The Tenth Circuit recently held that a law firm was not entitled to coverage from its malpractice insurer because a former partner of the firm had received a demand, unbeknownst to the firm, prior to the policy period. Berry & Murphy, P.C., et al. v. Carolina Casualty Insurance Company, No. 09-1004 (10th Cir. Nov. 12, 2009).

While a partner with the insured firm, a lawyer filed a complaint on behalf of a couple involved in a personal injury action. The lawyer moved to withdraw from representation of the couple around the same time the lawyer left the insured firm. The court granted the lawyer’s motion to withdraw, and shortly thereafter the judge granted a motion to dismiss the personal injury action for failure to prosecute. The couple obtained a new attorney, who was able to get the court to reconsider the motion to dismiss. After the couple failed to meet discovery deadlines, however, the judge granted a renewed motion to dismiss with prejudice.

Shortly after taking over the case, the couple’s new attorney sent a letter to the former lawyer alleging that he had mishandled the couple’s case and advising him to alert his malpractice carrier (the “Demand Letter”). The former lawyer notified his malpractice carrier, but never forwarded the Demand Letter on to his prior firm. The first time that the insured firm learned of the couple’s claim was when the couple filed a complaint against the lawyer and the firm (over a year after the couple’s new attorney had sent the demand letter to their prior lawyer).

The insured firm provided notice of the complaint to its malpractice insurer on the day that it accepted service. The insurer denied coverage based on the fact that the demand letter was sent to the lawyer, a prior partner of the insured firm, prior to the inception of the insurance policy. Accordingly, the insurer argued that a claim was first made against an insured prior to the inception date of the policy, and therefore fell outside the claims-made coverage provided.

The policy issued to the insured firm provided that “a Claim shall be deemed to have been made at the time notice of the Claim is first received by any Insured.” “Insured” was defined, in relevant part, as “any individual … who was a partner … of the Named Insured or Predecessor Firm, but solely while acting within the scope of their duties on behalf of the Named Insured or Predecessor Firm.” The policy also provided that “all Claims based upon or arising out of the same Wrongful Acts … shall be considered a single Claim.”

The Tenth Circuit, applying Colorado law, determined that the demand letter and the complaint filed by the couple constituted a single claim because the allegations in both arose out of the same or related alleged wrongful acts by the prior partner.

Furthermore, the majority of the court found that the prior partner was an Insured under the policy for both coverage and notice purposes. In doing so, the majority noted that the policy does not differentiate between who is an Insured for purposes of coverage and who is an Insured for purposes of notice. The majority found that under the policy, “Insured” should include “an individual after he has left the law firm if the claim involves that individual’s acts or omissions that occurred while at the law firm.” Although the lawyer was no longer a partner of the insured firm when he received the Demand Letter, the majority held that he was an Insured under the policy because the allegations of the Demand Letter involved his alleged acts while at the insured firm.

The dissent argued that although the prior partner was an Insured for purposes of coverage (because the alleged actions occurred when he was a partner there), he was not an Insured for purposes of notice. The dissent noted that the definition of “Insured” states that an individual is only an Insured “while acting within the scope of their duties on behalf of the Named Insured.” According to the dissent, the lawyer was not acting in the scope of his duties for the insured firm when he received the Demand Letter, and therefore he was not an Insured under the notice provision of the policy.

A copy of the opinion is available here.