Adam Fleischer and Jason Minkin highlight five recent professional liability decisions from the past month.  The topics addressed are: 1) whether “circumstances” that may lead to a claim constitute a claim; 2) whether a broker can be sued for its client’s purely financial loss; 3) whether a broker can be sued by an investor of one of its clients; 4) whether the insured can sue the broker directly for negligence; and 5) whether similar claims over two policy periods constitute the same or related claims.  The case summaries are presented below.

Koransky, Bouwer & Poracky, P.C. v. Bar Plan Mut. Ins. Co., 712 F.3d 336 (7th Cir. (Ind.) Apr. 2, 2013)

The Seventh Circuit Court of Appeals ruled that, under Indiana law, when a law firm knew in the first policy period that its negligent handling of client’s contractual dispute could lead to a claim, that knowledge precluded coverage under the second policy period when the malpractice claim actually was first made.

More specifically, the law firm made a mistake during claims made policy year one while representing a buyer in the purchase of a drugstore.  During that first policy period, the seller refused to go through with the deal with the firm’s client.  As a result of the botched business purchase, a malpractice lawsuit was subsequently filed against the law firm and reported to its insurer for the first time in policy year two.  The insurer denied coverage on the grounds that the second claims made policy precluded coverage for acts predating the policy period where the insured knew or reasonably should have known before the second policy’s inception of circumstances that might reasonably be expected to be the basis of a claim.  The Seventh Circuit found that, even though the law firm never believed that it had done anything wrong, the law firm certainly had reason to believe that their acts or omissions may result in a claim for malpractice.  The Seventh Circuit therefore affirmed the decision of the lower court and held that the knowledge of prior circumstances precluded coverage from the second claims made policy period.

Tiara Condo. Ass'n, Inc. v. Marsh & McLennan Companies, Inc., 09-11718, 2013 WL 1606345 (11th Cir. (Fla.) Apr. 16, 2013)

The Eleventh Circuit Court of Appeals relied on a ruling from Florida’s Supreme Court to hold that, even when an insured suffers only economic loss due to its broker’s negligence, the insured can still sue the broker in tort.

The case arose from a condominium association that suffered hurricane damage and then sued its insurance broker for negligence and breach of fiduciary duty, alleging the broker failed to secure adequate coverage for the association.  The broker relied upon the “economic loss doctrine” to argue that these tort claims could not be brought against it because the insurance broker had a contract with the insured, so all damages must be governed by the contract.  The Eleventh Circuit Court of Appeals certified the question to the Supreme Court of Florida as to whether the economic loss rule applied.  The Florida Supreme Court answered that the application of the economic law rule was limited to products liability cases, and that the insured was free to pursue its broker on the negligence and breach of fiduciary duty claims.

Travelers Prop. Cas. Co. of Am. v. Superior Court, 215 Cal. App. 4th 561 (Cal. Ct. App. Apr. 17, 2013)

A California appellate court found that an insurance broker cannot be sued by the investors of one of its clients because those investors had no professional services relationship with the broker.

While renewing a builder’s risk insurance policy, a construction developer informed its broker that most of the condominium units under construction had been sold.  The broker discussed the possibility of switching its builder’s risk policy with a condominium policy issued to the homeowner’s association.  Before the condominium sales became final, many prospective buyers backed out of their contracts.  Shortly after the new policy was issued, the property was allegedly damaged by theft and vandalism and the developer filed for bankruptcy.  An investor who purchased the property from the construction developer sought coverage under the condominium policy but the policy excluded coverage for losses that occurred while the units were vacant.  The investor sued the broker for negligence.  The court found that the broker owed no duty to the investor to provide any particular type of coverage to the broker’s clients (i.e., the developer and the homeowners association).  If the developer breached its contract with the bank (and its assignee) by failing to maintain builder’s risk insurance, the remedy of the investor, if any, according to the court, was against the developer, not the broker.

S. Bay Cardiovascular Associates, P.C. v. SCS Agency, Inc., 963 N.Y.S.2d 688 (N.Y. App. Div. Apr. 17, 2013)

A New York appellate court ruled that an insurance broker who allegedly failed to advise the insured of a reduction in employee dishonesty limits could be sued for negligence if the insured could prove a “special relationship” with the broker, giving rise to the duty of care.

The insured purchased commercial insurance policies issued by Travelers with a limit for employee dishonesty of $250,000.  Travelers later made changes to its policies, including reducing the limit for employee dishonesty to $25,000.  Travelers sent the insured a one-page notice of the reduction in limits but the insured purportedly did not read it, instead relying on the agent to inform her about any changes that she needed to know.  After discovering that one of its employees had misappropriated funds, the insured submitted a claim to Travelers.  It was at that point that the insured learned that its employee dishonesty coverage was limited to $25,000.  The insured then sued the agent for negligence, breach of contract, and breach of fiduciary duty on the ground that the agent failed to inform the insured of the change in coverage.  The agent filed a third-party action against Travelers seeking contractual and common-law indemnification.  Although the agent established that the insured received notice of the policy changes and a renewal policy, the court found that there was a triable issue as to whether the agent had a special relationship with the insured given that the record contained evidence that there was a course of dealing over an extended period of time that gave rise to such a special relationship.

Am. Guarantee & Liab. Ins. Co. v. Chicago Ins. Co., 963 N.Y.S.2d 642 (N.Y. App. Div. Apr. 25, 2013)

A New York appellate court found that two suits against a lawyer who allegedly referred his clients to a fraudulent financial services advisor were not part of the same interrelated insurance claim as two other suits against the same lawyer who allegedly referred other clients to a different fraudulent financial services advisor.

The attorney in question allegedly engaged in a mass market mail campaign targeting senior citizens and was sued by four of his clients after having referred his clients to various financial services representatives who defrauded them.  Four malpractice claims were filed.  Two clients filed suit during the policy period covered by Insurer A, and two clients filed suit during the policy period covered by Insurer B, although the attorney decided to reported the latter claims to Insurer A as well.  Insurer A denied coverage for the two latter claims on the grounds that they were made after the policy period expired.  Insurer B settled those claims and sued Insurer A for reimbursement, arguing that the claims were the “same and/or related” to the first two claims and Insurer A should have provided coverage for them.  The trial court ruled in favor of Insurer B.  The trial court found that the claims were related because the clients’ relationship with the attorney and the financial services representatives originated with the mass mailing campaign.  The appellate court reversed the trial court’s decision on interrelatedness finding that there were substantial differences between the clients, including the amounts of their claims and the fact that the financial services representatives who allegedly committed the fraud were not the same in each circumstance.  The appellate court concluded that the two latter claims were not the same or related as the first two and, thus, were not made during Insurer A’s claims made policy period.