Legal Malpractice Lawsuit Not Covered Where Insured Knew or Reasonably Should Have Known Pre-Inception of Conduct that Might Be Basis of Claim

The United States Court of Appeals for the Eighth Circuit, applying North Dakota law, has held that a lawyers professional liability policy did not provide coverage for a legal malpractice lawsuit where the insured knew or reasonably should have known, as of the effective date of the policy, that the insured’s conduct might be the basis for a claim. Alps Prop. & Cas. Ins. Co. v. Bredahl & Assocs., 2022 WL 258501 (8th Cir. Jan. 28, 2022).

A construction company was sued for breach of contract and contacted an attorney to represent it. The attorney appeared on behalf of the construction company at multiple court hearings in late 2015 and early 2016. On March 10, 2017, the attorney notified the construction company for the first time that trial was scheduled for March 13, 2017. The attorney further advised that the construction company did not need to attend trial because a motion for continuance would be granted. The state court denied the motion, however, criticizing its basis as attorney “inattentiveness.” The state court entered judgment against the construction company for just over $1 million.

The construction company sued the attorney for negligence, breach of fiduciary duty, and misconduct. The attorney’s insurer filed suit, seeking a declaratory judgment that it did not have a duty to defend or indemnify the attorney because, as of the effective date of the policy on October 1, 2017, the “Insured knew or reasonably should have known or foreseen that the act, error, omission . . . might be the basis of a Claim.” The attorney and the construction company settled the malpractice suit in a Miller-Shugart agreement. The district court subsequently held that the insurer had no duty to indemnify or defend the attorney. The construction company appealed.

On appeal, the Eighth Circuit applied a two-prong, subjective-objective test to determine whether the policy provided coverage. First, under the subjective prong, the insured must have ‘actual knowledge, or subjective awareness, of the relevant suit, act, error or omission.” Second, under the objective prong, the act, error, or omission must reasonably be expected to result in a claim or suit.

The Eighth Circuit held that the first prong was met because the attorney knew, before the policy’s effective date, facts constituting errors or omissions, including that (i) he had not litigated on behalf of the construction company in the breach of contract suit, even though the company thought he was doing so; and (ii) he gave the construction company advice that led to the company making no defense at trial and incurring a significant judgment. The Eighth Circuit determined that the policy and the first prong of the test require only that the attorney “knew of acts or omissions, not that he feel responsible for his client’s loss.”

The Eighth Circuit held that the second prong was met because an attorney in the insured’s position reasonably should have known that his involvement in the breach of contract suit “might be the basis of a” claim against him. Specifically, an attorney reasonably should know that a client might bring a claim against him if the client (i) thought the attorney was representing them; (ii) did not attend trial on the attorney’s advice; and then (iii) lost a million-dollar judgment. While the attorney may have subjectively believed that he was representing the construction company on a limited basis and the company would not sue him, the Eighth Circuit determined that the attorney’s “personal expectations have no bearing on whether a reasonable person would know that the [breach of contract] suit might be the basis of a claim.” The Eighth Circuit further held that the policy “imposes no qualification based on the likelihood or merit of claim; the Policy requires only facts that might lead to a demand for money.” The Eighth Circuit therefore affirmed the district court’s grant of summary judgment for the insurer.

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