Malpractice Suit Related Back to Claim for Compensation from Client Security Fund

Applying Pennsylvania law, a federal district court has held that a malpractice suit by a former client related back to the client’s pre-policy claim for compensation from the state lawyers client security fund, such that the suit did not constitute a claim first made during the policy period.  Kashkashian v. Liberty Ins. Underwriters, Inc., 2014 WL 3389115 (E.D. Penn. July 11, 2014)

An insured lawyer was sued for malpractice and fraud by a former client, who alleged that the insured took $125,000 from his bank account for a business venture when the parties purportedly agreed to $100,000.  The insured allegedly refused to return any money to the client, so the client filed a claim for compensation with the Pennsylvania Lawyers Fund for Client Security.  The insured was advised in June 2012 that the Fund had denied the client’s claim.  The client subsequently commenced suit against the insured, filing a writ of summons in August 2012 and a complaint in May 2013.

The insured sought coverage for the suit under his professional liability policy, which afforded coverage on a claims-made basis for the policy period of August 1, 2012 to August 1, 2013.  The policy defined claim to include a demand received by the insured for money or services, as well as a disciplinary proceeding, and provided that multiple claims arising from the same or related wrongful acts will be treated as a single claim.  The policy also included a prior knowledge exclusion, barring coverage for any claim arising out of a wrongful act that occurred before the policy period, if prior to the effective date of the first policy issued by the insurer to the insured, the insured had a reasonable basis to believe that he had breached a professional duty or to foresee that a claim would be made against him.

In light of the earlier claim for compensation for the client security fund, the insurer denied coverage for the suit.  In the coverage action that followed, the court first determined that the claim for compensation constituted a “claim” within the meaning of the policy to which the suit related back.  The court concluded that because the claim for compensation pre-dated the policy, the action did not constitute a covered claim first made during the policy period.  The court also held that the prior knowledge exclusion applied to bar coverage for the claim, finding that “a reasonable attorney could foresee that an individual who initiates a disciplinary proceeding against him based on the alleged breach of several professional duties, may later pursue a malpractice suit.”  According to the court, “an attorney cannot assume that the claim will not be brought because he subjectively believes it is time barred or lacks merit.”

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