Coverage designed to protect traditional professionals (e.g., physicians) and quasi-professionals (e.g., real estate brokers) against liability incurred as a result of errors and omissions in performing professional services. Although there are a few exceptions, most professional liability policies cover economic losses suffered by third parties, as opposed to bodily injury and property damage (which is typically covered under commercial general liability policies). The vast majority of professional liability policies are written with claims-made coverage triggers.
Copyright © International Risk Management Institute, Inc. (IRMI)
PROFESSIONAL LIABILITY INSURANCE
LITIGATION IN THE 1990'S
BY: Stanley L. Lipshultz, Esq.
1. The Professional Liability Insurance Policy
(a) These policies do not provide coverage for all acts which a professional performs. Generally, the acts complained of must be within the scope of the professional's services or incident to the professional's work. Pacific Indemnity Co. v. Linn, 766 F.2d 754 (3d Cir. 1985); Standlee v. St, Paul Fire & Marine Ins. Co., 693 P.2d 1101 (Idaho App. 1984).
(b) Fraudulent acts are usually excluded. Gay & Taylor, Inc. v. St. Paul Fire & Marine Ins. Co., 550 F. Supp. 710, (W.D. Okla. 1981).
(c) Coverage for lost income is generally not available. An insurance agent/broker usually does not have coverage when a claim is made to recover premiums. Attorney's fees forfeited due to a breach of fiduciary duty were not covered under malpractice policy. Perl v. St. Paul Fire & Marine Ins. Co., 345 N.W.2d 209 (Minn. 1984).
2. Coverage Triggers in Professional Liability Policies
Availability of coverage after policy expiration. If you are fortunate enough to have an occurrence type professional liability policy, the case of Travelers Ins. Co. v. National Union Fire Ins. Co. of Pittsburgh, 207 Gal.App,3d 1390, 255 Cal.Rptr.727 (1989), may be of some interest. "Erroneous advice" was held to be an act or omission, thus triggering coverage even though the actual damage did not occur until the Travelers policy had expired and the subsequent National Union claims-made policy was in force.
What about reporting requirements for claims-made policies? In St. Paul Fire and Marine Ins. Co. v. House, 315 Md 328, 554 A. 2d 404 (1989), the Maryland Court of Appeals held that the failure of an insurer to demonstrate statutorily mandated prejudice negated the reporting requirement of the St. Paul policy, even though the insured doctor had not purchased the reporting endorsement (nor purchased prior acts coverage in subsequent policies). The Maryland Court determined the claims-made trigger to be ambiguous.
Contrast St. Paul with a recent 8th Circuit case, Esmailzadeh v. Johnson and Speakman, 869 F.2d 422 (8th Cir. 1989) which held that a "claims made and reported" professional liability policy simply did not cover a claim that was not reported until after the expiration of the policy period.
See also the matter of Reliance Ins. Co. v. Arneson, 322 N.W.2d 604 (Minn. 1982), where the court held that, as a matter of law, an attorney was not negligent until his acts or omissions resulted in damage to his client as a result of the expiration of the statute of limitations. Because the statute expired eight (8) months after the attorney's policy, the insurer had no duty to defend or indemnify the attorney in a suit brought by his client.
The Employee Retirement Income Security Act of 1974 (88 Stat. 829, 29 U.S.C. Subsection 1001-1461, 1982 Supp. 1987), "ERISA", is an emerging area of litigation which should be given special attention. ERISA will apply to virtually any form of group benefits (life insurance, health insurance, pension, disability) as long as they are job related. Almost any nexus between the professional and the plan can result in some form of potential exposure either as a fiduciary or a party in interest. Donovan v. Dillingham, 688 F.2d 1367 (11th Cir. 1982). Fiduciary is a person or business that exercises any "discretionary authority or discretionary control respecting management" of a plan. 29 U.S.C.Section 1002(21)(A). A party in interest specifically includes, inter alia, fiduciaries, counsel, employees of the benefit plan, persons providing services to such plan (i.e. insurance companies, agents, accountants, actuaries, banks and other financial institutions), employers whose employees are in the plan, 50% shareholders and partners, 10% partners or joint venture holders, to name just a few. 29 U.S.C. Section 1002 (14). See also Mark DeBofsky's excellent article in The Winter, 1990 "The Brief entitled "Wrestling with ERISA".
4. Insurance Company Insolvencies
The general rule is that an agent/broker is not responsible for guaranteeing the solvency of the insurer. See, Wilson v. All Serv. Ins. Corp., 91 Cal.App.3d 793, 153 Cal.Rptr. 121 (1979). Note that accountants preparing audits for insurance carriers have exposure as well. In September of 1989, Peat, Marwick, Main & Company was sued for more than one billion dollars in the Federal District Court for the Eastern District of Pennsylvania as the result of the Insolvency of Mutual Fire, Marine and Inland Insurance Company of Pennsylvania.
5. “Drop Down" Coverage
This is becoming more prevalent as primary insurers become insolvent or when a primary layer of coverage is unavailable to the insured. Fageol Truck & Coach Co. v. Pacific Indemnity Co., 18 Cal.2d 748, 117 P.2d 669 (1941). Contrast this decision with Continental Marble & Granite v. Canal Insurance Co., 785 F.2d 1258 (5th Cir. 1986). See also Williams, et al. HWhen an Underlying Carrier Goes Broke: Recent Trends in 'Drop Down9 Coverage" Committee on Insurance Coverage Litigation, Coverage, Vol. I, No. 1. Insolvency is not the only reason to look for coverage in "drop down" situations, and care must be taken to review the language of all excess policies.
6. Aggregate/Occurrence Limits
Demonstrative of this area is whether claims are related and how a court will construe the event which triggers coverage. When a professional provides advice (which is actionably improper) which is disseminated to a large number of persons who rely upon it, all of whom are injured: Does the injury or the advice trigger coverage? The wording in the policy is critical. In Gregory v. Home Insurance Co., 876 F.2d 602 (7th Cir. 1989), the court held that the limit of liability for all claims made against an attorney for rendering erroneous advice was the per claim limit as opposed to the aggregate, because they arose out of a single act or series of related acts.
7. Property Damage Coverage Issues
Prevalent in western jurisdictions are such issues as subsidence and concurrent causation: Some examples: Montee v. State Farm Fire & Cas. Co., 99 Or.App. 401, 782 P.2d 435 (1989); Fidelity & Guarantee Ins. Underwriters, Inc. v. Allied Realty Co., Ltd., 238 Va.458, 384 S.E.2d 613 (1989); Garvey v. State Farm Fire & Cas. Co., 48 Cal.3d 395, 257 Cal.Rptr. 292, 770 P.2d 704 (1989); State Farm v. Martin, 872 F.2d 319 (9th Cir. 1989). Property damage also includes a large body of case law dealing with environmental claims, including whether CERCLA clean up costs are covered under a property policy. The cases are too numerous to cite; there are several good articles that are recommended: Knoll and Arthur, "Is there Property Insurance Coverage for Contamination Losses?11 DRI Policy, Vol 1988 No. 4, and articles referred to in footnote 1.
8. First Party and Third Party Bad Faith
Cases dealing with first party issues almost always involve coverages obligating the insurer to indemnify or reimburse the insured directly or to defend the insured against suits brought against them by third parties. Not all jurisdictions allow an action for the first party tort of bad faith. Maryland refused to recognize the tort action of bad faith arising out of an insurance contract, Johnson v. Federal Kemper Insurance Co., 74 Md.243, 536 A.2d 1211 (Md.App.1988), while the Alaska Supreme Court recently took the opposite position. State Farm Fire & Cas. Co. v. Nicholson. 777 P.2d 1152 (Alaska, 1989).
The basis for allowing the first party bad faith claims can be found in the body of law which has spawned the third party bad faith claims. Rather than cite cases, we suggest you refer to your local jurisdictions if necessary; however, you should be aware that the California Supreme Court has abolished the right of third parties to sue an insurer under California's Unfair Practices Act. The case of Moradi-Shalal v. Fireman's Fund Insurance Company, 46 Cal.3d 287 (1988) specifically reversed the holding in Royal Globe Ins. Co. v. Superior Court (Koeppel), 23 Cal.3d 880 (1979). If your state is one which relied upon the Royal Globe case, the right of a third party claimant to sue an insurer directly may be coming to an end.
In jurisdictions recognizing the tort, there has been a relatively recent expansion of first party bad faith claims to other areas: Gates v- Life of Montana Insurance Co -, 205 Mont.304, 668 P.2d 213 (the employer dealt in bad faith with the employee in contractual dealing); Sheets v. Teddy's Frosted Foods. 179 Conn.421, 427 A.2d 385 (1980) (bad faith discharge); Trombetta v. Detroit and Toledo R.R., 81 Mich.App.489, 265 N.W.2d 385 (1978) (bad faith termination); Neuberger Loeb & Company v. Gross. 365 F.Supp. 1364 (N.Y. 1973) (alleged stockbroker bad faith); Van Alen v. Dominick & Dominick, Inc., 560 F.2d 547 (N.Y. 1977) (alleged stockbroker bad faith); Martens Chevrolet. Inc. v. Seney, 292 Md.328, 439 A.2d 534 (1982) (bad faith in dealings by automobile dealer).
9. Insurance Claims Involving Environmental Damage
Insurance agents and brokers often have difficulty placing insurance for commercial accounts with one insurance company, and thus split the liability and property coverages. The broker is then notified of a claim which involves only environmental damage to the insured's premises and duly reports the claim to the insured's property insurer. What happens two years later when it is discovered that the contaminants have polluted surrounding non-owned land, the liability insurer, with no notice, will most certainly now claim prejudice and refuse to defend and/or indemnify the insured. Additionally, agents/brokers and attorneys called upon to obtain or interpret insurance coverage in this volatile area must be precise in their dealings with their clients and knowledgeable of the interpretation of the various pollution exclusions by their local courts.
10. Supervision of Other Professionals Within An Organization - The Edward S. Digges, Jr. Case
An emerging legal trend which may subject a professional to liability is a judicial willingness to hold one professional liable for failing to properly supervise or monitor the actions of another professional within the same organization. This represents an expansion beyond the previously well recognized concept of liability for failure to properly supervise the actions of employees. A recent Maryland case involving the now defunct law firm of Digges, Wharton & Levin, Dresser Industries, Inc. v. Edward S. Digges, Jr., et al, exemplifies this trend,
Edward S. Digges, Jr., left a prominent Maryland law firm to form a products liability litigation boutique in Annapolis, Maryland along with James T. Wharton and David A. Levin, Mr. Digges took with him approximately 1,000 asbestos-related lawsuits against a subsidiary company of Dresser Industries, a Dallas based corporation. In mid-1989. Dresser filed an action in the United States District Court for the District of Maryland alleging that Digges, Wharton & Levin had overcharged it as much as $2.5 million in defending the asbestos cases over a four year period. Included in the multi-count complaint, which named James T. Wharton and David A. Levin individually, was a count alleging that Messrs. Levin and Wharton were negligent in failing to ensure that the bills submitted by Mr. Digges to Dresser Industries were prepared properly and correctly. The Complaint alleged that Mr. Digges’ partners had failed to use reasonable care by not reviewing, monitoring and supervising the billing procedures followed by Mr. Digges.
Dresser Industries was ultimately granted summary judgment on its breach of contract and negligence claims, and David A. Levin and James T. Wharton were found personally liable for the conduct of their partner in over billing the client. There was no finding of any intentional wrongdoing or knowledge on the part of Messrs. Levin or Wharton; their liability was based strictly on vicarious liability principles. In his Memorandum Opinion, Judge Joseph C. Howard stated “Messrs. Wharton and Levin and DWL are liable for Mr. Digges' actions, even if Digges acted maliciously or without the knowledge or consent of Wharton and Levin, because Digges has admitted that he acted within the scope of the partnership. Moreover, because they benefitted monetarily from Digges’ acts, they are not immune from liability.” The opinion has been seen as a message to Maryland lawyers: partners are responsible for watching the actions of other partners, even if those partners have seniority within the partnership. Negligent supervision on the part of a professional with respect to another professional’s activities can result in personal liability.
There is no reason to think that courts will limit the concept of professionals supervising other professionals within an organization to attorneys. Accordingly, professionals must be conscious of the actions of those around them. It is not yet clear how the size of an organization could affect this liability. Nevertheless, the Ed Digges case sends out a signal: keep a careful eye on what is going on around you.
11. Reduction in Coverage Limits, Attorney’s Fees, Adjustment Expense
The coverage afforded to insureds under professional liability policies can vary depending upon the specific language of the policy involved. For example, some insurers are now providing policies in which the insured's coverage is reduced by certain expense items, including attorneys’ fees. The fact that coverage will be reduced by the legal fees expended with respect to a claim against the insured raises certain ethical issues for the attorney appointed to represent the insured. Mounting a rigorous defense can result in a corresponding reduction in coverage afforded to the client. See, Dorsch, "Insurance Defense Cost Containment Programs: Is the Free Ride Over?", 53 Ins. Counsel J. 580 (1986). Disclosure is the watchword, especially in situations involving excess insurers: as the amount of insurance coverage limits available for indemnity decreases, the greater the gap between primary and excess becomes.
It is important to obtain a copy of the specific policy involved in handling any professional liability claim. Any provisions purporting to reduce the amount of coverage under the policy must be carefully reviewed by counsel. Any provisions which could possibly give rise to conflict for the attorney representing the insured should be examined and explained to the client. The day when a professional sues his attorney for an overly vigorous defense may not be far away.
12. The Use of "Constitutional" Defenses in "Everyday" Cases
The recent case of Browning Ferris Industries of Vermont, Inc. v. Kelco Disposal, Inc.. 492 U.S. _, 106 L.Ed.2d 219, 109 S.Ct. 1113 (1989) is more important for bringing the constitutional defense into perspective than for its holding. Special attention should be paid to framing issues in a lawsuit so that they are preserved, especially in the area of punitive damages.
Another example of the use of the constitutional argument can be found in Molodyh v. Truck Insurance Exchange, 304 Or.290, 744 P.2d 992 (1987). An Oregon statute mandated that all fire policies have an appraisal clause. In order to hold the statute constitutional, the Oregon Supreme Court found that the appraisal clause was binding only upon the party demanding the appraisal. In so doing, the court protected the inviolate right to a jury trial.
13. Insurance Coverage Disputes
Counsel rendering opinions to insurance carriers on coverage issues have potential areas of exposure, not only to the company, but to the insured which is affected. An erroneous coverage opinion might well place the insurer in a position of having to pay a judgment without being able to collaterally attack the judgment since the general rule is that if an insurer denies all liability, it will not be allowed to rely on policy conditions. Gulf Insurance Company v. Parker Products, 498 S.W.2d 676, (Tex. 1973); Ridgeway v» Gulf Life Insurance Co., 578 F.2d 1026 (5th Clr. 1978). In addition, damages can be awarded to the insured for breach of the duty to defend, Aetna Cas. & Sur. Co. v. PPG Industries, Inc., 554 F.Supp.290 (Ariz. 1983). See also Section 14, infra.
Coverage disputes also give rise to potential (and real) conflicts of interest. The general rule concerning dual representation is ..."where the interest of the insured and insurer run parallel, an attorney representing both may do so without offending ethical mandates." Medical Mutual Liability Ins. Soc. v. Miller, 52 Md.App. 602, 451 A.2d 930, 934 (1982). The problem arises when coverage disputes become recognized, either at the outset or during the course of representation of the insured which could interfere with the defense. Suffice it to say that once recognized, counsel must be vigilant as to their duty and loyalty. See R. Mallen & J. Smith, Legal Malpractice, Chapter 23 (West Publishing Co., 1989). The aforegoing chapter also highlights areas where counsel may have exposure to lawsuits from the insurer, the insured or third party.
14. Duty to Defend
Most professional liability policies have a clause similar to the one found in this outline in the following section. Some courts have held that the duty may begin by mere notice of an accident, Employers Casualty Co. v. Mireler, 520 S.W.2d 516 (Tex. Civ. App. 1975), although there is authority for the opposite, Detrex Chemical Industries, Inc. v. Employers Insurance of Wausau, 681 F.Supp. 438 (N.D. Ohio 1987).
Generally, the duty to defend is based upon the allegations of the complaint, the allegations being assumed as true. Couch on Insurance 2d (Rev.ed.) Section 51:42. Courts usually resolve any question as to the existence of the defense obligation in favor of the insured, and any allegation within a complaint is sufficient to give rise to the duty. Rhodes v. Chicago Ins. Co., 719 F.2d 116 (5th Cir, 1983); Fidelity & Guarantee Ins. Und. Inc. v. McManus, 633 S.W.2d 787 (Tex. 1982); Pacific Indemnity Co. v. Linn, 766 F.2d 754 (3rd Cir. 1985). When the complaint contains one covered and other non-covered claims, the insurer is obligated to defend the entire action. Donnelly v. Transportation Ins. Co., 589 F.2d 761 (4th Cir. 1978).
The professional liability policy requires the insurer to defend claims against the insured, even if the claim is false, fraudulent or groundless.
“Such a provision requires the insurer to defend in every instance where an injured person's complaint states a cause of action against the insured, even though as a matter of fact the claim is groundless. Otherwise stated, it is the nature of the claim against the insured, rather than its merits, which determines the insurerfs duty to defend.”
Couch on Insurance 2d (Rev.ed.) Section 51:48.
The majority of courts still hold that the insurer is limited to the four corners of the complaint when defining the duty to defend. See Couch on Insurance 2d (Rev. ed. ) Section 51:51; See also: Flori v. Allstate Ins. Co., 388 A.2d 25 (R.I. 1978); Afcan v. Mutual Fire, Marine & Inland Ins. Co., 595 P.2d 638 (Alaska, 1979). There are, however, some courts which allow the insurer to go outside of the complaint to determine the duty, Granite State Ins. Co. v. Mountain State Ins. Co., 573 P.2d 506 (Ariz. App. 1977); City of Willouqhby Hills v. Cincinnati Ins. Co., 459 N.E.2d 555 (Ohio 1984); Travelers Ins. Co. v. Cole, 631 S.W.2d 661 (Mo-App, 1982).
The U.S. District Court for the District of Maryland recently issued an opinion examining the issue of when does a cause of action for failure to provide a defense become time barred?
In Millham v. Globe American Casualty Company, the insurer advised Millham, its insured, that it planned to pay out its policy limits on an automobile liability policy, and that under the language of the policy it would have no obligation to defend Millham in any lawsuit filed against him as the result of the accident once the payment had been tendered. This communication took place on April 28, 1983. The payment was provided to the insured approximately four months later. In July of 1984, an attorney representing Millham wrote to Globe American and requested it to take over the defense of a suit that had been filed against Millham as a result of the accident. Globe American once again refused, reiterating its position that it was not obligated to provide a defense under its policy.
The suit against Millham went to trial, resulting in a judgment of $17.5 million dollars against him. On April 4, 1988 a subsequent suit was filed against Globe American for $150 million dollars in compensatory and punitive damages for its alleged bad faith failure to investigate, settle and defend the law suit brought against Millham. Globe American sought to have the suit dismissed on the grounds that it was time barred by the three year Maryland statute of limitations. The plaintiff argued that the statute did not begin to run until the date of the $17.5 million dollar judgment against the insured. Judge Walter E. Black, Jr. held that under Maryland law "the limitations period begins to run in refusal to defend cases when the insured discovers that his insurer will not provide a defense, not when judgment is finally entered.” The Court acknowledged that the plaintiff had cited out-of-state cases purporting to hold to the contrary, but found that established Maryland law directly on point made these cases inapplicable. See, for example, Continental Casualty Co. v- Florida Power and Light Co., 222 So-2d 58 (Fla.Dist.Ct.App. 1969); Colpan Realty Corp. v. American Insurance Company, 83 Misc. 2d 730, 373 NY Supp. 2d 802 (N.Y. 1975); Moffat v. Metropolitan Casualty Insurance Company, 238 F.Supp. 165 (M.D.Pa. 1964) and 96 ALR 3rd, 1193 (1979).
Plaintiffs' counsel should be aware that the statute begins to run with the denial of a defense, and can expire prior to any judgment being entered in the underlying case.
15- Settling Claims Without Prior Approval/Consent
Many professional liability policies have clauses that require the prior consent of the insured to settle a claim. Some policies not only require consent to settle by the insured, but also the payment of a deductible before the insurer will consider contributing to the settlement. Failure to obtain the insured's consent to settle would arguably make counsel liable for the deductible as well as all other damages caused by the omission. Even where the policy does not require prior approval/consent, defense counsel must heed instructions not to settle. Rogers v. Robson, Masters, Ryan, Brumund & Belom. 81 Ill.2d 201, 40 Ill.Dec. 816, 407 N.E.2d 47 (1980); Arana v. Koerner, 735 S.W.2d 729 (Mo.App. 1987).
These same policies also contain what is generally referred to as a "hammer clause" such as the one found in the American Home Assurance Company Accountants Professional Liability Policy:
....Defense, Settlement, Supplementary Payments: As respects the insurance afforded by the other terms of this policy, the company shall:
(a) Defend in his name and behalf any action or suit against the insured alleging such negligence, error, omission, dishonesty, misrepresentation, fraud, breach of contract or libel or slander, even if such action or suit is groundless, false or fraudulent; but the company shall have the right to make such investigation and negotiation and, with the written consent of the named insured, such settlement or compromise of any claim or suit as the company deems expedient, and if the insured shall refuse his consent to the settlement of any claim or suit recommended by the company, based upon a judgment or a bona fide offer of settlement, the insured shall thereafter negotiate or defend such claim or suit independently of the company and on his own behalf, and in such event the damages and expense accruing or determined through litigation or otherwise, in excess of the amount for which settlement could have been made as so recommended by the company, shall not be recoverable under this policy;…
It is suggested that if a decision is made to exercise such a clause, that all the safeguards attendant to other conflict of interest situations be followed* Is this a controversy into which defense counsel should be thrust?
16. Responsibility to Third Parties for Advice to Client
Generally, a third party cannot make a recovery from a tortfeasor's agent or broker without some demonstration of privity or third party status. Flattery v. Gregory. 397 Mass. 143, 489 N.E.2d 1257 (1986). See also. Annotation, Liability of Tortfeasor’s Insurance Agent or Broker to Injured Party for Failure to Procure or Maintain Liability Insurance, 72 ALR 4th 1095 (1989). Similarly, an accountant must be advised of the existence of a third party to be liable for negligence. In Idaho Bank & Trust Co. v. First Bancorp of Idaho, 772 p.2d 720 (Idaho 1989), the Idaho Supreme Court held that for an accountant to be liable for negligence in performing an audit, there must be contractual privity or a relationship approaching privity. Florida courts have held that an accountant may not be liable to a third party for negligence or gross negligence, even if the accountant was aware of the third party's intended reliance. First Florida Bank, N.A. v. Max Mitchell & Co. . P,A., 541 So.2d 155 (Fla.App. 1989).