Failing to check whether the claim against your client might be covered by insurance can get you in hot water — or at least keep you there, preventing a speedy exit from a malpractice suit, as a Florida lawyer recently learned.
In Pharma Supply, Inc. v. Stein (PACER access ID required), the client alleged it retained the lawyer to “defend its interests” in the underlying suit. At the time, the client had an active insurance policy that would have provided coverage and a defense in the underlying case. The lawyer, however, allegedly failed to review the client’s insurance policies, and didn’t place the insurer on notice. Later, the insurer joined the client’s defense, but refused to reimburse the client for fees and expenses paid before then. The client subsequently sued the lawyer and his firm in federal district court for professional negligence, among other things.
In their motion to dismiss, the lawyer and his firm contended that they had been retained solely to defend the client in the underlying case, and that failing to inquire into the client’s insurance coverage did not breach a duty to the client.
The court rejected that argument. It ruled that the former client’s allegation that it had retained the lawyer and his firm to “defend its interests” was enough to survive a motion to dismiss. A duty to defend the client’s interests could also encompass developing claims against third parties, such as the insurer, that might owe indemnification to the client, the court said. Indeed, the court said, opinions from some jurisdictions have suggested that
[I]n certain circumstances a litigation attorney may have a duty to inquire into a client’s own insurance coverage as a way to provide for alternative recovery or soften the impact of the litigation.
Cases decided in California, Georgia and Alaska for example, point to such a duty, as does a recent New York Appellate Division case. (In a different case in 2000, however, the New York Supreme Court held that a lawyer did not have a duty to advise the clients about a “novel and questionable theory pertaining to their insurance coverage.”)
The defendants in the Pharma Supply case have moved for reconsideration of the court’s ruling denying their motion to dismiss; that motion, converted by the court to a motion for summary judgment, remains pending.
One way to address the issue of client insurance is to raise it in your engagement letter. Asking the client in writing to inform you if there might be insurance that would cover the claim can help identify and resolve any concerns at the front end of a matter.