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No Coverage Where Insured Knew Basis of Claim Before Policy’s Start Date

The case is ALPS Prop. & Cas. v. Keller, Reynolds 482 P.3d 638 (Montana, 2021). After purchasing the malpractice insurance policy, the firm sought to tender a malpractice claim to the insurer. Unfortunately for the lawyers, the insurer denied coverage because the law firm knew the basis of the malpractice action before it purchased the insurance policy. The Montana Supreme Court held that there was no coverage under the policy because the law firm (through one of its partners) was aware of the potential claim before purchasing insurance.

The reasoning:

¶16 Here, the Policy contains two provisions—one coverage provision, and one exclusionary provision—that enforce this basic concept. First, in defining the scope of the Policy’s coverage, provision 1.1.2 states that ALPS “agrees to pay on behalf of the Insured all sums (in excess of the Deductible amount) that the Insured becomes legally obligated to pay as Damages, arising from or in connection with a Claim first made against the Insured and first reported to [ALPS] during the policy period, provided that at the Effective Date of [the] Policy, no Insured knew or reasonably should have known or foreseen that the act, error, omission or Personal Injury might be the basis of a Claim….” (Emphasis added.)

¶17 Sandrock’s malpractice claim falls outside the scope of coverage pursuant to provision 1.1.2, because, for coverage to apply, “no Insured” may know that acts, errors and omissions might be the basis of the claim prior to the policy’s effective date. This prior knowledge provision is a condition precedent to coverage and indicates in clear and unambiguous language ALPS’s “unwillingness to cover liability arising from prior acts or omissions that any insured might reasonably expect to result in a claim.” Bryan Bros., Inc. v. Cont’l Cas. Co., 660 F.3d 827, 830-31 (4th Cir. 2011). The Firm and its members do not contest Gillespie’s knowledge of the potential claim and do not contest that his knowledge may be imputed to the Firm. Appellants argue, however, that because Johnson and Seifert had no knowledge of Gillespie’s acts and omissions giving rise to Sandrock’s claims, the prior knowledge provisions did not preclude them from coverage for the malpractice claims.

¶18 The Policy itself refutes this argument. Like all claims-made policies, the Policy focuses squarely on the claim itself. The unambiguous language of the Policy does not allow a claim to be divided into parts based on the knowledge of each Firm member. Consistently throughout the Policy, the prior knowledge provisions preclude coverage for the claim, not coverage for a specific attorney. In the 646*646 scope of coverage provision, ALPS agreed to provide coverage for “a claim” first made and reported during the policy period, provided that “at the Effective Date of the Policy, no Insured knew or reasonably should have known or foreseen that the act, error or omission … might be the basis of a Claim.” The Policy’s terms are clear and unambiguous: no attorney in the Firm can have knowledge of the potential claim.

¶19 The undisputed facts demonstrate that prior to December 12, 2015, Gillespie, an insured, “knew or reasonably should have known or foreseen” that his acts and omissions “might be the basis of a claim.” In July 2014, Sandrock was sanctioned in the Estate Action while represented by Gillespie. On September 11, 2015, the Deputy Clerk entered default against Sandrock when Gillespie failed to file an answer in the DeTienne Lawsuit. This was three months prior to the Policy’s effective date. Gillespie knew of the default, filed a motion to set it aside, and attended a hearing intended to assess damages and enter a judgment based on the default on November 30, 2015—two weeks prior to the Policy’s effective date and a day before he signed his Supplement. While at the November 30, 2015 hearing, Gillespie admitted to the District Court that he had “not paid the necessary attention to the matter.” Because Gillespie, an insured, knew or reasonably knew of Sandrock’s potential claims, Sandrock’s malpractice claims, in their entirety, fall outside the scope of coverage.[2] Although the results are “undeniably harsh” for Johnson and Seifert, the clear meaning of the Policy must govern here. See Woodhouse v. Farmers Union Mut. Ins. Co., 241 Mont. 69, 72, 785 P.2d 192, 194 (1990). The provision clearly and unequivocally states that coverage is provided only when, at the effective date of the Policy, no Insured knew or reasonably should have known that an act, error, or omission might be the basis of a claim. Gillespie was an insured, and he knew or reasonably should have known that his representation of Sandrock in the Estate Action and DeTienne Lawsuit might be the basis of a claim.

Comment: This is an unfortunate situation for the firm as the lawyers, other than Gillespie, probably did not know about the potential lawsuit and were caught unaware.

Ed Clinton, Jr.

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