In Zavodnick, Zavodnick & Lasky, LLC v. National Liability and Fire Ins. Co., 2019 WL 1003157 (E.D. Pa. 3/1/19) the Pennsylvania court held that when a workers compensation board criticized the attorney’s handling of the case, that a reasonable attorney would have known that a malpractice claim might be filed and therefore the professional liability policy’s prior knowledge provision precluded coverage of a malpractice claim.
In the workers compensation claim, an issue arose as to whether the workers comp insurer waived its subrogation lien as to past and future workers compensation benefits in exchange for a specified settlement amount. A dispute arose in the workers compensation case between the workers compensation insurer and the attorney as to whether the workers compensation insurer had agreed to waive its right to a credit against future compensation benefits. The dispute resulted in a hearing before the Industrial Accident Board of the State of Delaware (IAB). The IAB granted the workers compensation insurer’s motion for a credit. In finding the credit, the IAB faulted the attorney in a written decision for failing to draft a settlement letter that unambiguously stated that the workers compensation insurer agreed to waive its right to a credit for future benefits.
Several months after the critical written decision was issued, the attorney applied for a malpractice policy. The policy asked the attorney the following question: “Is the applicant or attorney for whom coverage is sought aware of any act, error, omission, or incident that might reasonably be expected to result in a claim or suit being made against them?” The attorney answered, “No.” Later, the injured worker whom the lawyer had represented, sued the lawyer for malpractice for failing to obtain a written agreement from the workers compensation carrier to waive the right to a credit against future workers compensation benefits. The claim was submitted to the malpractice insurer. The malpractice insurer denied the claim, asserting that the policy’s prior knowledge provision precluded coverage.
Analyzing the coverage issue, the court found that determining whether a prior knowledge provision of a policy precluded coverage required a two step analysis whereby the court would first determine what the facts were that were known to the insured, and then determine whether a reasonable insured who knew of those facts would have known that a malpractice suit might be filed. Using that analysis, and turning to the subjective component of the analysis, the court found that before the attorney applied for the insurance, he knew that when his client entered into the settlement of the personal injury action which gave rise to the subrogation lien credit, the client believed that the workers compensation carrier had waived its right to a credit against future workers compensation payments. The attorney also knew that a letter he had sent to the workers compensation insurer regrading the settlement did not address future workers compensation benefit credits. Additionally, the lawyer knew that he had been blamed by the IAB for failing to draft a settlement letter that explicitly provided for a waiver of the workers compensation carrier’s future credits. Then, applying the objective component of the analysis, the court held that a reasonable attorney in the position of the insured attorney, would have reason to know that a malpractice suit might be filed. According to the court, the IAB decision strongly indicated that the attorney’s actions might give rise to a claim for legal malpractice.