In 2008, the sole proprietor (Povich) of a New Jersey law firm completed an application for professional liability insurance.  He responded to the question “[a]re you aware of any incident, circumstances, acts, errors, omissions, or personal injuries that could result in a professional liability claim against any attorney of the firm?” based on his own personal knowledge. The sole proprietor admitted that he employed what the court described as a “don’t ask” policy, whereby he neither had a system in place to monitor other attorneys nor asked the other attorneys about potential liability issues prior to completing the application. Prior to the issuing of the policy, an attorney at the firm was involved in an issue that would lead to a professional liability claim but, failed to disclose this information to the sole proprietor.

After the policy was issued, a former client filed suit against the firm alleging professional malpractice stemming from a cause of action that had been unresolved since 2007. The insurer filed a declaratory judgment action, seeking a declaration that it had no obligation to defend or indemnify because of the firm’s supposedly material misrepresentation in the application for insurance. The trial court found that since the firm was a sole proprietorship, the term “you” referred only to the sole proprietor. Following the New Jersey Supreme Court ruling in Liberty Surplus Ins. v. Nowell Amoroso P.A., 189 N.J. 436 (2007), the trial court used the subjective standard in determining whether the proprietor knew about the potential liability.

On appeal, the Superior Court reversed the court’s ruling finding that based on the plain language of the policy “you” included any firm attorney.  Accordingly, the offending attorney’s knowledge of the potential professional liability claim was critical to the issue of coverage, and the fact that the firm was a sole proprietorship was of no moment.   Thanks to Tiffany Davis for her contribution, and please email Brian Gibbons with any questions.