Sixth Circuit Adopts “Insured Friendly” Interpretation of Professional Liability Policy

Policyholders who are insured under claims made professional liability insurance policies often struggle with the issue as to when they are required to report knowledge of a potential claim to their insurance company. Recently, the United States Court of Appeals for the Sixth Circuit concluded that, under Ohio law, a policyholder need not report every possible or feasible claim, but rather is only obligated to report those claims that were reasonably probable, reasonably likely to happen, or reasonably certain to occur. Gonakis v. Medmarc Casualty Ins. Co., 2018 WL 721673 (6th Cir. 2018).

In Gonakis, an attorney represented a seller with regard to the sale of an apartment building. In the course of his representation, the attorney reviewed a real estate purchase agreement, promissory note and mortgage on behalf of the seller of the building. Several years later, the purchaser of the building defaulted and the seller instituted foreclosure proceedings.

Approximately four years after the attorney had represented the seller of the apartment building, the lawyer received a letter from the seller’s new attorney advising him, as well as other individuals involved in the real estate transaction, that the seller was investigating claims for damages arising out of the sale and subsequent foreclosure of the apartment building. The letter requested that Gonakis send a copy of the letter to his professional liability insurer. Gonakis reviewed the letter in conjunction with the foreclosure proceedings against the buyer and concluded that the seller was not alleging that he committed malpractice. Moreover, he also concluded that Ohio’s one year statute of limitation had expired which would preclude the seller from prosecuting a malpractice action against him. As such, Gonakis did not forward the letter to his professional liability insurer.

Subsequent to the receipt of the letter, Gonakis changed liability insurers and purchased a claims made and reported policy from Medmarc Casualty Insurance Company (“Medmarc”). Gonakis did not disclose to Medmarc when he applied for his new policy the letter or the results of his investigation. Ultimately, Gonakis was sued by the seller alleging that he had committed legal malpractice for his role in the real estate transaction.

Gonakis tendered defense of the legal malpractice action to Medmarc which refused to provide coverage. Medmarc based its coverage position on the fact that the Medmarc policy excluded coverage for claims that occurred prior to the inception of the policy if “the insured knew or believed, or had reason to know or believe, that the circumstance, act, error, or omission might reasonably be expected to result in a claim * * * against the insured.” Medmarc argued that the letter received by Gonakis informing him that his former client had retained new counsel to investigate claims and that he should place his professional liability carrier on notice constituted reason to know or believe that an act, error, or omission might reasonably be expected to result in a claim.

Gonakis sued Medmarc for its denial of coverage. The district court granted Medmarc’s motion for summary judgment holding that “a reasonable insured would have expected a malpractice claim” based upon the letter Gonakis had received. On appeal, however, the Sixth Circuit reversed the district court’s grant of summary judgment in Medmarc’s favor. The court noted it was obligated to adopt an “insured-friendly interpretation” of the policy reporting requirement and that the phrase “reasonably be expected” was ambiguous.

The court observed that, “[l]ike a runner in baseball, the tie here goes to the insured[.]” The court determined that the letter Gonakis received was insufficient to place an insured on notice that the claim was reasonably foreseeable. Specifically, the court noted that the body of the letter did not mention Gonakis by name nor provide details to support a factual or legal basis for the assertion of a malpractice claim. The court also noted that Gonakis’ representation was limited to the review of closing documents and that he was not involved in the foreclosure proceedings which seemed to be the genesis of the malpractice action. It also concluded that Ohio’s one year statute of limitation for attorney malpractice led Gonakis to reasonably believe that his former client would not bring a claim against him as it would have been time-barred. Although the court recognized that the request that Gonakis provided the letter to his professional liability carrier weighed in favor of Medmarc’s declination, it ultimately concluded that such a reference “standing alone” was insufficient to trigger an insured’s duty to report a reasonably probable claim.

Insurers faced with a coverage determination regarding whether a policyholder should have reported a claim should review the totality of the circumstances to determine whether a subsequent claim would reasonably have been expected from the policyholder’s standpoint. From the perspective of a policyholder, if an act, error or omission would not reasonably be expected to give rise to a claim despite some evidence to the contrary, an insurer may have a difficult time justifying the outright denial of coverage and it should give consideration to the provision of a defense under a reservation of rights.

If you would like further information about this decision or its impact on a particular factual scenario, phone contact any member of Reminger’s Insurance Coverage and Bad Faith Practice Group.

This has been prepared for informational purposes only. It does not contain legal advice or legal opinion and should not be relied upon for individual situations. Nothing herein creates an attorney-client relationship between the Reader and Reminger. The information in this document is subject to change and the Reader should not rely on the statements in this document without first consulting legal counsel.