No Coverage, No Estoppel, No Duty to Settle; Prior Knowledge Exclusion Bars Coverage for Insured’s Malpractice Claim
The Kansas Court of Appeals has held that an insurer owed no duty to defend or settle a malpractice lawsuit against its insured because the attorney had knowledge of acts reasonably giving rise to the claim before the policy period began. Becker v. Bar Plan Mutual Ins. Co., 2015 WL 9459771 (Kan. Ct. App. Dec. 23, 2015). The court also held that the insurer was not estopped from denying coverage even though it undertook the defense before issuing a reservation of rights and that the insurer had no duty to settle.
The attorney purchased a claims-made-and-reported professional liability policy. The policy contained an exclusion that barred coverage for any claim “against an Insured who before the Policy effective date knew, or should reasonably have known, of any circumstance, act or omission that might reasonably be expected to be the basis of that Claim.” Before the policy incepted, the attorney was terminated by a client after the client learned that the attorney had failed to perfect the client’s security for a loan. The attorney tendered the claim to the insurer when the client sent a demand letter several months later. The insurer undertook the defense. At the outset of the case, the client made a settlement demand within a range that defense counsel recommended as reasonable. The insurer thereafter retained coverage counsel, issued a reservation of rights letter, and denied coverage approximately two months later.
The Court of Appeals affirmed the trial court’s ruling of no coverage. The court held that a reasonable attorney would have anticipated a claim upon learning that she had compromised her client’s security interest and that the client was terminating her services, viewed her work as substandard, and asked her to put her carrier on notice. The court rejected the attorney’s argument that she subjectively did not expect a claim because she continued to socialize with the client and the client did not mention a malpractice lawsuit until several months later.
The court also held that the insurer was not estopped from denying coverage. Although labeling the insurer’s reservation of rights letter “untimely,” the court held that the insurer was entitled to obtain and review the attorney’s entire file before issuing a coverage position. The court also held that estoppel would improperly expand the scope of the insurance policy. Finally, the court held that although the insurer denied coverage after the client made a settlement offer, the insurer did not have or breach a duty to settle because the attorney was not entitled to coverage under the policy.