7th Circuit says law firm forfeited malpractice coverage

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A law firm failed to provide the notice necessary to ensure coverage of a legal malpractice claim under its professional liability policy, the 7th U.S. Circuit Court of Appeals has ruled in affirming a summary judgment.

The firm represented a potential buyer of a drugstore. The buyer and seller executed the sales contract separately. Because the firm failed to properly deliver the contract executed by the buyer, the seller was able to back out of the deal.

When the buyer notified the firm of its intent to sue for malpractice, the firm tendered defense of the claim to its professional liability insurer. The firm sued when the insurance company denied coverage.

The insurance company contended that the firm was not entitled to coverage because it failed to properly notify the insurer of the mistake that ultimately led to the malpractice claim. Specifically, the insurance company contended that the firm failed to comply with a clause in its policy requiring notice when the firm “first becomes aware of a specific incident, act or omission while acting in a professional capacity providing legal services, which may give rise to a claim.”

The court agreed that the firm failed to satisfy the notice provision of its insurance policy.

“[W]e decline [the firm’s] invitation to hold that the notice requirement was too burdensome because it required the law firm to ‘report every error, no matter how trivial.’ It may well be difficult to determine exactly when an act or omission ‘might reasonably be expected to be the basis of’ a malpractice claim. But this case is not a close one. …

“No matter how we construe the record, it is clear that a reasonable attorney would have recognized that his failure to deliver the [sales] contract, in light of the communications and legal activity that quickly followed, was an omission that could reasonably be expected to be the basis of a malpractice claim,” the court said.

U.S. Court of Appeals, 7nd Circuit. Koransky, Bouwer & Poracky v. Bar Plan Mutual Insurance, No. 12-1579. April 2, 2013.