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A New Jersey court is being asked to outlaw one of the ways that malpractice carriers limit their responsibility to protect lawyers for negligence committed in years past. A class action fraud complaint against Lloyd’s of London in Middlesex County Superior Court seeks to stop carriers from writing claims-made policies that exclude coverage for acts before a particular date. The standard claims-made liability policies most lawyers have had since the late 1970s cover them for acts, errors and omissions reported during the life of the policy, even when the negligence occurred before the policy began. But carriers sometime hedge their bets by adding retroactive dates to such policies as firewalls against unforeseen claims. Such “retro-date” policies that exclude prior acts violate insureds’ understandings of what a claims-made policy is, making coverage illusory and unduly restrictive, according to the complaint filed May 18 by Morristown’s William Voorhees, a former chairman of the State Bar Association’s Insurance Committee. Agents say such policies are written occasionally when the insured is newly licensed, has had gaps in previous coverage or has a checkered claims history. Two decades ago, the state Supreme Court ruled against an insurance company practice of writing claims-made policies with retroactive dates that were the same date as the first day of the coverage period. Such a policy was so narrow in its coverage it defied reasonable expectations and violated public policy, the Court said in Sparks v. St. Paul, 100 N.J. 340 (1982). Voorhees takes the position that a policy with any retroactive date violates the expectations of a claims-made policyholder. “Considering the holding of Sparks, I long ago concluded that this was in fact a violation of the Consumer Fraud Act,” Voorhees wrote on May 7 to Timothy Burke, Lloyd’s counsel at Montclair’s Garrity, Graham, Favetta & Flinn. “Finally we have a test case.” Burke agrees that Sparks is the defining case. By his reckoning, though, it does not apply to the type of retro-date policy Lloyd’s sold Voorhees’ client. The plaintiffs in the case, Juman v. Certain Underwriters at Lloyd’s of London, MID-L-3616, are the principals of Juman & Juman of Edison, who have a Lloyds of London retro-date policy. Also named as a defendant is the broker who sold the policy, the Walnut Advisory Corp. of Watchung. Representatives of both defendants say the suit is frivolous. In addition, Voorhees’ drive may be dead before it gets going because both sides say the malpractice matter that spawned the class action is nearing settlement. The price of settlement could be withdrawal of the class action suit. TRAP FOR UNWARY PURCHASER? Even so, the litigation sheds light on an insurance industry practice that may or may not be good for lawyers, depending on who is talking. Voorhees says retro-date policies are a trap for the typical purchaser of legal malpractice insurance: a practitioner who wants coverage, is confident no claims are lurking and hasn’t the time, energy or patience to examine arcane policy language thoroughly. On the other hand, agents say it is a perfectly legal method — when fully explained to customers — that insurers can use to provide coverage and limit their exposure. Some risky clients would be without coverage if carriers couldn’t include retroactive dates in their policies, says broker Rickard Jorgensen of Jorgensen & Co. in Ridgewood. Under Juman & Juman’s policies with Lloyd’s, starting in 2001, coverage does not apply to acts, errors or omissions that occurred before Aug. 15, 1990 — a date that appears to be benign for the insured, given the six-year statute of limitations on legal malpractice claims. As it turned out, though, the retro-date became a problem. In February, a former matrimonial client sued the firm in Middlesex County alleging that lawyers at what is now Juman & Juman failed to include her husband’s Social Security benefits in the equitable distribution in a 1989 divorce. The plaintiff in Linda McLeod v. Juman, Juman, Hedesh & Deutchman, MID-L-257-04, also alleged that the firm gave her bad advice in 1996 when she found out about the benefits. When Juman & Juman turned the complaint over to its carrier, Lloyd’s cited the 1990 retroactive date and denied coverage for the 1989 claim but agreed to defend and indemnify the firm for any failure in 1996. When Juman & Juman objected, the insurer filed a reservation of rights letter and suggested that the firm hire a carrier-approved counsel to defend both claims and sort out the coverage issues afterward. As a practical matter, the 1990 retroactive date doesn’t appear to pose a grave threat to Juman & Juman because the 1989 claim is far beyond the statute of limitations, even granting the plaintiff the benefit of the discovery rule’s principle that the statute starts running when actual damages are discovered. In addition, as insurance lawyer Burke has pointed out in the pleadings, Juman & Juman’s policy has a $50,000 deductible that can be applied to indemnification and defense costs. The pleadings suggest: Why get excited about coverage when the carrier may end up with no financial obligation? The plaintiff’s lawyer in the malpractice case, Michael Nieschmidt, who has a firm in Hightstown, could not be reached for comment last week about the potential value of his claim. FLYING AMISS OF SPARKS Burke says Voorhees’ class action suit is based on a misreading of the Sparks decision. “ Sparks did not hold that all retro-active date exclusions were invalid per se,” Burke said in a May 19 letter that defended the 11-year retroactive date in the Juman & Juman policy. “On the contrary, it expressly recognized that there are certain factual circumstances and contexts that would render such omitted retroactive coverage both reasonable and expected.” Broker Ariel Hessing, executive vice president of Walnut Advisory, concurs. He said in a telephone interview last week that Juman & Juman was well aware of the retroactive date. “We bettered what they had previously,” he says. “We gave them better terms and conditions than what they had.” The premium on the firm’s current yearly policy is $56,000, according to the pleadings. Stephen Juman did not return a call on Thursday. Hessing says neither his company nor “any responsible company” would sell a policy like the one ruled illegal in Sparks, but he concedes there might be some policies that come closer to being illegal than the Juman & Juman policy. “He has chosen a very poor case,” Hessing says of Voorhees’ challenge. “There are better cases.” A better case would be to find an insurance company that took advantage of a firm that forgot to renew its policy and had a period in which it was unprotected, Hessing says. Hessing and Jorgensen say Evanston Insurance Co., whose underwriting manager is Shand Morahan and Co. Inc. of Deerfield, Ill., offers claims-made policies with retroactive dates as an alternative to more expensive full prior acts coverage. A spokesman for the company did not return a call. So far, the greatest effect of Voorhees’ class action is on him. Lloyd’s of London filed a motion to disqualify him from representing Juman & Juman in the malpractice case on grounds that his involvement in the coverage litigation put him in conflict with the carrier, which has, after all, agreed to defend at least some of the claims against Juman & Juman. The carrier has rights too, Burke argued, and Middlesex County Superior Court Judge Robert Longhi agreed with him on Wednesday. Longhi removed Voorhees as defense counsel for the firm in favor of someone, to be named later, acceptable to the insurance company.

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