Fifth Circuit Holds That Fortuity Doctrine Precludes Coverage for Claim That Pre-Dated Policy

Applying Texas law, the United States Court of Appeals for the Fifth Circuit has held that the fortuity doctrine precludes coverage for a suit filed against an attorney before his lawyers professional liability coverage incepted because the loss occurred or was ongoing at the time the policy was issued.  Wesco Ins. Co. v. Layton, 2018 WL 1472937 (5th Cir. Mar. 26, 2018).

Two individuals sued their longtime attorney and friend alleging that he had defrauded and stolen from them in connection with two transactions.  The original petition asserted causes of action for fraud and breach of fiduciary duty.  It alleged that the defendant was the claimants’ attorney and that he owed them fiduciary duties due to that attorney-client relationship.  The claimants later amended the petition to assert a cause of action for negligence.  A jury found the attorney and his firm liable for fraud, breach of fiduciary duty, negligence and civil conspiracy, and the court entered judgment against them.

The attorney had purchased a claims-made-and-reported lawyers professional liability policy after the filing of the suit but before the claimants amended the petition.  The insurer denied coverage because the claim was first made prior to the beginning of the policy period and, alternatively, because the attorney’s acts did not involve “legal services.”

In the coverage litigation that followed, the appeals court held that whether the fortuity doctrine precluded coverage under the policy depended on whether the claimants’ first petition alleged sufficient facts to put the attorney on notice that a loss had occurred before the policy’s coverage incepted.  Affirming the grant of summary judgment in favor of the insurer, the court reasoned that the attorney was on notice because of the original complaint’s breach of fiduciary duty claim and the numerous references to his status as an attorney for the claimants in connection with the transactions at issue.  The court also held that the attorney’s knowledge was imputed to his law firm.

The court rejected the claimant’s argument that an issue of fact existed because the attorney testified at his deposition that he did not believe a covered claim had occurred prior to the policy period.  The appeals court held that this self-serving testimony was insufficient to create a genuine issue of material fact, and that it was immaterial whether the attorney believed a covered claim existed.  The key question for the fortuity doctrine was whether the loss occurred before the policy incepted.  Because the loss occurred before the policy incepted, the fortuity doctrine precluded coverage.