Opinion
8:01CV308
October 28, 2002
MEMORANDUM AND ORDER
This matter is before the court following a bench trial. Plaintiffs brought this action for declaratory judgment and rescission requesting a determination that defendant TIG Insurance Company (TIG) had a duty to indemnify or defend. TIG alleges that plaintiffs failed to timely inform it of a potential legal malpractice claim. Although the parties did not stipulate to the facts, the relevant ones are not in dispute. Based on the evidence presented and pursuant to Fed.R.Civ.P. 52(a), I make the following findings of fact and conclusions of law:
Findings of Fact
1. Thomas Petersen ("Petersen") is an attorney in Omaha, Nebraska, and is a member of the Petersen Law Offices ("Law Office").
2. Law Office is a law firm in Omaha, Nebraska, and was insured by the defendant for malpractice coverage under a policy effective 7/11/99-7/11/00, Policy No. AP37979932, and a renewal policy effective 7/11/00-7/11/01, Policy No. AP3797932. Exs. 1 and 3.
4. John Kwapnioski ("Kwapnioski") was at all times relevant herein an attorney duly engaged and licensed to practice in Nebraska and an employee of Law Office.
3. TIG Insurance Company is an insurance company located in California with its principal place of business in Texas. 5. Matthew Samp ("Samp") was the office manager for Law Office and was succeeded by Joanna Tracy ("Tracy"). 7. Bruce Rennard is an underwriter with Affinity, and Patrick Larimer is a claims adjuster with Cambridge. 9. Michael Churchich is the deceased husband of Kathryn Churchich. 11. On July 27, 2000, Petersen completed an Application for Renewal Policy. Ex. 2. On the Renewal Application, Petersen listed one potential malpractice claim involving the Savig file. Petersen also listed disciplinary actions, a previous conviction, and the refusal of at least one state to permit him to take the bar examination. He did not list the Churchich matter.
7.C. After inquiry, are you aware of any acts, errors or omission that could result in a professional liability claim against any past or present attorney of the firm or do you have a reasonable basis to foresee that a claim would be made against any past or present attorney of the firm?14. On July 27, 2000, Petersen issued a letter stating "We are not aware of any claims, acts, errors or omissions that could give rise to a claim since our current policy expired July 11, 2000." Ex. 4. 16. Kwapnioski forwarded records to a medical expert, Dr. Fossi, for review. The medical expert asked for additional records. Kwapnioski sent a letter requesting additional records. Ex. 16. Churchich testified that she had supplied all records to Kwapnioski. Churchich was not happy with the progress of her representation. On December 8, 1999, she advised Kwapnioski that she was discharging the firm. 18. This letter was marked as received at the firm by Samp.
19. Petersen testified that he did not receive a copy of this letter, and no evidence was presented to the contrary.
20. On December 16, 1999, Kwapnioski wrote to Churchich advising there was generally a two-year statute of limitations for professional malpractice and indicated that the Law Office would no longer be handling the case. Ex. 109. Petersen testified that the Churchich file was then closed.
21. In January 2000, Kwapnioski left the Law Office.
22. On April 27, 2000, Richard Schicker sent a letter to Kwapnioski which was copied to Petersen. Ex. 102, "Schicker Letter." The Schicker Letter raised the possibility of a missed statute of limitations by Kwapnioski, and it asked that the malpractice carrier be notified. Ex. 102.
23. Petersen testified that he never received a copy of this letter and was never informed of a potential Churchich claim prior to July 11, 2000, or prior to February 2, 2001. Petersen conducted firm meetings, sometimes weekly, wherein potential claims would have been discussed. The Churchich claim was never discussed as a claim or potential claim.
24. The Schicker letter was marked received by Tracy on April 28, 2000. Ex. 102.
25. On or about February 2, 2001, Churchich filed a legal malpractice suit against Law Office, Petersen and Kwapnioski for missing the statute of limitations. Ex. 103.
26. On February 9, 2001, Petersen reported the Churchich claim for the first time to TIG. Ex. 112.
27. TIG initially supplied coverage for the claim, but upon further investigation, TIG declined coverage on the basis that this is a claims-made policy and notice was not given during the policy period. Exs. 114, 115.
28. On May 8, 2001, Petersen and Law Office filed a complaint seeking coverage for the claim under either the original policy or the renewal policy.
29. TIG filed its answer and requested rescission of the contract and a declaration of no coverage under the policy.
30. There is no evidence in the record that Petersen or any other insured attorney knew about the Schicker letter prior to the filing of the lawsuit.
31. TIG also argued in Patrick Larimer's April 25, 2001, letter that the Schicker letter was not a claim under the policy. Ex. 11. TIG now takes the position that the Schicker letter was a potential claim that should have been reported on the renewal application.
32. The letter from Larimer to Petersen dated April 2, 2001, states that plaintiff did not receive a claim or demand for money until the filing of the lawsuit. Ex. 10, p. 3.
33. The question is whether the Schicker letter constituted knowledge of a potential claim that should have been reported in the renewal policy.
Conclusions of Law
This court has jurisdiction over the parties and subject matter jurisdiction pursuant to 28 U.S.C. § 1332 and 2201. TIG has requested that this court find that the insuring agreement, as set forth below, excludes coverage under the policy. Further, TIG requests that the court rescind the insurance and renewal contracts.
Law
This is a claims-made policy. Claims-made coverage in general has been held not to violate public policy and coverage exists only when the claim is timely reported. Zuckerman v. Nat'l Union Fire Ins. Co. , 100 N.J. 304, 322-24, 495 A.2d 395, 405-06 (1985); Gulf Ins. Co. v. Dolan, Fertig Curtis , 433 So.2d 512, 515-16 (Fla. 1983). TIG bears the burden of proof on the applicability of any exclusion to coverage under the policy. Robinson v. State Farm Mut. Auto Ins. Co. , 197 N.W.2d 396, 397 (Neb. 1972). An insurer does not have a duty to defend the insured unless there is the possibility that the claim falls within the insurance coverage. Babcock Wilcox Co. v. Parsons Corp ., 430 F.2d 531, 535 (8th Cir. 1970) (Nebraska case). Absent ambiguity, the language in an insurance policy is to be given its common and ordinary meaning. Polenz v. Farm Bureau Ins. Co. , 419 N.W.2d 677, 680 (Neb. 1988). Both the policy and renewal policy in this case require the insured to notify the insurer of known claims and of potential claims. Failure to disclose known or potential claims, argues TIG, precludes coverage. See Carosella Ferry v. TIG Ins. Co., 189 F. Supp.2d 249, 253 (E.D.Pa. 2001) (no coverage where letter threatening a lawsuit created a foreseeable claim). The purpose of the claims-made policy is to avoid a tail of liability exposure. Nat'l Union Fire Ins. Co. v. Bauman , 1992 WL 1738, at *10 (N.D.Ill. Jan. 2, 1992). "The nature of a claims-made policy is that it protects the insured for claims made against it and reported to the insurer within the policy period or, if applicable, the extended reporting period." CheckRite Limited, Inc. v. Illinois Nat'l Ins. Co. , 95 F. Supp.2d 180, 194 (S.D.N.Y. 2000). "The existence of a cut-off date is integral to a claims-made policy, as it is `a distinct characteristic of such a policy that directly relates to rate setting.'" CheckRite Limited , 95 F. Supp.2d at 191-92, citing Rochwarger v. Nat'l Union Fire Ins. Co., 595 N.Y.S.2d 459 (1993). "The authorities establish that there is no coverage under a claims-made policy where the insured fails to notify the insurer of a claim by the end of the policy period (or extended reporting period, if any)." CheckRite , 95 F. Supp.2d at 192. TIG argues that no coverage exists if the insured had a reasonable basis to foresee that a claim would be made against an insured prior to the inception date of the policy. Rehm v. Tamarack, 623 N.W.2d 690, 697 (Neb. 2001); Carosella Ferry v. TIG Ins. Co. , 189 F. Supp.2d at 253. There are two lines of cases regarding the standard to be imposed on an insured's knowledge of a potential claim. These two standards are the subjective standard (looks at what the insured knows) and the objective standard (looks at what the insured could be reasonably expected to know).First, in determining Petersen's knowledge, I find that the Churchich letter of December 1999 was not sufficient to put the parties on notice that a claim or demand for money as defined under the contract was being made nor that a potential or foreseeable claim existed. However, the letter from Schicker, while not a "claim," would put an insured on notice of a potential claim, if he had or should have knowledge of such claim. I have reviewed the cases cited by the parties in this case. If I adopt the subjective standard, then the evidence shows that Petersen did not know about the Schicker letter until the lawsuit was filed. If I adopt the objective standard, then my determination hereinafter that Tracy's negligent actions could not be attributed to Petersen makes it unreasonable to impose Tracy's knowledge on Petersen. However, in any event, I think the Nebraska courts would use the subjective standard and determine what Petersen knew. See Rehm v. Tamarack , 623 N.W.2d at 697-700. See also Estate of Logan v. Northwest Nat'l Cas., 144 Wis.2d 318, 424 N.W.2d 179, 186 (1988) (subjective standard applied); contra Mt. Airy Ins. Co. v. Thomas , 954 F. Supp. 1073, 1079 (W.D.Pa. 1997), aff'd 149 F.3d 165 (3rd Cir. 1998) (objective standard applied). There is no evidence that Petersen knew of the error prior to the application for the TIG renewal policy. If, however, he had prior knowledge of the letter, this would be a substantially different case. See Coregis Ins. Co. v. Wheeler, 24 F. Supp.2d 478 (E.D.Pa. 1998) (where attorney knew that he had missed a statute of limitations, so it should have been disclosed on malpractice insurance application). To find otherwise, based on the facts presented at trial in this case, would nullify coverage for many plaintiffs.
Contractual Provisions
Claim is defined under the policy as:
VI. A. "Claim" shall mean:
A demand received by the Insured for money or services, including the service of suit, or the institution of alternative dispute resolution or arbitration proceeding against the Insured; provided however, that proceedings brought against any Insured solely to impose monetary sanctions shall not be considered a Claim. . . .
Ex. 1, p. 4; Ex. 3, p. 4. I conclude, and I believe that the parties are in agreement with this conclusion, that the Schicker letter does not meet the definition of "claim" as set forth under this policy. There is no demand for money or services or the notice of suit. Consequently, I turn to the language set forth in the Insuring Agreement.
The Insuring Agreement for the TIG Renewal Policy states:
1. Coverages Professional Services and Personal Injury
To pay on behalf of the Insured all sums that the Insured shall become legally obligated to pay as Damages as a result of Claims first made against the Insured and reported in writing to the Company during the Policy Period or during the Extended Claim Reporting Period, if applicable, by reason of any act, error, omission or Personal Injury arising from Professional Services rendered or which should have been rendered by the Insured or by any person for whose such act, error, omission, or Personal Injury the Insured is legally responsible; provided that such act, error, omission, or Personal Injury occurs:
A. During the Policy Period; or
B. Subsequent to the Retroactive Date set forth in Item 7 of the Declarations, if any, and prior to the Policy Period, provided that:
1. The Insured did not notify any insurer under any prior policy or policies of such act, error, omission or Personal Injury; and
2. Prior to the inception date, neither the Insured, nor any partner, shareholder, or the Insured's management committee knew or should have known that a wrongful act, error or omission or Personal Injury had occurred or had a reasonable basis to foresee that a claim would be made against an Insured; and
3. There is no other policy or policies which provide insurance for such Claim.
Ex. 1, p. 14; Ex. 3., p. 1. (Note: The retroactive date in the Declarations page is July 11, 1996.) Ex. 1.
I conclude that this section does not preclude or exclude coverage to the plaintiffs. Paragraph 1.B.2. of the Insuring Agreement, Ex. 1, p. 14 and Ex. 3, p. 1, does not mention the knowledge of a Law Office employee such as Tracy who evidently was the recipient of the Schicker letter. The language in that paragraph refers to "partner, shareholder or member of the management committee." The testimony of both attorneys Petersen and Kampnioski reveal that neither of them knew about the Schicker letter until the lawsuit was filed. Kampnioski had left the firm by January of 2000. The Churchich file was closed in December 1999. Petersen testified he did not receive a copy of the letter. The letter was in the Churchich file in 2001. Presumably, the letter was stamped in by Tracy and routed to the closed files. Pursuant to Nebraska law a non-lawyer such as Tracy cannot be a partner or shareholder in a law practice. There was testimony that Tracy was the "office manager" but no testimony that Tracy was a member of the firm's management committee. The testimony concerning Tracy's responsibilities were clerical, not substantive, to the firm. Thus, neither "a partner, shareholder or member of the management committee" had a reasonable basis to foresee that a claim would be made against the insured. There was no testimony from Schicker or anyone else that Petersen had been personally notified of the lawsuit, although there was testimony that Schicker placed phone calls to Petersen that were not returned. Section VIII sets forth the Notice of Claim Provision which states in relevant part:
As a condition precedent to the coverage afforded under this Policy, the Named Insured shall, as soon as practical, but in no event later than sixty (60) days after the expiration of the Policy Period, give written notice to the Company of any Claim first made against the Insured during the Policy Period, but only by reason of any act, error, omission or Personal Injury in Professional Services rendered or which should have been rendered prior to the expiration of the Policy Period and subsequent to the retroactive date, if any. . . . Upon any insured becoming aware of any act, error, omission or Personal Injury which could reasonably be expected to give rise to a Claim under this Policy, written notice shall be given by or on behalf of the Insured to the Company as soon as practicable during the Policy Period, or Extended Claim Reporting Period, if applicable; the Company is given written notice of any act, error, omission or Personal Injury which could reasonably be expected to give rise to a Claim under this Policy, any Claim which subsequently arises out of such act, error, omission or Personal Injury shall be considered to be a Claim reported during the Policy Period or Extended Claim Reporting Period, if applicable, which such written notice was received.
Ex. 1, p. 8-9 . I conclude that notice of the claim was given by Petersen to TIG of the lawsuit filed during the renewal period in a timely manner. TIG argues that Section VIII requires that notice be given during the 1999-2000 policy period. To the extent that Section VIII could be so construed, I conclude that the Insuring Agreement, section 1.B.2, specifically deals with an instance such as this where plaintiffs are unaware of the potential claim. The uncontradicted evidence revealed that once Petersen became aware of the claim, he immediately gave notice to his insurer.
Section X of the policy permits the named insured to purchase an endorsement to the policy which extends the time to notify the company of any claim first made during the policy period. Ex. 1, p. 9; Amendment to Policy, CHUH00577. However, this extended claim renewal is only permitted if the insured does not renew its policy. In the case at hand, plaintiffs renewed the policy, and this provision is not relevant to my conclusions.
Coverage of Tracy under the Policy
The knowledge of an agent acting within the scope of his authority is generally imputable to the principal. Selig v. Wunderlich Contracting Co. , 69 N.W.2d 861, 863 (Neb. 1955). An agent is a person who is authorized by another to act on his account. Gottsch v. Bank of Stapleton, 458 N.W.2d 443, 451 (Neb. 1990). "It is a well settled principle that knowledge of officers and key employees of a corporation, obtained while acting in the course of their employment and within the scope of their authority, is imputed to the corporation itself." Acme Precision Products, Inc. v. American Alloys Corp ., 422 F.2d 1395, 1398 (8th Cir. 1970) (citations omitted; emphasis added).This brings me to the question of whether Tracy is an insured under the agreement who knew or should have known that the Schicker letter was knowledge of a potential claim that should have been referred to TIG. Tracy did not testify. The Policy defines Insured as:
5. Any employee of the Named Insured who is not a lawyer, but only while acting within the course and scope of his or her employment. . . .