In Westport Insurance v Peter G Mylonas, Westport filed a declaratory action with the court to determine whether multiple allegations of attorney malpractice during Mylonas representation of his client Papadopoulos result in one claim or many claims.
During a jury trial, which Westport provided a defense of Mylonas, a jury awarded Papadopoulos $525,000 for attorney malpractice. Mylonas had been retained by Papadopoulos to form a corporation. During the trail Papadopoulos presented an expert witness report that concluded that Mylonas had committed at least five separate breaches of attorney malpractice.
So why is all of this important? Mylonas’s Westport attorney malpractice policy had limits of $500,000 per claim and $1,000,000 in the aggregate with defense costs inside the limits of liability. In essence, for every dollar that Westport use to defend Mylonas it reduces the limit of liability by a dollar. Westport spent $420,000 to defend Mylonas. Depending on whether there is only one claim or multiple claims would determine whether Westport has to pay $80,000 ($500,000 - $420,000 = $80,000) for damages or the aggregate limit of $1,000,000 where $580,000 ($1,000,000 - $420,000 = $580,000) is available for damages. Obviously $580,000 would take care of the jury award of $525,000.
The 3rd US Circuit relied on the following policy language:
“Two or more CLAIMS arising out of a single WRONGFUL ACT, as defined in each of the attached COVERAGE UNITS, or a series of related or continuing WRONGFUL ACTS, shall be a single CLAIM. All such CLAIMS ․ are subject to one “Per Claim Limit of Liability” and deductible.”
Based on this the US 3rd Circuit ruled that there was only one claim under the policy. As such the Westport policy only had $80,000 left to settle the damages portion of the claim. As the defense costs had ‘burned’ through $420,000 of the $500,000 per claim policy limit.
When considering attorney malpractice coverage limits, law firms need to consider not only the potential cost of a malpractice claim, but the cost of defense. Defense costs can easily ‘burn’ through a policy limit that has an inside the limit provision for defense costs (CEIL). In many cases it is wise to pay the additional costs for a higher limit policy or the additional cost of having defense costs outside the limits (CEOL).