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The New York State Court of Appeals on Tuesday threw out a novel malpractice action in which a Manhattan law firm had been accused of negligence for failing to advise a client that its legal expenses might be covered by insurance. While the court found that VSI International Inc. could not sustain a legal malpractice claim in this instance because it was not clear that an insurer had a duty to defend under the facts of the case, it left the door ajar to similar failure-to-advise claims in the future. Its fact-specific decision in Darby & Darby P.C. v. VSI International Inc., 114, upheld a panel of the Appellate Division, First Department, which had reversed the trial judge. The legal malpractice decision arose out of Darby & Darby’s representation of VSI International, a Florida firm that sells non-prescription eyeglasses in chain stores. Darby & Darby was retained in 1990 to defend VSI in two lawsuits alleging patent, trademark and trade dress infringement. Over the course of two years, Darby & Darby incurred about $200,000 in unpaid legal bills, and ultimately moved to withdraw as counsel. In August 1996, the law firm sued VSI to recover $209,199 in fees, costs and interest. VSI asserted a counterclaim alleging that Darby & Darby had negligently failed to advise that the legal fees might be covered under a general liability insurance policy. It noted that the firm that succeeded Darby & Darby in defending the infringement action successfully obtained coverage for their litigation expenses. At the trial level, a supreme court justice denied Darby & Darby’s motion for summary judgment, concluding that the firm’s failure to investigate insurance coverage raised a triable issue of fact. But the First Department dismissed the malpractice claim, finding that lawyers in a civil suit have no obligation to assist the client in tracking down theoretical sources for which to pay legal expenses. FIDUCIARY DUTY ARGUED On appeal, VSI argued that an attorney, as a fiduciary, has a duty to consider the financial needs of a client and to appropriately advise on those matters. Darby & Darby countered that imposition of such a duty would “forever relieve business executives in charge of a company’s insurance of the obligation to do their jobs” while saddling attorneys with an unreasonable burden. On Tuesday, the Court of Appeals affirmed the 1st Department. Writing for the court, Judge Carmen Beauchamp Ciparick said that an attorney’s disregard of clearly defined laws and rules is “seldom excusable.” However, in this case, she said that at the time Darby & Darby was representing VSI, neither New York nor Florida law recognized any duty of an insurer to cover patent infringement claims under the advertising injury clause in a general liability policy. In fact, Judge Ciparick said, both states had rejected coverage for such claims and only a handful of courts in the United States had recognized such a duty. She noted that it was not until 1998 that insurance carriers began to rewrite their advertising injury clauses to remove the language that gave rise to this theory of coverage. “Although defendants acknowledge the novel nature of their claim, they maintain that, as a highly specialized patent law firm, plaintiff had a duty to keep abreast of emerging legal trends,” Ciparick wrote. “We agree that attorneys should familiarize themselves with current legal developments so that they can make informed judgments and effectively counsel their clients. However, plaintiff in this case should not be held liable for failing to advise defendants about a novel and questionable theory pertaining to their insurance coverage.” VSI was represented by Steven Cooper, of Anderson Kill & Olick PC in Manhattan. Jeffrey A. Jannuzzo of Manhattan argued for Darby & Darby. Cooper said the scope of this decision is limited because it arises in a matter where insurance coverage had not yet been clearly established. He stressed that, under this decision, failure to advise of insurance can sustain a legal malpractice claim. Cooper said there has now been enough developed case law on advertising injury claims that an attorney failing to appropriately advise would almost certainly face a viable malpractice claim. Jannuzzo said the case had enormous implications for the profession. “By putting an end to this claim based on a novel and questionable theory concerning insurance, the court has protected all lawyers against future claims of ‘malpractice’ based on novel and questionable theories which would otherwise have been limited only by the imagination of claimant’s counsel,” Jannuzzo said.

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