Center City-based Pepper Hamilton L.L.P., accused of negligence in its representation of a failed student-loan company, may not collect from two of its malpractice insurers because the firm did not disclose that it might be the target of a lawsuit, New York state's highest court has ruled.

The loan company, Student Finance Corp., went bankrupt after disclosures that it had manipulated its books to hide student-loan defaults. Its former president and founder, Andrew Yao of Bryn Mawr, was sentenced to five years in federal prison in February after his conviction on charges that he had fraudulently obtained financing for his company.

Pepper Hamilton had ceased its representation of the company in 2002, based on concerns about its operations. But the firm was sued by the bankruptcy trustee, who alleged that Pepper Hamilton had failed to ferret out information about SFC's fraudulent finances and for allegedly furthering the deception.

In a 10-page opinion issued Oct. 20, the New York State Court of Appeals said the firm should have informed its insurance carriers, Executive Risk Indemnity Inc. and Twin City Fire Insurance Co., of the risk that it might be sued at the time it renewed its coverage.

"The law firm's knowledge of its client's fraudulent payments prior to its application for excess coverage coupled with the fact that a reasonable attorney would have concluded that the law firm defendants would likely be included in the litigation . . . create an obligation for the law firm to inform its insurers," the Court of Appeals said.

Read the full story here on the Philadelphia Inquirer website.