Failure of Lawyer to Report Claim Fatal to Coverage

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Twin City Fire Insurance Company sold a malpractice insurance policy to John S. Xydakis, an attorney and one of the Defendants. Xydakis made claims under the policy based on lawsuits and motions filed against him in Illinois state court. Twin City sought a declaratory judgment that it owes no insurance coverage to Defendants for these claims or, in the alternative, rescission of the policy. In Twin City Fire Insurance Company v. Law Office Of John S. Xydakis, P.C., et al., No. 18 C 6387, United States District Court, N.D. Illinois, Eastern Division (March 20, 2023) the USDC resolved the dispute.

In the affidavit to which Xydakis objected, Twin City’s counsel avered that several publicly filed documents were either served on Twin City or retrieved from the Cook County Clerk of Court or the Illinois Appellate Court and his objection failed because the Court could take judicial notice of publicly filed documents in other courts if, as in this case, their existence was not subject to reasonable dispute.

Contents

BACKGROUND

Underlying Lawsuits

Fiona Chen Consulting Company (“Chen Consulting”) sued Xydakis for failing to pay retained expert witness fees. Xydakis filed a sworn Answer, Affirmative Defenses, and Counterclaim against Chen Consulting, demonstrating that all the acts and conduct related to the Chen Lawsuit occurred between January 2012 and November 2012.

The Spiegel Motions for Sanctions.

Litigants in a separate set of lawsuits (collectively the “Spiegel Lawsuits”) brought three motions for sanctions The presiding Cook County judge ruled on all three motions and entered judgment against Spiegel and Xydakis for over $1,000,000.

On August 14, 2019, Tiberiu Klein filed a complaint against Twin City and Xydakis alleging legal malpractice, breach of contract, and breach of fiduciary duty. The Klein Lawsuit alleged that Xydakis’s wrongful conduct caused Klein to lose his “statutory deadlines” and his opportunity to collect a “significant recovery” of settlement proceeds in an underlying 2014 tort action. The Klein Lawsuit alleged that Xydakis knew of his malpractice on March 9, 2018 after the Seventh Circuit Court of Appeals “issued a damning decision criticizing Xydakis for his various failures in representing [Klein], which amounts [to] legal malpractice ” [see also Klein v. O’Brien, 884 F.3d 754, 757 (7th Cir. 2018)]

The Twin City Insurance Policy

In December 2016, Xydakis applied for legal malpractice insurance coverage from Twin City. Twin City underwrote and issued a claims-made-and-reported Lawyers’ Professional Liability Policy to the Law Office of John S. Xydakis (the “Policy”).

Xydakis sought coverage from Twin City for liability in the Chen Lawsuit and for the Spiegel Motions for Sanctions. Twin City denied it owed Xydakis defense or indemnity obligations in these matters. Additionally, the Klein Lawsuit sought damages in connection with Xydakis’s alleged malpractice. Twin City likewise denied it owed defense or indemnity obligations for the Klein Lawsuit.

DISCUSSION

Under Illinois law, the insurer’s duty to defend arises when the facts alleged in the underlying complaint fall within, or potentially within, the policy’s provisions. The insured bears the burden of proving that its claim falls within the policy’s coverage. Once the insured has established coverage, the burden shifts to the insurer to prove that a limitation or exclusion applies.

Claims-made insurance policies protect against the risk of an injured party bringing a claim against the insured during the covered period. Xydakis entered into a claims-made policy with Twin City that began on January 26, 2017 and specified January 26, 2016 as the retroactive date. By its plain language, the Policy covers only damages arising from Xydakis’s acts or omissions that occurred on or after January 26, 2016. The policy ended on January 26, 2018 and was not renewed. It allowed up to sixty calendar days after its termination to report a claim. So, Xydakis had until March 27, 2018 to make claims under the Policy. The Chen Lawsuit, the Spiegel Motions for Sanctions, and the Klein Lawsuit each fall outside the Policy’s scope of coverage, either for underlying conduct occurring before its retroactive date or for claims made after its expiration.

ESTOPPEL

Xydakis argued that a genuine issue of material fact exists as to whether Twin City should be estopped from denying coverage. Estoppel only applies where the insurer has breached its duty to defend.

When the policy and the underlying complaint are compared there was clearly no coverage or potential for coverage, estoppel does not apply. Estoppel may not be used to create or extend coverage where none exists.

DUTY TO INDEMNIFY

Where no duty to defend exists and the facts alleged do not even fall potentially within the insurance coverage, such facts alleged could obviously never actually fall within the scope of coverage. Under no scenario could a duty to indemnify arise. Twin City owed Defendants no duty to defend in any of the underlying actions; therefore, no duty to indemnify existed.

The Court, therefore, granted Twin City’s Motion for Summary Judgment. The Court further declared that Twin City Fire Insurance Company owed no duty to defend or indemnify Xydakis under all his professional and individual forms.

A lawyer should know how to read an insurance policy. Ask one if he or she has read their policy and almost all will answer in the negative. Since a claims made policy requires that there is only coverage if the claim is made during the policy period. Xydakis failed to report the existence of the claims during the policy period so there was neither a duty to defend nor a duty to indemnify. In addition, he concealed the fact of litigation against him that predated the inception of the policy. Xydakis is properly out of business and no longer practices law and must pay any judgment against him from his own assets.

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Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com

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