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Malpractice Insurer Cannot Deny Coverage Because Attorney Admitted Mistake to Client

Wednesday, November 21, 2012

By Samson Habte  

A clause in a malpractice insurance policy that precludes insured lawyers from admitting liability without the insurer's consent cannot be enforced because it interferes with attorneys' ethical obligation to keep clients apprised of significant events in their case, the Illinois Appellate Court, First District, ruled Nov. 9 (Illinois State Bar Ass'n Mutual Insurance Co. v. Frank M. Greenfield and Associates PC, Ill. App. Ct. 1st Dist., No. 1-11-0337, 11/9/12).

The case involved Frank M. Greenfield, a lawyer who made a drafting error in a client's will, informed the client's beneficiaries of his mistake, and was then sued by those beneficiaries for malpractice.


“[W]e are uncomfortable with the idea of an insurance company advising an attorney of his ethical obligation to his clients….”
Justice Robert E. Gordon

Greenfield's liability carrier, ISBA Mutual, said that Greenfield's admission of error essentially outlined “the elements of a legal-malpractice action” and thus relieved the company of any duty to defend or indemnify Greenfield under a clause in his insurance policy that stated:

The INSURED, except at its own cost, will not admit any liability, assume any obligation, incur any expense, make any payment, or settle any CLAIM, without the COMPANY'S prior written consent.  

 

The court disagreed. Justice Robert E. Gordon said this “voluntary payments” clause “interfered with Greenfield's discharge of his professional duties,” which include an obligation to keep clients apprised of major developments in their case. Accordingly, the provision is void as against public policy and unenforceable, Gordon declared.

Scrivener's Error.

Greenfield was retained to assist Leonard and Muriel Perry with their estate planning. According to the court, the couple established two separate trusts, but Leonard, who died first, gave Muriel the authority to modify the distribution plan for his trust.

Muriel exercised that power by amending her will, with Greenfield's help, in 2007.

Muriel decided to amend her will again in 2008. Greenfield made a critical error in preparing that document, the court said, by failing to “include language that [Muriel] was exercising her Power of Appointment from her deceased husband's trust.”

When Greenfield discovered the error after Muriel's death, the court said, he informed the Perrys' heirs about the mistake in a June 2008 letter that blamed the omission on a change in his computer software.

The letter further informed the heirs that they would have to reach a unanimous agreement as to how to resolve the discrepancy. Otherwise, the bank serving as a co-trustee of the Perrys' trusts would “be forced to seek a judicial determination to resolve the scrivener's error,” Greenfield wrote.

Four of the heirs sued Greenfield and his firm for malpractice. The beneficiaries alleged that they would have inherited over $1 million more under the 2007 will.

Coverage Fight.

ISBA Mutual filed a declaratory judgment action against Greenfield. The insurer argued that Greenfield's letter to the beneficiaries constituted an admission of liability, which violated the “voluntary payments” provision in his liability policy and relieved ISBA Mutual of its duty to defend or indemnify him.

Greenfield, the court said, countered with a motion for summary judgment which argued “that he had an ethical duty to inform the beneficiaries of his mistake, that he did not admit liability but only informed the beneficiaries of what occurred, and that the letter did not prejudice ISBA Mutual because JP Morgan Chase Bank, the trustee, would have immediately informed the beneficiaries of the same matters if Greenfield had not done so.”

“ISBA Mutual denied that the policy would foreclose Greenfield from complying with his ethical obligation,” Gordon wrote. Rather, the insurer argued that the “voluntary payments” clause simply required Greenfield to seek the company's guidance as to how he might “fulfill his ethical obligations in a way that would not compromise his defense to a malpractice case.”

The trial court granted Greenfield's summary judgment motion. It ruled in his favor for several reasons, Gordon said:

[First,] it found that Greenfield's letter only admitted facts and did not admit liability.… The court further noted that while ISBA Mutual argued that its insurance policy did not preclude disclosure, “any limitation on an attorney's ethical duty to disclose raises public policy considerations.” Finally, the court found that even if Greenfield had admitted liability, ISBA Mutual had not demonstrated that it was prejudiced by Greenfield's conduct, finding that “[a]ny claim of prejudice is speculative, at best.”  

 

First Impression.

The appeals court affirmed. However, it went further than the trial court by basing its ruling on public policy considerations, rather than the narrower issue of whether Greenfield's letter constituted an “admission of liability” rather than a relaying of facts.

“[T]here is very little case law concerning the effect of a 'voluntary payments' clause such as that at issue in the case at bar,” said Gordon, who added that the parties' dispute “is essentially a case of first impression.”

Prior decisions have upheld voluntary payment provisions, the court noted, but none of those cases involved situations in which the application of such a clause created a conflict with a lawyer's ethical obligation to keep clients apprised of the status of a case.

“[W]e are uncomfortable with the idea of an insurance company advising an attorney of his ethical obligation to his clients…,” Gordon wrote. “Instead, absent instruction from the rules of professional conduct or the Attorney Registration and Disciplinary Commission, it is the attorney's responsibility to comply with the ethical rules as he understands them.”

Accordingly, the court concluded that “a provision such as the one at issue here is against public policy, since it may operate to limit an attorney's disclosure to his clients.”

Too Broad.

Justice Rodolfo Garcia concurred in the court's judgment but not the reasoning that led to it. ISBA Mutual's argument against coverage fails as a matter of basic contractual interpretation, and it is unnecessary to find that the clause offended public policy, he said.

The plain terms of the liability policy suggest that a breach of the voluntary payments provision only nullifies an insurer's duty to indemnify, Garcia said, which is “a separate question from the much broader duty to defend.”

“Of course, ISBA Mutual's duty to indemnify is not ripe for consideration where the policyholder has not been found liable,” Garcia added. Accordingly, he said, there is no reason to consider at this stage whether Greenfield's letter went further than relating facts and thus violated the insurer's prohibition against admitting liability.

Greenfield was represented by Michael W. Rathsack, Chicago. ISBA Mutual was represented by Robert M. Chemers of Pretzel & Stouffer, Chicago.


Full text at http://op.bna.com/mopc.nsf/r?Open=kswn-922kuq.

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