U.S. District Court for W. District of NY orders malpractice insurer

Long Island Business News, Dec 5, 2003 by Helen Nguyen

In a case where the plaintiff/attorney was being sued for malpractice, was the insurer's disclaimer of coverage untimely? If it was, did the delay in disclaiming coverage prejudice the plaintiff?

Following a remand by the U.S. Court of Appeals for the Second Circuit, Judge Charles J. Siragusa for the U.S. District Court for the Western District of New York conducted a trial on these issues in Eric R. Adams v. Chicago Insurance Co., determining that the insurer's disclaimer of coverage was untimely and that this delay prejudiced the plaintiff.

Therefore, the court ordered the insurer to defend and indemnify the plaintiff on the underlying malpractice action.

Case background

In March 1994, the plaintiff, attorney Eric R. Adams, began representing Patricia Novak in a workers' compensation matter.

A personal injury claim was also involved since Novak's injuries resulted from an automobile accident. Because of his limited experience in the area, Adams referred the personal injury claim to attorney Randolph Zickl.

Even though he referred the case to Zickl, it should be noted that Adams told Zickl and Novak that he would continue to remain actively involved in all aspects of the claim.

While Novak retained Zickl as her attorney on the injury claim, Zickl failed to commence an action on Novak's behalf prior to the expiration of the statute of limitations.

Claiming malpractice, Novak, hired attorney Lee Michaels. On July 20, 1999, Adams informed his insurer, Chicago Insurance Co. (CIC), about the possible claim against him.

In response to a request by CIC for an assessment of liability and damages, Adams wrote in an Aug. 12, 1999 letter that an award of $300,000 [for emotional trauma and loss of enjoyment of life] would not be unreasonable. Through discovery, Michaels obtained a copy of this letter and stated that he intended to use the letter during the malpractice trial.

In March 2000, CIC informed Adams that it was disclaiming coverage because he had breached the notification requirement contained in the malpractice policy.

Timeliness of disclaimer, remand

Following CIC's disclaimer of coverage, Adams filed suit against CIC. Despite the federal court's finding that Adams breached the notice provision, the court ruled that CIC was estopped from denying him coverage since its disclaimer was untimely.

On appeal to the U.S. Court of Appeals for the Second Circuit, the appellate court agreed with the federal court that the eight- month delay between July 1999 to March 2000 was unreasonable.

However, the court ordered a remand of the case when it wrote, [e]ven where an insurer unreasonably delays in disclaiming coverage, the insured must demonstrate prejudice from the delay in order to merit an estoppel.

'Actual' prejudice

In addressing the issue of whether Adams was prejudiced by CIC's untimely disclaimer, Judge Siragusa first noted that Adams was only required to prove that he suffered actual prejudice as compared to substantial actual prejudice.

Citing Bluestein & Sander v. Chicago Insurance Co., and Gonzales v. State, Judge Siragusa wrote, Adams is not required to prove that any actual prejudice he sustained was substantial or significant, only that he did in fact suffer real prejudice.

Applying this standard, the court determined that Adams was prejudiced by CIC's untimely disclaimer.

In making that determination, the court referred to the Aug. 12, 1999 letter that contained Adams' $300,000 damages assessment.

There can be no dispute that had CIC timely disclaimed by July 1999, Adams would not have generated his Aug. 12, 1999 letter...., wrote Judge Siragusa. There can be no question that such evidence would be very detrimental to Adams on the issue of damages.

Furthermore, this evidence would be very detrimental to him in another respect, since the malpractice jury could reasonably infer from Adams' admission as to damages, that he believed that Novak would have been successful in the underlying action.

Based on this, the court concluded that Adams was prejudiced by CIC's eight-month delay in disclaiming coverage. Therefore, the court ordered CIC to defend and indemnify Adams on the underlying legal malpractice action.