AMY BERMAN JACKSON, United States District Judge.
In this case, an insurance carrier seeks a declaratory judgment holding that it is not bound to cover the costs of a legal malpractice action brought against a District of Columbia law firm and two of its attorneys. Invoking this Court's diversity jurisdiction, plaintiff Chicago Insurance Company ("CIC") brings this action against defendants Paulson & Nace, PLLC ("Paulson & Nace"), Barry J. Nace, Gabriel Assaad, and Sarah Gilbert. Paulson & Nace is a law firm at which attorney Barry J. Nace practices. Gabriel Assaad, also an attorney, was formerly an associate at Paulson & Nace.
On November 1, 2013, the Circuit Court for the City of Richmond, Virginia awarded defendant Gilbert a $1.75 million legal malpractice judgment against the attorney defendants. According to CIC, the attorney defendants should have been aware of defendant Gilbert's potential claim before the inception of the CIC-Nace insurance policy, and they failed to notify CIC as required by the policy. Therefore, CIC seeks a declaratory judgment from this Court that it has no obligation to indemnify the attorney defendants for the damages, costs, or fees incurred in connection with the Gilbert legal malpractice lawsuit.
After completing discovery in this action, defendants Barry J. Nace, Paulson & Nace, and Sarah Gilbert, and plaintiff CIC all moved for summary judgment.
The Court finds that District of Columbia law applies to this case, that the attorney defendants should have known of defendant Gilbert's potential claim before they even applied for the CIC insurance policy, that the attorney defendants failed to notify CIC of the potential claim, and that CIC's defense to coverage is not barred by the doctrines of waiver or estoppel. Therefore, the Court will grant plaintiff's motion for summary judgment and deny defendants' motion.
On July 28, 2004, Sarah Gilbert underwent spinal surgery to correct her scoliosis, and the surgery rendered her a paraplegic. Statement of Material Facts in Supp. of Chi. Ins. Co.'s Mot. for Summ. J. ¶ 3 [Dkt. # 18] ("CIC SOF"). Ms. Gilbert was a minor at the time. Id. ¶ 4. In December 2004, her parents, Richard and Rosie Gilbert, retained defendant Barry J. Nace and his law firm, defendant Paulson & Nace, to pursue a claim of medical malpractice and negligence on behalf of their daughter in Virginia. Id. Defendant Gabriel Assaad, then an associate attorney at Paulson & Nace who, unlike Nace, was admitted to the Virginia bar, see Ex. W to CIC SOF, Decl. of Gabriel Assaad ¶ 3 [Dkt. # 18-23]; Ex. W to CIC SOF, Aff. of Barry J. Nace ¶ 4 [Dkt. # 18-23], assisted in the representation of Ms. Gilbert.
The attorney defendants filed a complaint in the Gilbert medical malpractice lawsuit on July 24, 2006, in the Circuit Court for the City of Richmond. Statement of Material Facts Not in Dispute, Defs. Paulson & Nace, PLLC's & Barry J. Nace, Esq.'s Mot. for Summ. J. ¶ 3 [Dkt. # 14-2] ("Nace SOF"). The statute of limitations on Ms. Gilbert's claim expired four
The attorney defendants' attempts to appeal that ruling were unsuccessful, and the Supreme Court of Virginia finally disposed of Sarah Gilbert's untimely medical malpractice claim on December 15, 2009. Nace SOF ¶ 13. In addition, the attorney defendants nonsuited the remaining claims of Richard and Rosie Gilbert, which had not been dismissed, on May 19, 2009. Id. ¶ 11. On January 29, 2011, counsel for defendant Gilbert in this case, Herman Aubrey Ford, III, informed defendant Nace by letter that he would be taking over representation of Richard and Rosie Gilbert at their request. Ex. AA to Mem. of P. & A. in Supp. of CIC's Resp. in Opp. to the Nace Defs.' Mot. for Summ. J. at 1-2 [Dkt. # 23-3].
On July 18, 2007, after the Virginia court had ruled from the bench and dismissed the Gilbert case as untimely, defendant Barry J. Nace applied for a "claims-made" professional liability insurance policy from plaintiff, Chicago Insurance Company.
In the application for the initial policy, Mr. Nace answered "no" to the following question: "Having inquired of all partners,
Additionally, the 2008-2009 insurance agreement provided as follows:
CIC SOF ¶ 24 (emphasis added by CIC). The agreement further defined the term "reasonably foresee" as follows:
Id. ¶ 26 (emphasis added by CIC).
The attorney defendants did not alert CIC to Sarah Gilbert's potential legal malpractice claim until May of 2009. CIC SOF ¶ 18. At that time, the attorney defendants informed CIC that the "alleged error" with respect to defendant Gilbert had occurred in 2008. Id. The attorney defendants never informed their prior insurer, the Philadelphia Insurance Company, of Ms. Gilbert's potential claim. See Defs.' Reply at 23-24.
CIC retained a law firm to represent the attorney defendants against defendant Gilbert's potential malpractice action. Defs. Paulson & Nace, PLLC, & Barry Nace's Statement of Genuine Issues of Material Fact Necessary to Be Litigated ¶ 22 [Dkt. # 24-1]. On March 8, 2010, CIC received several litigation documents from the underlying Gilbert medical malpractice action. Nace SOF ¶¶ 19-20. CIC did not review these records, however, and did not discover the timing of the dismissal of the Gilbert medical malpractice action until November 2011. CIC SOF ¶ 22. CIC asserts that it did not review the documents it received in March 2010 for a timeliness issue because it relied on defendant Nace's representation that the "alleged error" had occurred in 2008, and because defendant Gilbert had not yet filed a claim. CIC SOF Resp. at 17. Nevertheless, CIC's own records indicate that, starting in 2009, its claims adjusters repeatedly noted that CIC had "insufficient facts" about the potential Gilbert claim and needed more information. Ex. Y to Mem. of P. & A. in Supp. of CIC's Resp. in Opp. to the Nace Defs.' Mot. for Summ. J. at CIC 000493-95 [Dkt. # 23-1].
On January 13, 2012, CIC sent letters to defendants Nace and Assaad stating that "CIC reserves its rights to deny coverage [of the potential Gilbert claim] to the extent that an insured had a reasonable basis to believe that a professional duty had been breached or to `reasonably foresee' that a `claim' would be made against the insured before the CIC policy incepted on July 24, 2007." Ex. Q to CIC SOF at CIC 000022, CIC 000029. CIC further stated that it would "continue to monitor and investigate [the] potential [Gilbert] claim under a strict reservation of rights including, but not limited to, the right to bring a declaratory action seeking a declaration of no coverage or a rescission action." Id. at CIC 000017, CIC 000024-25. It is undisputed that CIC never sent a reservation of rights notice to defendant Gilbert. CIC SOF Resp. at 9.
C. The Gilbert Legal Malpractice Action
Defendant Sarah Gilbert filed a legal malpractice claim against the attorney defendants in Richmond Circuit Court on March 13, 2012. Nace SOF ¶ 24. CIC received notice of this lawsuit on April 12, 2012, and issued a second reservation of rights letter to defendants Nace and Assaad on April 21, 2012. CIC SOF ¶¶ 29-30; Ex. T to CIC SOF at CIC 000444, CIC 000520. A jury awarded Ms. Gilbert $4,000,000, which the court reduced to $1,750,000 pursuant to Virginia law on November 1, 2013. Ex. A to Gilbert Resp. at 2 [Dkt. # 21-1].
On December 27, 2012, plaintiff CIC filed this diversity action seeking a declaratory judgment that it is not obligated to continue defending the attorney defendants.
Plaintiff CIC filed a cross-motion for summary judgment on September 19, 2013, [Dkt. # 18], contending that District of Columbia ("District" or "D.C.") law applies to this action and that plaintiff is entitled to a declaratory judgment as a matter of law. Mem. of P. & A. in Supp. of CIC's Mot. for Summ. J. at 11-16 [Dkt. # 18] ("Pl.'s Mem."). Defendants Paulson & Nace and Barry J. Nace opposed that motion on December 12, 2013, [Dkt. # 24]. Defendant Assaad joined the opposition on March 18, 2014, [Dkt. # 38], and defendant Gilbert joined the opposition on March 26, 2014, [Dkt. # 39].
Summary judgment is appropriate "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). The party seeking summary judgment bears the "initial responsibility of informing the district court of the basis for its motion, and identifying those portions of the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) (internal quotation marks omitted). To defeat summary judgment, the non-moving party must "designate specific facts showing that there is a genuine issue for trial." Id. at 324, 106 S.Ct. 2548 (internal quotation marks omitted). The existence of a factual dispute is insufficient to preclude summary judgment. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A dispute is "genuine" only if a reasonable fact-finder could find for the non-moving party; a fact is only "material" if it is capable of affecting the outcome of the litigation. Id. at 248, 106 S.Ct. 2505; Laningham v. U.S. Navy, 813 F.2d 1236, 1241 (D.C.Cir.1987). In assessing a party's motion, the court must "view the facts and draw reasonable inferences `in the light most favorable to the party opposing the summary judgment motion.'" Scott v. Harris, 550 U.S. 372, 378, 127 S.Ct. 1769, 167 L.Ed.2d 686 (2007) (alterations omitted), quoting United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S.Ct. 993, 8 L.Ed.2d 176 (1962) (per curiam).
"The rule governing cross-motions for summary judgment ... is that
As a preliminary matter, the Court must determine whether District of Columbia law or Virginia law applies in this case because a federal court sitting in diversity "must apply state law to the substantive issues before it." A.I. Trade Fin., Inc. v. Petra Int'l Banking Corp., 62 F.3d 1454, 1458 (D.C.Cir.1995), citing Erie R.R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938); see also Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496-97, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). To determine which state's substantive law to apply, a court must "apply the choice-of-law rules of the forum state." Republican Nat'l Comm. v. Taylor, 299 F.3d 887, 890 (D.C.Cir.2002). Thus, District of Columbia choice-of-law principles will guide the Court's inquiry.
Under D.C. law, a court must "first determine whether there is a conflict" between D.C. and Virginia law in the case. Eli Lilly & Co. v. Home Ins. Co., 764 F.2d 876, 882 (D.C.Cir.1985), citing Fowler v. A & A Co., 262 A.2d 344, 348 (D.C.App.1970); see also Capitol Specialty Ins. Corp. v. Sanford Wittels & Heisler, LLP, 793 F.Supp.2d 399, 407 (D.D.C.2011). If no conflict exists, the court need not proceed with the choice of law analysis. Eli Lilly, 764 F.2d at 882.
Defendants appear to believe that a conflict exists between District and Virginia law.
Assuming without deciding that these circumstances present a conflict between D.C. and Virginia law,
Adolph Coors, 960 A.2d at 620, citing Restatement (Second) of Conflict of Laws §§ 188, 193 (1971).
Taken together, these factors overwhelmingly indicate that District of Columbia law "controls the interpretation and enforcement" of the insurance contract at issue in this case. CIC is an Illinois company that issued an insurance policy to the attorney defendants in the District of Columbia. Defs.' Mem. at 10-11. Barry J. Nace is a resident of the District, and Paulson & Nace is organized under the laws of the District of Columbia, engaged in the practice of law in the District, with its principal place of business in the District. Id. at 10; CIC SOF ¶ 37. Therefore, the place of contracting and negotiation, the location of the subject matter of the contract, and the principal location of the insured risk (the law firm and its lawyers) is the District of Columbia. See Defs.' Mem. at 10. Moreover, while the legal action underlying the coverage dispute was filed in Virginia, the subject matter of the insurance contract, i.e. the attorney defendants' professional activities, was located in the District. Id. And despite defendants' insistence to the contrary, the question here is what law governs the insurance contract between CIC and the attorney defendants, and not what law governs the legal malpractice claim underlying this case.
Applying District of Columbia law, the Court concludes that the attorney defendants failed to report Ms. Gilbert's potential legal malpractice claim to CIC on a timely basis, and that CIC is therefore not obligated to defend or indemnify them against those claims. The Court finds that the attorney defendants reasonably should have known about defendant Gilbert's potential claim prior to the July 24, 2007 inception of the CIC policy, and therefore, they did not satisfy an essential prerequisite to coverage of her claim. Second, the Court finds that although CIC could—and perhaps should—have reserved its rights with respect to the defense it asserts in this case (the "prior knowledge" defense) much sooner, CIC did not waive this defense, and it is not estopped from asserting it here.
In the District of Columbia, "[a]n insurance policy is a contract between the insured and the insurer, and in construing it [a court] must first look to the language of the contract." Travelers Indem. Co. of Ill. v. United Food & Commercial Workers Int'l Union, 770 A.2d 978, 986 (D.C.2001), quoting Cameron v. USAA Prop. & Cas. Ins. Co., 733 A.2d 965, 968 (D.C.1999). "`Where insurance contract language is not ambiguous ... a written contract duly signed and executed speaks for itself and binds the parties without the necessity of extrinsic evidence.'" Id., quoting In re Corriea, 719 A.2d 1234, 1239 (D.C.1998). Moreover, "notice provisions in insurance contracts are deemed `of the essence of the contract' and are given effect `to promote the efficient and economic liability insurance administration.'" Columbia Cas. Co. v. Columbia Hosp. for Women, 633 F.Supp. 697, 699 (D.D.C.1986), quoting Diamond Serv. Co. v. Utica Mut. Ins. Co., 476 A.2d 648, 652 (D.C.1984).
Looking to the language of the contract here, the 2008-2009 liability insurance policy obligated CIC to cover incidents that took place prior to the inception of the policy as long as it received appropriate notice of potential claims. Specifically, the policy provided coverage if, "prior to the effective date of the first ... Policy issued by [CIC] to the Named Insured... the Named Insured, ... [or any] employee ... had no reasonable basis to believe that the Insured had breached a professional duty or to Reasonably Foresee that a Claim would be made against the Insured." CIC SOF ¶ 24. The policy further defined "Reasonably Foresse(n)" to include "incidents or circumstances that involve a particular person or entity which an Insured knew might result in a Claim or suit prior to the effective date of the first policy ... and which was not disclosed to [CIC]." Id. ¶ 26.
The parties do not dispute the meaning of the language of the contract itself, but rather the date on which the attorney defendants should have notified CIC of defendant Gilbert's potential claim. CIC argues that the attorney defendants had a "reasonable basis to believe" that they had "breached a professional duty," or to "Reasonably Foresee" that defendant Gilbert would bring a claim, as early as February 26, 2007, when the court dismissed
The Court finds that the attorney defendants had a reasonable basis to believe that they had breached a professional duty to defendant Gilbert no later than the date of the Virginia court's ruling on June 18, 2007, and that expert testimony is not necessary in this case. Whether the attorney defendants had a "reasonable basis to believe" that a breach of professional duty had occurred is an objective inquiry that asks what a reasonable attorney would have done in the same circumstances.
The Court further finds that this question is not "so distinctly related to some science, profession, or occupation as to be beyond the ken of the average layperson." Capitol Sprinkler, 630 F.3d at 225; see also Capitol Specialty, 793 F.Supp.2d at 411 (holding without expert testimony that attorneys who missed a filing deadline that caused a court to dismiss their clients' class action claims reasonably should have known that the clients had a potential malpractice claim against them); Ross v. Cont'l Cas. Co., 420 B.R. 43, 50 (D.D.C.2009) (holding without expert testimony that attorney's failure to timely file an answer, leading to a default judgment against the client, "might reasonably be expected to be the basis of a claim" under liability policy); Minn. Lawyers Mut. Ins. Co. v. Hahn, 355 F.Supp.2d 104, 110-11 (D.D.C.2004) (applying Virginia law and holding without expert testimony that attorneys reasonably should have known that a "[l]etter stating that an attorney ha[d] been `authorized to institute legal proceedings for claims'" constituted notice of a claim for purposes of a professional liability insurance policy). Therefore, the attorney defendants reasonably should have known of defendant Gilbert's potential claim prior to the inception of the CIC policy.
Defendants contend that even if their notice to CIC of defendant Gilbert's potential claim was untimely, CIC has waived its "prior knowledge" defense or is estopped from asserting it because CIC investigated the potential claim for more than two years before reserving its rights. Defs.' Mem. at 19-20; Defs.' Opp. at 26-28.
Under District of Columbia law, "[w]aiver is an act or course of conduct by the insurer which reasonably leads the insured to believe that the breach will not be enforced." Diamond, 476 A.2d at 654. In other words, and in this context, "`an insurer undertaking the defense of an insured against a litigious assertion of an unprotected liability, without a disclaimer of contractual responsibility and a suitable reservation of rights, is foreclosed from
Although it may be true that CIC should have uncovered the timing issue in this case earlier than it did, the Court finds that CIC's "prior knowledge" defense is not barred by the doctrines of waiver or estoppel. It is undisputed that CIC could have discovered the facts underlying its "prior knowledge" defense in March of 2010, NACE SOF ¶¶ 19-20, but it did not do so until November 2011, CIC SOF ¶ 22, and did not reserve its rights with respect to that defense until January 13, 2012.
Moreover, the twenty-two months that elapsed between the earliest date on which CIC could have become aware of its prior knowledge defense (March 8, 2010) and the date on which it issued its reservation of rights (January 13, 2012) did not prejudice defendants because CIC had taken no actions that "hampered or harmed" the defendants' "ability to defend [themselves]." See Diamond, 476 A.2d at 658. In Diamond, the court held that an insurance company had not foregone its coverage defenses when there was a "seven-month delay between the time [the insurer] knew there was a good possibility it would withdraw" and the time it did withdraw, because the insurer had merely "advise[d] [the insured] on answering interrogatories and ... file[d] an answer to the amended complaint." 476 A.2d at 656-57. Likewise, in Capitol Specialty, there was no prejudice when the insurer withdrew coverage nine months after receiving notice of the claim, having only "advised defendants that coverage [was] available for [their] claim" and "undert[aken] their defense in the Malpractice Action." 793 F.Supp.2d at 412-13 & n. 8. By contrast, in Cincinnati Ins. Co., the court did find prejudice when the insurer "controlled the defense of the... action for approximately five months before disclaiming coverage and ... undertook several important defensive actions,"
Again, and unlike the insurers in all of these cases, CIC reserved its rights with respect to its "prior notice" defense before defendant Gilbert even filed her complaint.
In their reply, defendants also contend that had CIC reserved its rights sooner, the attorney defendants would have "notif[ied] and pursu[ed] other potential insurers," including their immediately prior insurer, Philadelphia Insurance Company. Defs.' Reply at 23-24. But that policy expired in July 2007, and it is not clear that such a claim could have been successful, since the very earliest date CIC could have discovered its defense and notified the defendants was March 2010. See Ex. DD to Pl.'s Sur-Reply at PIIC 012, PIIC 027 [Dkt. # 32-1] (copy of the attorney defendants' Philadelphia Insurance Company policy stating that the insured could only purchase "Extended Reporting Period" coverage within sixty days after the termination of the policy period).
The Court cannot conclude, therefore, that CIC's actions prejudiced the attorney defendants or "undermin[ed] [their] ability to defend [themselves]." See Athridge, 604 F.3d at 629. Nor were CIC's actions "a course of conduct ... which reasonably [led] the insured to believe that the breach [would] not be enforced." Diamond, 476 A.2d at 654. Therefore, CIC's "prior knowledge" defense is not barred by the doctrines of waiver or estoppel, and the Court will grant its motion for summary judgment.
The Court finds that District of Columbia law applies in this case, that the attorney defendants failed to timely report defendant Gilbert's legal malpractice claim to their insurer, plaintiff CIC, and that CIC is not barred from asserting this defense to coverage by the doctrines of waiver or estoppel. Therefore, plaintiffs motion for summary judgment will be granted, and defendants' motion for summary judgment will be denied.