In Chicago Insurance Company v. Paulson & Nace, PLLC, -- F.3d --, 2105 WL 1782273 (D.C. Cir. Apr. 21, 2015), the United States Court of Appeals for the District of Columbia Circuit, applying DC law, affirmed the district court’s grant of summary judgment to the insurer, determining that, as a matter of law, the insured was on notice of a potential claim at the time it acquired liability insurance, and therefore could not recover for that claim under a policy with a known risk exclusion.

The appellant, Paulson & Nace (hereinafter the Firm), is a law firm that was retained in 2004 or 2005 to represent a paralyzed woman in a medical malpractice case.  The Firm filed a complaint in the medical malpractice case in Virginia state court four days before the expiration of the statute of limitations.  Months later, after the defendants in the underlying suit moved to dismiss based on an error in the case caption, the Firm “filed a properly captioned complaint in a separate civil action.”  Id. at *1.  Ultimately, the first complaint was dismissed for the improper caption, and the second was dismissed as untimely under the statute of limitations.  Id.

The Firm appealed the dismissals,and while that appeal was pending, on July 18, 2007, the Firm obtained a new “‘claims-made’ liability insurance policy” with appellee, Chicago Insurance Company (hereinafter CIC).  Id. at *2.  As part of the application process for the new policy, the Firm “was asked whether there were ‘any circumstances which may result in a claim being made against [the] firm.’” Id.  Though the medical malpractice suit had been recently dismissed (and was then on appeal), the Firm answered “no.” Id.

In May of 2009, the Firm notified CIC for the first time about the possibility of a suit arising from the underlying medical malpractice case, however the Firm told CIC that the incident had occurred in 2008, not 2006.  In 2010, CIC appointed counsel for the Firm to collect information about the potential liability.  In November of 2011 CIC discovered that the errors in the underlying medical malpractice case had actually occurred in 2006, before the CIC liability policy incepted.  CIC then filed a declaratory judgment action in January of 2012 on the ground that it had no duty to defend the Firm on the basis of the known risk exclusion.  The district court granted summary judgment to CIC, and the Firm appealed.

On appeal, the DC Circuit held that the relevant inquiry was “whether a reasonable attorney in [the Firm’s] position would have been on notice by July 2007 of a possible breach of professional duty or a potential malpractice claim, such that there was an obligation to disclose the underlying incident to the insurer.”  Id. at*3 (citations omitted)  In upholding the trial court, the Court found that, “where an attorney is aware that he committed a procedural error that resulted in an unfavorable outcome—there is no triable question with respect to a lawyer’s duty to inform his insurer of the potential claim.”Id. (citations omitted)

The court determined that the fact that the underlying suit was on appeal at the time the Firm obtained its insurance was irrelevant.  Id.  It also rejected the Firm’s argument that summary judgment was inappropriate because expert testimony “should have been required to determine what a reasonable attorney might have foreseen.”  Id. at *4.  While noting that expert testimony was not uncommon in legal malpractice cases, the Court nonetheless held that “no expert testimony is required if [as in this case,] an ‘attorney’s lack of care and skill is so obvious that the trier of fact can find negligence as a matter of common knowledge.’” Id. (citations omitted).

Finally, the court rejected the Firm’s argument that CIC waived its ability to enforce the known risk exclusion by failing to raise it in a timely matter.  The Firm argued that, by virtue of the fact that CIC had the relevant documents in its possession as early as 2010, it had “constructive knowledge” of the fact that the Firm’s error had actually occurred in 2006 for almost two years before raising it.  The court acknowledged that waiver was possible in some circumstances under DC law, but that an insurer was entitled to rely on the information expressly provided to it by the insured, which, in this case, was that the potential legal malpractice had occurred in 2008, not in 2006.  See id. at *5 (noting that an insurer is “under no duty during the preliminary stages of the claim process to sift and verify the information provided by” the insured).

The DC Circuit’s decision in Chicago Insurance Company reinforces a policyholder’s duty to disclose potential claims of which it is aware at the time it is seeking claims made liability insurance.  The court reached the common-sense conclusion that even where a law firm is seeking to overcome its legal error on appeal, its duty is to disclose the circumstances to its prospective malpractice insurer so that the insurer can make an informed decision whether to insure the risk associated with the legal error.