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State’s high court rules in favor of legal malpractice insurer

The Wisconsin Supreme Court has reversed a Court of Appeals case that lets legal malpractice insurance providers in the state go on with business as usual and keep premiums for legal malpractice insurance the same.

“We strongly believe this is a good decision, not only for insurance companies because it gives certainty but because … it continues coverage that is affordable and available when (policy holders) have claims to make,” said Claude Covelli, counsel for Wisconsin Lawyers Mutual Insurance Co., which provides legal malpractice insurance.

Jeffrey Davis, counsel for Melissa and Kenneth Anderson, the plaintiffs in the case, said he and his clients were disappointed in the decision and surprised the court’s decision focused on how the statutes did not apply to the WILMIC’s policy, yet the defendant’s counsel had conceded that the statutes did apply to the policy.

“From our standpoint it’s a hard result, which I think the majority opinion acknowledges,” he said, “and what’s disappointing is that the statute seems to be designed to prevent that harsh result. It leaves us scratching our heads a little bit.”

At issue in Melissa Anderson and Kenneth Anderson vs. Thomas Aulet al, was whether Wis. Stat. §§ 631.81(1) and 632.26(2) require an insurer to cover a malpractice claim made outside of the scope of a policy.

Wis. Stat. §§ 631.81(1) and 632.26(2) determine how soon all insurance claims must be made and what happens when a policy holder fails to give notice of a claim.

The decision Wednesday stems from a dispute between attorney Thomas Aul and his former clients, Melissa and Kenneth Anderson, regarding a business property purchase from a company owned by Aul. The Andersons sent Aul a letter Dec. 23, 2009, saying they were not treated fairly and demanding that he pay them $117,125.

Aul had a claims-made-and-reported policy through WILMIC from April 1, 2009 to April 1, 2010.  A claims-made-and-reported policy covers all claims made and reported within a policy period. Any claim reported or made after the policy period is not covered.

Aul reported the claim to WILMIC on March 9, 2011, almost a year after the policy period ended.

In March 2012, the Andersons sued Aul and the companies he owned. WILMIC undertook Aul’s defense, arguing that it did not cover the claims.

The circuit court ruled Jan. 14, 2013, that Aul had more than enough time to provide WILMIC with notice of the Andersons’ claim, so no coverage existed.

The Andersons appealed, and the Court of Appeals reversed the circuit court’s decision. Wis. Stat. §§ 631.81(1) and 632.26(2), according to the court, required WILMIC to provide coverage because WILMIC was not prejudiced by lack of notice. Prejudice, according to the appeals court opinion, is a “serious impairment” of the insurer’s ability to investigate a claim, which WILMIC did not show.

But the state Supreme Court disagreed, ruling that, based on an analysis of the language, historical context and of the statutes, Wis. Stat. §§ 631.81(1) and 632.26(2) do not take precedence over the reporting requirement in claims-made-and-reported policies.

Some of the history the court took into account included how, before the late 1970s and early 1980s, occurrence policies were the industry standard.

But costs began to rise for those policies. WILMIC was formed in 1986 to offset those rising costs. Eventually, claims-made and claims-made-and-reported policies became standard.

The rising cost of occurrence policies was caused by their wide scope.

“What happens when some of those claims come up five to 10 years down the road?” Tom Watson, senior vice president at WILMIC and State Bar member, asked. “It makes forecasting losses more unpredictable.”

During oral arguments Nov. 5, Justice David Prosser said he was concerned about the court ruling in the Andersons’ favor because it would affect the cost of legal malpractice insurance for every lawyer in the state.

According to Dean Dietrich, attorney at Ruder Ware, legal malpractice insurance is a commonly purchased by lawyers, and few lawyers “go bare,” or practice without that insurance.

Watson and Covelli pointed out that the Colorado Supreme Court came to a similar conclusion in a Feb. 17 decision in line with the Wisconsin’s Supreme Court’s decision.

“It recognized the tradeoff between an occurrence-based policy,” Covelli said, “versus having the insurance being unavailable or too expensive.”

About Erika Strebel, [email protected]

Erika Strebel is the law beat reporter for the Wisconsin Law Journal and a law school student at UW-Madison. She can be reached at 414-225-1825.

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