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Professional Liability Roundup: Recent Cases Addressing Attorneys, Brokers and Other E&O Issues


Jason P. Minkin and Dominic Spinelli highlight six recent professional liability decisions. The topics addressed are:

  1. whether the notice-prejudice rule applies to a “claims-made and reported” policy;
  2. whether an insurer may rescind its policy based on a material misrepresentation in the nature of services being rendered by the insured;
  3. whether the recovery of legal fees are covered under a malpractice policy;
  4. whether an insurer is entitled to reimbursement of defense costs when defending under a reservation of rights, even if there is never a possibility of coverage under the policy;
  5. whether claims against an insurance broker are assignable; and
  6. whether an insurance broker can be held liable for not informing an insured that the insured property’s sprinkler system had to be functional for their insurance policy to be triggered.

We provide brief summaries of these cases below.

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Ashland Hosp. Corp. v. RLI Ins. Co., No. 15-5377, 2016 WL 787774 (6th Cir. Feb. 29, 2016) (applying Kentucky law):  Under Kentucky law, prejudice is not required to deny coverage based on late notice under a “claims-made and reported” policy.

In July 2011, the United States Department of Justice initiated an investigation of the insured-hospital.  The insured-hospital eventually settled with the government, paying $40.9 million to resolve allegations that it billed the government for unnecessary heart procedures.  At the time of the investigation, the insured-hospital had a $10 million excess liability policy from defendant RLI Insurance Company for losses in excess of the primary policy limit.  The policy was a “claims-made and reported” policy for losses stemming from claims that arise during the policy period of October 1, 2010, to October 1, 2011. As a precedent to coverage under the policy, the insured was required to provide notice within ninety days after the policy period.

The insured-hospital notified the primary insurer about the investigation on the last day permitted under the policy, December 30, 2011, and eventually recovered the $15 million limit under the primary policy.  The insured-hospital did not provide notice to the excess insurer, RLI, until June 29, 2012 (more than ninety days after the policy period), and RLI denied coverage because the insured-hospital failed to satisfy the excess policy's notice requirements.

In the ensuing coverage litigation, the Sixth Circuit upheld summary judgment in favor of the insurer, predicting that the Supreme Court of Kentucky would not extend the notice-prejudice rule to a “claims-made and reported” policy like the excess policy at issue here, which contained unambiguous notice requirements as conditions precedent to coverage under the policy.

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Essex Ins. Co. v. Galilee Med. Ctr. S.C., No. 14-1791, 2016 WL 851688 (7th Cir. Mar. 4, 2016) (applying Illinois law):  Under Illinois law, an insurer may rescind its policy where the insured-medical center made material misrepresentations in its application about its practice of administering weight loss drugs and injections to patients. 

An insured-medical clinic represented to its errors and omissions insurer in an insurance application that it did not offer any weight loss drugs or injections to its patients, and did not perform experimental procedures.  The insured-medical center was sued by a former patient in Illinois state court, alleging that she developed blisters on her body after the insured injected her with a cocktail of drugs in a treatment known as “mesotherapy,” which is not approved by the FDA.  Thereafter, the insurer sought to rescind the policy on the grounds that the insured made material misrepresentations in its application regarding the scope of its professional services.

The Seventh Circuit upheld summary judgment in favor of the insurer, finding that false statements made by the insured-medical clinic in the insurance application provided a basis for rescission.  The Seventh Circuit noted that under Illinois law, insurers may deny coverage and rescind a policy if a statement in the insurance application is false and the false statement was either made with intent to deceive the insurer or if it materially affects the insurer’s acceptance of the risk. The Seventh Circuit held that due to the insured-medical clinic’s failure to disclose in its application information related to administering and recommending weight reduction procedures with experimental drugs, the insurer was not able to correctly price the policy it issued based on the risk it was actually undertaking.  The Seventh Circuit found that the misrepresentations were material and warranted rescission of the policy.  

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Edward T. Joyce & Associates, P.C. v. Professionals Direct Ins. Co., No. 14-3341, 2016 WL 1085223 (7th Cir. Mar. 21, 2016) (applying Illinois law):  Under Illinois law, a malpractice insurance policy does not cover the recovery of legal fees.

An insured-law firm won a large damages award for a class of plaintiffs and hired another law firm to sue to collect the money from the underlying defendant's insurers.  Some of the class members thought the insured-law firm should have handled this aspect of the litigation itself under the terms of its contingency-fee agreement.  The class members brought a claim against the insured-law firm over the extra fees incurred in the collection litigation.  That dispute was arbitrated.

The insured-law firm’s errors and omissions insurer paid for the law firm’s defense in the arbitration.  After the arbitrator found in favor of the clients and ordered the insured law-firm to reimburse some of the fees they had paid in the collection litigation, the insurer refused to pay these fees under its E&O policy.

In the ensuing coverage litigation, the United States District Court for the Northern District of Illinois sided with the insurer, concluding that the arbitration award was a “sanction” under the insurance policy's exclusion (o), which excluded coverage for “fines, sanctions, penalties, punitive damages or any damages resulting from the multiplication of compensatory damages.”  On appeal, the Seventh Circuit affirmed, though for a different reason.  The Seventh Circuit held that the arbitration award was not functionally a sanction, so exclusion (o) did not apply.  However, the Seventh Circuit held that because the arbitration award adjusted the attorney's fees owed to the insured-law firm in the underlying class action, the “legal fees” exclusion applied, which excluded “claim[s] for legal fees, costs or disbursements paid or owed to you.”

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Attorneys Liability Protection Society Inc. v. Ingaldson Fitzgerald PC, Case No. S-15683 (Supreme Court of Alaska, March 25, 2016): Under Alaska law, an insurer is not entitled to the reimbursement of defense costs when defending under a reservation of rights, even after it is established that there was never a possibility of coverage under the policy.

An insured-law firm was sued for restitution, disgorgement, and conversion in connection with the law firm’s actions in disbursing from and withdrawing fees against a retainer.  The law firm’s errors and omissions insurer accepted the defense of the underlying lawsuit subject to a reservation of rights on the bases that certain allegations in the underlying lawsuit did not involve “professional services” and the restitution sought in the underlying suit was not within the policy’s definition of “damages.”  The insurer also reserved the right to be reimbursed for the portion of fees incurred in the defense of claims that were deemed not covered under the policy.

The insurer then filed a declaratory judgment action in the United States District Court for the District of Alaska seeking, among other things, reimbursement of defense costs.  The district court granted the insured-law firm summary judgment on the issue of reimbursement of defense costs, concluding that “Alaska law prohibits the inclusion of a right to reimbursement in insurance policies….”  The insurer appealed to the Ninth Circuit, and the Ninth Circuit certified to the Alaska Supreme Court the question of whether Alaska law prohibits enforcement of a policy provision entitling an insurer to reimbursement of fees and costs incurred by the insurer defending claims under a reservation of rights, specifically where the claims are later determined to be excluded under the policy, or where it is later determined that the duty to defend never arose because there was no possibility of coverage.

The Alaska Supreme Court concluded that the state’s law prohibits the enforcement of reimbursement provisions in insurance policies that require an insured must reimburse its insurer for defense costs if coverage is later denied based on an exclusion, or, further, if it is later discovered that there had never been a possibility of coverage in the first place.  

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AMCO Ins. Co. v. All Sols. Ins. Agency, LLC, 244 Cal. App. 4th 883 (2016):  Under California law, a broker who intentionally or negligently fails to procure insurance as requested by a client, can be liable to the client in tort for the resulting damages, and the negligence claims against an insurance broker who failed to procure insurance are assignable.

An insurance broker allegedly failed to obtain insurance requested by its client, who subsequently sustained uninsured liability when he negligently caused a fire that spread to neighboring buildings.  The client settled the uninsured liability by assigning to the underlying plaintiffs and the insurer of the damaged building his causes of action against the insurance broker.  The plaintiffs pursued the assigned causes of action by filing a lawsuit against the insurance broker.

The insurance broker moved for summary judgment against the plaintiffs, alleging that the broker’s client could not assign his negligence claims under California law and that its conduct did not fall below the standard of care for an insurance broker. The broker further contended that the plaintiffs’ negligence claims were precluded by the so-called superior equities doctrine because their losses were not caused by the insurance broker’s purported failure to secure fire coverage for its client.  The trial court granted the insurance broker’s motion for summary judgment.

On appeal, the California Fifth Appellate District reversed, holding that the insurance broker must face the claims that it negligently failed to procure fire insurance for its client, concluding that: (1) claims against an insurance broker for failure to procure requested coverage are assignable; and (2) that express contractual assignments of claims against a broker are not subject to the rule of superior equities that otherwise limits an insurer’s rights under the equitable subrogation doctrine.  The doctrine of superior equities precludes an insurance company from recovering against a third party, unless the insured has equities superior to those of the third party.  In other words, the insurance company’s insured must be less at fault for the injury than the third party from whom subrogation is sought.  The court concluded that the rule applies to a contractual assignment only if an insurance company is receiving an assignment of a cause of action from its policyholder, which was not the case here.  The assignment was from a third-party.

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3140 LLC v. State Cent. Fin. Servs., Inc., No. 14-1602, 2016 WL 351425 (Iowa Ct. App. Jan. 27, 2016):  Under Iowa law, an insurance broker is not obligated to inform the insureds, owners of a nursing home, that the property’s sprinkler system, which caused damage when the pipes froze, had to be functional for their insurance policy to be triggered.

The plaintiff, 3140 LLC, purchased property where a former nursing home was located, and obtained insurance coverage from the defendant, State Central.  A property insurance policy was issued for the building, which contained an exclusion for damage due to sprinkler leakage.  Thereafter, it was discovered that the building incurred damages as a result of water pipes and the sprinkler system freezing and breaking.  The plaintiff sought coverage for the property damage from the insurance company.  The claim was denied pursuant to the policy exclusion for damage due to sprinkler leakage.

The plaintiff then brought claims for negligence and negligent misrepresentation against the insurance broker.  The Iowa Appeals Court affirmed summary judgment in favor of the insurance broker, finding that the plaintiff did not raise a genuine issue of fact that the broker assumed a duty beyond the procurement of the coverage.  The court noted that the broker had “the general duty to use reasonable care, diligence, and judgment in procuring the insurance requested by an insured,” and that the plaintiff “presented no evidence supporting a finding that the broker held itself out as an insurance specialist, consultant, or counselor….”


For more information on these or other E&O issues, please contact Jason P. Minkin at 312-762-3230, or