Failure of PI insured to report potential malpractice suit (US)

Patrick Bracher from Norton Rose Fulbright.

The question debated in a claim under a lawyers’ professional indemnity policy was whether the attorneys could have reasonably expected the underlying malpractice action and should have reported it to their insurers.

The insurers argued that a claim should have been expected from an expressly unhappy client. The attorneys said the suit was not reasonably expected and years had passed since they withdrew from the litigation.

The matter is still to be decided but the judge formulated an interesting test. The court must consider ‘the subjective knowledge of the insured and then the objective understanding of a reasonable attorney with that knowledge in order to determine whether the attorneys had prior knowledge of the suit’ in the sense required by the policy. There are subjective questions as to what the attorneys knew and an objective assessment whether a reasonable lawyer in that firm’s position would recognise a reasonable possibility of a claim which needed to be reported.

(The case is Allied World Insurance Co v Nagel Rice LLP, case number 2:16-cv-03888, in the US District Court for the District of New Jersey)

First published by Financial Institutions Legal Snapshot.