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Insurer not required to pay lawyer who didn't disclose procedural error

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A Fireman’s Fund Insurance Co. unit was justified in denying a $1.75 million legal malpractice award, because the policyholder had failed to inform it of the case when he applied for coverage, an appeals court says.

In July 2004, 15-year-old Sarah Gilbert underwent a spinal surgery that left her paralyzed, according to Tuesday’s ruling by the U.S. Court of Appeals for the District of Columbia, in Chicago Insurance Co. v. Paulson & Nace P.L.L.C. et. al.

In July 2006, Washington-based Paulson & Nace P.L.L.C. filed a medical malpractice complaint in state court in Virginia, four days before the statute of limitations expired on Ms. Gilbert’s claims.

The plaintiffs’ names on the complaint, though, were improperly worded, which led to the case’s dismissal. The court said in June 2007 it would dismiss the second complaint that was subsequently filed because the statute of limitations had expired. The law firm unsuccessfully appealed the trial court’s decision.

In July 2007, while the state court appeal was still pending, the law firm applied for a new legal malpractice insurance policy with Fireman’s Fund unit Chicago Insurance Co. The firm’s sole member at the time, Barry J. Nace, indicated on the application that there were no circumstances under which a claim could be made against his firm.

Chicago Insurance subsequently issued a claims-made liability insurance policy, which included a standard risk exclusion that said it would not provide coverage for any breach of professional duty committed prior to the policy’s issuance, according to the ruling.

Ms. Gilbert eventually filed a legal malpractice action against the law firm, and in 2013 a jury awarded her $1.75 million. Chicago Insurance filed an action seeking a declaration that the law firm should have known of the potential claim when it filed for coverage.

The U.S. District Court in Washington granted the insurer summary judgment, and a three-judge appeals court panel unanimously upheld the ruling.

“The principal question in this case is whether a reasonable attorney in Paulson & Nace’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,” said the ruling.

“We agree with the District Court that no reasonable jury could have found against Chicago Insurance on this question,” said the ruling. “Under such circumstances — that is, 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.”