Thrid Circuit Upholds Inter-Related Wrongful Acts Provision in PL Policy (NJ)

Joining their colleagues in the medical profession, attorneys are increasingly becoming the targets of claims of professional malpractice. Given the mobility of individual lawyers, it can become a tricky endeavor to ensure that an attorney is covered in the event a claim is made based on alleged wrongful conduct committed at a prior firm.

In Gladstone v. Westport, an attorney found himself bare for earlier acts of alleged wrongful conduct committed while working as a solo practitioner after his firm was absorbed by a larger firm in New Jersey. The new firm added the attorney to its malpractice policy by attachment of a “Prior Firm Endorsement” that amended the policy’s definition of “Who is an Insured” covering him for legal services performed at his prior firm.

While operating as a solo, the attorney performed legal services from 2004 through 2006 for various individual and corporate clients who unsuccessfully sought to overturn some local zoning ordinances. After filing a collections action in 2006 against several of those former clients for non-payment of his legal fees, two responded by seeking damages for allegedly incompetent legal work. Of significance, the attorney did not file a claim with his own malpractice insurer in 2006. The collections action was eventually settled with almost all defendants, leaving the counterclaim of one defendant intact. Nevertheless, the collections action was dismissed without the knowledge or consent of the defendant with the counterclaim.

Fast forward to 2009. The former client realized that his counterclaim was mysteriously dismissed so he filed a new complaint asserting malpractice in 2009 when the attorney’s new firm had its professional liability coverage with Westport. In that suit, it was alleged that the zoning matter was not handled in accordance good practice. Notice was given to Westport who denied coverage on the basis that the malpractice claim was excluded by the “inter-related wrongful acts” provision.  That provision explains that “Two or more CLAIMS arising out of a single WRONGFUL ACT…or series of related or continuing WRONGFUL ACTS, shall be a single claim. All such CLAIMS whenever made shall be considered first made on the date on which the earliest CLAIM was first made arising out of such WRONGFUL ACT…”  The new firm filed an action for declaratory judgment challenging Westport’s denial of coverage.

The Third Circuit affirmed the district court’s ruling that the “inter-related wrongful acts” provision in Westport’s policy was not ambiguous or in conflict with the “Prior Firm Endorsement.” In short, the court found that the 2009 malpractice complaint related back to the earlier counterclaim and was “considered first made on the date on which the earliest claim was first made,” that is, in 2006. Since the claim was not “made and reported” during Westport’s policy year, it had no obligation to defend or indemnify the attorney in the newly filed malpractice case. Further, the “Prior Firm Endorsement” did not conflict with the “inter-related wrongful acts” provision. It merely added the  attorney to the roster of attorneys who qualified as an insured under the Westport policy and enlarged his coverage for wrongful acts committed while at an earlier firm.

If you have any questions or comments about this post, please email Paul at pclark@wcmlaw.com.