Last fall, we discussed the Appellate Division, First Department’s ruling in Executive Risk v. Pepper Hamilton,1 in which the First Department adopted a narrow view of the prior knowledge exclusion, finding that the exclusion only applies where the insured law firm has a reasonable belief that claims may be filed against it as a result of its own conduct. The Court of Appeals, however, clearly disagrees. In a decision written by Judge Theodore T. Jones and issued on Oct. 20, 2009, the Court of Appeals reversed the First Department, ruling that the prior knowledge exclusion bars coverage where an insured law firm has a reasonable belief that claims may be filed against it as a result of wrongful conduct, regardless of whether the claims arise from the conduct of the lawyers, or, as in this case, the conduct of the client.2
Although the Court of Appeals’ decision is based on Pennsylvania law, neither the First Department nor the Court of Appeals set forth any reason why a similar rule would not apply under New York law.3 If that is the case, this ruling has the potential to significantly expand the application of the prior knowledge exclusion. The Court of Appeals appears to follow the same two-prong test, part subjective and part objective, adopted by the First Department. However, based on the rationale of the Court’s decision, a law firm with knowledge of wrongful conduct by its client may find it very difficult to be comfortable not disclosing the information to its insurer, even if the firm believes its own conduct was beyond reproach. Thus, the question: Has the Court of Appeals adopted a subjective test that broadens the scope of the prior knowledge exclusions in professional liability policies?
