Collateral Estoppel Bars Relitigation of Issues Bearing on Prior Knowledge of Potential Claim

An Alaska federal court has held that a state court’s finding in the underlying litigation that an insured should have known of a potential claim by a date before inception of a policy collaterally estopped the insured from relitigating that issue in a coverage dispute concerning a prior knowledge provision.  ALPS Prop. & Cas. Ins. Co. v. Merdes & Merdes, P.C., 2018 WL 1278422 (D. Alaska Mar. 12, 2018).

A law firm defended a client in a quiet title action under a contingent fee arrangement.  The client was successful.  The client subsequently refused to pay the firm amounts purportedly due under the contingent fee arrangement.  The law firm brought suit against the client to recover the unpaid fees in 1995 (the “1995 Suit”), and the firm was successful at the trial court.  Following the trial court decision, on July 28, 2010, the client paid the firm the amounts due pursuant to the decision in the 1995 Suit.  The Alaska Supreme Court subsequently reversed the trial court’s decision in the 1995 Suit.  The law firm refused to return the amounts that it paid following the trial court judgment.

The client subsequently filed a lawsuit of its own in 2013 (the “2013 Suit”) that sought recovery of the amounts retained by the law firm.  The law firm tendered the suit to its E&O carrier, which denied coverage.  The policy’s insuring agreement only provided coverage for claims if “at the effective date of [the] policy, no Insured knew or reasonably should have known or foreseen that the act, error, omission or personal injury might be the basis of a claim.”

An Alaska trial court subsequently entered judgment against the law firm in the 2013 Suit.  The trial court also awarded prejudgment interest that ran from July 28, 2010.  The apparent basis for the award of prejudgment interest from that date was that the law firm was aware of a possible claim beginning on that date.  Subsequently, the Alaska Supreme Court affirmed that ruling.

In the ensuing coverage litigation, the court granted summary judgment to the insurer.  The court held that the firm was collaterally estopped from challenging a decision that it “reasonably should have known or foreseen that the act, error, omission or personal injury” at issue “might be the basis of a claim.”  The court held that because the law firm was a party to the 2013 Suit and the court in the 2013 Suit decided that the law firm was aware that a claim “may be brought” in 2010, the law firm “reasonably should have known or foreseen that the act, error, omission or personal injury might be the basis of a claim.”

Wiley Executive Summary

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