§ 12.3.2
Lawyers’ Professional Liability in Colorado
out of those acts or circumstances may not be covered under the insurance policy. This is discussed in greater detail in § 12.3.8, below. Courts are divided as to whether a subjective or objective standard applies in determining the existence of circumstances that could reasonably be expected to result in a claim.17 Under a subjective standard, the question is whether the insured should have disclosed the incident given his or her subjective knowledge of the facts and law. Under an objective standard, the question is simply whether a reasonably prudent lawyer under similar circumstances would have disclosed the incident. The fact that a potential claim may be without merit does not necessarily render it unforeseeable. The firm may, therefore, have an obligation to disclose a potential claim in the application even if it believes the potential claim to be entirely without merit.18 In addition, a failure to report potential incidents may result in a later claim for rescission by the insurance company should the failure to report rise to the level of a misrepresentation,19 even if there is no intent to deceive.20 C.R.S. § 10-1-128(6)(a) provides for the inclusion of language substantially the same as the following on all printed insurance policy applications: It is unlawful to knowingly provide false, incomplete, or misleading facts or information to an insurance company for the purpose of defrauding or attempting to defraud the company. Penalties may include imprisonment, fines, denial of insurance, and civil damages. Any insurance company or agent of an insurance company who knowingly provides false, incomplete, or misleading facts or information to a policyholder or claimant for the purpose of defrauding or attempting to defraud the policyholder or claimant with regard to a settlement or award payable from insurance proceeds shall be reported to the Colorado division of insurance within the department of regulatory agencies. In addition, because most policies now require, as a purported condition precedent to coverage, that no partner or shareholder of the firm have reason to expect a potential claim prior to the inception of the policy under which insurance is sought, the failure to report a potential claim may result in the insurer disclaiming coverage under the policy regardless of whether the insurer can establish the elements necessary to rescind the policy. This result may appear unfair where the lawyer is not aware of his or her negligence and, consequently, has no reason to expect a claim at the time the application is submitted. For instance, a lawyer may unknowingly miss a statute of limitations and not realize the mistake until after he or she applies for and receives a new insurance policy. If a claim is subsequently brought, the insurer could argue that the lawyer “should have known” of the missed statute of limitations at the time it was missed and therefore should have reported the potential claim on the application. In such a circumstance, it would seem that the insurer should cover the claim, as the insured had no reason to expect the claim. Nevertheless, if an objective standard is utilized in interpreting the policy — i.e., should a reasonably prudent insured have realized that he or she had missed the statute of limitations — it is possible that the insurer could attempt to avoid coverage for the claim on the basis that the insured should have
12-12
(1/07)