1. {00056289.1 }
JOHN D. COYLE
jcoyle@bmgzlaw.com
CASE ALERT: Summary Judgment granted dismissing direct against attorney
malpractice carrier.
Innes v. St. Paul Fire & Marine Ins. Co. (D.N.J. September 11, 2015) Esther Salas, U.S.D.J.
(2015 U.S. Dist. LEXIS 121753)
Holding
In a case of first impression, the United States District Court for the District of New
Jersey granted summary judgment in favor of insured in a coverage action filed by the prevailing
party in an attorney malpractice action. The policy at issue was a claims-made and received
policy. St. Paul Fire & Marine Ins. Co. denied coverage, arguing that their insured was on actual
notice of the claim prior to the inception of the policy. The District Court rejected Plaintiff’s
argument that correspondence regarding a potential claim
:
from a non-client did not provide
actual, or reasonably known, knowledge of a claim. The Court held that where the insured was
aware of the underlying facts for the claim prior to the policy period, the insured was on actual
and constructive notice. The insured also waived coverage from St. Paul and Plaintiff argued
that this waver was unenforceable as against public policy. The Court did not address this issue
after determining that the claim did not arise during the policy period.
Discussion:
The underlying attorney malpractice claims arose from a divorce action. During a
period of separation prior to filing for divorce, Mr. and Mrs. Innes agreed that the passport for
their minor daughter was to be held by counsel for Mrs. Innes. Mr. Innes subsequently switched
counsel and her file, with the passport, was transferred to her new attorneys (the insured in the
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District Court action). The insured believed it was not bound by the agreement made by prior
counsel and gave Mrs. Innes the passport when she requested it. Mrs. Innes flew to Spain with
her daughter in January of 2005 and the child remained behind with her maternal grandparents.
Mr. Innes was granted sole custody in the divorce action and, after lengthy international
proceedings, he was ultimately unable to compel the return of his daughter.
In January of 2006, counsel for Mr. Innes sent a letter to the insured stating that he had
been retained to represent Mr. Innes “in an action against your firm” based upon the insured's
failure to follow to the passport agreement. The letter also asked the insured to place his carrier
on notice and referenced significant legal fees incurred by Mr. Innes in his attempts to recover
his daughter. The insured responded that the claim was frivolous and suggested that if counsel
sent a new letter “with a sensible, moderate tone,” he would explain what really happened. The
insured also agreed to accept service of any complaint filed. Mrs. Innes was subsequently
convicted of custodial interference and served over 8 years in prison before her release in 2014;
her daughter, now age 14, remains in Spain.
St. Paul provided coverage under a claims-made and reported policy that was in effect
from October 2006-2007. This policy applied to claims where the “earliest claims” arising out of
the alleged negligence were made, and reported, during the coverage period. As such, it
excluded any omission or act where the insured knew or reasonably could have foreseen that
such might be the basis for a claim outside of the coverage period. In October of 2007, Mr.
Innes filed the underlying negligence action individually, and as guardian for his daughter. In
November of 2007, the insured provided notice of the action to St. Paul. The insured declined
and waived coverage for the action, proceeding to trial without coverage and without appointed
counsel.
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In May of 2011, a jury returned a verdict for $1.4 million, including attorneys’ fees1
. In
April of 2014, the Appellate Division affirmed the decision in favor of Mr. Innes, holding that
while the courts tend to hold attorneys only liable for negligence to their clients, it can extend
liability to others based on issues of fairness. Innes v. Marzano-Lesnevich v. Leibowitz
Mr. Innes then brought the instant declaratory judgment action against St. Paul seeking
coverage for the underlying award. The New Jersey Supreme Court granted certiorari with
respect to the award of counsel fees, but did not disturb the remainder of the decision
, 435
N.J.Super 198 (App. Div. 2014). The Court held that Mr. Innes reasonably relied on the insured
to follow the agreement entered into by prior counsel, and the harm of his daughter being taken
outside of the country was foreseeable. Thus he could maintain the action against the insured
despite the fact that his claim was essentially against opposing counsel. However, the Court held
that the daughter was outside the extended circle of foreseeable plaintiffs who could rely on the
agreement and reversed the judgment in her favor.
2
Plaintiff disputed that the claim was first presented with the January 2006 letter, arguing
that the letter did not demand payment or seek services. Instead, Plaintiff argued that it was
merely a request to discuss the allegations and a solicitation of a response. The District Court
($833,000
was awarded to Mr. Innes exclusive of attorneys’ fees was). Once the Supreme Court affirmed
the insured’s liability to Mr. Innes, the parties in the District Court cross-moved for summary
judgment. St. Paul raised three defenses to coverage: 1) the claim was made in January of 2006,
before the inception of the policy; 2) the insured knew or should have known that giving the
passport to Mrs. Innes could form a basis for a claim before the inception of the policy; and 3)
that the insured disclaimed and waived coverage.
1
Procedural history irrelevant to the declaratory judgment action has been omitted.
2
Proceedings before the Supreme Court are still pending.
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rejected this argument holding that a letter that does not demand damages, but uses language
clearly indicating a claim, such as here where the letter said “place your carrier on notice,” is
sufficient. The Court also held that the question of whether an insured knows or should know of
a claim turns on the insured's subjective awareness. Here, where the insured turned over the
passport at issue and was aware that their client used the passport to take her daughter to Spain,
the insured was subjectively aware of facts that could give rise to a claim3
Given the lengthy series of appeals in the matter to date, it is possible that Plaintiff will
file a Notice of Appeal to the United States Court of Appeals for the Third Circuit. I will
monitor the docket and update accordingly.
. Additionally, the
Court found that the insured had further subjective knowledge by virtue of his statement that he
would accept service. Thus, the January 2006 letter was the operative date and because this was
prior to the coverage period, summary judgment was granted in favor of St. Paul.
For Consideration:
The Court did not reach Plaintiff’s argument that "New Jersey public policy protects the
public from the negligence of uninsured attorneys" and that public policy prevents an insurance
company from allowing its insured to waive coverage and then relying on that waiver to avoid
paying a claim. Plaintiff argued here that there is a strong public policy against allowing
attorneys to have malpractice insurance gaps, citing Court Rules prohibiting same (R. 1:21-1A
and 1:21-1B. Plaintiff argued that the insurer should be liable for negligently allowing its
insured to voluntarily create such a coverage gap by waiving coverage.
There are no reported cases in New Jersey where a victim of attorney malpractice
proceeded directly against the attorney’s malpractice carrier. However, where there are other
3
However, the Court did not address the fact that the insured was on notice of facts that could give rise to a claim by
a non-client.
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gaps in coverage created through the negligence of another, the Court have placed the
responsible party in the shoes of the insurer. Carter Lincoln-Mercury, Inc. Leasing Division v.
EMAR Group, Inc., 135 N.J. 182 (1994)(broker liability affirmed when insurance policy was
obtained from insolvent carrier); Werrman v. Aratusa, Ltd.
Plaintiff argued here that the negligent act by St. Paul was allowing the insured to waive
coverage and it could likely be argued that the insured negligently waived coverage. It is
unlikely that a Court would allow an attorney to voluntarily disrupt the legislated system of
malpractice coverage for what appears to be a business decision. If the insured was ultimately
insolvent, a Court may impose liability on the insurer instead of leaving the injured party without
a remedy, even though this is essentially what the District Court did here. Based upon this
unsettled area of law, my recommendation would be to carefully evaluate an insured’s attempts
to waive coverage by ensuring that alternate insurance coverage was available, especially for
legally mandated insurance coverage.
, 266 N.J. Super. 471 (App.Div.
1993)(insurance agent liable to injured patron for negligently allowing liability policy to lapse).
Another critical issue from this case is the imposition of liability based upon alleged
professional negligence directed to the insured’s party opponent and the legal effect of notice by
non-clients of a potential claim. It appears from the underlying briefing in this matter that the
insured disregarded the January 2006 claim letter because it was sent by opposing counsel. The
decisions from the Appellate Division and District Court combine to create a circular argument.
The insured was given notice of a claim that, on its face, was legally unsustainable and thus, did
not provide notice of the claim to its insurer. However, because the trial court and Appellate
Division ultimately held that the insured was liable to his client’s adversary, the seemingly
unsustainable claim now became viable. Thus, the failure to give notice of this retroactively
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valid claim was a sufficient to deny coverage. The prudent insured should read this decision as
requiring them to provide notice of any claim, even ones that appear to be unsustainable. The
lesson from the insurer side is that there non-traditional claims should be carefully analyzed for
latent notice issues.
If you would like to discuss this matter, or the issues raised here, please contact me.
Thank you.
John D. Coyle, Esq.
Bevan, Mosca & Giuditta, P.C.
222 Mount Airy Road, Suite 200
Basking Ridge, NJ 07920-2335
Direct (908) 848-5922
Cell: (973) 801-0454
Fax: (908) 848-6422