Wiley Rein reports on a case in the Ninth Circuit, arising in Arizona concerning prior acts exclusions in legal malpractice coverage:

"The United States Court of Appeals for the Ninth Circuit, applying Arizona law, has reversed a district court’s entry of summary judgment in favor of a professional liability insurer whose policyholder failed to list its inadequate representation of former clients as a potential claim on its policy application. James River Ins. Co. v. Hebert Schenk, P.C., 519 F.3d 917 (9th Cir. 2008), modified, 2008 WL 1836729 (9th Cir. Apr. 25, 2008). In doing so, the court determined that a reasonable person could disagree over whether the application sought the policyholder’s subjective opinion or a factual response and that it was unclear whether the malpractice claim that did result was reasonably foreseeable.

In the underlying matter, the policyholder law firm was retained by a couple seeking representation following a business failure. An attorney for the firm met with the clients and promised to perform certain follow-up actions on their behalf. However, he thereafter failed to respond to numerous phone calls or otherwise communicate with the clients for nearly three months after this meeting. The clients finally sent a letter to the attorney chastising him for his inattention and indicating that they wished to terminate their relationship. To "bring the matter to a close," the clients demanded the return of their documents and a waiver of their legal fees. In a response letter, the attorney "acknowledg[ed] his fault and stat[ed] that [the clients’] complaint was" correct in every aspect." He also agreed to return the documents and waive the fees.

One week before receiving the former clients’ termination letter, the firm had applied for a professional liability policy. The application inquired whether any lawyers within the firm were "aware of any circumstances, allegations . . . or contentions as to any incident which may result in a claim being made" against the firm, and required the attorneys to identify any such potential claims. The firm did not disclose any information regarding a potential claim by the couple. Approximately two weeks after receiving the letter, the insurer issued the firm a quote and advised the firm that before it would issue the policy, the firm would need to update its application and supplement signatures. The firm did so, advising that it "ha[d] no known claims and no known claims incidents" to report at that time. The insurer thereafter issued the policy. "