Related Acts of Malpractice Give Rise to One Claim; Coverage Precluded by Prior Knowledge Exclusion
An Illinois intermediate court of appeals has held that several acts of legal malpractice stemming from one error gave rise to one “claim” under the policy and that coverage for the claim was precluded by the policy’s prior knowledge exclusion because the law firm had reason to know a malpractice claim might result from its error prior to the issuance of the policy. Synergy Law Grp., LLC v. Ironshore Spec. Ins. Co., 2015 IL App (1st) 142070-U (Ill. Ct. App. Mar. 24, 2015).
The insured law firm was sued for malpractice stemming from a drafting error in a shareholders agreement that it prepared for its advertising firm client. The error entitled a terminated employee to 20 times the amount the company intended for repurchase of the employee’s shares of stock. When a terminated employee sued the advertising firm to enforce the agreement in 2008, the insured law firm defended the advertising firm and assisted it in forming a new corporation.
While the employee’s shareholder suit was pending, the law firm obtained a malpractice policy in May 2010 that barred coverage for any Claim where “an Insured, prior to the effective date . . . had knowledge of the circumstances that gave rise to the Claim and reason to believe that a Claim might result.” On its application in March 2010, the insured law firm answered “No” to the question “Are you or any members o[r] employees of your firm aware of any fact, circumstance, or situation which might reasonably be expected to give rise to a claim?”
After the circuit court entered judgment for the terminated employee, the advertising firm fired the insured law firm and demanded reimbursement for any judgment in excess of the amount it intended the contract to provide. The advertising firm then sued the law firm in September 2011 for legal malpractice. The law firm sought coverage under its malpractice policy, and the insurer denied coverage based on the prior knowledge exclusion and the exclusion for the warranty question in the application. The law firm then filed a coverage action against its malpractice insurer for breach of contract. The circuit court granted the insurer’s motion for summary judgment.
The Illinois intermediate appellate court affirmed, holding that the insured had reason to know that a claim might result from the drafting error when it applied for the malpractice policy. The court found that when the insured bought the policy, it knew about the drafting error, that the terminated employee had sued, that the agreement as drafted entitled the employee to more than the advertising firm had intended, and that the circuit court had denied the advertising firm’s motion to dismiss the employee’s complaint. The insured argued that it had no reason to believe that the advertising firm would allege further acts of malpractice beyond the drafting error—such as failing to preserve certain defenses in the employee’s lawsuit and failing to warn the advertising firm’s principal that any asset transfer might expose him to personal liability—and that those later acts should be covered by the policy. The appeals court applied the policy’s related claims provision to hold that these acts were the “same, related or continuous, or . . . ar[o]se from a common nucleus of facts” and thus the alleged malpractice acts all constituted one “claim.” In declining to treat the later acts of malpractice as separate “claims,” the court relied on the policy language and the fact that a contrary rule would incentivize an attorney to commit additional acts of malpractice related to the initial act to obtain coverage.