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An insurer won’t have to indemnify a law firm it insured for a quantum-meruit judgment against the firm and subsequent appeal because the judgment did not constitute a “loss” under the terms of the insurance policy, a federal court has ruled. U.S. District Judge Herbert J. Hutton of the Eastern District of Pennsylvaniasaid that because the quantum-meruit judgment could not be considered a “loss” resulting from any “wrongful act,” the Coregis Insurance Co. “was not required to fund the appeal of the … judgment” against the Salmanson & alcao law firm, nor was Coregis required to indemnify the firm for the amount of the judgment. The ruling in Coregis Insurance Co. v. Salmanson & Falcao is the latest decision related to a dispute over fees between two now-defunct law firms, Mager Liebenberg & White and Salmanson & Falcao. While employed as an associate with Mager Liebenberg & White, attorney Michael J. Salmanson worked on a qui tam case brought under the federal False Claims Act by client Lynn Bultena. On the request of Bultena, according to Salmanson, Salmanson took the case with him when he left Mager Liebenberg to form Salmanson & Falcao with attorney Linda P. Falcao, his wife at the time. Salmanson won a contingent fee of $864,000 for Bultena’s qui tam case. After Bultena’s victory, Mager Liebenberg sued in Mager v. Bultena to recover the entire amount of the fee or, in the alternative, a pro rata share. In June 2000, Mager Liebenberg won a quantum-meruit judgment against Salmanson & Falcao for $183,600. Salmanson & Falcao turned to its professional liability insurer, Coregis, to provide a defense, according to the opinion. Coregis had defended Salmanson & Falcao in Mager v. Bultena and appointed defense counsel for the firm. But in July 2000, according to the opinion, Coregis refused to appoint appellate counsel and post an appeal bond for Salmanson & Falcao. Coregis said that its insurance policy did not cover the quantum-meruit judgment and, therefore, that it was not obligated to fund an appeal. Coregis then sued Salmanson & Falcao, seeking a declaratory judgment that the underlying judgment did not obligate it to pay under Salmanson & Falcao’s policy. In response, Salmanson & Falcao filed a counterclaim accusing Coregis of bad faith and seeking a declaratory judgment requiring Coregis to pay the cost of appealing the judgment in the Mager case. Coregis filed a motion for summary judgment. JUDGMENT NOT A ‘LOSS’ Although Hutton repeatedly said in the opinion that the quantum-meruit judgment against Salmanson & Falcao did not constitute a loss resulting from a wrongful act within the Coregis insurance policy, the judge did not elaborate on whether an insured is entitled to be covered for an appeal. When construing an insurance policy, Hutton said, “the court must ascertain the intent of the parties as evidenced by the language of the written agreement.” Here, Hutton said, “Bultena exercised his prerogative and decided to terminate his attorney-client relationship with [Mager Liebenberg] in favor of representation by Salmanson & Falcao.” “Salmanson & Falcao and its partners did not commit a ‘wrongful act’ as defined by the terms of the policy by accepting Bultena’s patronage,” Hutton said. But Mager Liebenberg did not want to accept the equitable relief of pay for the hours Salmanson worked on the case at the firm and sought to pursue litigation, Hutton said. Coregis agreed in the policy to “pay on behalf of any insured all loss … which any insured becomes legally obligated to pay as a result of claims … made against any insured … by reason of any wrongful act.” The policy defined “wrongful act” as “any act, error, omission, circumstance, personal injury or breach of duty in the rendition of legal services for others in the insured’s capacity as a lawyer, and arising out of the conduct of the insured’s profession as a lawyer, or as a lawyer acting in the capacity of an arbitrator, mediator or notary public.” Hutton said Coregis was not liable for a bad-faith “frivolous or unfounded refusal” to pay proceeds on its policy under Pennsylvania law for its failure to pay for the appeal bond. Again, he said, Coregis’ denial was based on the fact that the quantum-meruit judgment was not a “loss” that resulted from a “wrongful act” under the policy. Pennsylvania law distinguishes between the duty to defend and the duty to indemnify, Hutton said. The duty to defend arises whenever the complaint filed by the injured party may potentially come within the policy’s coverage, Hutton said. But he said the duty to indemnify is more limited. That duty only arises “if it is established that the insured’s damages are actually within the policy coverage,” he wrote, quoting a decision from the 3rd U.S. Circuit Court of Appeals. REACTION In March 2002, the $183,600 Mager Liebenberg win was vacated by the Superior Court, which ruled that Mager Liebenberg could only recover fees for the hours Salmanson worked on the case while he was employed at Mager Liebenberg. The court remanded the case for an entry of judgment of $6,000. Salmanson represented Salmanson & Falcao in the litigation. Given the changed facts of the amount in dispute, the district court opinion filed means little, he said Friday. “There’s only about $3,000 owed now,” he said, explaining that $3,000 of the $6,000 judgment was already paid from Bultena’s original retainer with Mager Liebenberg. However, he said, Mager Liebenberg filed a petition for rehearing in the case that is still pending, so the amount due could conceivably change. Compared with the original judgment of more than $183,000, Salmanson said, the remaining amount in dispute was so small that he “asked Coregis to agree to either a stay [of the litigation] or to dismiss the case with prejudice.” He said Coregis refused. Coregis was represented by Stephen J. Polansky of Philadelphia’s Spector Gadon & Rosen and Bryan G. Schumann, Vincent P. Tomkiewicz and R.J. Smyk of Bollinger, Ruberry & Garvey in Chicago. Polansky did not return a call Friday. Maryanne Starr Garber of Philadelphia-based Drinker Biddle & Reath represented Mager Liebenberg.

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