Keeping your fingers crossed, with perhaps a little truculence thrown in for good measure, should not guide an insured’s answers in filling out an insurance application. Rather, as the decision in a recent case from federal district court in Florida shows, insureds filling out renewal applications should view the world through a pessimistic eye.
In David R. Farbstein, P.A. v. Westport Ins. Corp., David Farbstein, the insured, was an attorney whose client had asked him to represent it in the sale of an apartment building. The client’s mortgage loan included a “prepayment penalty” that the client did not want to pay, either through getting the buyer to assume the loan or by getting the buyer to agree to pay the penalty.
According to the client’s complaint in a lawsuit against Farbstein, he had drafted the sale documents without either of these protections. A couple of weeks before the closing in July 2015, Farbstein supposedly notified the client about the omission, but he advised that it was too late because the agreement had already been made for the sale. Ominously, Farbstein had supposedly “made reference to” his malpractice insurance in this conversation.
Despite knowing that the client was unhappy about this issue, Farbstein answered “no” to the following question in August 2015 when filling out the renewal application for his malpractice insurance:
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 previously been reported to the carrier?
The opinion never fully explains why Farbstein answered this way, but the parties evidently had very different views of what happened before the sale. For the coverage issue, however, none of this mattered to the judge’s decision in favor of the insurer because she focused only on the “eight corners” of two documents: the complaint and the policy (the judge refused to consider other evidence submitted with the parties’ briefs). And because the complaint, standing alone, alleged Farbstein’s knowledge of a possible claim before the application date, the policy’s “prior-knowledge exclusion” applied to absolve the insurer of any responsibility to defend or indemnify Farbstein.
This focus on those two documents should give insureds pause when filling out insurance applications. An insured in Farbstein’s position may believe that a client will not really (really!?) bring a claim because of other circumstances that exonerate the lawyer — but the complaint will likely tell a very different, and very one-sided, story lacking details helpful to a defense. And a lawyer may even believe that the facts favor her, making a potential claim weak or even impossible to win. But this confidence in the merits of a defense will similarly not be any part of the plaintiff’s complaint if that dark day comes. For the question on the application: if a claim is possible, from the aggrieved client’s [mistaken, silly, wrong-headed, or biased] point of view, then “yes” is the answer to the question above.
Even worse for Farbstein, the mechanics of how “claims made and reported policies” work will likely rule out not only the renewal policy, but also the previous policy in force during the alleged negligence. Under these kinds of policies, which is how most professional-malpractice coverage is written, the claim has to be made and reported during the policy period or within a short window (like 60 days) after the end of the policy period.
Because Farbstein’s client didn’t file the legal-malpractice lawsuit until March 2016, the expiring policy would not respond either, even though it was the policy in place during the sale and Farbstein had apparently kept seamless coverage in place. Claims-made policies, unlike occurrence-based policies, are traps for the unwary insured, especially for losses that happen near the end of a policy period.
The opinion linked to this article was reprinted from WestlawNext with permission of Thomson Reuters. If you wish to check the currency of this case by using KeyCite on WestlawNext, please visit www.next.westlaw.com.