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In the case of Westport Insurance v Mylonas, the attorney finds out true cost of not buying high enough Attorney Malpractice Liability Insurance Limits.  First the Pennsylvania State court stated that coverage was limited to $500,000 in 2015.  Now the US District Court of Pennsylvania has affirmed that decision on summary judgement.

Westport issued a legal malpractice policy to the Law Offices of Peter George Mylonas, P.C.  Westport defended Peter Mylonas and the firm in a state court action filed by Anastasios Papadopoulos. Papadopoulos received a judgment in his favor in the amount of $525,000. Westport offered to settle its obligation of the judgement less the cost of defense  per the Westport policy.

The Westport policy has a limit of liability of $500,000 per claim and $1,000,000 in the aggregate with Claims Expenses Inside the Limits (CEIL).  With CEIL the limits of liability are reduced by the payment of defense costs. Westport filed an action seeking a declaration that its liability under the policy is limited to $500,000 on basis that the underlying action constitutes only one “claim.”

Among the arguments that were tried to increase the obligation of Westport’s $500,000 CEIL policy were:

1.       That each error or action by the firm for the client constituted a different occurrence.  If granted this would have brought the aggregate policy limit into play.  This argument was rejected by the courts.

2.       That it was against “public policy” to sell an Attorney Malpractice policy in Pennsylvania as it violates Rule 1.4(c) that requires attorneys in Pennsylvania to carry a certain amount of Lawyers Professional Liability Insurance Coverage.  This argument was rejected by the courts.

3.       That an “eroding policy offends traditional notions of fairness’ because [a]ttorneys purchase liability insurance to protect their clients”.  This argument was rejected by the courts.

4.       Than an eroding policy “subverts that intent by using liability coverage to pay the insurance company’s litigation expenses and attorney’s fees, rather than protecting the attorney by making the injured party whole against their losses.”  This argument was rejected by the courts

The reality was that the law firm was underinsured for the types of cases that the firm handled.  Law Firms when determining the liability limits that they need have to look not only at the cost of damages that could be incurred if they make a mistake, but the cost of claims expenses, which can be considerable with many attorney malpractice cases. 

Having an attorney malpractice policy with Claims Expenses Outside the Limits (CEOL) is one alternative, but one needs to remember that most CEOL Attorney Malpractice policies limit expenses paid under the CEOL sublimit to the limit of liability or in some cases a lower limit.  Once that limit is exhausted, the primary limit of liability starts to be eroded for additional claims expenses.

Also of note, the cost of being underinsured to the law firm is not just $25,000 (the difference between the $525,000 judgement less the $500,000 limit).  Although not disclosed in the court’s ruling it is far greater:

“The crux of this case is a dispute over whether the professional liability insurance policy issued  by  Westport  to  the  Mylonas  Defendants  obligates  Westport  to  pay  $500,000  or $1,000,000 under the Policy.  The amount is critical because defense costs are included in the coverage and Westport spent a considerable amount of the first $500,000 on expenses defending the Mylonas Defendants against Papadopoulos in state court.  Westport is willing to tender the amount remaining of the $500,000 to Papadopoulos after deducting these costs.  Papadopoulos seeks in this case to have the coverage amount increased to $1 million so he may fully recover the $525,000 awarded by the jury in the underlying lawsuit.”

 

It would appear that the amount left by the Westport Policy to pay for indemnity expenses is very little, meaning that the law firm is on the hook for most of the $525,000 judgement.  Assuming that the firm cannot be collected upon, than the client is left without recourse to recover damages they have incurred. 

The law firm by saving a little money on the Lawyers Professional Liability Insurance policy premium is now responsible for hundreds of thousands of dollars in damages to their past client.

 

 

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