Policy, no Insured knew or reasonably should have known or foreseen that the Wrongful Act might be the basis of a Claim.”  Alternatively, the insurer argued that the policy excluded coverage for matters as to which “[p]rior to the Effective Date of this Policy, any Insured gave or should have given to any insurer, notice of a Claim or potential Claim arising from or in connection with the Wrongful Act, or from any Wrongful Act that is connected temporally, logically, or causally, by any common fact, circumstance, situation, transaction, event, advice or decision to the Claim or potential Claim.”  Finally, the insurer sought recoupment of defense costs it had paid for defending the malpractice action.

The court sided with the insurer on all counts.  First, the court applied a “subjective-objective framework” to determine that the prior knowledge exclusion barred coverage.  The court concluded that (1) the insureds knew, before they completed their application for insurance, that their error caused the statute of repose to run on their client’s claim; and (2) a reasonable attorney would have known that the statute of repose issue might result in a malpractice lawsuit against them.  The court noted that the exclusion applied “regardless of whether the insured actually formed an expectation of a claim, if a reasonable ‘professional in the insured’s position might expect a claim or suit to result.’”  The court also agreed with the insurer that there was no coverage under the claims-made-and-reported policy because the “wrongful acts” alleged in the lawsuit—the statute of repose issue—all occurred before the policy became effective, and the insureds were on notice of a potential claim that should have been disclosed to the insurer.  Notably, the court rejected the insured’s argument that the notice-prejudice rule applied, on the grounds that the rule is not applicable in Nevada to claims-made-and-reported policies.

Finally, the court granted reimbursement of defense costs to the insurer, noting that the policy expressly provided a right to recoupment of defense costs for amounts paid to defend a non-covered claim and because the court had determined that there was no coverage under the policy for the malpractice suit.