Judgment Does Not Revive Malpractice Limitations Period

The legal malpractice statute of limitations for counsel’s failure to timely file an insurance claim commences when the claim is denied, not when the carrier later prevails in a declaratory judgment action about coverage. In Concepts Design Furniture v. FisherBroyles, LLP, the U.S. Court of Appeals for the Seventh Circuit held that the statute of limitations for the insured’s malpractice claim began to run when it learned that its insurer had denied coverage, well before later declaratory judgment litigation over the coverage. ABA Litigation Section leaders believe the decision correctly identifies when a malpractice plaintiff suffers an injury.

No Insurance Coverage Due to Failure to Timely Submit Claim

After a Hong Kong furniture company sued a Canadian competitor in 2014 for intellectual property infringement, the Canadian defendant retained an attorney to represent it and notified the attorney that it had an insurance policy which might apply to the legal fees and damages sought. Despite this notice, the attorney did not advise the defendant to submit a claim to the insurer, and no claim was submitted at the time.

After the defendant lost the underlying litigation in 2018, it notified its insurer, which denied coverage in September 2019. Shortly thereafter, the insurer sued seeking a declaratory judgment that it did not need to pay the claim. The insurer prevailed in May 2021. Six months later, the defendant sued its lawyer for malpractice arguing that the insurer would have covered millions of dollars’ worth of costs if the attorney had advised it to timely notify the insurer.

Plaintiff’s Injury Arose When Coverage Denied

The lawyer moved to dismiss the claim as untimely. He argued that the company knew about its injury no later than September 2019, when the insurance company denied coverage because the claim was noticed too late. Because the applicable the statute of limitations for legal malpractice claims was two years, the attorney contended that the claim had expired in September 2021, two months before the lawsuit against him began. The U.S. District Court for the Northern District of Illinois agreed.

On appeal, the company claimed that the limitations period only began running when the court decided the declaratory judgment action. It argued that it only suffered an injury, or should have discovered its injury, upon the “resolution of disputed facts” that came with the decision on the declaratory judgment claim. The company further contended that malpractice claims accrue only upon the entry of an adverse judgment in a lawsuit in which “the plaintiff has become entangled due to the purportedly negligent advice.” The company claimed that it therefore only suffered damages when it lost the lawsuit that the lawyer’s malpractice invited.

The court of appeals rejected the claim on the grounds that an injury occurs when a plaintiff suffers “a loss for which monetary damages may be sought.” It held that the company’s loss occurred well before the entry of the declaratory judgment. It cited the 2019 letter from the insurer denying the claim for lateness as evidence that the company was on notice of the loss as of that date. And it distinguished the principle about malpractice claims arising after adverse judgements because the claim in this case did not concern mishandled litigation, but rather the failure of the attorney to advise his client to file an insurance claim.

Decision Correctly Identifies Date of Injury

Litigation Section leaders believe this decision accurately identifies when a malpractice plaintiff suffers an injury. “The court got it right here,” states Tiffany Rowe, Washington, DC, chair of the Section’s Professional Liability Litigation Committee. “The declaratory judgment litigation is completely separate from the cause of action in which the malpractice is alleged to have occurred,” Rowe notes.

“The result on appeal here is unsurprising,” adds Jeffrey Gross, New York, NY, vice-chair of the Section’s Trial Practice Committee. “While the plaintiff here argued that the injury was not definite enough until there was a declaratory judgment denying coverage, many legal malpractice claims accrue in situations where there never was a declaratory judgment or other judicial finding about the harm that ensued,” Gross observes.

This decision reminds practitioners to be careful in determining when a limitations period starts. “This is an aggressive approach to determination of injury triggers and puts the onus on defense lawyers to conservatively evaluate limitations issues,” advises George F. Ritchie, Baltimore, MD, vice chair of the Section’s Business Torts & Unfair Competition Committee.

Section leaders also note that the issues underlying this dispute could have been addressed through better communication between counsel and client. “The client and attorney share responsibility for the inaccurate or incomplete initial disclosures that should have identified a relevant insurance policy,” counsels Rowe. But that communication may have been impeded because the client did not hire the lawyer until a year after the lawsuit began. “At that point, even if the lawyer had said go tell your carrier immediately, the carrier still would have denied coverage because a year-late notice is far too late,” notes Gross.