‘Prior knowledge’ clause bars legal malpractice action

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A professional liability insurance policy did not cover a malpractice claim brought against an attorney who drafted a company’s standard noncompete agreement before representing one of the company’s principals against allegations that she breached the agreement, a Superior Court judge has held.

Defendant John Tocci provided employment counseling to Flexible Fundamentals for several years, during which he drafted its noncompete agreement and advised “FlexFun” on the agreement’s implementation and enforceability.

In 2021, FlexFun sued principal Errion McGrath, claiming she violated her noncompete by starting a competing entity.

When FlexFun learned that Tocci was defending McGrath and other defendants in its action, it sought to disqualify him, citing a conflict of interest. A trial judge allowed the motion and the Appeals Court upheld the disqualification, stating that the record showed he had confidential information from his prior representation of FlexFun that he could have used against his former client.

FlexFun subsequently brought a malpractice claim against Tocci and his firm.

Plaintiff AIX Specialty Insurance followed with an action seeking a declaration that a “prior knowledge limitation” in Tocci’s policy barred coverage because he had a reasonable basis to foresee the malpractice claim before the applicable policy period began.

Judge Peter B. Krupp, sitting in the Business Litigation Session, granted the motion.

“Where, as here, ‘a plaintiff can demonstrate that a disciplinary rule was intended to protect one in his position, a violation of that rule may be some evidence of the attorney’s negligence,’” Krupp wrote, quoting the Supreme Judicial Court’s 1986 decision in Fishman v. Brooks. “[T[he Appeals Court concluded [two years before the relevant policy period began] that Tocci willfully ignored those rules and appears to have used confidential information in his representation of the McGrath Defendants. In this context, it was reasonably foreseeable that FlexFun and [principal Jennifer] McGee could initiate litigation based on Tocci’s representation of the McGrath Defendants.”

Krupp additionally found that a “claim first made” limitation barring coverage for claims not first made during the relevant policy period applied.

The 16-page decision is AIX Specialty Insurance Company v. Tocci, et al., Lawyers Weekly No. 09-057-25.

Willful ignorance?

AIX’s attorney, Patricia B. Gary of Boston, said her client was pleased with the decision.

“Judge Krupp rightly agreed that the law firm had knowledge of facts that would cause it to foresee a malpractice claim, particularly because a decision by the Appeals Court in December 2022 determined that the lawyer had willfully ignored his duty to safeguard client confidences,” Gary said.

Boston attorney Michael J. Rossi, who represented Tocci and his firm, declined to comment.

However, Jessica Gray Kelly, a Boston attorney who handles professional liability matters, said she was struck by how easily Krupp concluded as a matter of law that Tocci had a reasonable basis to foresee a legal malpractice claim arising from the disqualification proceedings, since that is usually an issue for a jury.

In fact, Kelly said, in certain parts of the opinion, the court appeared to be using its own subjective judgment of the potential for a claim, but with the benefit of hindsight.

“On the other hand, the decisions by both the trial court disqualifying the insured attorney and the Appeals Court affirming the disqualification clearly concluded that the attorney acted improperly,” she said.

While some level of judicial commentary about counsel’s conduct is not uncommon, especially in the context of a motion to disqualify, this case presented the sort of criticism, coupled with sanctions, that should have immediately set off alarm bells.

— John G. O’Neill, Boston

While the finding that Tocci committed an ethical violation is not per se negligence, it was enough for the court to conclude that he was on reasonable notice of a claim that should have been reported before the policy period began in 2024, Kelly added.

“Not every coverage dispute based on prior knowledge is likely to be so easily decided as a matter of law,” she said.

John G. O’Neill of Boston, who handles coverage disputes in malpractice cases, said it can be surprising for attorneys to learn that that the relevant inquiry is not whether they expected a claim but whether an objectively reasonable lawyer would have concluded that a claim might result.

“While some level of judicial commentary about counsel’s conduct is not uncommon, especially in the context of a motion to disqualify, this case presented the sort of criticism, coupled with sanctions, that should have immediately set off alarm bells,” O’Neill said. “Adverse rulings are a fact of life, but where a ruling implicates counsel’s performance or conduct, it may be time to consult with your insurance broker for advice.”

Boston attorney Alan E. Brown said that while Krupp’s decision focused on an appellate decision discussing the attorney’s conduct, it takes much less than that to trigger an obligation to report a claim to an insurer.

“In a situation where the lawyer believes the potential claim lacks merit, the lawyer is free to inform the carrier of the lawyer’s analysis and supporting facts,” Brown said. “Making a report is not an acknowledgment by the lawyer of the merits of the allegations but is crucial to ensuring coverage.”

Sara N. Holden of Newton said the decision highlights how important it is for lawyers to read and understand their malpractice insurance policies so they are clear on when they need to put their carrier on notice of a claim.

“For a variety of reasons, including increases in premiums or denial that they have engaged in any wrongdoing, lawyers are sometimes hesitant to get their carriers involved,” Holden said. “However, ignoring a potential claim in order to avoid an increase in premium can be penny-wise [and] pound-foolish, as the cost of defending a legal malpractice action after a denial of coverage for failure to provide notice can be and will be far greater.”

Conflict of interest

Tocci first began providing FlexFun employment counseling in 2016 and drafted the noncompete agreement the company used with its personnel.

In 2019, he represented McGrath when she was named in an individual capacity as a defendant in various suits against FlexFun.

On Aug. 6, 2021, FlexFun sent McGrath a cease-and-desist letter alleging that she was violating her noncompete by forming a competing company, Social Perspectives 4 Everyone. Tocci was copied on the letter.

The following month, FlexFun and principal Jennifer McGee sued McGrath, her new company, and other former FlexFun employees in Superior Court, alleging that they misappropriated FlexFun’s confidential information and goodwill and sought to steal FlexFun’s clients.

They also sought a preliminary injunction to enforce their noncompetes.

Tocci said he was representing the McGrath defendants and accepted service on their behalf.

FlexFun soon notified him that the company and McGee objected to him representing any such defendants, asserting that it would be a conflict of interest, but he declined to halt his representation.

In response, FlexFun filed an emergency motion to disqualify Tocci and his firm.

On Oct. 8, 2021, Judge J. Gavin Reardon Jr. granted the motion, finding that Tocci’s prior representation of FlexFun exposed him to confidential information that could be used against the company in the McGrath litigation.

The Appeals Court affirmed the decision on Dec. 28, 2022, describing it not only as a situation in which an attorney possesses confidential information that could be used against a former client, but one in which the attorney “appears to have already” done so.

The panel also awarded FlexFun attorneys’ fees and double costs, concluding that the appeal was frivolous.

On May 1, 2024, FlexFun brought a legal malpractice action in Superior Court against Tocci and his firm, alleging that by representing the McGrath defendants, he disregarded his ethical duties to FlexFun and used privileged and confidential information to its detriment.

Tocci sought a defense from AIX, which denied coverage.

In August 2024, AIX brought a declaratory action arguing that there was no coverage under the policy. The parties cross-moved for judgment on the pleadings.

Prior knowledge

Krupp found that the AIX policy’s prior knowledge limitation barred coverage.

Specifically, Krupp noted that in awarding fees and costs, the Appeals Court suggested that Tocci had exhibited “willful blindness” to the constraints of Rule 1.9 of the Massachusetts Rules of Professional Conduct, which bars attorneys from representing a client in a matter that is materially adverse to the interests of a former client.

“These conclusions strongly suggested … that Tocci had committed an ethical violation against FlexFun, his former client, which potentially caused it harm,” Krupp wrote. “Given the panel’s decision and the contentious relationship between McGee and McGrath that led to the Employment Action, a reasonable attorney would have foreseen by December 2022, more than a year before the Policy Period, that a malpractice claim could arise from the Tocci Defendants’ representation of the McGrath Defendants in the Employment Action.”

Krupp similarly found that the policy’s “claim first made” limitation barred coverage in the case because events surrounding FlexFun’s 2021 efforts to disqualify Tocci constituted a “claim” within the meaning of the policy.

Tocci argued that allegations in FlexFun’s 2024 malpractice suit that he aided and abetted the McGrath defendants in setting up Social Perspectives as a FlexFun competitor constituted a new claim that fell under the policy.

“I disagree,” Krupp said. “The additional wrongful acts alleged in the Malpractice Action are logically, causally, and/or temporally related to the purported misconduct that is the subject of the 2021 claim.”