In a recent article in this column on attorney liabilities, we proffered that, anecdotally, it appeared the first reaction of attorney liability insurers, unlike other liability insurers, to an “occurrence” would be to seek to disclaim coverage (or otherwise defend upon a reservation of rights). Therein, we cautioned that an attorney’s insurer is not your friend — no matter that you may believe your insurer is obligated to defend and indemnify you from any and all professional liabilities.
Post v. St. Paul Travelers Ins. Co., — F.3d —, 2012 WL 3095352 (C.A.3 (Pa.) July 31, 2012) is just such an example.
In 2003, Benjamin Post and Tara Reid (collectively, Post) were retained through their law firm to defend Mercy Hospital-Wilkes Barre, et al, in a medical malpractice action filed in Luzerne County, Bobbett v. Grabowski. In May 2005, counsel left their prior firm to join a new firm, continuing to represent Mercy in the Bobbett matter.
In September 2005, at trial, medical malpractice plaintiffs introduced evidence suggesting that the defendants’ counsel had engaged in discovery misconduct. Specifically, on September 23, 2005, plaintiffs counsel examined a risk manager regarding allegedly undisclosed redactions for medical policies produced by Mercy in discovery. That risk manager testified that defense counsel were responsible for the redactions. Plaintiffs counsel characterized that testimony as establishing that defense counsel “covertly redacted … and/or simply failed to produce requested documents.” As a result of this allegation, Mercy terminated that counsel.
Fearing that the medical malpractice jury may believe there had been a cover-up involving its lawyers, and concerned with the “substantial potential of uninsured punitive exposure,” Mercy, through new counsel, negotiated a settlement of $11 million (representing the full extent of Mercy’s medical malpractice policy limits). The settlement contained a carve-out from its release — not releasing original defense counsel for alleged malpractice.
Defense counsel’s prior firm was insured by Travelers from any claims and suits asserting malpractice. A “claim” is a “demand that seeks damages.”
The Travelers policy contained a duty to defend its insured against any claim or suit that expressly includes the duty to pay defense expenses, such as “fees, costs and expenses that result directly from the investigation, defense or appeal of a specific claim or suit.” The policy excludes from its definition of “damages” any “civil or criminal fines, forfeitures, penalties or sanctions.” It does not define “sanctions.”
On September 25, 2005, Mercy advised of its intent to bring a lawsuit for legal malpractice. On October 6, a termination and preservation letter followed on behalf of Mercy. On October 12, a letter was sent asserting that the Bobbett settlement was forced on Mercy because of the alleged cover-up.
On October 27, Travelers was put on notice. In contrast to its policy, Travelers did not acknowledge the claim. On November 18, 2005, Mercy’s malpractice claim was reiterated.
On November 21, 2005, Tukishia and William Bobbett filed a motion for sanctions against former defense counsel and that counsel’s new firm (i.e., counsel’s prior firm was not named as a respondent). On November 28, 2005, Travelers was put on notice as to the sanctions petition therein requesting defense and indemnification.
On December 1, Travelers advised that its inclination was to deny coverage as to the sanctions proceeding. Travelers retained counsel to advise regarding coverage solely as to the sanctions petition. Travelers’ counsel was unaware that the factual allegations in the sanctions petition were effectively identical to those underlying Mercy’s malpractice claim. Travelers’ counsel was not aware that Mercy had separately retained counsel to pursue its legal malpractice claim.
Travelers declined coverage under the belief that the policy’s definition of “damages” (by omission) did not include sanctions. Despite a request for reconsideration, Travelers did not change its position.
Then, Mercy essentially joined in the sanctions motion additionally requesting Mercy receive money damages in the form of the amount of the underlying settlement (and related to the negative publicity).
Travelers was again requested to reconsider, given the overlap between the malpractice and sanctions proceedings. Mercy continued to hold that the sanctions petition did not trigger coverage as it did not allege a claim for damages as defined by the policy.
In the fall of 2006, Post filed a lawsuit against the Bobbetts’ counsel for defamation and tortuous interference whereupon the Bobbetts withdrew their sanctions petition in apparent settlement of that suit.
On November 19, 2007, Mercy filed its praecipe for writ of summons in the Luzerne County Court of Common Pleas. The following February, Post filed a praecipe for writ of summons against Mercy in Philadelphia. In November 2008, both actions were discontinued without monetary consideration, apparently in global release.
On October 13, 2006, Post filed his complaint against Travelers, among others, for, inter alia, breach of insurance contract and bad faith. In June 2008, Travelers and Post filed motions and cross-motions for partial summary judgment, respectively.
After adjudication by the Eastern District of Pennsylvania, the matter was appealed to the U.S. Court of Appeals for the Third Circuit.
Breach of Insurance Contract
Mutual intention of the parties at the time the insurance contract is formed is to be inferred from the written provisions of the insurance policy. However, if doubt or ambiguity exists, it should be resolved in the insured’s favor. All provisions of an insurance contract must be read together, according to the plain meaning of the words involved, so as to avoid ambiguity while at the same time giving effect to all of its provisions.
An insurer’s duty to defend is broader than its duty to indemnify. An insurer is obligated to defend if the factual allegations of the complaint on its face encompass an injury that is actually or potentially within the scope of the policy.
The duty to defend arises whenever the complaint may potentially come within the coverage of the policy. The comparison between the policy and the complaint requires the factual allegations of the complaint to be taken as true and liberally construed in favor of the insured. The facts — not causes of action pleaded — are to be determined for a coverage analysis.
The Third Circuit affirmed the district court’s conclusion that Travelers was obligated to defend and indemnify as to the Mercy legal malpractice claim. However, due to the policy definitions difference between “claim” and “suit,” the Third Circuit reversed the district court and held that Travelers did not owe a duty to defend the sanctions petition until Mercy joined same. Because Mercy requested monetary relief, Mercy’s answer to the sanctions petition became a “civil proceeding that [sought] damages,” and thus a “suit” — triggering coverage under the policy.
To recover for bad faith, “a plaintiff must show by clear and convincing evidence that the insurer (1) did not have a reasonable basis for denying benefits under the policy; and (2) knew or recklessly disregarded its lack of a reasonable basis in denying the claim.” “A reasonable basis is all that is required to defeat a claim of bad faith.”
The Third Circuit held the district court correctly granted summary judgment in favor of Travelers on the bad-faith claim because the sanctions exclusion in the policy provided Travelers a reasonable basis for declining to provide a defense, among others. While bad faith may extend to an insurer’s investigation and other claims handling conduct, that conduct must “import a dishonest purpose.”
The Third Circuit remanded the action to the district court to recalculate damages: (1) Travelers to be responsible for all costs incurred in connection with Mercy’s malpractice claim from its relative inception; and (2) for all costs incurred in defending the sanctions proceedings from the date of Mercy’s answer to same forward; but not for (3) the defamation suit against the Bobbetts’ counsel.
Dissent in Part
It was suggested that Travelers owed no duty to defend any portion of the sanctions proceeding disagreeing that Mercy’s request for relief in the sanctions motion converted that motion to a suit under the policy. Citing as unprecedented, the partial dissent held the majority incorrectly reasoned that Mercy could have obtained damages through the sanctions proceeding without ever having to prove legal malpractice.
In analyzing Post (which is only superficially summarized above secondary to its factual complexity), the Third Circuit, especially in partial dissent, placed rigid emphasis akin to strict statutory interpretation on the underlying insurance policy when, in fact, most insureds, including attorneys, believe their coverage is, contrarily, to the broadest extent.
Said another way, when shopping for insurance, most insureds likely understand their policy’s basic tenets (premium, deductible and coverages — as perhaps advised by their agent; coverage for professional negligence, sanctions, disciplinary proceedings, subpoenas, etc.) without understanding or perhaps envisioning the consequences of the policy’s wording.
In fact, as is evident by the majority’s holding, the insurer itself may not understand its own policy when affected. Instead, policy language is often analyzed in the same manner as legislation notwithstanding the vast differences between their formulations (i.e., an insurance policy being a contract of adhesion).
Unfortunately, Post‘s partial dissent appears most logical — that, practically speaking, a discovery sanction proceeding is not akin to a legal malpractice suit, no matter the interplay. Therefore, even the majority’s rigid interpretation of the policy is not strict enough according to the dissent.
Whether insurance policies, contractual arbitration provisions, mortgages, retail installment motor vehicle sales contracts or the like, the fine print seems to govern in favor of its corporate drafters against the individual seemingly requiring everyone individual to have legal expertise in contract interpretation.
Soon, our lives, even when we are at our most vulnerable — potentially liable — will be governed solely by contracts of adhesion with courts glossing over the ancient doctrine of contra proferentem. The unilateral insertion of the fine print governing a conflict’s outcome should be looked upon again by our courts. •
Matthew Weisberg is the managing partner of Weisberg Law. He focuses the firm’s practice on consumer and individual rights throughout Pennsylvania and New Jersey. Weisberg Law represents victims of legal malpractice and other professional negligence resulting in financial injury, fraud, civil rights violations, consumer abuse and foreclosure actions.