In Synergy Law Group, LLC v. Ironshore Specialty Insurance Co., 2015 Ill. App. 1st 142070-U (Ill. App. Ct. Mar. 24, 2015), the Illinois Appellate Court for the First District, applying Illinois law, affirmed the trial court’s grant of summary judgment in favor of a legal professional liability insurer, ruling that the prior knowledge exclusion justified the insurer’s refusal to defend and indemnify the policyholder against two complaints arising from the policyholder’s alleged professional negligence in drafting a shareholders agreement.  The court also affirmed the circuit court’s dismissal of the policyholder’s complaint against its insurance broker, ruling that the policyholder failed to allege facts showing that the broker’s alleged negligence caused damage.

Synergy Law Group, LLC (Synergy) allegedly made an error in drafting a shareholders agreement for its client in 2006.  Id. ¶ 2.  Synergy and its client discovered the error in 2008 when a departing shareholder sought compensation for her shares under the terms of the shareholders agreement and, subsequently, sued for breach of the agreement.  Id.  ¶ 8.  Synergy handled the defense of the breach of contract lawsuit and also assisted its client with the formation of a new corporation, in an effort to avoid liability for any adverse judgment resulting from the suit.  Id. ¶ 9. 

Synergy applied to Ironshore Indemnity, Inc. (Ironshore) for professional liability insurance on March 26, 2010, representing that it was not aware of any circumstance which might reasonably be expected to give rise to a claim.  Id. ¶ 10.  In August 2010, judgment was entered against Synergy’s client in the underlying action.  Id. ¶ 12.  In September 2010, the client demanded that Synergy reimburse it for amounts relating to the error in the shareholders agreement.  Id.  Synergy notified Ironshore on January 7, 2011 that its client may file suit against it alleging professional malpractice. Id.  Ironshore denied coverage, relying on, inter alia, the prior knowledge exclusion.  Id.  As anticipated, Synergy’s client sued it for legal malpractice on September 19, 2011, alleging that Synergy (1) erred in drafting the shareholders agreement; (2) failed to advise it about the drafting error; (3) failed to preserve defenses against the departing shareholder’s breach of contract claims; and (4) failed to advise its client that he might become personal liable to the departing shareholder by transferring the company’s assets to a new entity.  Id. ¶ 13.

The departing shareholder filed another suit in December 2011 against Synergy, its client, and others, accusing the parties of trying to fraudulently transfer the client’s assets to avoid paying the breach of contract judgment to the departing shareholder.  Id. ¶ 14.  Ironshore refused to defend the second suit as well.  Id. ¶ 15.

In evaluating the circuit court’s grant of summary judgment in favor of Ironshore, the court first rejected the Synergy’s argument that it had no reason to believe a claim might result from its drafting mistake when it purchased the policy from Ironshore.  The court explained that Synergy “knew of the possibility of a malpractice claim at least by the time the circuit court denied [its client’s] motion to dismiss the [departing] shareholder’s lawsuit to enforce the shareholders agreement as written.”  Id.¶¶ 4, 26.

The court also determined that the malpractice allegations raised in the two complaints filed against Synergy “all arose from the initial error in drafting the shareholders agreement, so all the allegations in the complaints formed part of a single claim within the meaning of the exclusions listed in the insurance policy.”  Id. ¶¶ 4, 32, 33.  As part of this ruling, the court specifically rejected the notion that Ironshore had a duty to defend the malpractice claims relating to Synergy’s efforts to undo the damage of its initial drafting error.  According to the court, to hold otherwise “would encourage underinsured attorneys who commit a single act of malpractice to purchase new insurance and commit more malpractice related to the initial malpractice” in an effort to create insurance coverage. Id.  ¶ 33.  The court concluded that Ironshore owed no coverage under the prior knowledge exclusion because Synergy had prior knowledge of its error and the possibility of malpractice claims arising from that error.  Id. ¶ 40.

While it does not provide a bright-line test to determine the applicability of the known loss exclusion, parties may wish to consider this case in determining whether and at what point in time a policyholder knew or had reason to know of the probability of a loss.  The case is also significant because it recognizes that a professional liability policy does not provide coverage for subsequent acts of malpractice where all of the allegations of malpractice arise from a single, known act of professional malpractice and the original act is not covered.