MARCH 2009 BAD FAITH CASES SUMMARY JUDGMENT ON BAD FAITH DENIED WITHOUT PREJUDICE AFTER COURT FINDS DUTY TO DEFEND ON SANCTIONS CASE DESPITE POLICY EXCLUSION OF SANCTIONS (Philadelphia Federal)
In Post v. St. Paul Travelers Insurance Company, the court denied the insurer’s motion for summary judgment on all counts, including the bad faith count, after it determined that the insurer had a duty to defend because the sanctions exclusion in the policy did not apply under the circumstances.
The insured attorney had filed for bad faith, among other counts, because his professional liability carrier denied him defense in a sanctions case. That case had been joined by the insured’s former client who had previously notified him of the intention to file a malpractice case against him. The insurer asserted it owed him no duty because his policy specifically excluded sanctions.
The court determined that the insurer did owe a duty to defend, based upon several factors.
First, a claim was established once the insurer received written notice of the former client’s intention to file for malpractice.
Second, the duty to defend was established because the malpractice claim was potentially covered under the policy.
Third, the duty to defend extended to the sanctions petition once the former client joined it because the petition then became “involved” in the claim under the policy language, and, as it was based on the same alleged facts as the malpractice, it created the potential for collateral estoppel (a judgment on issues in one legal action is binding on those same issues in any subsequent legal actions).
Fourth, even if it weren’t “involved,” defense of the sanctions petition would have been covered because: “sanctions” was not defined so it must be construed in favor of the insured; sanctions are understood to be brought by opposing counsel; former clients typically file for malpractice, not sanctions; the court must consider the alleged facts instead of the action pled when determining coverage; and the damages the former client was seeking under the sanctions petition were actually malpractice damages, which are covered under the policy.
Once the court established the insurer had a duty, the issue arose of whether the denial of coverage had been done in bad faith. The court found there to be a genuine issue of material fact so it denied the insurer’s motion for summary judgment on the bad faith claim but without prejudice, allowing it to be raised later.
Conversely, the court also granted two parts of the insured’s partial motion for summary judgment: on breach of the insurance contract and for a declaratory judgment.
