• Lawyer Not Required to Disclose Dissatisfied Client to Insurer
  • August 10, 2008
  • Law Firm: Hinshaw & Culbertson LLP - Chicago Office
  • James River Ins. Co. v. Hebert Schenk, P.C., 523 F.3d 915 (9th Cir. 2008)

    Brief Summary
    Attorney’s failure to disclose a dissatisfied client in an insurance application was not sufficient to support summary judgment declaration that insurer could deny coverage of client’s later malpractice claim because a reasonable person could find that attorney did not expect the client to sue.

    Complete Summary
    Attorney-defendant Hebert gave legal advice to the Nolans from 2001 until February 2004, when Hebert stopped communicating with them. Two months later, Hebert applied for professional liability insurance with plaintiff James River. As required by the application, he disclosed a number of actual or potential claims against his firm. One week later, the Nolans terminated their relationship with Hebert as a result of his lack of communication. In their termination letter, the Nolans stated that Hebert could “bring [the] matter to a close” by waiving their legal fees and returning their legal documents. Id. at 919. Hebert complied. Less than two weeks later, James River faxed Hebert an insurance quote requesting, as a condition of acceptance, an updated disclosure of actual or potential claims. Hebert did not mention the Nolan incident.

    The Nolans then sued Hebert for legal malpractice. James River agreed to defend Hebert but reserved the right to deny coverage. James River then sought a declaration in district court that the Nolans’ claim was not covered by the policy. Hebert counterclaimed on breach of contract and bad faith theories. The district court granted summary judgment in favor of James River and Hebert appealed.

    The Ninth Circuit reversed on the issues of coverage and bad faith. James River argued that the Nolans’ claim was not covered because it was both undisclosed and reasonably foreseeable. In order to deny coverage based on Hebert’s failure to disclose, the court noted, James River needed to establish actual or legal fraud. The court dismissed the possibility of actual fraud because there was no evidence of intent to deceive. Legal fraud, on the other hand, requires, inter alia, a question by the insurer seeking facts. The question at issue in James River’s application was whether “[a]fter inquiry” the lawyer was “aware of any . . . incident which may result in a claim being made against [the firm].” Id. at 918. The court conceded that “awareness” is a factual condition, and that “after inquiry” calls for the lawyer to “report on, rather than opine on, the awareness of lawyers in the firm.” Id. at 921. But, by asking the applicant to determine which incidents “may result” in a claim, the court noted, a reasonable person could conclude the application was ultimately eliciting an opinion.

    The court briefly addressed the possibility, as suggested by other courts, that the application question was not seeking the subjective opinion of the applicant but was instead eliciting a factual answer based on an objective reasonable person standard. The court dismissed this argument because Arizona tends to construe ambiguous language in insurance applications in favor of the insured, and, even if the question was to be assessed under a reasonable person standard, Hebert still had to exercise judgment in applying the standard.

    James River alternatively argued that it could deny coverage because the policy excluded coverage for claims that arose from services rendered prior to the policy and were “reasonably foreseeable” by the insured. Id. at 923. The court held that the Nolans’ claim was not reasonably foreseeable because, in their termination letter, the Nolans made no threats and in fact instructed Hebert on how to “bring [the] matter to a close,” which instructions he followed. Id. at 919.

    Finally, the court reinstated Hebert’s bad faith claim. The court held that even though James River had provided for Hebert’s defense, it might still be possible for Hebert to prove bad faith based upon other aspects of James River’s handling of the claim.

    Significance of Opinion
    The court’s interpretation of the insurance policy favored the insured. Professional liability insurers may need to work even harder to seek strictly factual information from attorneys.