No Coverage for a Lawsuit Filed Two Years after the Expiration of a Claims-Made-and-Reported Policy
Applying California law, a federal district court has held that there is no coverage under a claims-made-and-reported policy for a legal malpractice suit that was filed two years after the expiration of the policy period and reported to the insurer two years later. Petersen v. Arch Ins. Co., 2015 WL 3968590 (C.D. Cal. June 30, 2015).
In May 2009, a client retained the insured attorney to bring a civil rights lawsuit. The attorney missed several filing deadlines, which led to the dismissal of the suit. The dismissal was upheld on appeal in January 2012.
In May 2012, the client filed a malpractice suit against the attorney, and the court entered a default judgment in favor of the client in January 2014. During post-judgment proceedings, the client learned that the attorney had purchased a claims-made-and-reported professional liability policy for the period of May 20, 2009 to May 20, 2010. In November 2014, the client assigned the default judgment to a third party, who then sought coverage under the policy.
In granting the insurer’s motion to dismiss, the court held that no malpractice claims were asserted against the attorney or reported to the insurer during the policy period, as required by the language of the policy. The court rejected all of the assignee’s arguments to the contrary. First, the court held that this case did not present the sort of unique factual circumstances that warrant application of the “equitable excuse” rule. The court observed that, unlike a case where a claim is made against an insured mere days before the expiration of the policy, the malpractice suit here was filed two years after the policy expired and was not reported to the insurer until two years later—a delay of years, not hours. Second, the court held that the “idle act rule”—which excuses a party from performing a condition precedent to a contract when such performance would be futile or would cause further harm—did not apply. According to the court, although the client’s appeal was not resolved until 2012, the attorney’s malpractice “was complete and final” upon the missing of the deadlines, such that the client could have sent a demand letter in 2009, which would have constituted a “claim” under the policy. Finally, the court rejected the assignee’s argument that the policy was unconscionable as applied to him because the insurer never provided him with a copy of the policy or otherwise disclosed its limitations. The court noted that claims-made-and-reported policies are “perfectly legal” and that, because the assignee was a “complete stranger” to the contract between the attorney and the insurer, the insurer owed no duties to him.