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In James River Ins. Co. v. Herbert Schenk, P.C., 523 F.3d 915 (9th Cir. 2008), the U.S. Court of Appeals in San Francisco held that a lawyer who failed to disclose to the insurance company that a client was dissatisfied was insufficient to support the insurer’s deny coverage on the client’s later malpractice claim.

In this case the lawyer, as required under the insurance application, disclosed the actual and potential claims. One week after submitting the application the lawyer terminated his relationship with the client. The client told his lawyer that the lawyer could bring the matter to a close by waiving legal fees and surrendering the file. The lawyer complied with this request and thought that this ended the relationship. Prior to binding to the new policy the insurer provided a quote and requested any updated information on potential or actual claims. The lawyer did not disclose this because he had no reason to know that this unhappy client would make a claim. After the policy came into effect the client filed a malpractice suit. The insurance company defended the lawyer, however, its position was that the lawyer failed to disclose this potential claim. The insurance company commenced a declaratory judgment lawsuit against the lawyer-insured.

It was reasonable for the attorney not to expect the client to sue. The court ruled that the lawyer had no reason to expect that the dissatisfied client would turn-around and sue for legal malpractice. The court also ruled that the lawyer might have some grounds for a bad faith claim against his insurer.

On legal malpractice insurance applications (as well as other type of malpractice insurance) the insurer asks the applicant to disclose all potential claims against the law firm. The insurer needs to know so that it determine its level of risk, whether it will write the coverage, and how to price the coverage. Where the insured-applicant withholds information about claims, the courts have held that the insurance company does not have to cover such claims.

Here are a few lessons learned from this case:

* It is of the utmost importance to go with a quality insurance company which may charge a little more in premium, but will not fight its insured to get out of covering a claim. A quality insurance company probably would not have brought this lawsuit against its insured based on the facts. Ask your insurance agent for advice.

* In the case of professional liability insurance for lawyers, physicians, etc., it is necessary to build a track record with an insurance company and not to ”hop and skip” from carrier to carrier based on price. Generally, an insurance carrier will exclude occurrences prior to its inception date. Again, a quality insurance company will tend to give its insured the benefit of the doubt where the insured has been a loyal customer for a number of years.

* Be truthful on your insurance application. If you know of a potential claim, disclose it. The alternative is not being covered for the claim.

* Be mindful that your insurance carrier is not your friend. You should seek legal advice if a claim is made and if the insurance company issues either a denial or a reservation of reights letter to you.

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