Insured’s Subjective Belief Regarding Likelihood of Being Sued Irrelevant to Prior Knowledge Analysis Under Pennsylvania Law

The United States District Court for the Eastern District of Pennsylvania, applying Pennsylvania law, found that an attorney “knew or should have known” he might get sued for (allegedly) botching a settlement term sheet where a worker’s compensation review board publicly criticized his handling of the settlement, even though his client did not appear angry at the time.  Zavodnick, Zavodnick & Lasky, LLC v. Nat’l Liab. & Fire Ins. Co., 2019 WL 1003157 (E.D. Pa. Mar. 1, 2019).  Because the insured attorney knew the relevant facts before his professional liability policy incepted, the district court granted the insurer’s motion for summary judgment that there was no coverage.

An electrician working at a private residence fell in a hole.  He applied for, and began receiving, worker’s compensation (WC) benefits.  The electrician then retained the insured attorney to bring a personal injury (PI) suit against the homeowner.  By statute, the electrician’s recovery in the PI suit would be subject to a subrogation lien by the WC insurer in an amount equal to the benefits already paid (then, $229,000), and a settlement higher than that would also create a credit in the WC insurer’s favor towards any WC payments due in the future, absent an express written waiver by the WC insurer.

With a $350,000 settlement on the table in the PI suit, the insured attorney called the WC insurer to see if it would waive all of its statutory rights in exchange for a payment equal to one-third of the benefits already paid.  Confusion ensued over whether the proposal was for one-third of $229,000 or one-third of $350,000 and whether the WC insurer was waiving its right to a credit for future benefits.  While resolving the first issue, the insured attorney opted not to press for clear written confirmation regarding waiver of the credit for future benefits as required by the statute.

The WC insurer subsequently moved the WC review board for a credit of over $153,000.  In the written decision granting the credit, the WC review board criticized the insured attorney’s handling of the settlement.  The electrician expressed frustration with others involved in the process, but not with the insured attorney.  The electrician later asked for a copy of his file, however, which the insured attorney conceded at his deposition in the coverage action is often a bad sign.

The insured attorney later renewed his professional liability policy.  He indicated on the application that he was not aware of an error or omission that might lead to a suit.  A condition precedent to coverage was that, prior to the inception of the policy, no insured “knew or should have known” of a circumstance that might give rise to a claim.

In the coverage action, the court applied Pennsylvania’s two-step analysis for determining whether a prior knowledge provision applies to bar coverage.  First, the court determines what the insured knew at the relevant time.  Second, the court asks whether an objectively reasonable attorney, in possession of those facts, would have a basis to believe that a claim might be made against them.  Of the facts recited above, the court focused on the express blame laid at the insured attorney’s feet by the WC review board.  While this might not be dispositive in the underlying malpractice suit, the coverage court wrote, it was a “strong indicator” that an objectively reasonable attorney would conclude that a malpractice suit might be coming.  The court observed that it was “irrelevant,” under the two-step analysis, that the insured attorney might have subjectively believed that a claim was unlikely based on his relationship with, and knowledge of, the client.

Wiley Executive Summary

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