14.2 Attorneys

• Library: Insurance Law in Virginia (Virginia CLE) (2020 Ed.)

14.2 ATTORNEYS

14.201 In General. Although it is not mandatory for an attorney to purchase professional liability insurance to practice law in Virginia, ³ a prudent attorney will give serious consideration to doing so. ⁴ The dramatic increase in legal malpractice claims in the past fifty years suggests that the uninsured practitioner is exposed to considerable risk. Nevertheless, while the figures reflecting the number of insured attorneys vary widely, at least one commentator has estimated that one quarter of practicing attorneys are without professional liability insurance. ⁵ For those attorneys who do carry professional liability insurance (and for those seeking recovery on a policy), it is important to understand the terms of the insuring agreement and the conditions and exclusions under the policy.

14.202 Contents of the Policy.

A. In General. A lawyer's professional liability insurance policy consists of the declarations page, the insuring agreement, the conditions, the exclusions, and, to the extent to which it is agreed or required by statute, any endorsements modifying the policy. While the coverage issued by different insurance carriers is often similar, there may be wide variations in the terms and conditions of the policy, which often depend upon the nature of a lawyer's practice and the features offered by an insurer.

B. The Declarations Page. The declarations page, or face sheet, sets forth the basic information concerning the policy, such as the name of the insured, the policy term, the name of each lawyer covered under the policy, the amount of any deductible to be paid by the insured, and the limits of liability (per claim and in the aggregate). Any divergence from the insurer's standard form will typically be noted on the declarations page by indicating

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any endorsements made to the policy, including any changes required by Virginia law or the Bureau of Insurance.

C. The Insuring Agreement. The insuring agreement describes the coverage afforded the policyholder under the policy, stating who is insured, how they are insured (liability or indemnity), and for what contingencies they are insured. The breadth of the insuring agreement is, however, subject to any stated conditions or exclusions in the policy.

D. Conditions, Exclusions, and Endorsements. As the terms imply, conditions, exclusions, and endorsements modify the extent of coverage under the policy, set forth the duties owed by the insured, and affirm any agreed-to changes to the policy. While careful scrutiny of the entire policy is required, these sections often contain the proverbial "fine print" from which disputes arise. ⁶

E. The Application for Insurance. An application for insurance is an offer to enter into a contract and does not necessarily "merge" into the policy. ⁷ The declarations page or the conditions may incorporate into the policy by reference certain provisions and statements made in the insured's application. For example, the policy may contain language stating that "by accepting this policy, the insured agrees that the statements in the application are the insured's representations and that this policy is issued in reliance upon the truth of such representations." Thus, in an insurance coverage dispute, the insurer may use statements made by the insured in the application to assert that misrepresentations in the application materially affected its decision to accept the risk. ⁸ For example, in Westport Insurance Corp. v. Lydia S. Ulrich Testamentary Trust, ⁹ the insurer brought a declaratory judgment

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action seeking a determination of noncoverage of claims against a law firm whose attorney had embezzled funds. The embezzling attorney, in his capacity as president of the law firm, endorsed an insurance renewal application on behalf of the firm. The application inquired:

Is the Applicant, its predecessor firms or any individual proposed for this insurance aware of any circumstance, act, error, omission or personal injury which might be expected to be the basis of a legal malpractice claim or suit that has not been previously reported to the firm's insurance carrier?

The attorney had answered the question "no," and the Fourth Circuit Court of Appeals agreed with the district court that the attorney had lied on the application and that his response was "untrue." Because the parties conceded that the answer was material to the risk assumed by the insured, the court of appeals affirmed the district court's holding that the insurer may rescind the policy.

Likewise in TIG Insurance Co. v. Robertson, Cecil, King & Pruitt, ¹⁰ an insurer sought either rescission of a lawyer's professional liability policy or a declaration of lack of coverage based upon a material misrepresentation in the application. Apparently, an attorney in the insured law firm misappropriated client funds before his death. The same attorney had responded to a renewal application on behalf of the firm. The application inquired as follows:

Is any attorney in your firm aware of any claims made (whether reported or unreported), wrongful acts, errors or omissions that could result in a professional liability claim against any past or present attorney of the firm or to its predecessors or is there a reasonable basis to foresee that a claim would be made against any past or present attorney or the firm or its predecessors?

The attorney responded that there was "no change." Noting that the parties did not dispute that the attorney engaged in wrongful conduct

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before completion of the renewal application, the district court concluded that the question clearly asked the attorney to disclose his own misconduct, which he did not do. The district court found that the misrepresentation was material to the risk of insuring against future malpractice claims. Notwithstanding that the other lawyers in the firm were "innocent" of the wrongful conduct, the district court noted that the insurer was likewise innocent in relying upon the misrepresentation. Accordingly, the court held that the misrepresentation entitled the insurer to rescind the policy.

Similarly, in Minnesota Lawyers Mutual Insurance Co. v. Hancock, ¹¹ the attorney represented in the application that he was "[un]aware of any incident which could reasonably result in a claim being made against" him. ¹² Unknown to both the attorney's partner and the insurer, the statement was false. Instead, Hancock embezzled money from firm clients. Hancock surrendered his law license and pled guilty to embezzlement charges. Notably (and typically), the policy excluded coverage for "any Claim for Damages arising out of the dishonest, criminal, malicious or deliberately fraudulent act, error, or omission of the Insured . . . ." ¹³ Still, the policy included an "innocent insured" provision, providing "coverage for any Insured who did not personally participate" in the criminal act as long as the insured had no knowledge of the act. ¹⁴ An endorsement to the application provided that the insured agrees that "the statements in the application are the representations of all INSUREDS," ¹⁵ and "this policy is issued in reliance upon the truth of such representations." ¹⁶ In granting summary judgment to the insurer providing for rescission of the policy in its totality, the court concluded that the false statements were material, relied upon by the insurer, and, notwithstanding the "innocent insured" provision, did not preclude rescission, as the provision did not reference a material misrepresentation. ¹⁷

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F. Interpreting Policy Language. In deciphering the language of the policy, the courts ordinarily apply the rules of construction and interpretation used in other areas of insurance law in Virginia. Generally, where the policy language is susceptible of two constructions, (i) the language is to be construed strictly against the insurer and liberally in favor of the insured; (ii) the interpretation "which permits a greater indemnity will prevail"; and (iii) "it is the court's duty to adopt that construction which will effectuate coverage." ¹⁸ Again, the practitioner should consult cases dealing with other areas of insurance law to derive the principles likely to be applied in the interpretation of the professional liability policy. ¹⁹

G. Practice Considerations. The named insured should keep copies of previous professional liability insurance policies. This is especially true for "occurrence" policies in which a policyholder may be covered under the policy beyond the end of the policy period. ²⁰

When an insurance dispute or litigation involves the professional liability of a lawyer, counsel should seek the disclosure of the lawyer's professional liability policies. ²¹ The policy will not only reveal the policy limits but may also indicate whether the stated cause of action or alleged malpractice falls within the "professional services" covered by the policy. Similarly, from a settlement perspective, it may prove advantageous to know whether the insured must pay a "loss only" or "damages" deductible and whether defense costs reduce the policy limits. For negotiation purposes, the insured's reluctance

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to settle a claim may be more understandable if the policyholder is responsible for the payment of a deductible only upon a final determination of liability or upon an agreement to settle a claim.

14.203 Policy Limits. The declarations page sets forth the policy limits or the amount of coverage provided under the policy. The policy limits are bifurcated into a "per claim or occurrence" limit and a limitation on the "aggregate" amount for all claims. The insurer is not obligated to pay in excess of the "per claim" amount for any occurrence. The aggregate limit represents the insurer's maximum liability for any given policy period without regard to the number of claims. Where a policy provides coverage of $250,000 per claim and $1,000,000 in the aggregate, the insurer will pay...