Filed Under:Claims, Litigation

Was a letter saying ‘notify your professional liability carrier’ a claim?

If so, was the claim made within the policy period?

Everyone who offers professional services should have coverage for professional liability. (Photo: Shutterstock)
Everyone who offers professional services should have coverage for professional liability. (Photo: Shutterstock)

This story is reprinted with permission from FC&&S Legal, the industry’s only comprehensive digital resource designed for insurance coverage law professionals. Visit the website to subscribe.

Anyone who provides professional services faces the prospect of disgruntled clients, and lawyers often have clients who are unhappy when a deal falls apart. In a recent case, a lawyer received a letter from one such client’s new attorney warning him that the former client intended to pursue “claims” and that the lawyer should “forward this letter to your carrier of professional liability.” What was the effect on the lawyer’s malpractice coverage when he decided not to send the letter to the carrier?

In December 2011, Spiros Gonakis, an attorney, represented Rolvow Properties, LLC, in a real estate transaction involving Rolvow’s sale of an apartment building to Classic Victor, LLC. Gonakis was retained to review the real estate purchase agreement, promissory note, and mortgage. Title to the apartment building transferred to Classic Victor on Jan. 9, 2012, and Gonakis’ representation of Rolvow ceased.

Subsequently, Classic Victor breached the parties’ purchase agreement and defaulted on the promissory note and mortgage that it had executed in Rolvow’s favor to secure financing for the sale.

On Dec. 21, 2015, Gonakis received a letter from attorney Stephen Thomas on behalf of Rolvow. The letter was addressed to Gonakis and five others: Edwin P. Pigman, Esq., Michael Burrington, Brian Stark, Bill Dragolis, and Howard Hanna Real Estate Services. The letter stated in part that Rolvow had hired Thomas to “prosecute claims for damages arising from ... the sale” of the apartment building. It stated: “Please refer this letter to the carrier of your professional liability, errors and omissions or comprehensive liability insurance policy, or to your legal adviser if you do not maintain any such coverage.”

‘Letter doesn’t apply to me’

Based on his reading of the Thomas letter and the foreclosure action, Gonakis concluded:

• The phrase “as applicable” in the first paragraph of the Thomas letter meant that the letter did not apply to Gonakis.

• The reference to “the negligent failure of persons other than Mr. Stark and Mr. Dragolis to protect Rolvow ... arising from the anticipated deficiencies in foreclosure proceedings pending against Classic Victor, LLC” only applied to Pigman’s representation of Rolvow in the foreclosure action, not to Gonakis.

• Thomas simply was conducting an investigation, the investigation had not yet been concluded, Gonakis should preserve his file, and Thomas might contact Gonakis as part of his investigation.

• The Thomas letter was a letter of representation advising Gonakis of the possibility of litigation against Pigman, Burrington, Stark, or Dragolis.

Because Gonakis determined that Rolvow was not bringing any allegations of malpractice against him, he did not forward the Thomas letter to his professional liability insurance carrier at the time, Professional Solutions Insurance Company (PSIC).

On April 4, 2016, Rolvow served Gonakis with a complaint naming him as a defendant and alleging one claim of legal malpractice against him. Immediately after receiving Rolvow’s complaint in April 2016, Gonakis tendered it to the insurance agent for his professional liability insurance carrier at the time, Medmarc Casualty Insurance Company, along with a copy of the Thomas letter.

Insurer denies coverage

On April 22, 2016, Medmarc responded that “no coverage is available for the Rolvow Claim and Lawsuit” because Gonakis’ policy only covered claims made and reported within the policy period. The denial noted that the Thomas letter:

provided [Gonakis] with information of specific circumstances involving Mr. McMillin and Rolvow Properties, LLC which could be reasonably expected to result in a claim. Therefore, [he] knew or should have known of facts that reasonably could have been expected to result in a claim at the time [he] received the December 18, 2015 letter.

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Gonakis filed an action against Medmarc, seeking a declaration that Medmarc owed a duty to defend and indemnify him in the Rolvow malpractice lawsuit and recovery of monetary damages, including punitive damages, for an alleged bad faith denial of insurance coverage. Both parties asked for summary judgment.

Medmarc argued that it had no duty to defend Gonakis against the Rolvow malpractice lawsuit because the policy only covered a claim if it was first made during the policy period and “no insured knew or should have known of facts that reasonably could have been expected to result in a claim prior to the [policy’s] effective date.” Medmarc asserted that Gonakis could have reasonably expected the Rolvow lawsuit once he received the Thomas letter.

It also argued that the claim was excluded because the policy excluded any claim “that occurred prior to the continuous coverage effective date, if on that date, 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.”

Gonakis countered that he had no reasonable basis to foresee the Rolvow lawsuit prior to the policy’s effective date and that he had complied with the Medmarc policy’s reporting requirements by giving notice of the lawsuit during the policy period. 

The Medmarc Policy Application

On Jan. 12, 2016, Gonakis had completed and signed a Medmarc application stating that only claims first made against the insured and reported to the company during the policy term were covered, subject to the policy provisions, and warning that incomplete or inaccurate information could lead to a denial of coverage. 

The application asked whether any lawyer in the firm was aware of any “act, error, omission or specific circumstances which could reasonably be expected to result in a professional liability claim against the firm, any past or present lawyers in the firm, or any predecessor firm.”

Gonakis answered “no” to the question and also stated that he had reported “all claims, potential claims and incidents.” Gonakis did not disclose the Thomas letter to Medmarc at the time of his application. 

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District court rules for insurer

The district court, applying Ohio law, granted Medmarc’s motion for summary judgment.

In its decision, the court explained that the Medmarc policy was a “claims-made” policy, meaning that it only protected Gonakis for claims made and reported within the policy period. The issue, the district court said, was whether Gonakis was aware of facts or should have known of facts that “reasonably could have been expected to result in a claim.” It then ruled that “a reasonable insured would have expected a malpractice claim by Rolvow after receiving the Thomas letter.”

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In the district court’s view, the letter was “clear” that the claims would relate to both the real estate transaction — for which Gonakis was Rolvow’s attorney — and the foreclosure proceedings. “The letter advised all addressees, without exception, to refer the letter to their professional liability insurers,” the district court noted.

The district court decided that Gonakis’ interpretation of the Thomas letter — that it did not apply to him, that all addressees except for him would be the subject of a lawsuit by Rolvow, and that Thomas was conducting an investigation and wanted Gonakis to preserve his file because Thomas might contact him as part of the investigation — was “not supported by the language of the letter.”

It declared that Gonakis’ subjective belief that a malpractice claim would be meritless was “beside the point” because the objective prong of the policy provisions did “not address the insured’s subjective belief as to the merits of a possible claim or whether he had committed a wrongful act.” The Thomas letter, which Gonakis had received several weeks prior to the effective date of the Medmarc policy, had given him a basis to reasonably expect that Rolvow would file a claim against him, the district court concluded.

The case is Gonakis v. Medmarc Cas. Ins. Co.

Steven A. Meyerowitz, Esq., is the director of FC&S Legal, the editor-in-chief of the Insurance Coverage Law Report, and the founder and president of Meyerowitz Communications Inc. Email him at smeyerowitz@meyerowitzcommunications.com.

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