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What is an Innocent Insured and where is that clause in my policy continues to be one of the most asked questions.   It is also a clause that has promoted countless amounts of litigation.

Deliberate or illegal acts are normally not insurable either by rule of law or the insurance language in a particular policy.  But what happens when a firm member commits an act that is clearly illegal or deliberate and thereby excluded from coverage.  This “deliberate” act may also cause there to be a malpractice claim that normally would be covered.  Is it fair to the rest of a firm, if they did not know or participate in the excluded act to not have attorney malpractice coverage for is incident? 

The “innocent insured” clause in a policy is intended to provide coverage for the “innocent” parties that are members of the firm so that they are not left with insurance protection.  As each malpractice insurance policy is different, this “clause” may differ in wording and may not be called an “innocent insured” clause, while the intent remains the same.

The current AXIS Lawyers Professional Liability Insurance policy is just one such policy.  The “innocent Insured” clause is buried as part of the deliberate acts exclusions:

4.   Fraudulent, Criminal, Malicious, Deliberately Wrongful Acts, or Omissions. This policy does not

apply to any claim based upon or arising out of any dishonest, fraudulent, criminal, malicious or deliberately wrongful acts or omissions committed by you.

 

This exclusion shall not apply to a claim until and unless such conduct is evidenced by any judgment, final adjudication, alternate dispute resolution proceeding or written admission by you.

 

This exclusion does not apply to those of you who did not personally commit, personally participate in committing, or remain passive after learning about one or more of the acts or omissions described in this exclusion.  However, our obligation to provide coverage in any such case shall be excess of the deductible and excess of the full extent of any assets in the named insured, or monetary value attributed to such assets, of anyone to whom this exclusion applies.

This exclusion shall not apply to claims alleging personal injury.

 

Even though the clause and intent are clear, where does the litigation start?  I have not yet met a lawyer that enjoys completing their attorney malpractice applications.  So if one member of the firm handles it without complaint, very few people we ask any questions.  What if the party that is completing the application firm’s application(s), is also the party that is committing the acts that would normally be excluded from coverage because they were considered deliberate acts?  You now have the attorney malpractice carrier crying foul because there was a material misrepresentation to the malpractice insurance carrier on the law firm’s application.

One example of this was a multi-lawyer firm where the partner that was completing the malpractice applications was also the lawyer that was stealing money from his clients.  The attorney that had committed the illegal acts committed suicide when discovered.  The former clients now sue the firm to recover the stolen funds and for attorney malpractice.  The other partners had no involvement in the scam and no knowledge of the scam.  Yet year after year the firm’s applications were completed stating that the firm had “no knowledge” of any act that could lead to a potential claim signed by the offending partner.  The firm’s malpractice policy did have an “innocent insured” clause.  Should the malpractice carrier provide a defense for the firm and pay the claims or should they be able to rescind coverage because of the material misrepresentations made in years of applications?

 

Note:  The above is general information about a Claims Made Insurance policy concept.  Different insurance policies and different situations may or may not treat these concepts in a similar manner.

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