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Benjamin A. Post, Esquire v. St. Paul Travelers Insurance Co.

July 31, 2012

BENJAMIN A. POST, ESQUIRE APPELLANT (NO. 10-3088)
v.
ST. PAUL TRAVELERS INSURANCE CO. APPELLANT (NO. 10-3300)



On Appeal from the United States District Court for the Eastern District of Pennsylvania (D.C. Civil Action No. 2-06-cv-04587) District Judge: Honorable Anita B. Brody

The opinion of the court was delivered by: Ambro, Circuit Judge

PRECEDENTIAL

Argued January 25, 2012

Before: AMBRO, CHAGARES and HARDIMAN, Circuit Judges

OPINION OF THE COURT

Before us are an appeal and a cross-appeal arising from an action brought by attorney Benjamin Post ("Post") against his legal malpractice insurer, St. Paul Travelers Insurance Company ("Travelers"), for, among other things, insurance bad faith and breach of contract. The District Court granted summary judgment in favor of Travelers on the bad faith claim, the order from which Post now appeals. Travelers appeals the District Court's damage award of $921,862.38 to Post for breach of contract.

Post argues that his bad faith claim was erroneously dismissed at summary judgment, and asserts, among other things, that there was sufficient evidence to create a genuine issue of material fact that Travelers lacked a reasonable basis to deny coverage. Travelers contends that the District Court erred by awarding damages on Post's breach of contract claim because the malpractice insurance policy contained an explicit coverage exclusion for sanctions proceedings.

For the reasons stated below, we affirm the District Court's grant of summary judgment in Travelers' favor on Post's bad faith claim, but we vacate and remand with respect to the District Court's damage award for breach of contract.

I. Factual and Procedural Background

A. The Bobbett Case

In 2003, Post and Tara Reid, both employed at the time by the law firm of Post & Schell, P.C., were retained to defend Mercy Hospital-Wilkes Barre, Mercy Healthcare Partners, and Catholic Healthcare Partners (collectively, "Mercy") in a medical malpractice action filed in the Court of Common Pleas of Luzerne County, Pennsylvania, captioned Bobbett, et al. v. Grabowski, et al., Case No. 4310-C-2003.

In May 2005, Post left Post & Schell to start a new law firm with his wife-Post & Post, L.L.C. Thereafter, he continued to represent Mercy in the Bobbett matter, and Reid joined Post & Post as an associate.

Trial of the Bobbett case began in September 2005. During its first week, the plaintiffs introduced evidence suggesting that Post and Reid had engaged in misconduct during discovery. Specifically, on Friday, September 23, 2005, plaintiffs' counsel examined a risk manager, Anne Marie Zimmerman, regarding allegedly undisclosed redactions from medical policies produced by Mercy in discovery. Zimmerman testified that Post and Reid were responsible for the redactions. Plaintiffs' counsel characterized Zimmerman's testimony as "establish[ing] that [Post and Reid] covertly redacted and withheld information from documents . . . , and/or simply failed to produce requested documents without permission from this Court and/or notice to Plaintiffs' counsel." Plaintiffs' counsel then suggested to the presiding Judge, Hon. Peter Paul Olszewski, Jr., that the trial be adjourned for the day. On learning of this possible discovery misconduct, Mercy replaced Post as its counsel.

Fearing that the jury now believed that there had been a "cover-up" involving its lawyers, and concerned with the "substantial potential of uninsured punitive exposure," Mercy, represented by new counsel, began settlement negotiations with the plaintiffs over the weekend. The negotiations resulted in a settlement of $11 million, which represented the full extent of Mercy's medical malpractice policy limits. The settlement was presented to Judge Olszewski in court on Tuesday, September 27, 2005. It included a release among the parties, but with one significant caveat: the settlement agreement did not release Post, Reid, Post & Schell, and/or Post & Post from any liability they, or any of them, might have to Mercy for malpractice. Mercy did in fact threaten Post with a malpractice suit.

B. The Policy

Post & Schell was insured against claims of legal malpractice by Travelers under Policy #GL09000524 (the "Policy"). The Policy had an annual premium of $226,500, and had an occurrence and aggregate limit of $10,000,000. The Policy insured the firm and "protected persons" (i.e., the firm's attorneys) against "claims" and "suits" asserting malpractice. It thus insured Post for any alleged acts within the scope of coverage occurring (1) during the Policy's term and (2) while Post was employed by Post & Schell.

The Policy defines a "claim" as a "demand that seeks damages." It states that a claim is considered "to be first made or brought" (1) on the date that Travelers or any protected person "first receives written notice of such claim," or (2) when Travelers receives written notice from a protected person "of a specific wrongful act that caused the loss which resulted in such claim or suit." A "suit" is "a civil proceeding that seeks damages."

The Policy imposes on Travelers the "duty to defend any protected person against a claim or suit . . . even if any of the allegations of such claim or suit are groundless, false, or fraudulent." Travelers' duty to defend expressly includes the duty to pay "defense expenses incurred by, or for, the protected person for the claim or suit." "Defense expenses" are "fees, costs, and expenses that result directly from the investigation, defense, or appeal of a specific claim or suit," including "[f]ees, costs, and expenses of hired or appointed attorneys" and "[t]he cost of the proceedings involved in the suit, including court reporter's, arbitrator's and mediator's fees." The Policy excludes from its definition of "damages" any "civil or criminal fines, forfeitures, penalties, or sanctions . . . ." It does not define "sanctions."

The Policy provides in pertinent part as follows:

What This Agreement Covers

Lawyers professional liability. We'll pay amounts any protected person is legally required to pay as damages for covered loss that:

* results from the performance of, or failure to perform, legal services by or on behalf of any protected person; and

* is caused by a wrongful act committed on or after any retroactive date that applies and before the ending date of this agreement.

Damagesmeans:

* compensatory damages imposed by law; and

* punitive or exemplary damages imposed by law if such damages are insurable under the law that applies.

But we won't consider damages to include any:

* civil or criminal fines, forfeitures, penalties, or sanctions; or

* legal fees charged or incurred by any protected person.

Defense expenses means the following fees, costs, and expenses that result directly from the investigation, defense, or appeal of a specific claim or suit:

* Fees, costs, and expenses of hired or appointed attorneys.

* The cost of the proceedings involved in the suit, including court reporter's, arbitrator's, and mediator's fees.

* Fees for witnesses.

* Independent expert's and special investigator's fees, costs, and expenses.

Exclusions -- What This Agreement Won't Cover

Criminal, dishonest, or fraudulent wrongful acts or knowing violation of rights or laws. We won't cover loss that results from any criminal, dishonest, or fraudulent wrongful act or any knowing violation of rights or laws committed by:

* any protected person; or

* anyone with the consent or knowledge of any protected person.

C. Mercy's Legal Malpractice Claim Against Post

On Sunday, September 25, 2005, James Saxton, an attorney with the law firm of Stevens & Lee, Mercy's newly retained counsel, advised Post's father, Barton Post, that Mercy intended to bring a lawsuit for legal malpractice against Post, and that the claim should be reported to Post's insurance carrier. Saxton asked for the name of the insurance carrier so that he could make a report.

Michael Williams, Vice President for Risk and Insurance for Catholic Healthcare Partners, sent two letters on October 6 to Post advising him that he was terminated as Mercy's counsel and instructing him not to destroy any documents from the Bobbett case.

On October 12, Williams sent Post a third letter, this time asserting that the Bobbett settlement was forced on Mercy because the alleged "cover-up" by Post and Reid during discovery had caused Mercy "substantial . . . uninsured punitive exposure."

Williams stated the following:

[W]hat clearly drove the settlement was the damage done during the testimony of Anne Marie Zimmerman regarding the document production issues raised during her testimony. More specifically is the fact that there was a claim in front of the jury that there was a "cover-up" that appeared to involve our lawyers. Further, under those circumstances and knowing that Ms. Zimmerman would likely invoke her Fifth Amendment right or testify under immunity, we absolutely disagree regarding your ability to rehabilitate. There were other aggravating factors that occurred involving you, your father and other members of your firm; however, this is not the time to review them.

An unprecedented and certainly unanticipated situation arose in which Mercy employees needed to retain criminal counsel as directly related to the issue of redacted policies and procedures; policies and procedures that you admitted had been redacted, notwithstanding your position that such was not relevant. In fact, those redactions were most relevant and[,] as a result, an irreconcilable conflict developed with your firm, all of which put us at tremendous risk. In light of these dramatic developments, the physicians' insurers all tendered their policy limits and were prepared to take a joint tortfeasor's release. We determined the case had to be settled to protect not only the assets of the Trust but to eliminate the substantial potential of uninsured punitive exposure resulting from the actions of your firm.

On October 20, 2005, Williams again wrote to Post, stating:

Pursuant to our internal protocols, your former clients, Catholic Healthcare Partners, Mercy Health Partners, and Mercy Hospital Wilkes-Barre are providing you with a copy of the executed Release in the above captioned matter. We ask that you note the carve-out for third-party claims.

Please notify your professional liability insurer of this, and ask a representative of that Company to contact me upon receipt.

On October 27, Post & Schell notified Travelers that Mercy had retained Stevens & Lee as its counsel "to review the matter for possible professional malpractice implications." Post & Schell enclosed the aforementioned letters sent by Williams.

George Bochetto, counsel for Post, sent a letter to Travelers on November 3 to put it "on notice of a claim or potential claim" against Post. He enclosed the October 20 letter from Williams. On receipt of the letter (which was contemporaneous with its receipt of the October 27 letter from Post & Schell), Travelers opened a claims file for Post.

Michael Spinelli, a senior claims specialist in Travelers' New York office, assumed responsibility for the claim. During the month of November, Spinelli had numerous conversations and at least one email exchange with Post & Schell partner William Sutton regarding Travelers' retention of counsel to represent the firm in connection with Mercy's malpractice claim. There is no evidence that Spinelli communicated with Bochetto or Post during this time, not even to acknowledge receipt of the claim. This was despite a Travelers' policy providing that [t]he claims professional is instructed to attempt to contact the insured within 24 hours of receiving the claim to introduce yourself to the insured, acknowledge that you have received the claim and to speak with them to find out more information so you could assist the insured in the handling of the matter.

On November 18, 2005, Saxton wrote to Bochetto to place Post on notice again of Mercy's malpractice claim. In relevant part, Saxton's letter stated:

As a follow-up to the various letters and discussions regarding this matter, please be advised that [Mercy] is in the process of assigning counsel to pursue its claims against its former counsel in the Bobbett case. However, before getting too far into the litigation process, I wanted to further discuss a meeting of the stakeholders that you first proposed verbally to my partner, Jim Schwartzman, Esquire. While [Mercy] is moving forward with preparation for litigation, it remains open to a good-faith meeting to discuss possible resolution prior to suit being filed.

To that end, they will need certain information from you, namely confirmation that you notified your client's insurers regarding the potential claim, the name of the insurance carriers, and the name of the claims representative, if assigned.

D. The Sanctions Petition

On November 21, 2005, the plaintiffs in the Bobbett case filed a 108-page petition for sanctions against Post, Reid, Barton Post, and Post & Post. Post & Schell was not named as a respondent. In the petition, the plaintiffs claimed that Post and Reid violated the Pennsylvania Rules of Civil Procedure and the Rules of Professional Conduct in their handling of discovery by (1) failing to produce and/or producing altered versions of responsive documents, and (2) misrepresenting to the plaintiffs and the Court what documents Mercy had in its possession. They asserted also that Post and Reid had engaged in "dilatory, obdurate, vexatious, and/or bad faith conduct." The discovery misconduct allegedly occurred while Post and Reid were with Post & Schell and also while with Post & Post. The plaintiffs sought sanctions against each defendant, as well as "any other relief this court deems just and equitable . . . ."

By letter dated November 28, 2005, Bochetto advised Travelers of the sanctions petition and, pursuant to the Policy, requested that Travelers pay for Post's defense costs and indemnify Post with respect to the petition. After receiving Bochetto's letter seeking a defense to the petition for sanctions, Spinelli had a "lengthy discussion" with Bochetto's partner, Jeffrey Ogren, on December 1, 2005 about the Bobbett case, the sanctions petition, and Mercy's malpractice claim. Post contended that Mercy made a malpractice claim that was covered by the Policy. Spinelli's view was that the sanctions petition only sought relief in the form of sanctions, which are expressly excluded under the Policy. As such, Spinelli's inclination was to deny coverage.

On December 1, Travelers retained attorney Mark Anesh, a partner with the insurance defense firm of Wilson Elser Moskowitz Edelman & Dicker, as outside counsel to advise it on its defense and coverage obligations with regard to Post. Anesh is a New York attorney not licensed to practice law in Pennsylvania. Despite the fact that Spinelli's general practice was to provide coverage counsel with "anything and everything" he had, he did not provide Anesh with any information regarding the allegations that Mercy made in October and November. Spinelli did not even advise Anesh of Mercy's letters. Rather, Spinelli sent Anesh only the petition for sanctions and other documents relating to the Bobbett case, and Spinelli asked Anesh only for his opinion on whether there was coverage in connection with the sanctions petition alone. Thus, in forming his opinion, Anesh was not aware that a claim for legal malpractice had been lodged beforehand by Mercy, nor was he aware that the factual allegations in the sanctions petition were identical to the factual allegations underlying Mercy's malpractice claim. Likewise, Anesh was not aware that Mercy had retained counsel to pursue its legal malpractice claim.

After Anesh reviewed the materials given to him and determined Travelers was not obligated to defend or indemnify Post with respect to the allegations against him in the petition for sanctions, he informed Bochetto by a December 8 letter that this was Travelers' conclusion. Anesh also told Bochetto that Travelers had received a draft of the sanctions petition on October 31, 2005, three weeks before it had been filed. Anesh explained the declining of coverage as follows:

The sole and complete relief sought by the petition at issue is not for Damages as they are defined in the Policy, but for sanctions. Since sanctions are not included in the definition of Damages under the Policy, no coverage, either for defense or indemnity, will be afforded for the above mentioned petition or any hearing subsequently scheduled to address the contents of the petition. Furthermore, a Claim is defined in the Policy as a "demand that seeks damages". Therefore, your request for defense and indemnity of the sanctions petition is not a Claim as defined in the Policy.

Travelers reserved its rights to deny coverage on several other bases, including the exclusion for "loss that results from any criminal, dishonest, or fraudulent wrongful act or any knowing violation of rights or laws." Nonetheless, Anesh stated that Travelers was willing to reconsider its decision if other information warranted it.

In a letter dated December 19, 2005, Bochetto, on Post's behalf, requested that Travelers reconsider its denial of coverage for the sanctions petition, arguing that Travelers erred on each basis it denied coverage. Travelers determined that a change in coverage position was not warranted, ...


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