MADISON, Wis. (CN) - Insurers that won't honor legal-malpractice claims reported outside the end dates of certain policies face no obligation to do so under Wisconsin law, the state Supreme Court ruled Wednesday.
Attorney Thomas Aul filed the untimely insurance claim at issue here after his former clients Melissa and Kenneth Anderson tried to enforce a judgment against him.
Aul retained an attorney when he received a settlement demand from the Andersons in December 2009, but he did not report it to the Wisconsin Lawyers Mutual Insurance Co. until March 9, 2011 - nearly a year after the end of his policy period. The WILMIC policy at issue provides coverage for those "claims that are first made against the insured and reported to the [insurance company] during the policy period."
"This type of policy is commonly known as a claims-made-and-reported policy," the high court explained Wednesday.
WILMIC said Aul's failure to report invalidates his claims-made insurance contract, but a lower court found no evidence that WILMIC was harmed in its ability to defend Aul in the lawsuit.
After a hearing in November 2014, the high court unanimously reversed Wednesday.
The ruling rejects claims from the Andersons that Wisconsin law bars an insurer from denying a claim for late reporting without showing prejudice.
"Yet, if we interpret the notice-prejudice statutes to apply to the reporting requirement specific to claims-made-and-reported policies, we will in effect rewrite the terms of such policies," according to the lead opinion from Chief Justice Shirley Abrahamson. "The reporting requirement, after all, is what distinguishes claims-made-and-reported policies from other kinds of liability policies. Thus, claims-made-and-reported policies would be converted into pure claims-made policies or occurrence policies. Such an interpretation would frustrate the purpose of claims-made-and-reported policies."
Further, Abrahamson said, claims of prejudice would fail in this case.
"Requiring an insurance company to provide coverage for a claim reported after the end of a claims made-and-reported policy period is per se prejudicial to the insurance company," the opinion states.
This leaves the Andersons doubly wronged.
"As we noted previously, from the Andersons' vantage point, they have been victimized twice: first by Attorney Aul's malpractice and now by his failure to comply with his malpractice insurance policy's reporting requirement," Abrahamson wrote. "We reach a harsh result, but one we have determined the law requires."
Jeffrey Davis, a partner with Quarles & Brady LLP in Milwaukee, represented the Andersons in the insurance dispute. He would not comment on whether they were seeking reconsideration.
"I'm surprised, in part because the rationale for the decision was one that I believe the other side had conceded in its briefs and arguments," Davis said in a phone interview, referring to whether the statutes applied to claims-made policies.
"The statutes say they apply to every liability policy, so it's hard to, hard to understand how that, how you could reach this conclusion, given those circumstances," Davis said.
Claude Covelli with Boardman & Clark LLP in Madison, who represented the insurer before the Supreme Court, said Davis was partially right.
"We never took the position that, on its face, the statute didn't apply to a claims-made-and-reported policy," Covelli said in a phone interview. "The statutes say you can't forfeit coverage unless you're prejudiced, and we say, well, there's no forfeiture of coverage because they never bought or paid for coverage," which echoes the concurrence's sentiment.
Covelli said he's pleased with the ruling because it will allow insurers to continue to offer affordable claims-made-and-reported policies, essential in a state that only requires certain lawyers to carry malpractice insurance.
Four justices signed on to a concurrence, written by Justice Annette Kingsland Ziegler, that clarifies conclusions the court made regarding the statutes.
"I need to write because the lead opinion writer has rejected suggested changes to the opinion which would make these conclusions clear, and as a result, I write to clarify the majority opinion of the court," Ziegler's concurrence states.
The plain meaning of the statutes does not create an "initial grant of coverage," Ziegler wrote, so Abrahamson's examination of the legislative history is irrelevant and unnecessary.
Further, Abrahamson goes a step further than she should in considering "consequences of alternative interpretations" of the statutes, when she should stop at whether the results produced would be "unreasonable or absurd."
Justices N. Patrick Crooks, Patience Drake Roggensack and Michael J. Gableman joined the concurrence.
Davis said the case will now be remanded to the Waukesha County Circuit Court, where the Andersons will proceed against Aul alone.
Aul did not immediately respond to a request for comment.