Law Firm Had Duty to Report Omission, Even Though Clients Promised Not to Sue

The Iowa Court of Appeals has held that a law firm’s clients’ purported assurance that they would not sue the law firm for its omission in representing them did not obviate the firm’s obligation to notify its claims-made professional liability insurer about the claim. Minn. Lawyers Mut. Ins. Co. v. Rasmussen, Nelson & Wonio, 2024 WL 4369947 (Iowa Ct. App. Oct. 2, 2024).

The law firm represented the clients in connection with purchasing a multimillion-dollar property secured by a financing statement that would lapse after five years unless refiled. The law firm failed to file for the extension, and the clients brought the omission to the law firm’s attention but, according to the law firm, orally assured the firm that they did not plan to sue for malpractice. After this exchange, the law firm renewed its professional liability insurance and answered “no” to a question asking whether the firm was “aware of any INCIDENT which could reasonably result in a claim,” making no mention of the omission. In the subsequent policy period, the clients’ new counsel emailed the law firm to suggest that a lawsuit was forthcoming and that the law firm should notify its professional liability insurer. The law firm did so, and its insurer denied coverage because it contended that the firm had not provided notice at the appropriate time.

The insurer filed a declaratory judgment action, and the trial court granted summary judgment in its favor. On appeal, the court rejected the law firm’s argument that its clients’ promise not to sue negated the firm’s obligation to notify the insurer of its error. The court emphasized that “the policy makes clear that the claim is deemed made when the insured ‘first becomes aware’ of an error or omission which could support a claim.” The court further pointed out that the policy renewal application asked the insured whether it was “aware of any INCIDENT which could reasonably result in a claim,” i.e., whether there existed a legally reasonable basis for a claim, not whether the insured subjectively believed a claim would actually result. The court thus concluded that the claim was made under the policy when the firm first discovered the omission and that it should have been reported at that point.