A federal appeals court has reduced the amount of money an insurance company owes an attorney following his dispute with the company to fund his defense in sanctions proceedings.

Although attorney Benjamin Post brought the appeal from a district court ruling that had granted him nearly $1 million from his legal malpractice insurer, St. Paul Travelers Insurance Co. gained some ground in the ruling from the U.S. Court of Appeals for the Third Circuit.

The court chipped off a few months’ worth of attorney fees from what the lower court had ordered Travelers to cover and rejected the holding that the insurer was responsible for covering the cost of a separate suit filed by Post, even though it was related to the underlying issue.

The court said it was also adopting a bright-line rule that an insurer has no responsibility to cover separate litigation undertaken by its insured.

The majority of the split appeals court panel affirmed that Travelers must fund Post’s defense for a portion of a sanctions proceedings.

The dispute between Post and Travelers stems from a September 2005 trial of a medical malpractice case in Luzerne County in which Post was serving as lead defense lawyer for Mercy Hospital in Wilkes-Barre.

The trial was aborted when plaintiffs attorney Joseph Quinn accused Post of discovery violations and Mercy responded by firing Post and threatening to sue him for malpractice. The trial never resumed because Mercy hired Stevens & Lee soon after to take over the case and struck an $11 million settlement.

But while the medical malpractice case was quickly finished, the legal malpractice litigation was just beginning, along with satellite litigation over whether Post was entitled to insurance coverage for the lawyers he hired to defend him.

Post hired George Bochetto of Bochetto & Lentz to represent him in defending against a sanctions motion filed by Quinn. But Travelers refused to pay Bochetto’s bills, setting the stage for a hard-fought battle over insurance coverage in the U.S. District Court for the Eastern District of Pennsylvania.

By the time the insurance battle was coming to a head, Post had successfully defended himself both in the sanctions proceedings and in fending off legal malpractice claims from Mercy.

Post won the first significant round in the coverage lawsuit when U.S. District Senior Judge Anita B. Brody ruled that Travelers had a duty to fund Post’s defense in the sanctions proceedings.

However, Post filed for an appeal of the district court’s dismissal of his claim of bad faith against Travelers and the insurer responded by filing a cross-appeal on the award of damages for his breach of contract claim. The district court had awarded Post $921,862 on that claim.

The three-judge panel for the Third Circuit was unanimous in upholding the lower court’s dismissal of the bad-faith claim.

“Travelers did not frivolously decline to provide a defense to Post; rather, after an investigation and retention of outside counsel, Travelers reasonably concluded that the sanctions exclusion in the policy applied to Post’s claim and denied coverage,” Judge Thomas Ambro wrote in Post v. St. Paul Travelers Insurance on behalf of the majority, which included Judge Michael Chagares. Judge Thomas Hardiman, who dissented in part, joined the majority on that holding.

“Even if Travelers’ claims-handling processes were not ideal, there is no evidence in the record — let alone clear and convincing evidence — to indicate that Travelers’ purported mishandling of Post’s claim was motivated by a dishonest purpose or ill will,” Ambro said.

Where Hardiman differed from the majority was on the issue of whether or not a sanctions proceeding that was originally brought by the initial plaintiffs in the underlying medical malpractice case became a suit under the terms of the policy that Post had with Travelers. That policy obliged Travelers to cover Post’s defense for any “claim” or “suit,” but not for “sanctions.”

Tukishia and William Bobbett, who were the plaintiffs in the underlying medical malpractice case in which Post had been representing Mercy, filed a petition for sanctions in November 2005. When Mercy answered the petition in February 2006, the action became a “suit” that required Travelers to provide for Post’s defense, the majority held.

“Because Mercy requested its attorneys’ fees as an item of relief in its Feb. 8, 2006, answer to the sanctions petition, the sanctions proceeding at that time became a ‘civil proceeding that [sought] damages,’ and thus a ‘suit,’ thereby triggering coverage under the policy,” Ambro said.

Hardiman, however, said in his dissent, “I part ways with the majority with respect to whether Mercy’s answer to the Bobbetts’ petition converted the sanctions proceeding into a ‘suit’ as defined by the policy, that is, ‘a civil proceeding that seeks damages.’”

He said that Travelers was responsible for no part of Post’s defense in the sanctions proceedings.

The majority also held that the district court had erred in ruling that the suit Post filed against Mercy would be covered under his policy with Travelers “on the basis that it was inextricably intertwined with Mercy’s malpractice claim against Post,” Ambro said.

Mercy filed a malpractice claim against Post in November 2007 and, had Post asserted counterclaims in that suit, his expenses would have been covered by Travelers, Ambro said.

“However, Post did not simply assert counterclaims in the same proceeding; rather, he filed a separate civil action in a different venue,” Ambro said. “While Post’s new action in Philadelphia County surely related to the case instituted by Mercy in Luzerne County, to hold that Post’s separate action was covered by the policy simply because it related to Mercy’s suit would condone, and perhaps even encourage, the multiplicity of litigation. Such a holding would also place insurers in the difficult and unenviable situation of having to determine whether related cases are related enough — i.e., ‘inextricably intertwined’ — to trigger coverage for the insured’s counterclaims. Both of these results are highly undesirable and, therefore, we cannot adopt such a rule.”

Instead, the court adopted a “bright-line and sensible rule” laid out by Judge Timothy J. Savage in Amquip v. Admiral Insurance, stating that an insurer has no responsibility to cover separate litigation undertaken by its insured.

“While there may be tactical reasons for an insured to file a related suit in a different venue, we believe that discouraging multiple litigation and providing clear coverage guidelines for insurers are more important considerations,” Ambro said.

“They’re always trying to minimize further litigation,” Bochetto, who represented Post, said of that part of the ruling. Overall, he and Post were pleased with the decision and read it as a vindication of Post.

“Ben Post was found to be completely vindicated of all the allegations against him,” Bochetto said, adding, “Insurance policies can be bought and sold; a person only has one reputation.”

Robert Byer of Duane Morris represented Travelers. He and a spokeswoman for his client declined comment on the opinion.

Saranac Hale Spencer can be contacted at 215-557-2449 or sspencer@alm.com. Follow her on Twitter @SSpencerTLI.

(Copies of the 55-page opinion in Post v. St. Paul Travelers Insurance , PICS No. 12-1440, are available from The Legal Intelligencer . Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information.) •