In two recent cases, lawyers have been sanctioned for failing to understand their client's insurance program. These cases (along with others from the past) illustrate that courts are increasingly placing a burden on defense lawyers to have a basic understanding of insurance and to thoroughly discuss insurance matters with their clients.
North Carolina attorney sanctioned for failing to disclose umbrella policy
Last December, the United States District Court for the Western
District of North Carolina sanctioned an insurance defense lawyer
with a $1,000 sanction because the Court found that she failed to
properly discuss and review the applicable insurance her client had
for a claim. Further inquiry would have revealed a $10 million
umbrella policy above the first $1 million layer of commercial
general liability insurance. Palacino v. Beech Mountain Resort,
Inc., 2015 WL 8731779 (W.D.N.C., Dec. 11, 2015).
Under Federal Rule of Civil Procedure 26(a)(1)(A)(iv), a defendant
must disclose, relatively early in a case, "any insurance
agreement under which an insurance business may be liable to
satisfy all or part of a possible judgment in the action or to
indemnify or reimburse for payments made to satisfy the
judgment." In this case, the umbrella policy was only
disclosed after mediation and after discovery closed. The Court
concluded that this was a violation of Rule 26, as "Defendant
was legally obligated to disclose both [insurance] policies in its
Initial Disclosures, and its failure to do so violated its
obligations under the Federal Rules of Civil Procedure and the
Court's Pretrial Order."
By only disclosing the first $1 million in coverage under the CGL
policy – presumably the policy which the attorney was
retained under – the attorney neglected to investigate the
full range of available insurance and to disclose the $10 million
umbrella. The attorney submitted an affidavit stating that, in
responding to Rule 26, the Risk Manager for the defendant was asked
to provide all applicable insurance policies. However, the Court
ruled that this was not enough. It noted that the attorney's
affidavit in opposition to sanctions did not state that the
attorney "independently verified the completeness of the
information provided" or that "additional steps [were
taken] to ensure that the information" provided in the Initial
Disclosures was complete "or that a reasonably inquiry was
made prior to providing the Initial Disclosures." The Court
goes on to state that the attorney should have been able to
"represent to the Court that she undertook [an] independent
inquiry to verify whether the information provided by [the Risk
Manager] was complete prior to signing the" Initial
Disclosures. However, the Court gave no guidance as to how a
retained defense attorney is to show that "a reasonable
inquiry [into insurance policies] was made prior to providing the
Initial Disclosures" other than asking the Risk Manager
– presumably the most knowledgeable employee of the defendant
– to provide all insurance policies. Does this require asking
other employees of the client? Reaching out to the client's
insurance broker? Physically inspecting the client's
files?
In addition to the $1,000 sanction against the attorney, the
client was also fined $500 for its failure to uncover and disclose
the umbrella policy.
Tenth Circuit affirms sanction for failing to disclose D&O policy
In Sun River Energy, Inc. v. Nelson, 800 F.3d 1219
(10th Cir. 2015), decided last September, the Tenth Circuit
affirmed an award of sanctions against counsel for failing to
disclose the company's directors and officers (D&O)
insurance policy in its initial disclosures.
In that case, the Plaintiff had a "Directors and Officers
Liability Insurance Policy including Employment Practices and
Securities Claims Coverage" which arguably provided coverage
for certain counterclaims which the Defendant may have made.
However, by the time the policy was disclosed, any potential
coverage under that "claims made" policy had
lapsed.
The federal magistrate judge, in issuing the underlying sanction,
wrote that counsel never "took a serious look at whether there
was applicable insurance" and "exhibited deliberate
indifference to the obligation of providing relevant insurance
information under Rule 26."
Importantly to defense counsel, the Tenth Circuit flatly rejected
the attorney's excuse that "counsel need not bother to
review the actual terms of an insurance policy . . . before denying
the existence of the potential coverage, so long as he believes the
existence of coverage would be very unlikely or unusual."
Instead, defense counsel is obligated to review all applicable
policies and then provide the information required by Rule 26 when
completing Initial Disclosures. Implicit in the Tenth Circuit's
ruling is that the lawyer must have a basic understanding of
insurance law and whether certain policies may provide coverage for
the claims at issue.
Finally, no discussion of defense counsel's potential insurance
obligations is complete without reference to Shaya B. Pacific,
LLC v. Wilson, Elser, Moskowitz, Edelman & Dicker, 827
N.Y.S.2d, 231 (N.Y. Sup. App. Div. 2006). In that New York case,
the court held that an attorney could be liable for
negligence/malpractice for failing to investigate his client's
insurance coverage for a claim or failing to notify the insurer of
a claim. However, the determination of negligence would also turn
on "the scope of the agreed representation." Clarifying
the scope of representation - by excluding any obligation to
consult on insurance coverage - is thus important to attorneys who
do not feel comfortable opining on insurance matters.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.