7th Circuit: no liability insurance coverage for associate’s error

The 7th Circuit Court of Appeals agreed with a Northern District judge’s conclusion that a Dyer law firm’s professional liability insurer did not have to cover a mistake by an associate in a client’s failed business deal because the firm didn’t timely notify its insurer of a potential malpractice claim.

Koransky Bouwer & Poracky P.C. represented George Novogroder when he sought to buy four drugstores in Ohio from Newtown Oldacre McDonald LLC. Three of the four sales closed without issue; the fourth sale never came to fruition because an associate at the law firm inadvertently misfiled the executed contract. On Feb 22, 2007, Newton’s attorney sent a letter to the firm saying the seller rescinds its signature and declares the contract null and void since it did not receive the executed contract. The associate attempted to fix the problem by sending the contract, but the seller still did not want to continue the sale.

This led to litigation being filed in both Alabama and Ohio in March of that year. Also during this time, Koransky Bouwer & Poracky renewed its professional liability insurance with The Bar Plan Mutual Insurance Co., but did not notify the firm of a potential malpractice claim from Novogroder. When the Alabama court, which concluded it had jurisdiction over the case, ruled in favor of Newtown, Novogroder told the firm he was going to file a malpractice claim over the failed transaction. After receiving a formal notice of claim, the firm notified its insurer in August.

But The Bar Plan concluded through an investigation that the firm knew of the potential malpractice claim in February, before it renewed its policy for another year. Based on language in the policy, the insurer declined to represent the firm or indemnify it. Judge William Lee ruled in favor of the insurer on its motion for summary judgment.

In Koransky, Bouwer & Poracky P.C. v. The Bar Plan Mutual Insurance Co., 12-1579, the 7th Circuit looked at the language of the policy in effect at the time the law firm made its claim and agreed with Lee that the firm did not timely notify The Bar Plan as soon as it had reason to think that the failure to deliver the contract to the seller might result in a claim. The policy required the insurer to be notified if an act or omission “may” give rise to a claim, not just when one is filed.

“It may well be difficult to determine exactly when an act or omission ‘might reasonably be expected to be the basis of’ a malpractice claim. But this case is not a close one. Buyer believed that the parties had formed a binding agreement. However, as a result of Koransky & Bouwer’s failure to deliver the executed contract, Seller refused to complete the deal and active litigation ensued,” Judge Daniel Manion wrote.

“Once the Alabama case was filed, Koransky & Bouwer knew or should have known that the only thing standing between it and a probable malpractice claim was the question of whether the Alabama state court would exercise jurisdiction. No matter how we construe the record, it is clear that a reasonable attorney would have recognized that his failure to deliver the contract, in light of the communications and legal activity that quickly followed, was an omission that could reasonably be expected to be the basis of a malpractice claim.”