## Facts

- John R. Sparks III and Carolyn Sparks obtained a legal-malpractice judgment against their attorney, A. Raymond Guarriello, arising from negligent handling of a residential real-estate dispute and related litigation.
- Guarriello carried professional liability insurance from St. Paul Insurance Company under successive annual policies starting in 1976.
- The policy in dispute became effective November 6, 1979 and was later canceled in January 1980 for nonpayment.
- The policy was labeled “claims made,” but in its initial year it provided no meaningful retroactive protection and, in practice, required the malpractice to occur, be discovered, and be reported to the insurer within the same policy period.
- The Sparkses’ new counsel notified St. Paul of Guarriello’s negligence in mid-1980, after the policy period and after cancellation; St. Paul denied coverage for lack of timely reporting.
- The trial court entered summary judgment for the Sparkses on coverage; the Appellate Division affirmed, treating the policy limitation as contrary to public policy.

## Issues

1. Whether a professional-liability “claims-made” policy that effectively requires malpractice to occur, be discovered, and be reported within the same policy year—while providing no meaningful retroactive coverage in its first year—is enforceable as written under New Jersey law.
2. Whether, given insurance-contract reasonable-expectations principles and public policy concerns, the coverage limitation should be construed or reformed to provide indemnity for the malpractice judgment.

## Decision

- The New Jersey Supreme Court affirmed judgment for the Sparkses, holding St. Paul obligated to provide coverage.
- The Court held that claims-made policies are generally permissible, but this policy’s unusually narrow coverage could not be enforced strictly according to its terms.
- The Court concluded the limitation defeated the reasonable expectations of an insured purchasing professional liability coverage and conflicted with public policy given the likelihood that malpractice is discovered after the policy year.
- To avoid illusory protection, the Court construed the policy to provide coverage in an occurrence-like manner sufficient to reach the reported malpractice claim.

## Legal Principles

- Claims-made professional liability insurance is not invalid per se; enforceability depends on the practical scope of protection provided.
- Because insurance contracts are typically adhesive, coverage limitations are scrutinized and will not be applied to defeat the reasonable expectations of the average policyholder.
- A claims-made form that offers virtually no retroactive coverage and only a short, unrealistic window for discovery and reporting may be treated as contrary to public policy.
- When a professional-liability policy’s terms create illusory coverage, courts may construe or reform the policy to provide the coverage a reasonable insured would expect.

## Conclusion

The court enforced the general legitimacy of claims-made coverage while refusing to enforce an unusually restrictive version that offered illusory protection; it construed the policy to provide coverage consistent with reasonable expectations and public policy and required the insurer to indemnify the malpractice judgment.


Sparks v. St. Paul Ins. Co., 100 N.J. 325, 495 A.2d 406 (N.J. 1985)