The Duty to Disclose Possible Exposures When Applying for Insurance Policies

Why do we have insurance coverage lawyers, and why, as Mark Mayerson has written, has “insurance-coverage law . . . developed over the last 20 years into a rarefied specialty practice”? Because when lawyers who don’t know their way around the subject get involved with insurance coverage, problems just pile up. A case out of the New Jersey Supreme Court reflects this dynamic. In that case, as this article describes it, a law firm retained to represent a business in a dispute won a judgment that was then overturned because the lawyers had blown the statute of limitations. But that wasn’t the worst part for the attorneys who lost that case; they then turned out to not have coverage for the resulting legal malpractice claim, because they had failed to disclose the potential error and potential claim on their application for professional liability insurance. Now even if they had disclosed it, they may well not have been covered for it, as the insurer may have refused to issue a policy without excluding any claims that might arise out of the disclosed events. However, one will never know, because what we do know for sure is that a failure to disclose on an application a potential claim is a quick way to lose coverage. Indeed, as the article sums up:

[T]he ruling sends a clear signal to attorneys: Be forthcoming, and err on the side of discretion, when applying for malpractice insurance. "Law firms have to disclose in the application any potential error they've committed," [one of the lawyers involved] says. "Here, they knew there was a likelihood a complaint was going to be filed. If there is any basis to believe you have breached a duty, there is a good chance you're going to be sued." The insured's lawyer . . . does not disagree in principle. "It is in an attorney's best interest to disclose to its carrier any possible mistake because then the carrier is responsible," he says. "You're putting the carrier on notice."