2001 Winter - Insurance Newsletter
January 1, 2001

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LAW FIRM DEFEATS MALPRACTICE CLAIM OVER ADVICE ON INSURANCE COVERAGE

The New York Court of Appeals recently affirmed a decision of the Appellate Division, First Department, reported on in an earlier issue of the Insurance Newsletter (see Attorney Retained to Defend Business Client Has No General Duty to Advise Client on Insurance Coverage, OHRENSTEIN & BROWN INS. NEWSLETTER, Spring 2000 at 1), holding that a law firm did not commit malpractice when it failed to advise its client that legal defense costs may be covered by insurance.

In Darby & Darby, P.C. v. VSI International, Inc., 95 N.Y.2d 308, 739 N.E.2d 744, 716 N.Y.S.2d 378 (2000), Darby & Darby, P.C., commenced an action against its former client, VSI International, Inc. for unpaid legal fees accrued while defending VSI in a patent infringement suit between the years 1990 and 1992. During that two year period, Darby & Darby incurred over $200,000 in unpaid legal fees and ultimately moved to withdraw as counsel.

VSI subsequently retained new counsel who was successful in securing coverage for its legal fees under VSI's insurance policy.

In 1996, Darby & Darby commenced its action against VSI, which was for an account stated and legal fees. VSI counterclaimed, alleging malpractice and breach of fiduciary duty based on Darby & Darby's failure to advise VSI that litigation expenses were covered under VSI's insurance policy.

Darby & Darby moved for summary judgment. The trial court denied the motion, holding that Darby & Darby's failure to inquire into VSI's insurance coverage constituted a question of fact pertinent to relating to the firm's representation of VSI. The Appellate Division reversed, holding that VSI's allegations were insufficient to support a finding of legal malpractice and that "absent a factual allegation that [Darby & Darby's] representation specifically encompassed advice on insurance coverage, [Darby & Darby] owed [VSI] no duty to inquire into the nature and scope of that coverage."

VSI appealed the Appellate Division's decision to the Court of Appeals, asserting that Darby & Darby should have been aware that patent insurance coverage was available under the "advertising liability" clause in the standard general liability insurance policy, and that various courts around the United States had begun to recognize coverage for patent claims under this clause. In support of its contention, VSI relied on the fact that successor counsel was able to successfully obtain coverage.

In affirming the decision of the Appellate Division, the Court of Appeals held that malpractice requires a showing that an attorney failed to exercise "the ordinary reasonable skill and knowledge commonly possessed by a member of the legal profession," and that at the time of Darby & Darby's representation, neither Florida, VSI's domicile, nor New York recognized the duty of an insurer to provide litigation expenses for a patent infringement claim. On the contrary, both states had denied coverage for similar claims at the time in question. The Court acknowledged that attorneys are expected to keep abreast of "emerging" legal trends in order to properly advise their clients, but noted that in the instant matter, Darby & Darby "should not be held liable for failing to advise [VSI] about a novel and questionable theory pertaining to [its] insurance coverage."

Nevertheless, law firms and their insurers should not take too much solace in the Court's fact specific decision, which arose in a matter where the entitlement to insurance coverage had not yet clearly been established. Under the wording of the Court's decision, it is entirely possible that similar failure to advise claims might be sustainable where the right to insurance coverage is more clearly established. • —Japhet Boutin

STATUTE OF LIMITATIONS IN CRIMINAL LEGAL MALPRACTICE CASES BEGINS TO ACCRUE WHEN UNDERLYING CRIMINAL PROCEEDING IS TERMINATED

In Britt v. The Legal Aid Society, Inc., — N.Y.S.2d —, 2000 WL 1754456, 2000 N.Y. Slip Op. 10597 (2000), the New York Court of Appeals held that for statute of limitations purposes, a cause of action for criminal legal malpractice begins to accrue when the criminal proceeding is terminated. That is, on the date when the indictment against the plaintiff is dismissed.

Plaintiff Danny Britt was indicted on July 11, 1990, for rape in the first degree and related sexual offenses. Defendant Norman Bock of the Legal Aid Society was assigned by the court as Britt's counsel. After some disagreements between plaintiff and Bock, and after a motion by Bock to be relieved as plaintiff's counsel was denied, on March 6, 1991, Britt pleaded guilty to attempted rape in the first degree.

Britt later moved to withdraw the guilty plea on the grounds that he had been coerced by Bock. The motion was denied and Britt was sentenced on February 2, 1992. On appeal, the Appellate Division reversed and remanded the matter to the trial court for a hearing regarding the voluntariness of plaintiff's plea. The trial court determined that Bock had provided ineffective assistance to Britt, rendering Britt unable to effectively consider the plea offered. Therefore, on September 30, 1994, the court vacated the guilty plea and remanded the case for further proceedings. Britt was released from prison on December 27, 1994, and the indictment dismissed against him on March 7, 1996.

On September 27, 1997, plaintiff filed a legal malpractice action against Bock and The Legal Aid Society. The Supreme Court denied defendants' motion to dismiss the action as untimely, finding that, in legal malpractice actions based upon representation in a criminal proceeding, the cause of action does not accrue until the plaintiff no longer faces criminal charges either by vacatur or reversal. Because the conviction was vacated on September 30, 1994, the action was indeed timely. The Appellate Division affirmed the Supreme Court's decision. The Court of Appeals affirmed the decision, but disagreed as to the date the cause of action accrued.

The Court stated that, for three major policy reasons, a cause of action for criminal legal malpractice does not accrue until the date the criminal proceeding is terminated. In these actions, a plaintiff bears the unique burden of pleading and proving that his conviction was solely the result of his attorney's actions, not a result of plaintiff's own guilt. See Carmel v. Lunney, 70 N.Y.2d 169, 173, 511 N.E.2d 1126, 518 N.Y.S.2d 605 (1987). A conviction in the underlying criminal action precludes a plaintiff from asserting innocence in a civil suit. In Britt, even when the conviction was vacated, Britt's criminal liability was still doubt. Only once the court dismissed the indictment could Britt assert the necessary element of his innocence in his civil action for legal malpractice.

The Court compared criminal legal malpractice actions to malicious prosecution actions, where a plaintiff must also assert the element of innocence. In an action for malicious prosecution, there must be a final termination of the underlying proceeding before a claim may be pursued. See Smith-Hunter v. Harvey, 95 N.Y.2d 191, 197, 734 N.E.2d 750, 712 N.Y.S.2d 438 (2000). The objective is to avoid parallel litigation, in the civil and criminal actions, over issues of probable cause and guilt which could result in two conflicting resolutions of those issues. As in malicious prosecution actions, and to prevent such parallel proceedings, the Court held that there must be a final determination of the criminal proceeding before a criminal legal malpractice claim may proceed.

Finally, the Court considered the fact that statutes of limitations, in the interests of justice and judicial economy, are designed to prevent surprises through the revival of claims at a time when evidence may have been lost, memories have faded and witnesses have disappeared. See Blanco v. Amer. Tel. & Tel. Co., 90 N.Y.2d 757, 773, 689 N.E.2d 506, 666 N.Y.S.2d 536 (1997). These interests must be balanced against the injured person's interest in having a reasonable opportunity to assert a claim. It is not in the interests of judicial economy, however, to allow litigious criminal defendants to occupy themselves while incarcerated with the pursuit of civil actions against their former attorneys, even if the time for bringing such actions is effectively extended. Therefore, the Court held that a cause of action for legal malpractice arising out of representation in a criminal proceeding may not be brought until the criminal proceeding has terminated, at which time the statute of limitations begins to accrue.

NEW YORK COURT OF APPEALS HOLDS THAT AMENDMENT TO CPLR § 214(6), GOVERNING STATUTE OF LIMITATIONS FOR PROFESSIONAL (NON-MEDICAL) MALPRACTICE CASES, APPLIES RETROACTIVELY

The New York Court of Appeals has recently issued a decision which may impact professional (non-medical) malpractice cases commenced after September 4, 1996, involving claims accruing before September 4, 1996.

On September 4, 1996, the Legislature amended CPLR § 214(6), which governs the statute of limitations for professional (non-medical) malpractice cases, to provide that a three-year statute of limitations applies to professional (non-medical) malpractice claims regardless of whether the claim is based in contract or tort. Prior to September 4, 1996, the New York courts held that a six-year statute of limitations applied to professional (non-medical) claims based in contract. Thus, plaintiffs' professional (non-medical) malpractice claims based in contract that accrued more than three years, but not more than six years, before September 4, 1996, became time-barred by virtue of the amendment to section 214(6). For example, if a professional (non-medical) malpractice claim based in contract accrued on January 1, 1992, the plaintiff believed that he or she had until January 1, 1998 to commence a lawsuit. On September 4, 1996, that plaintiff learned that because of the amendment to September 4, 1996, his or her claim was subject to a three-year limitations period which expired on January 1, 1995.

Realizing the inequity caused by the amendment, the New York courts began holding that plaintiffs in that situation were entitled a reasonable time after September 4, 1996 to bring their professional (nonmedical) malpractice actions. The problem was that the "reasonable time" allowed was subjective and courts disagreed on the time considered reasonable.

In Brothers & Co. v. Florence, 95 N.Y.2d 290, 739 N.E.2d 733, 716 N.Y.S.2d 367 (2000) (four consolidated cases), the Court of Appeals simplified the situation by deciding that the amendment to section 214(6) applies retroactively. The Court also held that the statute of limitations for filing cases which became time-barred by virtue of a September 4, 1996 amendment to section 214(6), is the shorter of either the remaining time under the former six-year limitations period or September 4, 1997. Now, a professional (non-medical) malpractice claim that became time-barred because of the September 4, 1996 amendment must have been brought before the shorter of either the remaining time under the former six-year limitations period or by September 4, 1997. If not, the claim is time-barred. To level the playing field, the Court also held that where plaintiffs' professional (non-medical) malpractice claims accrued within three years before September 4, 1996, leaving less than a year after September 4, 1996 for the plaintiffs to have commenced a lawsuit within the three-year limitations period, the plaintiffs are afforded until September 4, 1997 to have commenced a lawsuit. —Joseph G. Colbert

HEALTH INSURER OWES NO DUTY TO PERFORM OBLIGATIONS WITH REASONABLE CARE

New York's Appellate Division, Second Department has held that a cause of action for negligence against a health insurer for denial of claims cannot survive since, due to the very nature of the health insurance contract, the insurer does not owe a duty to perform its contractual obligations with reasonable care.

In Logan, et al. v. Empire Blue Cross and Blue Shield, — A.D.2d —, 714 N.Y.S.2d 119, (2d Dep't, 2000), the plaintiffs were covered by health insurance policies issued by Empire Blue Cross and Blue Shield between 1993 and 1996. All of the respective policies at issue during this time provided coverage for "medically necessary services" and excluded treatments and/or drugs that were not. Included under the category of items considered not "medically necessary" were experimental treatments, which were further defined pursuant to a specific group of standards.

Prior to 1993, physicians employed by Empire to review claims realized that an inconsistent method of handling claims with respect to intravenous (IV) antibiotic treatment for Lyme disease existed. Due to an influx of claims involving coverage of Lyme disease treatment, Empire began to create a plan to establish a medical policy governing the circumstances under which Empire would pay for IV antibiotic treatment. Effective October 1993, Empire required pre-authorization for two different treatments, including the IV method. However, IV antibiotic treatment would only be approved for chronic or late-stage Lyme disease and when such therapy was authorized, the plan dictated that it was limited to 28 days unless the claimant could produce a proper medical showing to extend the treatment. This policy was periodically revised in response to the latest research studies on Lyme disease until December 1995 when, based on a lack of medical/scientific evidence supporting prolonged courses of such therapy, coverage for IV antibiotic treatment was limited to 30 days. The amendment did, however, outline limited circumstances under which claims for such treatment in excess of 30 days would be approved. In 1998, Empire once again revised its policy with respect to Lyme disease treatment, recognizing the necessity of treating some instances of early-stage and late-stage infection with IV antibiotics but required documentation of objective evidence of certain Lyme disease manifestations. Preauthorization for such treatment was also required and limited to 30 days.

During the relevant years of the plaintiffs' coverage period (1993-1996), each plaintiff submitted claims to Empire for extended IV antibiotic treatment of Lyme disease. In some instances, Empire approved such claims. Eventually, however, Empire refused to provide further coverage to each claimant and these denials led to a lawsuit which asserted a total of 30 causes of action against Empire, including one alleging negligence, one alleging fraud and demands for punitive damages. Specifically, the plaintiffs alleged that the nature of Empire's contractual obligation to them, along with the public interest in seeing those obligations performed with reasonable care, imposed a duty on Empire to carry out the health insurance contracts with reasonable care. Empire's actions were alleged to have amounted to a breach of such duty.

In support of their claim for negligence, the plaintiffs reasoned that because health insurance contracts, by their very nature, have such a profound effect on the public interest, Empire's failure to perform its contractual obligations pursuant to standard of reasonable care can have catastrophic consequences. The plaintiffs cited both New York University v. Continental Insurance Co., 87 N.Y.2d 308, 316, 662 N.E.2d 763, 639 N.Y.S.2d 283 (1995) and Sommer v. Federal Signal Corp., 79 N.Y.2d 540, 552, 593 N.E.2d 1365, 583 N.Y.S.2d 957 (1992) to illustrate this proposition. In New York University, the Court of Appeals stated that a tort obligation is separate from and independent of promises made and, therefore apart from the manifested intention of the parties to a contract. In Sommer, the Court recognized that the very nature of a contractual obligation and the public interest in seeing it performed with reasonable care may give rise to a duty of reasonable care in performance of the contract obligations and the breach of that independent duty will give rise to a tort claim. Another important factor considered by the Court of Appeals to support the existence of an independent tort duty, however, the manner in which a plaintiff's injuries arose and the resulting harm, which must be "typical" of tort claims. Sommer at 553.

The Appellate Division, in considering plaintiffs' allegations against Empire, noted that the very purpose of the health insurance policies at issue was to provide protection against covered expenses resulting from an illness or injury. Further, the record showed that the plaintiffs were essentially seeking enforcement of the bargain, specifically payment of their claims. Noting that a tort claim cannot lie where a party is merely seeking to enforce its contractual bargain (New York University at 316), the court held that because the "injuries" suffered because of Empire's alleged denial of their claims was solely financial, such injuries could not be said to fall within the same league as protection of the personal safety of citizens.

The plaintiffs also sought to hold Empire liable as a result of its alleged engagement in conduct outside the contract intended to defeat the contract. Specifically, the plaintiffs argued that by Empire's redrafting of its internal corporate medical policies it "underhandedly raised the bar for those seeking coverage for expensive medical treatment." The Appellate Division refused to entertain this claim based upon the plaintiffs' failure to plead and prove fraud. The court noted that, in order to establish tort liability under such a theory, the plaintiffs must establish that the contract was employed merely as a device in a broader scheme to defraud one of the parties. The plaintiffs' complaint failed to properly plead such a cause of action. Aside from the procedural failure, the Appellate Division also commented upon the illogical assertions made by the plaintiffs in attempting to plead such a claim. Specifically, the court found it impossible to agree with plaintiffs' position that an insurer should be forced to cover treatment which recognized studies and research show is no longer considered medically effective, since this would essentially require Empire to ignore the latest research and findings within the medical community concerning what is appropriate treatment for a given medical condition.

As a result of the Appellate Division's refusal to recognize causes of action against Empire sounding in negligence and fraud, plaintiffs' demands for punitive damages were also dismissed. Again citing New York University v. Continental Insurance Co., plaintiffs argued that punitive damages may be recoverable in an action based upon breach of contract in order to vindicate a public right. The court, however, pointed out that New York University also held that one of the necessary elements in such a case is that the defendant's conduct must be actionable as an independent tort. Therefore, because the Appellate Division had already concluded that there was no basis for determining that Empire's conduct constituted a tort independent of the contracts, no claims for punitive damages could stand. —Janice Greenberg

SECOND CIRCUIT ASKS NEW YORK COURT OF APPEALS TO DEFINE "THE DATE AS TO WHICH A COVERED POLICY IS FIRST ISSUED" IN INSURANCE LAW §3425 (a) (7)

In Rosner v. Metropolitan Property and Liability Ins. Co., — F.3d —, 2000 WL 1817039 (2d Cir. 2000), the United States Court of Appeals for the Second Circuit certified a question on New York insurance law to the New York Court of Appeals. The Second Circuit declined to issue a ruling concerning the meaning of an unclear statute governing the administration of insurance in New York for fear that an untenable conflict would arise in the event the state courts addressed the same issue at a later date and did not come to the same conclusion as the Second Circuit.

The Second Circuit surmised that a question of New York law is appropriately certified to the New York State Court of Appeals for decision where the interpretation of a statute is open to more than one reasonable alternative and authoritative guidance may be provided by the state court. The Second Circuit further asserted that the interests of the insurers writing coverage in New York and of New York insureds would be best served if the question at issue were decided by the state's highest court. The Second Circuit certified the following question: Does the phrase "the date as of which a covered policy is first issued" as used in section 3425(a)(7) of the Insurance Law refer to (a) the date of execution of the policy; (b) its effective date; or (c) another date?

The plaintiff, suing as the guardian of a person injured in a traffic accident sought a declaratory judgment that an insurance policy issued by the negligent driver's insurer, Metropolitan Property and Liability Insurance Company ("Metropolitan"), remained in effect on the date of the accident. The plaintiff prevailed on summary judgment and Metropolitan appealed, bringing the case to the Second Circuit.

In 1996, Israel Rosner was struck by an automobile driven by Charles Mintz. Israel Rosner suffered severe head injuries and has been institutionalized since the accident. At the time of the accident, Charles Mintz was insured by Metropolitan under an automobile liability insurance policy with a $100,000 limit of liability. Charles Mintz and his wife were also insured for several years prior to the accident under a personal excess liability policy for $1 million in excess of other coverage. The issue which became the subject of litigation is whether the excess policy was in effect on the date of the accident, May 29, 1996.

Effective May 25, 1988, the Mintzes contracted with Metropolitan for the $1 million personal excess liability policy. Because the personal excess liability policy was a "covered policy" under New York Insurance Law § 3425(a)(2), Metropolitan was required to comply with New York's "required policy period" rules in sections § 3425(a)(7) and 3425(e), which provide that personal lines policies must be extended for "three years from the date as of which a covered policy is first issued or is voluntarily renewed." N.Y. Ins. Law § 3425(a)(7) (McKinney's 2000). Therefore, Metropolitan granted the Mintzes two consecutive one year renewals of the policy, through 1991. Thereafter, Metropolitan and the Mintzes agreed to renew the policy effective May 25, 1991, triggering a second three-year required policy period. Metropolitan renewed the policy through 1993.

During the 1992-1993 policy year, Mr. Mintz's employer instituted a group insurance program. The Mintzes enrolled in the group insurance program and arranged for Mr. Mintz's payroll deduction to pay the premiums for the personal excess policy and automobile policy with Metropolitan. However, due to mishandling by the group insurance program, the premiums were not paid and the excess liability policy was canceled on July 15, 1993. In the fall of 1993, the Mintzes and Metropolitan straightened out the transfer and Metropolitan issued a new personal excess policy. The new policy was issued on October 11, 1993 but showed an effective date of May 25, 1993. Pursuant to the required policy period, the Mintzes and Metropolitan entered into two consecutive one-year renewals, extending coverage through May 25, 1996. However, prior to its expiration on May 25, 1996, Metropolitan elected to nonrenew the excess policy.

After the accident, the Rosners sued the Mintzes in New York State Supreme Court. In September 1997, Metropolitan tendered $100,000 to the Rosners under the automobile policy. Thereafter, Hanna Rosner brought suit against Metropolitan seeking a declaratory judgment that the Mintzes' $1 million excess policy remained in effect on the date of the accident, May 29, 1996. The Rosners moved for summary judgment under the theory that sections 3425(a)(7) and 3425(e) required Metropolitan to extend coverage for three years from October 11, 1993, the date on which Metropolitan executed the policy at issue. Metropolitan cross-moved, arguing that the three-year period runs from the effective date of the policy, not the date on which it was executed. The trial court ruled that in the absence of a specified "issue date" in the policy itself, the required policy period runs from the date on which the policy is executed, rather than its effective date. Metropolitan appealed the judgment to the Second Circuit.

The Second Circuit examined three possible interpretations of the phrase "the date as of which a coverage policy is first issued" as it appears in the statute. The plaintiff's interpretation interprets the phrase to mean the date of execution or delivery of the policy by the insurer. The Second Circuit opined that such a plain meaning interpretation has support both in the structure of the statute as well as insurance case law. The defendant's interpretation urges that the phrase refers to the effective date of the policy. The Court opined that this interpretation as well was not without merit, in that the phrase "as of" indicates the date of contractual significance is of the most importance. The third possible interpretation observed by the Court is that of running the three-year period from the "issue date" of the policy, a date separate and apart from either the effective date or the date of execution. The court found that the New York case law does not provide a clear answer as to the phrase's intended meaning. For that reason, the Court elected to certify the question to the New York Court of Appeals for an authoritative finding. The Court of Appeals has not yet answered the question. We will report on the Court's ruling in a subsequent issue. —Melissa C. Shea