Westport Ins. Corp. v. McClellan

475 F.Supp.3d 447

WESTPORT INSURANCE CORPORATION

v.Frank M. MCCLELLAN, et al.

CIVIL ACTION NO. 20-1372

United States District Court, E.D. Pennsylvania.

Filed July 31, 2020

Andrew J. Gallogly, Margolis Edelstein, Philadelphia, PA, Christopher J. Shannon, Robert P. Conlon, Walker Wilcox Matousek LLP, Chicago, IL, for Westport Insurance Corporation.

Robert W. McAndrew, Jonathan P. Vuotto, McAndrew Vuotto, LLC, Morristown, NJ, for Frank M. McClellan.

William L. Gold, Bendit Weinstock PA, West Orange, NJ, Jeffrey A. Krawitz, Stark & Stark, Yardley, PA, Robert L. Sachs, Jr., Shrager & Sachs, Philadelphia, PA, for Cindy Johnson.

MEMORANDUM

KEARNEY, District Judge

We today address the coverage obligation of a legal malpractice insurer who offered a lawyer an option of an extended reporting period after the lawyer ceased practicing, but then defended a malpractice case against him for years without specifically identifying the possibly known grounds based on a pending malpractice case for declining coverage. The underlying client later brought a second case seeking disgorgement of his legal fees. The insurer then specifically reserved rights to decline coverage for the disgorgement action and, after the state court judge ordered disgorgement, declines to indemnify the lawyer for the disgorgement judgment on appeal. The insurer today seeks a declaratory judgment on the limited pleadings confirming it owes no obligation to defend or indemnify the lawyer on both the ongoing malpractice case and the disgorgement judgment and appeal costs. The lawyer and the client counterclaim alleging estoppel and bad faith. We find ambiguity in the insurance policy concerning how the lawyer's "option" to report a post-practice claim affects the insurer's obligations in both cases, and there are facts ripe for discovery on whether we can estop the insurer from withdrawing defense or denying indemnity to the lawyer. We also find judgment is warranted dismissing the client's bad faith claims and the lawyer's bad faith claim relating to the ongoing defense of the malpractice case.

I. Background based on submitted and authentic records.¹

Legal malpractice insurer Westport Insurance Corporation began insuring Philadelphia lawyer Frank M. McClellan in 2007 agreeing to pay for his defense and indemnify him for judgments arising out of defined losses caused by his legal malpractice.² Five years later, Westport issued Attorney McClellan a Lawyers Professional Liability Policy (the "Policy") for claims accruing during a policy period of November 9, 2012 to November 9, 2013.³

Westport and Attorney McClellan agreed Westport would pay "all LOSS in excess of the deductible which any INSURED becomes legally obligated to pay as a result of CLAIMS first made against any INSURED during the POLICY PERIOD[.]"⁴ The parties defined the term "LOSS" as "the monetary and compensatory portion of any judgment, award or settlement."⁵ The parties agreed "LOSS shall not include":

1. civil or criminal fines, penalties, fees or sanctions;

2. matters deemed uninsurable by operation of law;

3. punitive or exemplary damages;

4. the multiplied portion of any multiple damages;

5. the return by any INSURED of any fees or remuneration paid to any INSURED; or

6. any form of non-monetary relief.⁶

Westport and Attorney McClellan agreed Attorney McClellan would report any claim within the policy period or within the sixty days following the policy period (ending January 8, 2014) unless Attorney McClellan elected an extended reporting period.⁷ Westport and Attorney McClellan agreed Attorney McClellan could extend the time required to report claims to Westport under two different options.⁸ If Westport cancelled the Policy or Attorney McClellan decided not to renew the Policy, the parties agreed Attorney McClellan had the right, if he met certain conditions, to extend the time for reporting claims by paying an additional premium.⁹

At issue today is the second option, called a "Non-Practicing Extended Reporting Period," allowing Attorney McClellan to extend his required reporting for an "unlimited" time period if he "permanently and completely" ceased the private practice of law during the policy period.¹⁰ The parties agreed the "Non-Practicing Extended Reporting Period option is provided until the [Attorney McClellan] resumes the private practice of law."¹¹ Attorney McClellan exercised the option under the "Non-Practicing Extended Reporting Period" and Westport issued him an endorsement effective November 19, 2013 documenting Attorney McClellan's ability to report claims for an "unlimited" time period.¹²

Before the Policy period ended, Attorney McClellan referred Ms. Cindy Johnson to an attorney who brought a medical malpractice case on behalf of her husband's estate, and Attorney McClellan received a $52,145.42 referral fee from Ms. Johnson's lawyer.¹³ In November 2017, Ms. Johnson sued Attorney McClellan, the lawyer who paid Attorney McClellan a referral fee, and others for legal malpractice in New Jersey state court ("2017 Legal Malpractice Action").¹⁴

Shortly after Ms. Johnson filed this 2017 Legal Malpractice Action, it appears Westport tendered a defense to Attorney McClellan.¹⁵ Ms. Johnson moved for summary judgment in November 2018, asking, in part, for the court to order Attorney McClellan to disgorge the $52,145.42 referral fee.¹⁶ A month later, Westport issued Attorney McClellan a letter purporting to reserve its rights against covering the disgorgement of the referral fee.¹⁷ The New Jersey state court denied Ms. Johnson's summary judgment motion and directed her to refile a separate disgorgement action.¹⁸

Consistent with the New Jersey judge's direction, Ms. Johnson filed a separate civil action in March 2019 asking the court to order Attorney McClellan to disgorge his referral fee ("2019 Fee Action").¹⁹ Westport tendered a defense to Attorney McClellan in the 2019 Fee Action but reserved its rights to deny coverage for damages falling outside the covered definition of "Loss" in April 2019.²⁰

On January 3, 2020, the New Jersey state court entered judgment in the 2019 Fee Action in favor of Ms. Johnson and ordered Attorney McClellan to disgorge the $52,145.41 referral fee and pay $156,436.23 in treble damages for violating New Jersey law governing the unauthorized practice of law.²¹ A few weeks after the ruling, Westport sent a letter to Attorney McClellan saying it would not provide coverage for the January 3, 2020 judgment, stating the ordered damages (1) did not fall within the covered definition of "Loss," and (2) for the first time, advising Attorney McClellan he had no coverage under the Policy because the Non-Practicing Extended Reporting Period option "is provided until [Attorney McClellan] resumes the private practice of law."²²

II. Analysis²³

A little over two months later, Westport sued Attorney McClellan and Ms. Johnson before us asking for a declaratory judgment it (1) has no duty to defend or indemnify Attorney McClellan for any claim asserted against him by Ms. Johnson in either a 2017 Legal Malpractice Action or a 2019 Fee Action filed in New Jersey state court; and, (2) has no duty to indemnify Attorney McClellan for the judgment entered against him in a January 3, 2020 Order in New Jersey state court.²⁴ Attorney McClellan and Ms. Johnson separately raise counterclaims for estoppel/waiver and bad faith.²⁵

Westport now moves for judgment on the pleadings as to both its complaint and the counterclaims. Westport argues undisputed facts in the record allow us to enter judgment in its favor before the parties engage in discovery. We agree in part. We disagree as to Westport's claims for declaratory relief as fact questions prevent us from entering judgment in its favor as a matter of law on the current record. But we agree we may enter judgment dismissing Ms. Johnson's bad faith counterclaims and Attorney McClellan's bad faith counterclaim based on the 2017 Legal Malpractice Action.²⁶

A. We cannot enter judgment based on the pleadings as to Westport's request for declaratory relief.

Westport seeks two separate declarations: one relating to the 2017 Legal Malpractice Action and another relating to the 2019 Fee Action. We find fact questions exist as to both precluding judgment on the pleadings.

First, we cannot declare Westport's rights regarding the 2017 Legal Malpractice Action. The parties adduce sparse facts in the record concerning the status or claims asserted in this underlying case. For example, we are not aware of its status or the specific allegations raised against Attorney McClellan. Westport acknowledges the record is rather bare—but says we can still enter judgment because the undisputed facts establish Attorney McClellan resumed the private practice of law and therefore Attorney McClellan's coverage under the Policy ceased to exist.

This argument turns on two ideas: (1) the Policy language; and, (2) the doctrine of estoppel. Neither convinces us judgment can be entered today. The Policy provides: "This Non-Practicing Extended Reporting Period option is provided until [Attorney McClellan] resumes the private practice of law."²⁷ We interpret contractual language consistent with its plain meaning.²⁸ Westport would like us to read this language as saying the Policy terminates and all coverage ceases if Attorney McClellan resumes the private practice of law. But we do not think this is the unambiguous reading of this clause. In offering its reading, Westport glosses over the significance of the word "option." Does this mean an "option" to exercise the right to elect an extended reporting period or an "option" to receive coverage once reported? We find it unclear. The present record shows Attorney McClellan exercised the "option" to report claims for an "unlimited" duration under this provision of the contract. Westport acknowledged Attorney McClellan's decision by issuing him an endorsement.²⁹ If Attorney McClellan did not exercise this "option" to...