Failure to Report, Acknowledge and Make Claim to Your Client’s Insurer is Legal Malpractice

Barry Zalma

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David Quaknine and several of his companies sued their former attorney and his law firm for alleged malpractice connected to a 2014 suit. The district court granted the defendants’ motion to dismiss. It ruled that the two-year limitations period, which at the latest began to run in September 2019, expired before the plaintiffs sued in December 2021. In Concepts Design Furniture, Inc., et al. v. Fisherbroyles, LLP and Alastair J. Warr, No. 22-2303, United States Court of Appeals, Seventh Circuit (March 31, 2023) the Seventh Circuit resolved the dispute.

FACTS

The parties called Comptoir, which did business from Quebec, Canada, were sued for intellectual-property infringement in 2014. Over a year later, Comptoir hired Alastair Warr and his law firm to negotiate a settlement or, failing that, represent Comptoir in court. Comptoir told Warr that it had a policy with Intact Insurance Company that potentially could cover defense costs and indemnify it for claims. Warr did not advise Comptoir to submit a claim to Intact nor did it do so on its own.

The lawsuit did not go well and the disclosures in the suit stated that Comptoir had “no insurance agreement.” A jury eventually found against Comptoir with a judgment over three million dollars in damages. In February 2018, Comptoir-through other counsel-told Intact about the attorney’s fees. The notice, four years after the suit, was the first time Intact learned of the intellectual-property suit.

Comptoir reorganized after the adverse judgment. The bankruptcy court declared Comptoir bankrupt and discharged the judgment debt from the 2014 litigation.

Intact denied coverage on September 10, 2019. When it demanded coverage, Comptoir sent to Intact (apparently for the first time) a copy of the complaint in the 2014 suit. In denying Comptoir’s demand in September 2019, Intact gave three reasons:

1. the suit against Comptoir was not covered under the policy.

2. because Comptoir “failed to promptly notify Intact of the [2014] Complaint and to immediately upon receipt thereof, deliver to Intact a copy of the Complaint,” it violated the policy and forfeited its right to and was “time barred” from reimbursement.

3. Comptoir listed its defense fees “as amounts due to creditors,” which implied that only the bankruptcy trustee could collect them.

Intact sued seeking a declaration in Cook County Circuit Court that it was not obligated to pay defense fees or indemnify Comptoir. Comptoir made its defense-fees claim outside the three-year statute of limitations applicable under Quebec law. Thus, Comptoir’s complaint and subsequent demand for reimbursement of fees was time barred.

On December 17, 2021, refusing to admit is errors and failure to promptly act, Comptoir sued Warr and FisherBroyles for legal malpractice. The district court granted Warr and FisherBroyles’s motion to dismiss the suit as untimely under Illinois law.

Both parties accept that Illinois’s two-year statute of limitations for malpractice suits applies to this case. They also do not dispute that the Illinois statute of limitations incorporates the so-called “discovery” rule, which delays the commencement of the relevant statute of limitations until the plaintiff knows or reasonably should know that he has been injured and that his injury was wrongfully caused.

Comptoir’s claim is not based on the mishandling of litigation. Rather, its claim arises out of the defendants’ alleged failure to advise Comptoir to file a timely claim with its insurer. These damages existed before-and regardless of- the outcome of the declaratory-judgment suit. It is undisputed that one explicit reason for Intact’s denial was that Comptoir failed to promptly notify Intact of the Complaint and to immediately upon receipt thereof, deliver to Intact a copy of the complaint, and that the policy stated that failure to notify meant a forfeiture of rights to compensation.

Once a malpractice plaintiff is aware of injury the plaintiff is not required to wait for a court’s judgment certifying that the plaintiff’s attorneys erred. Thus, the limitations clock for Comptoir started when it reasonably should have known of the alleged malpractice and that occurred, at the latest, when Intact sent its letter in September 2019 denying coverage to Comptoir.

The statute of limitations is an affirmative defense, and Comptoir was not required to anticipate the defense in its complaint. Comptoir accepts that Intact denied coverage in September 2019, starting the two-year clock that expired before it sued in December 2021.

ZALMA OPINION

Lawyers, like people not trained in the law, like their clients, all have an uncanny ability to avoid reading an insurance policy. The defense lawyer, with knowledge of the existence of a policy that could provide a defense to Comptoir, ignored the fact, answered discovery reporting no insurance, and defended the suit on its merits, only to impose a multi-million dollar verdict on Comptoir. After the judgment and a bankruptcy action Comptoir made claim for its attorneys fees only to lose because the claim was time barred. Waiting even longer it sued its lawyers for failing to advise it to report its claim to its insurer, only to lose again because it was time barred.

(c) 2023 Barry Zalma & ClaimSchool, Inc.

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Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at http://www.zalma.com and [email protected]

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Barry Zalma, Esq., CFE is available at http://www.zalma.com and [email protected]