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Does failure to notify your insurer of a subpoena void your professional liability insurance coverage?

subpoena

By Rickard Jorgensen, FCII, ARM, ACIArb

We have frequently been contacted by members of the CPAGold™ program for assistance to respond to a subpoena, either for documents or for testimony.

In fact, the CPAGold™ policy provides a specific coverage extension a follows:

1.2.2     Subpoena Expenses

We will pay on your behalf Defense Expenses approved by us incurred in responding to a subpoena for documents or testimony first received by you during the Policy Period, or during an automatic or optional Extended Reporting Period, if applicable, resulting solely from your rendering or failure to render Professional Services performed by you, on or after the Retroactive Date and before the end of the Policy Period, which has not resulted in a Claim against you, and is not related to a matter previously notified as a Claim to any of your prior Accountants’ Professional Liability insurers.  We will, at your request, and upon receipt of a copy of the subpoena, retain an attorney to advise you regarding the document production and represent you during the preparation and giving of testimony.

Any notification you give to us of such subpoena shall be deemed to be notification of a Covered Act that may give rise to a Claim pursuant to CONDITIONS 9.1

This coverage is also subject to the following preamble:

1.2        Additional Coverages

Solely with respect to the extensions of coverage described in this Section 1.2 Additional Coverage, amounts paid by us shall not reduce the Limits of Liability set forth in Item 3 of the Declarations and you shall not be required to pay the Deductible set forth in Item of the Declarations.

My underline.

We have also discussed the benefits of early notification of claims (including subpoenas) in the past here.

But what if you receive a subpoena that does not arise from or relate to any allegation of professional wrongdoing? If you don’t immediately notify your insurer of the subpoena does this prejudice your ability to file a future claim if the subpoena ultimately develops into a lawsuit against you?

The policy definition of the term “Claim” in many CPA professional liability policies has expanded in recent years and the range of situations where a policyholder is obliged to provide notice to the insurer has also expanded.   Among the recent expansions has been the inclusion in many policies of receipt of a “subpoena” within the meaning of the term “Claim.” As a result, a policyholder’s failure to notify its insurer of a “subpoena” could jeopardize coverage for a later related lawsuit. However, as a federal district court recently held, applying New York law, the notice requirement is not triggered if the prior “subpoena” does not meet the professional liability insurance policy’s definition of  the term “claim,” and, the court additional held that the failure to notify the insurer of the subpoena did not preclude coverage for a later suit. The court’s decision sheds interesting light on a number of frequently recurring coverage issues.

In the Southern District of New York Judge Cathy Seibel gave an opinion on February 3, 2020 which can be reviewed here.  A summary of the case may be found here.  But the essence is that the insured received subpoenas for documents pertaining to “foreclosure actions” in July 2015.  The Title company that received the subpoena complied.  Fast forward to April 2016 and the title company was sued for conspiracy, fraud, and fraudulent conveyance.  The case was ultimately dismissed in June 2019.

During the intervening three years, the Title company’s professional liability insurance provided continuous professional liability insurance.   Because there was an obligation to disclose “any incident or circumstance which MAY RESULT in a Claim being made against the applicant” and the Title company did not make mention of the subpoena, the insurer tried to deny the professional liability claim via a summary judgement.

In her opinion, Judge Seibel granted the Title company’s motion for summary judgment and denied the insurer’s motion for summary judgment.

In support of its motion, the Title company argued that the subpoena is not a “Claim” within the meaning of the policy because it had not been issued “as a non-party to litigation or arbitration involving Professional Services provided by” the Title company. In seeking to argue that the subpoena met the definition of “Claim,” the insurer argued that the phrase “involving Professional Services by [the insured]” modifies “subpoena,” not “litigation or arbitration,” and thus the subpoena is a “Claim” because the Title company rendered professional services in connection with the properties that are the subject of the 2015 subpoena.

Judge Seibel rejected the insurer’s argument, saying that “the only reasonable interpretation of the language” is that the “adjectival clause ‘involving professional services’ modifies the nouns that it immediately follows” – that is, “litigation or arbitration.” Therefore to qualify as a “Claim,” the subpoena must be issued in a “litigation or arbitration” involving Professional Services by the Title company. The subpoena, Judge Seibel said, “does not so qualify,” as the post-judgment subpoena was “for the purpose of enforcing the judgment, not questioning the Title company’s professional services.”

Consequently, if you receive a subpoena from a client or third party that DOES NOT include an implied or direct allegation of professional wrongdoing, then it should not trigger an obligation to notify your insurer and should not impair your ability to file a claim at some later date.  However, prudence and good risk management practice may contradict this and it might be wiser to contact the toll free risk management hotline provided by your insurer.  It’s free and in the case of CPAGold™ members, Ralph Picardi [(866) 668 7475] may be a better judge as to whether or not a subpoena should be reported to your insurer.

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Jorgensen & Company are not attorneys and do not offer any form of legal advice. Consult with appropriately qualified local counsel for more assistance. Rickard Jorgensen is President and Chief Underwriting Officer for the CPAGold™ program and may be contacted at (201) 345 2440 or rjorgensen@jorgensenandcompany.com.