Buying Insurance For A House Already On Fire

On February 23, 2021, the Montana Supreme Court issued an opinion delivered by Justice Laurie McKinnon in ALPS Prop. & Cas. Ins. Co. v. Keller, Reynolds, Drake, Johnson & Gillespie, P.C., 2021 MT 46 (Mont. 2021) which upheld the lower court’s ruling that there was no coverage for a claim because the insured firm had prior notice of the claim and submitted an application for a policy without disclosing it.  For the purists reading this blog, be forewarned that I am not providing legal citations or an in-depth review of the legal holdings. I will leave that to an enterprising law student to write a law review article on it someday. The purpose of this blog post is only to address a couple of recurring issues that I still see with some frequency.

I have previously written about the importance of giving ALPS notice of potential claims and, without going through the ALPS blog archives, I am sure there have been several similar blogs written on the topic over the years. The fact remains, however, that ALPS continues to see lawyers submit claims that they had prior notice of and which were not disclosed during the insurance application process. The most common reason given for not disclosing the potential claim is because the lawyer did not think the matter would turn into an actual claim.

This justification was at the center of the Keller case where an attorney did not disclose in his firm’s insurance application that, three months prior, a court had entered a default against his client for failing to file an answer to a complaint. In the Appellant briefing, the following deposition excerpt was quoted to explain why the lawyer did not report the incident as a potential claim:

QUESTION: Ok. Did you feel a duty to disclose the fact of the default having been entered?

ANSWER: I don’t know that I gave it a lot of thought. What my thought process was, was that there was a great likelihood that the default would be set aside and that’s where my thought process ended. I didn’t—well, and I didn’t, so I didn’t consider that there was a claim of any merit that would come from it, and so that’s why, in my mind, I answered the question honestly.

It should go without saying that every lawyer will make a mistake – ranging from a simple typo to a more serious situation like in Keller where there was a missed deadline to file an answer. But while ALPS does not expect every single mistake to be reported as a potential claim, when a lawyer reasonably expects the mistake to potentially lead to a claim then it must be immediately reported to the lawyer’s insurance carrier when there is a claims-made-and-reported policy in effect (such as ALPS’ policies).

The court’s opinion in Keller succinctly explained the importance of this requirement when it explained that, unlike a more liberal claims-made policy, notice of a potential claim is what actually triggers coverage under a claims-made-and-reported policy. This requirement is a fundamental aspect of insurance coverage because “that insurance is intended to cover only the risk of unknown loss.” Which is another way of saying that companies like ALPS cannot remain profitable if they are expected to cover losses that the insured is already aware of. The court analogized this situation to a homeowners policy stating: “Just as no homeowner would expect to obtain coverage for a house that was already on fire, no reasonable attorney would expect an insurer to cover a malpractice claim that existed prior to the inception of the policy when the malpractice was known to an attorney in the firm.”

The second issue I have seen here at ALPS, which was also addressed in Keller, concerns the situation where only one lawyer in the firm knew of the potential claim and he or she never disclosed it. Firms often misunderstand that if any member of the firm has knowledge of a potential claim, that notice is imputed to the entire firm. As the court’s opinion states: “The Policy’s terms are clear and unambiguous: no attorney in the Firm can have knowledge of the potential claim.” The Keller opinion shows the importance of stressing to each attorney that he or she must carefully analyze whether or not he or she has knowledge of a potential claim because, ultimately, the firm will be held responsible for the attorney’s representation.

While not necessary to support the court’s holding, the court in Keller also addressed a common misunderstanding concerning ALPS’ “innocent insured provision.” That provision is, in essence, an exception to a policy exclusion for “dishonest, fraudulent, criminal, malicious, or intentionally wrongful or harmful act, error, or omission…” which protects other members of the firm who were not involved in the intentional misconduct as long as notice was timely provided. The insured attorney in Keller was not alleged to have intentionally done anything wrong but the court nonetheless explained that that provision is not triggered if notice is not timely provided and cannot be used to expand coverage beyond the plain language of the insurance contract.

While the holding in Keller is not unique, it provides a good analysis of the importance of timely providing notice to a malpractice carrier under a claims-made-and reported policy. As the court noted, just as a homeowner would not reasonably believe that he or she could obtain coverage for a house that was already on fire, a firm cannot expect to have coverage for a claim it had prior notice of.