C. INGRAM CO. v. PHILADELPHIA INDEM. INS. CO.
(Ct. App. Ga., April 7, 2010)

The insured was retained by Ingram to file an action to foreclose on a mechanic’s lien in excess of $600,000. The insured failed to file the action within the statute of limitations. After becoming aware that the action had not been timely filed, Ingram, through other counsel, informed the law firm that its failure to properly file the action subjected it to a malpractice claim. Eventually, the foreclosure action was dismissed on February 5, 2002.

In 2003, the firm obtained a professional liability policy providing coverage for claims made during the policy period. The policy also included an exclusion precluding coverage for any claim that occurred prior to the effective date of the policy if the insured knew, or could have reasonably foreseen, that a wrongful act may give rise to such a claim.

On August 7, 2003, Ingram filed suit alleging legal malpractice. The insured sought coverage under the professional liability policy. The insurer agreed to provide a courtesy defense under a reservation of rights while it determined its obligations under the policy. Eventually, after the policy was canceled for non-payment of the premium, the insurer issued a letter denying coverage based upon the prior knowledge exclusion. The insured executed an assignment of its rights under the policy to Ingram resulting in the instant coverage action.

Upon review of the record, the court concluded that it was apparent that the insured learned of the potential malpractice action as early as November 2001 when the insured was informed that it failed to timely file the mechanics lien litigation. Accordingly, the court held that the exclusion was triggered, and coverage was properly denied.

Impact: The denial of coverage based upon a prior knowledge defense can sometimes be difficult. This defense is obviously fact-intensive, and it is incumbent upon the insurer to demonstrate the state of the insured’s knowledge at the time he or she applied for coverage. In this case, however, the insurer had the benefit of clear evidence establishing the existence of a potential malpractice claim and as such, it easily met its evidentiary burden.

For a copy of this decision, click here: http://insurancecoverage.typepad.com/insurance_and_reinsurance/2010/04/cases-for-professional-liability-monthly-april-edition.html