Prior Knowledge and Prior Notice Exclusions Barred Coverage For Legal Malpractice Claim

The United States District Court for the District of North Dakota has held that an insurer had no duty to defend a claim under a lawyers professional liability policy where the insured had prior knowledge that a claim might be made and should have given notice of the potential claim prior to the policy’s effective date. ALPS Prop. & Cas. Ins. Co. v. Brehdal & Assoc., P.C., 2020 WL 6268043 (D.N.D. Oct 23, 2020). The court also held that the insurer was entitled to reimbursement of defense costs where the policy provided such a right, and the insurer reserved its rights to seek such reimbursement.

The insured attorney defended a construction company in a breach of contract action beginning in 2015. While the attorney maintained that his representation was in a limited capacity, he made several appearances in court and received electronic service of documents on behalf of the client. The client never obtained other counsel. The case proceeded to trial in March of 2017, without the insured attorney present, and judgment was entered against his client. A legal malpractice lawsuit against the insured attorney followed.

The relevant claims-made policy incepted on October 1, 2017.   Following the insurer’s denial of coverage for the legal malpractice lawsuit, coverage litigation ensued.

On summary judgment, the court determined that coverage was precluded on the basis of two policy exclusions.  First, the policy barred coverage for claims where “at the Effective Date . . . no Insured knew or reasonably should have known or foreseen that the act, error, omission or Personal Injury might be the basis of a Claim.” Second, the policy contained an exclusion for “any Claim arising from or in connection with . . . [a]ny act, error, omission or Personal Injury that occurred prior to the Effective Date if . . . any Insured gave or should have given, to any insurer, notice of a Claim or potential Claim.”

Noting the dearth of North Dakota case law construing prior knowledge exclusions, the court applied the Third Circuit’s two-part Colliers test to determine the insured’s knowledge. Colliers Lanard & Axilbund v. Lloyds of London, 458 F.3d 231 (3d Cir. 2006). Under the Colliers test, a court first considers the insured’s subjective awareness of the act, error, or omission. If the insured had subjective awareness, the court next conducts an objective inquiry into whether a reasonable person in the insured’s position would expect a claim to result.

Applying the Colliers test, the court reasoned that the attorney had subjective knowledge of the facts underlying the legal malpractice lawsuit prior to the policy’s inception in October 2017, including that a trial had occurred without an attorney present on behalf of the client. The court next determined that a reasonable attorney in the same position would expect a malpractice claim to result. Accordingly, the court held that coverage was barred by the prior knowledge exclusion, and the insurer had no duty to defend.  “For similar reasons,” the court held that the policy’s prior notice exclusion barred coverage “because the [insured] should have given notice of the potential claim prior to the Policy’s effective date.”

Finally, the court held that the insurer was entitled to reimbursement of defense costs expended on the insured’s behalf. The policy provided the insurer with “the right to seek reimbursement from any Insured . . . for any amount paid by the Company in defending any such non-covered Claim.” Finding that the insurer reserved its right under the policy, and that there was no duty to defend, the court ordered the insured to reimburse the insurer for defense costs.

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