Prior Knowledge Exclusion Bars Coverage for Claim Against Insured Attorney

Applying Florida law, a federal district court has held that a prior knowledge exclusion bars coverage for a claim against an insured attorney where the attorney knew, prior to applying for the policy, that he had failed to meet his client’s expectations for the representation.  David R. Farbstein, P.A. v. Westport Ins. Co., 2017 WL 3425327 (S.D. Fla. Aug. 9, 2017).

An attorney was retained by a client in connection with a real estate sales transaction.  The property at issue had a mortgage with a pre-payment penalty, and the client retained the attorney to negotiate a sales contract that would have the purchaser assume the mortgage and release the client from the pre-payment penalty obligation.  Shortly before the closing, however, the parties discovered that the sales contract did not require the purchaser to assume the mortgage or pay the penalty.  The attorney advised his client to go through with the sale in any event, as otherwise the client could be sued for specific performance.  Accordingly, the client proceeded with the sale and paid the penalty at the time of closing on July 21, 2015.

Approximately one month after the closing, the attorney completed a renewal application for a lawyers professional liability policy.  The application asked whether the attorney was aware of any act, error or omission that might be expected to be the basis of a malpractice claim, and the attorney answered “no.”  The attorney likewise signed a warranty statement swearing to a lack of knowledge of any such circumstances that could give rise to a claim.  The insurer issued a policy effective October 12, 2015.  The policy contained an exclusion for any claim arising from a Wrongful Act “if the Insured at the effective date of the Policy Period . . . knew or could have reasonably foreseen that such Wrongful Act might be expected to be the basis for a Claim.” When the client filed a malpractice claim against the attorney, the insurer denied coverage based on the policy’s prior knowledge exclusion.

In subsequent coverage litigation, the court agreed with the insurer that the exclusion precludes any defense or indemnity coverage.  The court found that the client’s complaint against the attorney alleged that, prior to the closing, the attorney knew that he had failed to negotiate a sales contract that released the client from the mortgage and pre-payment penalty but counseled the client to go forward with the sale anyway.  Accordingly, the court held that, as of the closing on July 21, 2015, which predated the policy’s inception, the attorney could have reasonably foreseen that the alleged error might give rise to a claim by the client.

Wiley Executive Summary

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