A recent decision by a New York State Appellate Court has again reminded law firm risk managers of a possible law firm obligation to clients, especially those recently served with a lawsuit.  The Court held that defense counsel may have a duty to inquire of the client about potential sources of insurance coverage for the claim asserted against the client.

In Soni v. Pryor, 2016 WL 2724128 (N.Y. App. Div. May 11, 2016), the clients, directors and officers of several entities, had been named as defendants in a damages action in which they were alleged to have aided and abetted the entities in acts of fraud and conversion.  After the clients parted ways with defense counsel, they sued their former lawyers for professional negligence (legal malpractice) on the following theory: allegedly failing to advise the clients that they may have had coverage for the claims - both for defense costs and the cost of any potential judgment - under a directors and officers (D&O) policy.

In moving for summary judgment, the defendant lawyers argued, among other things, that even if they had been under a duty to inquire into the existence of a D&O policy, the clients would not have been covered in the underlying claim because of a broadly worded fraud exclusion in the policy.

The Appellate Division rejected this contention, holding that there remained a triable issue of fact about whether the fraud exclusion "clearly applied to preclude coverage."

Cautionary Lesson: Law firms should consider including in their standard client engagement agreement a provision putting the client on notice that, in the event the client has been, or may be, named as a defendant, the client should confirm whether it holds an insurance policy or policies providing coverage against the claim.

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