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What did they know and when did they know it? Prior knowledge exclusions and the duty to defend or indemnify under NY law

11/6/23

By: Edward Solensky Jr.

North River Insurance Company v. Leifer, No. 22-1009, 2023 WL 2978970 (2d Cir. Apr. 18, 2023) involved an insurance coverage dispute between The North River Insurance Company (“NRIC”) and Max D. Leifer and the Law Offices of Max D. Leifer, P.C. (together, “Leifer”).  

At issue was whether NRIC had an obligation to defend or indemnify Leifer, under a professional-liability insurance policy (the “Policy”) that NRIC had issued to Leifer, in connection with a malpractice lawsuit brought by Andy Lee, a former client.   

Leifer did legal work for Andy Lee in connection with a lawsuit (“the Original Action”) that was filed in October 2016. Although Leifer was allegedly hired to represent Mr. Lee in the Original Action, Mr. Lee never answered the Complaint, and the plaintiff moved for a default judgment. Mr. Lee, represented by Leifer, opposed the motion. However, the judge entered the default judgment, holding that the opposition was “without merit” because it failed to demonstrate a reasonable excuse for failing to answer or to advance a potentially meritorious defense to the case.  

Approximately 18 months later, in September 2019, Leifer applied to NRIC for professional liability insurance. When completing the application, Leifer represented that it had no reasonable basis to believe that there was “an act or omission in their rendering of services [that] might become the basis of a claim.” After approving the application, NRIC issued the Policy, which covered “all Damages and Defense Expenses” arising out of any “Claim first made against [Leifer] during the Policy Period” – here, October 20, 2019 to October 20, 2020. The Policy excluded certain types of claims from coverage, including those based upon “facts or circumstances of which [Leifer] had knowledge as of the effective date of [the Policy] and which could reasonably have been expected to give rise to a Claim” (the “Prior Knowledge Exclusion”).  

On October 7, 2020, Leifer reported to NRIC that it had received a letter from an attorney on behalf of Mr. Lee asserting that it was the subject of a potential malpractice claim by Mr. Lee. In November 2020, Mr. Lee filed suit alleging malpractice and NRIC accepted Leifer’s defense. Subsequently, in March 2021, NRIC advised that it would no longer provide a defense because Leifer had prior knowledge of facts that it could reasonably have expected to give rise to a claim. 

Thereafter, NRIC commenced a declaratory judgment action, seeking a ruling that it had no duty to defend or indemnify Leifer pursuant to the policy’s Prior Knowledge Exclusion. Alternatively, NRIC sought a rescission of the malpractice policy based upon Leifer’s failure to disclose material information related to the risk to insure. NRIC next moved for summary judgment, arguing that under New York law, the facts alleged in the Original Action were excluded by the Policy. The district court granted the motion, concluding that the underlying facts of the lawsuit fell within the Policy’s Prior Knowledge Exclusion. Leifer appealed. 

According to the Second Circuit, Leifer’s pleadings left no doubt that, at the time of the Policy’s effective date: (1) Leifer had knowledge of the facts and circumstances giving rise to Lee’s malpractice claim; and (2) a reasonable attorney would have understood that Leifer’s conduct could reasonably have been expected to give rise to a malpractice claim.  

In an Answer to NRIC’s complaint, Max Leifer admitted that he advised Lee not to file an Answer in a state-court action in which Lee was named as a defendant, and later sought leave to interpose a late pleading after the plaintiff moved for a default judgment. But the state court denied Leifer’s request and ultimately entered a default judgment against Lee, citing (among other reasons) Leifer’s failure to file an affidavit from his client, as required under New York’s Civil Practice Law and Rules. Based on these undisputed facts, which were known to Leifer before the effective date of the Policy, a reasonable attorney would have appreciated that Leifer’s conduct in Lee’s case might have exposed him to a claim for malpractice.  

The Court was unpersuaded by Leifer’s argument that he advised Lee to file an Answer, but that Lee never retained him to do so. The Court noted that this contention was contradicted by Leifer’s Answer in the case, in which he admitted that he “took the position of not entering an Answer” in the state-court action against Lee. The Court further noted. “Given that we must take Leifer’s assertions in his Answer to NRIC’s Complaint as true, Leifer is not permitted to rely on facts that fall ‘outside the pleadings’ to tell a different tale.”  

The Court was similarly unpersuaded by Leifer’s argument that his decision not to file an Answer was justified because Lee had no meritorious defenses. The Court reasoned that this assertion was “contradicted by Leifer’s own affirmation in opposition to the motion for default judgment in the state-court action against Lee, in which Leifer affirmatively stated that Lee did in fact have a ‘meritorious defense.’” The Court noted that it need not resolve this apparent contradiction between Leifer’s Answer in the district court and his affirmation in the state court, “for the simple reason that any reasonable lawyer in Leifer’s shoes – having filed a court document asserting the existence of a meritorious defense after previously advising the defendant not to file an answer in that action – would recognize the likelihood of being named in a future malpractice lawsuit following the entry of a default judgment in that action.” 

Finally, the Court rejected Leifer’s argument that it had no reason to anticipate the malpractice suit since Lee had thanked him for his services. The Court pointed out that the relevant question was “not whether Leifer believed that Lee would bring a malpractice claim, but whether a reasonable attorney, based on the facts known to Leifer at the time, could have expected one. And on that score, Leifer’s admitted conduct leaves no room for dispute.” 

In affirming the judgment of the district court, the Second Circuit held that, based on the admissions contained in Leifer’s answer, the lower court properly concluded that: (1) Leifer had knowledge of the facts and circumstances giving rise to Lee’s claim at the time of the Policy’s effective date; and (2) a reasonable attorney would have understood that such conduct exposed him to a malpractice claim. The Second Circuit concluded that the district court therefore did not err in granting judgment on the pleadings to NRIC and declaring that it had no obligation to defend or indemnify Leifer in connection with the malpractice action brought by Lee. 

For further information or inquiries please contact Edward Solensky Jr. at edward.solensky@fmglaw.com.