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Broken Real Estate Contract not Deemed a "Pending Claim" Against Law Firm

June 3, 2009

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When applying for a professional indemnity policy, a typical question asks the applicant whether it is aware of any legal work performed that might lead to a claim against the law firm. Recently, in <i>United National v. Granoff Walker &amp; Forlenza, P.C.</i>, a New York federal court held that there was no duty of a law firm to answer this question in the affirmative despite the fact that the firm worked on a real estate transaction that ended unfavorably for its client.

In the underlying case, GWF represented a client in a real estate transaction. The contract contained a mortgage contingency clause, which permitted the client 30 days to secure a mortgage commitment. The client told GWF that he intended to pay in cash for the purchase; the attorney relayed this information to the seller; the 30 days expired; and the seller cancelled the transaction. The seller’s right to cancel was ultimately upheld on appeal, and the client sued GWF for malpractice in not advising him of the consequences of the contingency clause.

When GWF applied for insurance coverage, it answered “no” to the question regarding any potential claims. At that point, the real estate contract had already been cancelled, and a trial level court had already ruled against the client; but the matter was still on appeal. After the appeal was denied, GWF’s client told them they intended to file a malpractice claim. GWF then notified its professional indemnity carrier, United National, who disclaimed coverage on the basis that GWF knew about the cancelled contract when it applied for coverage.

The court cited to a number of facts, including the point that GWF reviewed the clause with its client, who was a sophisticated real estate purchaser, and said a reasonable attorney would not have foreseen that the client would assert a malpractice claim. The court cited the “heavy burden” that an insurance carrier needs to establish in disclaiming coverage based on a prior knowledge exception, and indicated an attorney only needs to answer the question in the affirmative when the matters involve a “clear breach of duty, such as the failure to comply with the statute of limitations, attorney neglect, criticism by the court or disciplinary proceeding, or explicit threats of litigation.”

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