Imagine the law firm’s surprise when its legal malpractice insurance carrier not only denied coverage for a claim, but also sued it in a declaratory judgment action seeking a judicial determination of “no coverage.” This is the kind of thing that an attorney or law firm might expect if the claim involved intentional misconduct or activities outside the rendition of professional services. Yet this is what happened with a recent garden-variety legal malpractice claim.

In Fleming, Ingram & Floyd, P.C. v. Clarendon National Underwriters Co., one of the firm’s partners conducted a review of the firm’s pending cases and discovered some that might involve potential malpractice. One in particular involved a personal injury lawsuit against a hotel. From the review, it appeared that the associate handling the matter failed to sue the proper defendant.

As a general practice, undertaking internal audits like this one is an effective risk management technique—especially if the law practice permits associates to directly handle and/or supervise cases.

One important word of caution is appropriate. Currently, the Georgia Supreme Court is considering the degree to which internal reviews and/or communications about matters that may involve a potential claim are protected by an attorney-client privilege, if at all. Until the court rules, it is particularly important that law firms follow the protocols outlined in Judge Stephen Dillard’s opinion in Hunter, Maclean, Exley, & Dunn v. St. Simons Waterfront, LLC., Case No. A12A0716, (Ga. Ct. App. 2012). For a more complete outline of the specific recommended steps, go to “Protect internal communications,” Daily Report, Aug. 21, 2012, http://tinyurl.com/8j22q6a.

In Fleming, the partner called the firm’s legal malpractice insurer to discuss the instances of potential malpractice discovered during the audit, including the specific case involving the failure to name the proper defendant. During that conversation, the insurer advised that there was no need to provide written notice at that time. About three months later, the insurer canceled the firm’s policy. The law firm did purchase an extended reporting period (or tail coverage) for claims arising out of acts occurring during the policy period.

Avoid the gap

Anytime an attorney faces the prospect of interrupted coverage it is important to make sure to avoid any gap in coverage. There are two ways to do this. First, as in this case, the firm should purchase tail coverage to protect it from claims made after the expiration of the policy based on acts that occurred before the expiration of the coverage. Second, the firm should purchase prior acts coverage from its new insurer extending back to before the inception date of the new policy. Generally, this combination provides the best alternative for ensuring coverage of reported claims (under the expiring policy), reported but not yet made potential claims (under the expiring policy), and unreported and not yet made claims for conduct before the cancellation date (under both the tail coverage and the prior acts coverage).

After the cancellation of the policy, the Fleming law firm met with its client, who asked whether she would receive money from her lawsuit. Consistent with its ethical obligations, the firm fully disclosed the situation and then said: “Either your case is going to survive through court, or you’re going to get it from our malpractice carrier should the judge throw it out. … One of those ways, you’re going to recover.” As reflected in “What to do when mistakes happen,” Daily Report, June 20, 2011, http://tinyurl.com/bu4szmc, this statement is probably one step further than the firm needed to go. After all, legal malpractice involves more than just a mistake.

In any event, the law firm then wrote the insurer describing the situation and stating “this may be a claim.” When the legal malpractice claim was later filed, the insurer denied coverage and filed a declaratory judgment lawsuit against the law firm. After a trial, a jury returned a verdict in favor of the law firm. The court then addressed the coverage issues in deciding post-trial motions.

Actual and potential claims

In situations like this, there are two kinds of claims with two different kinds of notice and reporting requirements. First, there are actual claims—written demands for money or services. Virtually all legal malpractice insurance policies require immediate written notice of actual claims made during the policy period as a condition of coverage.

For attorneys and law firms, this means one important thing: when a claim—i.e., a demand for money or services—is made, immediately report it in writing to the insurer exactly as specified in the legal malpractice policy. Typically, the policy will specify to whom such notice should be given, along with the mailing address. If there is a telephone number, use it. The key is to get confirmation of the insurer’s receipt of the notice of the claim, preferably with a confirmed claim number.

In most cases, these steps are obvious. A demand comes in and the attorney sends written notice. The more difficult scenario occurs when an individual attorney knows about the demand, but the law firm does not. Unfortunately, there are no exceptions to the notice rule. It is important that the firm have in place strict procedures for the communication of any written demand by a client or other third party.

The ability to provide notice is so important that some firms even have procedures for anonymous reporting by any employee. The most important dynamic is a culture that encourages reporting so that the firm can be fully protected.

Second, there are potential claims. These occur when an attorney becomes aware of a fact or circumstance that might give rise to a claim even though the client has not raised the issue or asserted a claim. Unfortunately, in today’s world, that can happen anytime that a client suffers an adverse ruling or a transaction falls apart. In those situations, attorneys have to consider the possibility that a client will blame the attorney for the adverse development. Of course, not every adverse development should be reported as a potential claim (although some firms treat them that way).

Few policies make notice of a potential claim mandatory. As a result, the decision to provide notice is a balance between ensuring coverage in the event that a malpractice claim is asserted and the impact on insurability (and the cost of insurability) if a firm is reporting a seemingly endless string of potential claims. The best line to draw usually turns on whether the adverse development arises from something the attorney did or failed to do, as opposed to the merits or facts of the matter.

Two obligations

Notices of circumstances involve two different obligations of an insured attorney—a “notice” obligation and a “reporting” obligation. To be effective, a notice of a potential circumstance must be given during the policy period and contain sufficient information. More often than not, the legal malpractice policy contains the information necessary for sufficient notice. The best practice is to precisely track the language in the policy when providing the notice of a circumstance.

Second, apart from the notice during the policy period, firms must report the claim as soon as it is made. Since most legal malpractice policies are “claims made and reported” policies, the claim must be reported within the policy period, or any extended reporting period.

In Fleming, the court found that the insurer waived the written requirement for notice when it advised the law firm not to send written notice at that time. As to the reporting obligation, the court treated the “get money from the legal malpractice carrier” statement as a demand that was timely reported.

While the firm succeeded in the end, the safer and less risky course is written notice and timely reporting.