Prior Acts Date Limits Insurer’s Liability for Underlying Judgment
The United States District Court for the Eastern District of Virginia, applying Virginia law, has held that a lawyer’s professional liability insurer’s liability was limited because the underlying action arose out of acts, errors, or omissions occurring on or before a prior acts date specified in the policy. Minnesota Lawyers Mut. Ins. Co. v. Protostorm, LLC, 2016 WL 3447892 (E.D.Va. June 22, 2016).
The insurer issued a malpractice policy to a law firm. The policy included a split limit of liability, providing $5 million in coverage for any Claim arising out of any acts, errors, or omissions which occurred on or before October 25, 2006, and a $10 million limit for any acts occurring after that date.
An internet game company retained the law firm in 2000 to prepare and prosecute patent applications. The law firm properly filed a provisional application in 2001, but allegedly made a mistake in a later filing, jeopardizing the company’s ability to receive patent protection. The error could have been corrected as late as February 2003; however, the firm abandoned the patent application without informing the company. When the company did not hear from the firm for five years, it investigated and learned in 2008 that the law firm had abandoned the application. The company filed suit. The jury found for the company, awarding compensatory damages of nearly $7 million.
The insurer sought a declaratory judgment that the policy’s $5 million limit of liability applied, rather than the $10 million limit, because the underlying judgment arose out of acts, errors, or omissions occurring before October 25, 2006.
The court determined that the lower limit of liability applied. The court reasoned that because the relevant endorsement addressed the insurer’s duty to indemnify for claims resulting from the rendering of professional services, the term “Claim” should be read in context to mean “the cause of action within a lawsuit that obligates [the insurer] to pay damages covered by the Policy.” In interpreting the phrase “arising out of,” the court examined whether there was a “causal connection between a particular fact or source of law and an essential element of the cause of action alleged.” The court determined that law firm’s liability arose from its failure to prosecute the applications, which could not be corrected after February 2003. Thus, the court reasoned that “all of the elements necessary for the accrual of the malpractice cause of action were present by early 2003 at the latest,” and the action could not have been a Claim arising out of an act, error or omission occurring after October 2006.
The court rejected the law firm’s theory that the Claim at issue comprised the entire malpractice lawsuit and that the success of that lawsuit depended on some post-October 2006 act to toll the statute of limitations. The court determined that, “[a]s a factual matter, no post-October 2006 act, error, or omission was necessary to the tolling of the statute of limitations,” and “[a]s a legal matter, it is clear that under the New York law that governed the malpractice lawsuit that acts tolling the statute of limitations do not affect the date of accrual of the cause of action itself.”