Property Casualty Focus

The Second Circuit Court of Appeals recently affirmed a lower court’s ruling, which declared that North River Insurance Co. had no duty to defend or indemnify its insured in connection with a legal malpractice lawsuit.

Background

In September 2019, Max Leifer and his law office applied for professional liability insurance with North River. Leifer’s application was approved, and North River issued the policy, which covered damages and defense expenses for claims made against Leifer during the policy period of October 20, 2019, through October 20, 2020. Claims based on facts or circumstances of which Leifer had knowledge as of the effective date of the policy and which could reasonably have been expected to give rise to a claim were excluded from coverage.

In 2020, a malpractice lawsuit was brought against Leifer by Andy Lee, an individual to whom Leifer had previously given legal advice. Leifer sought to have North River extend coverage for the lawsuit, but North River argued that the lawsuit was not covered by the policy. North River subsequently filed suit in the U.S. District Court for the Southern District of New York, seeking a declaratory judgment that it had no obligation to defend or indemnify Leifer in the lawsuit. The district court granted North River’s motion for judgment on the pleadings, and Leifer appealed the decision.

Ruling on Appeal

Under New York law, an insurer has a duty to defend if there is a possibility that it might eventually be obligated to indemnify the insured under any provision of the insurance policy. To avoid a duty to defend based on a policy exclusion, an insurer must demonstrate that the allegations of the underlying complaint place the pleading “solely and entirely” within the exclusion and that the allegations are subject to no other interpretation. In this particular case, the Second Court explained that North River had to show the facts as alleged in the Lee malpractice suit were completely barred by the policy’s “prior knowledge exclusion” such that there was potential coverage under the policy.

On appeal, Leifer argued that the facts alleged in Lee’s malpractice suit did not fall entirely within the prior knowledge exclusion and that the district court erred in granting North River’s motion. The Second Circuit disagreed, finding there was no doubt based on Leifer’s own pleadings in the underlying action that he knew of the facts giving rise to the malpractice claim as of the policy’s effective date. The court also held that a reasonable attorney would have understood that Leifer’s conduct could reasonably give rise to a malpractice claim. The court looked specifically to Leifer’s answer to North River’s complaint, in which Leifer admitted that he advised Lee not to file an answer in an action in which Lee was involved, resulting in a default judgment.

Leifer attempted to argue that he advised Lee to file an answer, but that Lee never actually retained him to do so, and that he could not have anticipated a malpractice suit because Lee thanked him for his services. The Second Circuit rejected both arguments, finding any reasonable attorney in Leifer’s position would have understood the possibility of a future malpractice suit following the entry of a default judgment. The Second Circuit held that the appropriate question was not what Leifer expected but rather what a reasonable attorney in Leifer’s position would have anticipated. Having determined Leifer knew of the pertinent facts before the North River policy was incepted, and that Leifer should have anticipated a malpractice suit, the court found the prior knowledge exclusion barred coverage under the North River policy and therefore affirmed the district court’s ruling.