By David A. Grossbaum

In Post v. St. Paul Travelers Ins. Co., 2009 WL 37491 (E.D. Pa. 2009), the court broadly interpreted the defense provisions, and narrowly interpreted the definition of “sanctions,” in a professional liability policy and thereby ordered an insurer to pay for the insured’s defense in a proceeding solely seeking sanctions for alleged discovery violations. This holding is significant as carriers commonly attempt to exclude defense costs for such proceedings, and there is little precedent finding a defense obligation in this situation.

The Post case was a declaratory judgment action by the insured seeking to recover about $600,000 in defense costs he incurred in defending a sanctions motion. But the story began when the insureds were hired to defend Mercy Hospital in a medical malpractice case, which ultimately settled. Id. at *1. Nonetheless, the hospital claimed that it consummated the settlement because the insureds committed discovery abuses, and the hospital told the insureds in writing that it intended to seek damages due to this conduct. Furthermore, Mercy told the insureds to notify their malpractice carrier, which they did. Id. at *1. The insurer opened up a file for the potential claim.

The plaintiff in the tort case then brought a motion against the insureds seeking sanctions and “any other relief this court deems just and equitable…” The hospital filed an answer in the sanctions proceeding and joined with the plaintiff in the prayer for relief. Id. at *1. The insureds asked for a defense from the carrier, which declined on the basis that the policy did not cover sanctions. Id. at *1. The insurer agreed to pay the costs incurred to defend the potential malpractice case (about $36,000, according to the insurer), but declined to pay the bulk of the insureds’ legal fees, about $400,000 at that point. Id. at *2. After incurring an additional $200,000 in defense of the sanctions motion, the insureds sued the insurer. Id. at *2.

The policy obligated the insurer to defend both “claims” and “suits.” Id. at *2. A “claim” was defined as a “demand that seeks damages,” while a “suit” was defined as “a civil proceeding that seeks damages.” Id. at *2. The policy defined “damages” so as not to include “civil or criminal fines, forfeitures, penalties, or sanctions.” Id. at *2. The duty to defend extended to all “proceedings involved in the suit.” Id. at *2.

The court first determined that the initial letter from the hospital was a “claim” and this triggered the duty to defend. Id. at *4. This is not a surprising result as most professional liability polices obligate the carrier to defend a “claim” even if it is not in suit. What was surprising here is that the court further found that defense of the malpractice “claim” included the defense of the sanctions motion because this was a “potential malpractice suit.” The court did not explain how a motion that addresses only sanctions against the lawyer could become a “malpractice suit.”

The court rejected the carrier’s argument that the sanctions motion was separate from any present potential or actual malpractice claim, and the motion did not seek covered “damages.” The court found it significant that the malpractice claim made by Mercy derived from the same conduct raised in the sanctions motion, and the facts and law established in the sanctions motion would have a collateral estoppel effect on any later malpractice suit. Id. at *5. It, thus, determined that the sanctions motion constituted “proceedings involved in the suit,” even though there was not yet a “suit” against the insured as defined in the policy.

With regard to the carrier’s argument that the policy specifically did not include “sanctions” as covered damages, the court defined “sanctions” as only those sought by an opposing party, not a client, and thereby found that the hospital’s joinder in the sanctions motion removed the matter from the category of excluded “sanctions”:

The sanctions exclusion in the Liability Policy, however, under the commonly understood definition of sanctions as discussed above, refers to sanctions motions brought by opposing counsel. This exclusion does not preclude from coverage a sanctions petition joined by a lawyer's former client, particularly one brought in anticipation of a malpractice suit based on identical allegations of wrongdoing. The attorney-client relationship between [the insured] and [the client] indicates that the damages [the client] requested in the sanctions petition were actually malpractice damages, though [the client] termed them “sanctions.”

Id. at *7. Relying on the broad language in the sanctions motion seeking “any other relief this court deems just and equitable…,” the court additionally stated that the sanctions motion was potentially seeking “malpractice damages.” Thus, the court found that the insurer had a duty to reimburse the insured for the fees incurred in defending the sanctions motion.

Practice Note: This case should be of great interest to insurers and to coverage counsel, as it has been widely accepted that policies with similar language do not cover sanctions motions. The defense provisions in this policy appeared adequate to prevent such a result, but carriers may want to consider defining sanctions to include such motions brought by clients.

Reprinted with permission of the American Bar Association, February 2009, LPL eAdvisory

This publication has been prepared by Hinshaw & Culbertson LLP to provide information on recent legal developments of interest to our readers. It is not intended to provide legal advice for a specific situation or to create an attorney-client relationship.