Benjamin Post v. St Paul Travelers Ins Co , 691 F.3d 500 ( 2012 )

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_______________
Nos. 10-3088 & 10-3300
_______________
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
_______________
Argued January 25, 2012
_______________
Before: AMBRO, CHAGARES
and HARDIMAN, Circuit Judges
(Opinion filed: July 31, 2012)
George A. Bochetto, Esquire (Argued)
Bochetto & Lentz
1524 Locust Street
Philadelphia, PA 19102
Charles S. Fax, Esquire
Rifkin, Livingston, Levitan & Silver
7979 Old Georgetown Road
Bethesda, MD 20814
Marc J. Zucker, Esquire
Weir & Partners
1339 Chestnut Street
The Widener Building, Suite 500
Philadelphia, PA 19107-0000
Counsel for Appellant/Cross-Appellee
Robert L. Byer, Esquire (Argued)
Duane Morris
600 Grant Street, Suite 5010
Pittsburgh, PA 15219-0000
Francis J. Deasey, Esquire
Henri Marcel, Esquire
Stephen J. Parisi, Esquire
Deasey, Mahoney, Valentini & North
1601 Market Street, Suite 3400
Philadelphia, PA 19103-0000
Robert M. Palumbos, Esquire
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Duane Morris
30 South 17th Street, United Plaza
Philadelphia, PA 19103-4196
Counsel for Appellee/Cross-Appellant
_______________
OPINION OF THE COURT
_______________
AMBRO, Circuit Judge
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.
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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.
4
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.”
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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.
*****
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Damages means:
• 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
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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
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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
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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:
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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
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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
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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
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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
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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
15
that a change in coverage position was not warranted, and
again denied that it owed any defense or coverage obligation
to Post.
Post & Schell took the same coverage position as Post,
notwithstanding that the sanctions petition did not even name
the firm as a respondent. Post & Schell contended that
Mercy’s claim for malpractice against it and Post was “so
intertwined” with the sanctions petition that Post & Schell’s
fees and costs incurred in the latter (responding to a document
subpoena and a potential claim by Post for contribution in the
event sanctions were imposed on him) should be paid by
Travelers. Travelers responded that the Policy did not cover
legal fees and costs that the firm incurred in connection with
the sanctions proceedings.
E. Mercy Joins In The Sanctions Proceedings
From the onset of the sanctions proceedings, Mercy
participated in conferences with Judge Olszewski, insisted on
receiving copies of all discovery produced by Post, and
attended depositions relating to the sanctions petition.
On January 20, 2006, Mercy sought to question Post
during his deposition. Post’s counsel objected to the
questioning on the basis that Mercy was not a party to the
petition for sanctions. The parties could not resolve this
discovery dispute on their own and turned to Judge Olszewski
to resolve it. He decided to permit Mercy to participate in the
sanctions proceedings on the condition that Mercy file an
answer to the sanctions petition. On January 30, 2006,
Bochetto wrote to Travelers to inform it of Mercy’s
intervention in the sanctions proceedings. Travelers did not
respond.
16
Mercy filed an answer to the petition on February 8,
2006. It joined in the sanctions proceedings because it “was
required to participate in the search, review and production of
documents, and to produce witnesses for depositions.” In
addition, Mercy had an “important interest” in the plaintiffs’
request for sanctions because it was “the misconduct of
[Mercy’s] former counsel that [was] at issue.” Mercy’s
answer admitted that Post and Reid had engaged in discovery
violations—without Mercy’s participation—and that those
violations had prejudiced the plaintiffs. Mercy alleged that
Post had withheld information that he “knew[ ] or should
have known” was discoverable, and had “produced
incomplete copies of policies and/or covered up discoverable
information on policies . . . .” It was in this context that
Mercy claimed it joined the plaintiffs’ request for sanctions.
Mercy’s prayer for relief “request[ed] that th[e] Court hold an
evidentiary hearing and sanction [Post and Reid] for their
conduct, and to enter any other relief [that] this Court
deem[ed] just and equitable under the unique and serious
circumstances presented before it, and award costs, attorneys’
fees and expenses.”
During his deposition in February 2006, Mercy Chief
Executive Officer James May confirmed that Mercy was
seeking money damages in the sanctions proceedings—for,
among other things, the amount of the settlement and the
negative publicity—on account of Post’s alleged misconduct.
On February 20, 2006, Bochetto again wrote to
Travelers, this time to notify it of Mercy’s answer to and
joinder in the sanctions petition, as well as May’s deposition
testimony, all of which made clear that Mercy was seeking
money damages in the sanctions proceedings. Post and Reid
sought a defense to Mercy’s answer to the sanctions petition.
17
Spinelli and Anesh reviewed Mercy’s answer and
determined that, like the petition for sanctions itself, it did not
trigger coverage because it did not allege a claim for
“damages” as defined by the Policy. Anesh informed
Bochetto of Travelers’ coverage decision.
F. The Travelers-Post Letter Agreement
Despite concluding that it owed no defense or
indemnity obligation to Post, Travelers attempted to reach an
accommodation with Post that would reimburse him for some
portion of the defense costs related to the sanctions
proceedings. Travelers did so because, while expressly
reserving its rights on the issue of coverage, it recognized that
(1) there was significant overlap between the sanctions
proceedings and Mercy’s threatened malpractice suit, and (2)
what transpired during the sanctions proceedings could have
an effect on the future malpractice suit with regard to which
Travelers arguably would owe defense and indemnity
obligations.
To that end, in the spring of 2006 Anesh had two
meetings with counsel for Post, Reid, and Post & Schell to
discuss Travelers’ payment of some of their attorneys’ fees
despite its denial of coverage. Bochetto testified that, at the
second meeting, Anesh agreed that Travelers would pay a
“very substantial” amount of the legal fees incurred to date,
an amount that Bochetto understood to be “in the range of
hundreds of thousands of dollars.” However, Bochetto
admitted that Anesh “[n]ever promised . . . an exact dollar
amount . . . [and that a] specific dollar amount was not
mentioned.”
On May 3, 2006, Anesh wrote to Bochetto and Gary
Figore (Reid’s counsel) offering to pay Post’s and Reid’s
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attorneys’ fees in connection with the sanctions proceedings
as follows:
• Travelers would pay an hourly
rate of $225 for partners, $175
for senior associates, and $150
for junior associates;
• Travelers would only pay for
legal services provided on or
after December 15, 2005;
• Travelers would only
reimburse for attorney time
“expended to defend potential
legal malpractice claims”; and
• The $100,000 deductible
would have to be exhausted
prior to reimbursement.
In consideration for this payment, Post would have to
waive any claim for payment of attorneys’ fees and expenses
in the context of the sanctions proceedings except as payable
under the letter agreement.
Post agreed to the terms of the offer letter and
submitted invoices to Travelers for over $400,000 in fees
related to the sanctions proceedings, which amount included
over $250,000 in fees incurred in the sanctions proceedings
prior to Mercy filing its answer to the petition.
After reviewing the invoices, Anesh wrote to Bochetto
on July 26, 2006 stating that Travelers would pay the amount
of $36,220.26. Anesh explained that the reduction in fees—
from the more than $400,000 in invoices submitted—resulted
19
from Travelers’ implementation of the terms of the offer letter
as it had interpreted them.
The next day Bochetto wrote to Anesh rejecting
Travelers’ offer of payment and stating that he was
“genuinely offended by the contents of [the] letter” and that
the suggestion that “only $35,000 (out of over $400,000 in
fees and expenses) are reimbursable . . . is beyond ludicrous.”
In August and September 2006, the parties to the
sanctions proceedings began discussing the possibility of a
mediation that would “encompass the sanctions matter and
the potential legal malpractice action.” In light of this
development, Anesh wrote to Bochetto and Figore stating that
Travelers “agree[d] to pay for fifty per cent (50%) of
reasonable preparation time and attendance at the mediation.”
The mediation was scheduled for late November 2006.
G. The Bobbetts Withdraw The Sanctions Petition
In the fall of 2006, Post filed a lawsuit against the
Bobbetts’ lawyer, Joseph Quinn, for defamation and tortious
interference in order to create leverage to persuade Quinn to
withdraw the sanctions petition. Post believed that, if this
tactic succeeded and the Bobbetts discontinued the sanctions
proceedings, Mercy would no longer be able to use the
sanctions proceedings to obtain discovery against Post in aid
of its malpractice claim without the burdens and costs of
filing a direct action for malpractice. Post’s lawsuit achieved
its purpose—on March 23, 2007, the Bobbetts withdrew their
sanctions petition with prejudice.
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H. Mercy Files A Praecipe For Writ Of Summons
Against Post
In late summer 2007, Mercy offered to mediate its
malpractice claim against Post without resorting to litigation.
Post agreed and demanded that Travelers assume all legal
fees incurred by him in connection therewith. Travelers
responded that it had no duty to represent Post in the
mediation nor to reimburse him for the legal fees incurred in
connection with it. Instead, Travelers made a “courtesy”
offer of $3,000 as a “good faith gesture.” Bochetto rejected
this offer, describing it as an “absurdity.” It almost goes
without saying that the mediation between Mercy and Post
was unsuccessful.
On November 19, 2007, Mercy filed a praecipe for
writ of summons against Post in the Court of Common Pleas
of Luzerne County, Pennsylvania. The following February,
Post filed a praecipe for writ of summons against Mercy in
Philadelphia County. In November 2008, final agreement
was reached among all involved parties—Mercy, Post &
Schell, Post, Reid, and Travelers—for discontinuance, with
prejudice, of these two actions. No money was paid to any
person or entity by or on behalf of Post or Post & Schell in
consideration for the mutual discontinuances.
I. This Lawsuit
On October 13, 2006, Post filed a complaint in the
United States District Court for the Eastern District of
Pennsylvania against Travelers, Liberty Surplus Insurance
Company, and Lexington Insurance Company. Liberty
Surplus and Lexington (Post & Schell’s excess insurers) were
dismissed from the case in January 2007.
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On February 7, 2008, Post filed an amended complaint
against Travelers wherein he asserted five claims. Count I
was for breach of contract based on Travelers’ alleged breach
of the Policy. Count II also was for breach of contract, but
was based on Travelers’ putative breach of an oral agreement
between Bochetto and Anesh that Travelers would pay the
costs incurred by Post in connection with the sanctions
proceedings. Count III asserted a claim for insurance bad
faith pursuant to 42 Pa. Cons. Stat. § 8371. In Count IV,
Post asserted promissory estoppel, contending that Travelers
promised to cover his defense costs in connection with the
sanctions proceedings and that Post reasonably relied on
Travelers’ promise to his detriment. Finally, Count V sought
a declaratory judgment that Post was entitled to coverage for
defense costs he incurred in connection with the sanctions
proceedings.
On June 30, 2008, Travelers moved for partial
summary judgment as to Post’s claims for breach of contract,
insurance bad faith and declaratory judgment (Counts I, II,
III, and V), asserting that its duty to defend Post was not
triggered by the Bobbetts’ sanctions petition or by Mercy’s
answer to it because these pleadings related only to sanctions,
and sanctions are expressly excluded from coverage under the
Policy.
On July 31, 2008, Post filed a cross-motion for partial
summary judgment as to his breach of contract and
declaratory judgment claims (Counts I, II, and V). He
argued, among other things, that Travelers was legally
required to defend and indemnify him in connection with the
sanctions proceedings because (1) Mercy’s malpractice claim,
which predated the sanctions petition, triggered coverage, (2)
the malpractice claim and the sanctions proceedings involved
the same facts and were interrelated, and (3) Mercy was using
22
the sanctions proceedings to further its claim of legal
malpractice.
On January 7, 2009, the District Court entered an
Explanation And Order denying Travelers’ motion for
partial summary judgment and granting in part Post’s cross-
motion. Specifically, the Court denied Travelers’ motion for
summary judgment as to Counts I and V with prejudice, and
denied that motion as to Counts II and III without prejudice.
It granted Post’s cross-motion as to Counts I and V, and
denied it as to Count II without prejudice. The Court held
that the Policy covered the sanctions petition, and explained
in pertinent part as follows:
First, . . . Mercy’s malpractice
claim triggered a duty to defend
that included the sanctions
petition after Mercy joined
because that petition was involved
in the covered claim. As long as
Mercy’s malpractice claim could
have resulted in covered loss,
[Travelers] had a duty to defend
all proceedings involved in that
claim.
...
Second, even if the sanctions
petition were not part of Mercy’s
claim, the petition was not
excluded by the Liability Policy
after Mercy joined the petition.
The sanctions exclusion in the
Liability Policy does not exclude
sanctions petitions brought or
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joined by an attorney’s former
client. . . . The term “sanctions”
was undefined in the
Liability Policy. . . . Sanctions,
particularly those for violations of
discovery rules, are understood to
be sought by the opposing party
on motion, while a client’s
remedy for his or her attorney’s
errors is a malpractice suit.
...
The sanctions exclusion in the
Liability Policy . . . under the
commonly understood definition
of sanctions . . . 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 Post and
Mercy indicates that the damages
Mercy requested in the sanctions
petition were actually malpractice
damages, though Mercy termed
them “sanctions.” As Post’s
former client, the facts alleged by
Mercy in the sanctions petition
sound in malpractice, even though
brought under a cause of action
24
for sanctions. It is the facts in the
complaint that dictate whether the
exclusion in the liability policy
applies, not the cause of action
selected by Mercy. If the
sanctions petition were excluded
from coverage, Mercy could
choose whether to proceed with
an action where Post was covered
by his insurance carrier, or an
action where Post was not, and
potentially be awarded similar
relief in either action.
A professional liability insurance
carrier should not be able to avoid
coverage for what is essentially a
malpractice claim simply because
of how an attorney’s former client
chooses to term the requested
relief. Because the sanctions
exclusion in the liability policy
was unclear, it must be construed
in favor of the insured. Therefore,
the sanctions petition was not
excluded from coverage under the
liability policy after Mercy joined
the sanctions petition and
[Travelers] had a duty to defend
Post at that time. [Travelers]
breached [its] duty to defend Post
under the Liability Policy and [is]
therefore liable for breach of
contract.
25
On January 23, 2009, the District Court entered an
order expressly granting Travelers permission to file a
renewed summary judgment motion as to bad faith. Travelers
did so on February 9. It asserted that an insurer cannot be
held liable for bad faith when, as here, its denial of coverage
rests on a reasonable foundation and is fairly debatable;
rather, an insurer can only be found to have acted in bad faith
if its refusal to provide coverage was frivolous, unfounded, or
based on a motive of self-interest or ill will.
On March 31, the District Court entered an
Explanation And Order granting Travelers’ motion for
summary judgment as to Post’s bad faith claim. It reasoned:
Post, though he makes many
allegations of misconduct on the
part of [Travelers], cannot prove
that [Travelers] did not have a
reasonable basis to deny coverage
. . . . [T]hough I previously held
that coverage of the
Sanctions Petition was required,
[Travelers] had a reasonable basis
to deny coverage. [It] denied
coverage to Post because the
Sanctions Petition requested relief
in the form of sanctions, which
. . . were excluded from the
Liability Policy. . . . I find that
[Travelers’] denial of coverage
was not legally frivolous or
unfounded. Post cannot maintain
a claim for bad faith even if his
allegations of improper conduct
are true because the sanctions
exclusion in the Liability Policy
26
was a reasonable basis for
denying coverage.
Post filed a motion for reconsideration of this grant of
summary judgment on his bad faith claim, which the Court
denied.
In May 2009, Post withdrew Counts II and IV of the
amended complaint. Thereafter, the District Court presided
over a bench trial to determine the amount of damages to
award Post on Count I. It concluded that he was entitled to
reimbursement in the amount of $921,862.38, which
represented the work relating directly to Mercy’s potential
malpractice claim beginning on October 12, 2005, and the
work done relating to the sanctions petition after
November 21, 2005.
Post now appeals the entry of summary judgment on
his bad faith claim. Travelers cross-appeals from the damage
award on the breach of contract claim. 1
II. Discussion
A. Standard of Review
We review a grant of summary judgment de novo.
Azur v. Chase Bank, USA, Nat’l Ass’n, 601 F.3d 212, 216 (3d
Cir. 2010). “To that end, we are required to apply the same
test the [D]istrict [C]ourt should have utilized initially.”
1
The District Court exercised jurisdiction pursuant to 28
U.S.C. § 1332 based on the diversity of citizenship between
the parties and the fact that the amount in controversy
exceeds $75,000. We have appellate jurisdiction under 28
U.S.C. § 1291.
27
Chambers ex rel. Chambers v. Sch. Dist. of Phila. Bd. of
Educ., 587 F.3d 176, 181 (3d Cir. 2009) (citation and internal
quotation marks omitted). This test requires a court to “grant
summary judgment 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). “In determining whether such relief is
warranted, ‘[t]he evidence of the nonmovant is to be believed,
and all justifiable inferences are to be drawn in his favor.’”
Chambers, 587 F.3d at 181 (quoting Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 255 (1986)). The inquiry is
“whether the evidence presents a sufficient disagreement to
require submission to a jury or whether it is so one-sided that
one party must prevail as a matter of law.” Anderson, 477
U.S. at 251-52.
“We may affirm the District Court’s order granting
summary judgment on any grounds supported by the record.”
Nicini v. Morra, 212 F.3d 798, 805 (3d Cir. 2000) (en banc).
“To the extent that the District Court made conclusions of
law, our review is de novo.” In re Merck & Co., Inc. Sec.,
Derivative & ERISA Litig., 493 F.3d 393, 399 (3d Cir. 2007).
We thus review de novo the District Court’s interpretation of
the Policy. Alexander v. Nat’l Fire Ins. of Hartford, 454 F.3d
214, 219 n.4 (3d Cir. 2006).
We review a district court’s findings of fact following
a bench trial for clear error. Am. Soc’y for Testing &
Materials v. Corrpro Cos., 478 F.3d 557, 566 (3d Cir. 2007).
In so doing, we “must give due regard to the trial court’s
opportunity to judge the witnesses’ credibility.”
Fed. R. Civ. P. 52(a)(6). In contrast, we exercise plenary
review over a trial court’s conclusions of law. Kosiba v.
Merck & Co., 384 F.3d 58, 64 (3d Cir. 2004). We similarly
exercise plenary review over its “choice and interpretation of
28
legal precepts.” Blasband v. Rales, 971 F.2d 1034, 1040 (3d
Cir. 1992).
B. Overview of Issues
The central issue for both Post’s appeal from the
dismissal of his bad faith claim, and Travelers’ cross-appeal
of the damage award on Post’s breach of contract claim, is
whether Travelers had a duty to defend Post in the sanctions
proceedings. In short, Post asserts that Travelers owed such a
duty and denying its defense obligations constituted bad faith;
as such, he contends that the District Court erred by granting
summary judgment in Travelers’ favor on the bad faith claim.
Conversely, Travelers argues that the Policy expressly
excludes sanctions, and, thus, not only was the denial of
coverage entirely reasonable and done in good faith, but the
District Court erred by awarding damages to Post based on
Travelers’ supposed breach of the Policy.
C. The Parties’ Arguments
1. Post’s Appeal As To Bad Faith
On appeal, Post asserts that the District Court erred by
granting Travelers’ motion for summary judgment on bad
faith “because Post had demonstrated that there were
numerous genuine disputes of material fact which mandated
the case being submitted to a jury.” Post contends that he
produced evidence establishing, among other things, that
Travelers:
• ignored Post’s multiple
notifications of Mercy’s legal
malpractice claim;
• “loaded the dice” in seeking a
29
formal coverage opinion from
its outside counsel, who was
not a member of the
Pennsylvania bar and who was
unfamiliar with Pennsylvania
insurance law, and worse,
Travelers concealed from its
outside counsel the existence
of Mercy’s claim;
• failed to investigate the Mercy
malpractice claim;
• communicated freely with, and
favored, Post & Schell at the
expense of Post;
• provided legal representation
to Post & Schell, but not to
Post, under the very same
insurance policy;
• never responded to Post’s
demand for coverage of the
legal malpractice claim as a
whole; instead, it denied
coverage based on the more
narrow issue of the sanctions
proceeding without regard to
the pending Mercy claim;
• ignored that the sanctions
proceeding and the Mercy
malpractice claim were
inextricably intertwined, thus
triggering coverage;
30
• made a bad faith offer to
compromise Post’s coverage
claim in exchange for his
waiving his rights under the
Policy;
• violated its own policies and
procedures, as well as
Pennsylvania law, in its
mishandling of Post’s claim;
and
• concealed documents
(particularly, purported
claims-handling manuals)
during discovery in this case.
Post argues that “mistreatment by an insurer, quite
apart from an unreasonable denial of coverage, can itself give
rise to a claim of bad faith.” As support for this proposition,
he cites an unpublished decision of this Court, Gallatin Fuels,
Inc. v. Westchester Fire Insurance Co., wherein we stated that
“a finding that the insure[r] d[oes] not ultimately have a duty
to cover the plaintiff’s claim does not per se make the
insure[r]’s actions reasonable.” 244 F. App’x 424, 435 (3d
Cir. 2007) (citing Frog, Switch & Mfg. Co. v. Travelers Ins.
Co., 193 F.3d 742, 751 n.9 (3d Cir. 1999) (“Bad faith is a
frivolous or unfounded refusal to pay, lack of investigation
into the facts, or a failure to communicate with the insured.”)
(emphasis in Gallatin Fuels)).
Travelers disagrees with Post’s interpretation of
Pennsylvania law. According to Travelers, a bad faith claim
must consist of the unreasonable and intentional (or reckless)
denial of benefits. See UPMC Health Sys. v. Metro Life Ins.
31
Co., 391 F.3d 497, 506 (3d Cir. 2004). Because it had a
reasonable basis to deny coverage for the sanctions
proceedings, Travelers asserts that it did not act in bad faith
as a matter of law. Further, it disputes the “evidence”
purportedly supporting the putative bad faith mishandling of
Post’s coverage claim, arguing, among other things, that: (1)
Spinelli first communicated with Post’s counsel—and had a
“lengthy discussion” with him—within 10 days of receiving
Bochetto’s November 3, 2005 letter; (2) there is no evidence
that Post & Schell received more favorable treatment than did
Post, nor that Travelers favored the firm at Post’s expense; (3)
Travelers conducted a thorough investigation of Post’s
coverage claim— Spinelli reviewed the Policy, the sanctions
petition, Mercy’s answer thereto (once it had been filed), and
two large binders containing documents from the Bobbett
case, and he then took the additional step of retaining counsel
to provide a coverage opinion—and this investigation
continued well after Travelers declined to provide a defense
in December 2005; and (4) three Travelers employees
submitted affidavits attesting that no claims-handling manuals
existed for the lawyer’s professional group within Travelers
(the supposedly concealed documents about which Post
complains).
2. Travelers’ Cross-Appeal As To The
Contractual Damages Award
In support of its cross-appeal, Travelers asserts that it
did not owe a duty to defend Post in the sanctions
proceedings, explaining that its duty to defend Post is
determined solely by the allegations in the sanctions petition
and Mercy’s answer to it, neither of which triggered the duty
to defend because there was no statement of a claim for
covered “damages,” but rather a request for “sanctions,”
which are expressly excluded by the Policy.
32
In response, Post contends that a “demand for
damages” was made by Mercy in October 2005, and the
subsequently filed sanctions petition did not eliminate
Travelers’ duty to investigate and defend Mercy’s malpractice
claim. Instead,
[t]he duty to cover [Mercy’s
malpractice claim] that arose in
October 2005 was a single,
unitary obligation, which
encompassed the sanctions
proceeding initiated on November
21, 2005, but was not defined by
it. This is so because[ ] . . . the
sanctions proceeding was [ ]
merely a vehicle by which Mercy
advanced its claim.
Post also observes that the duty to defend is broader in scope
than the duty to indemnify, and that coverage provisions are
to be interpreted broadly while exclusions are to be construed
narrowly and against the insurer.
D. Analysis
Because our resolution on the merits of the breach of
contract issue (i.e., whether Travelers owed a duty to defend
Post under the Policy) affects our determination as to the
issue of bad faith (i.e., whether Travelers unreasonably and
intentionally or recklessly denied coverage), we shall analyze
Post’s breach of contract claim first.
1. Breach of Insurance Contract
a. Legal Standard
33
“Insurance policies are contracts, and the rules of
contract interpretation provide that the mutual intention of the
parties at the time they formed the contract governs its
interpretation.” Am. & Foreign Ins. Co. v. Jerry’s Sport Ctr.,
Inc., 2 A.3d 526, 540 (Pa. 2010). “Such intent is to be
inferred from the written provisions of the contract. . . . If
doubt or ambiguity exists it should be resolved in [the]
insured’s favor.” Id. (internal citation omitted). “[A]ll
provisions of an insurance contract must be read together and
construed according to the plain meaning of the words
involved, so as to avoid ambiguity while at the same time
giving effect to all of its provisions.” Masters v. Celina Mut.
Ins. Co., 224 A.2d 774, 776 (Pa. Super. Ct. 1966).
As already noted, an insurer’s duty to defend is
broader than its duty to indemnify. Am. & Foreign Ins. Co., 2
A.3d at 540. It is a distinct obligation, separate and apart
from the insurer’s duty to provide coverage. Id. at 541. “An
insurer is obligated to defend its insured if the factual
allegations of the complaint on its face encompass an injury
that is actually or potentially within the scope of the policy.”
Id. See Erie Ins. Exch. v. Transamerica Ins. Co., 533 A.2d
1363, 1368 (Pa. 1987) (describing the duty to defend as
arising “whenever the complaint filed by the injured party
may potentially come within the coverage of the policy”
(emphasis in original)). “As long as the complaint ‘might or
might not’ fall within the policy’s coverage, the insurance
company is obliged to defend.” Am. & Foreign Ins. Co., 2
A.3d at 541 (citation omitted).
Whether a pleading raises a claim against an insured
that is potentially covered is a question to be answered by the
insurer in the first instance upon receiving notice of the claim
by the insured. Id. Although that question may be difficult, it
is the insurer’s duty to make a decision. Id. at 541-42. “The
insurer’s duty to defend exists until the claim is confined to a
34
recovery that the policy does not cover.” Id. at 542. “Where
a claim potentially may become one which is within the scope
of the policy, the insurance company’s refusal to defend at the
outset of the controversy is a decision it makes at its own
peril.” Id.
The question whether a claim against an insured is
potentially covered is answered “by comparing the four
corners of the insurance contract to the four corners of the
complaint.” Id. at 541. “An insurer may not justifiably
refuse to defend a claim against its insured unless it is clear
from an examination of the allegations in the complaint and
the language of the policy that the claim does not potentially
come within the coverage of the policy.” Id. In making this
determination, the “factual allegations of the underlying
complaint against the insured are to be taken as true and
liberally construed in favor of the insured.” Frog, Switch &
Mfg. Co., 193 F.3d at 746. “[T]o determine if there is
coverage, we must look to the facts alleged in the underlying
complaint, not the cause of action pled.” QBE Ins. Corp. v. M
& S Landis Corp., 915 A.2d 1222, 1225 (Pa. Super. Ct. 2007)
(emphasis in original). The manner in which the complainant
frames its request for relief does not control. Mut. Benefit
Ins. Co. v. Haver, 725 A.2d 743, 745 (Pa. 1999) (“[T]he
particular cause of action that a complainant pleads is not
determinative of whether coverage has been triggered.
Instead it is necessary to look at the factual allegations
contained in the complaint.”).
“Under Pennsylvania law, when an insured tenders
multiple claims to an insurer for defense, the insurer is
obligated to undertake defense of the entire suit as long as at
least one claim is potentially covered by the policy.” Caplan
v. Fellheimer Eichen Braverman & Kaskey, 68 F.3d 828, 831
n.1 (3d Cir. 1995); see also Am. Contract Bridge League v.
35
Nationwide Mut. Fire Ins. Co., 752 F.2d 71, 75 (3d Cir.
1985).
b. Merits
i. Travelers’ Duty To Defend
Post Against Mercy’s
Claim Was Triggered At
Least As Of October 12,
2005
Under the Policy, Travelers had a duty to defend Post
against any “claim” or “suit” for covered loss. Because the
Policy differentiates a “claim” from a “suit,” and because it
defines a “claim” as simply “a demand that seeks damages,”
Travelers’ duty to defend could be triggered by something
short of, and prior to, the filing of a complaint. See Heffernan
& Co. v. Hartford Ins. Co. of Am., 614 A.2d 295, 298 (Pa.
Super. Ct. 1992) (holding that insurer’s duty to defend was
triggered by answers to interrogatories because they put
insurer “on notice that a claim for damage . . . will probably
be made”).
The Policy provides that a claim is considered “to be
first made or brought” on the date that Travelers or any
protected person “first receives written notice of such claim.”
We thus find no error in the District Court’s conclusion that
Mercy’s malpractice claim was first made or brought on
October 12, 2005, the date on which Mercy faxed to Post a
letter blaming him for exposing it to the threat of uninsured
punitive damages and forcing it to settle the Bobbett case for
full policy limits in order to avoid such exposure. As such,
Travelers’ duty to defend Post in connection with Mercy’s
malpractice claim was triggered at least as of October 12,
2005.
36
While damages were not explicitly demanded in the
October 12, 2005 letter, Mercy asserted its malpractice claim
in no uncertain terms. After learning of Post’s alleged
misconduct, Mercy quickly terminated him as its counsel.
Mercy told Post that it would sue him for malpractice.
Indeed, in the September 25, 2005 conversation between Jim
Saxton (of Stevens & Lee) and Barton Post (Post’s father),
wherein Saxton threatened “that he, on behalf of Mercy, was
going to bring a lawsuit for malpractice against [Post],”
Saxton also advised that Post should “make arrangements to
report the claim to [Travelers], the insurance carrier.” Mercy
quickly followed up on this conversation by letter, dated
October 6, 2005, wherein Mercy (1) advised Post that it had
retained Stevens & Lee as outside counsel to investigate and
potentially prosecute a legal malpractice claim against him,
(2) directed Post to preserve relevant documents and
electronic data in connection with the threatened malpractice
suit, and (3) requested that Post produce all such relevant
documents and electronic data to Stevens & Lee. All this laid
the groundwork for the October 12 letter, wherein Mercy
blamed Post for placing it “in a position that demanded
settlement so as to limit [its] exposure and protect [its]
charitable assets” from “the substantial potential of uninsured
punitive exposure resulting from the actions of your firm.”
Considering the cumulative effect of all that
transpired—i.e., Post’s immediate termination as Mercy’s
counsel, the September 25, 2005 conversation between
Saxton and Barton Post, and the October 6 and October 12
letters—it would be fantasy to believe as of October 12 that
Mercy would not be seeking damages from Post in the
threatened malpractice suit to compensate it for the excessive
settlement it believed Post’s misconduct forced on it. As
the threatened malpractice suit certainly would have the
potential to result in a covered loss under the Policy,
Travelers’ duty to defend Post in connection with Mercy’s
37
malpractice claim was triggered at the latest “on the date that
[Travelers] or [Post] first receive[d] a written notice” of
Mercy’s claim—October 12, 2005.
Travelers’ contention that Mercy’s letters did not
trigger a duty to defend because they indicated only a
“potential” claim underwhelms. There was nothing
“potential” about Mercy’s threat to sue Post for malpractice
or its assertion that Post’s misconduct caused it monetary
loss. The definition of “claim” under the Policy does not
require anything more than a “demand that seeks damages,”
which Mercy made via its threats and letters. Indeed,
Travelers itself viewed its duty to defend as having been
triggered by Mercy’s letters because it opened a claims file
for Post and assigned responsibility of the claim to Spinelli,
who then spent considerable time reviewing numerous
documents and analyzing the claim.
ii. The Scope Of Travelers’
Duty To Defend Against
The Sanctions Petition Is
Limited To The Defense
Costs Incurred By Post
Subsequent To Mercy’s
Filing Of Its Answer On
February 8, 2006
We part ways with the District Court with regard to the
scope of Travelers’ defense obligation, as we disagree with its
holding that Travelers’ duty to defend Post encompassed the
entirety of the sanctions proceedings (that is, from when they
were begun by the Bobbetts).
Relying on the Policy’s definition of “defense
expenses”—which includes “[t]he cost of the proceedings
involved in the suit, including court reporter’s, arbitrator’s,
38
and mediator’s fees”—the District Court explained as
follows:
When Mercy joined the sanctions
petition, the proceedings
surrounding the petition became
“involved” in Mercy’s previously
asserted malpractice claim
through the potential for collateral
estoppel effect. Mercy likely
joined the sanctions petition, in
part, to participate in developing
the facts and/or law that would
directly impact their malpractice
suit (assuming the sanctions
petition did not result in sufficient
monetary compensation to
eliminate Mercy’s need to sue for
malpractice).
We disagree for at least two reasons. First, the Court’s
holding is at odds with the very distinction it (and we)
recognized between a “claim” and a “suit.” This distinction
was critical to its (and our) conclusion that Mercy had
asserted a covered malpractice “claim” at least as of October
12, 2005. But the Court then puts aside this distinction by
relying on “[t]he cost of the proceedings involved in the suit”
Policy language to support its view that the sanctions
proceedings “became ‘involved’ in” Mercy’s malpractice
claim once Mercy began participating in those proceedings.
Under the Policy, however, “defense expenses” only include
costs “involved in the suit,” and neither Mercy’s answer to
the sanctions petition (February 8, 2006) nor its malpractice
action against Post (November 19, 2007) had been filed when
the Bobbetts filed their petition for sanctions against Post on
November 21, 2005. Thus, while the sanctions proceedings
39
related to Mercy’s claim, there was as yet no suit that those
sanctions proceedings could be “involved in.” The District
Court therefore erred by concluding, based on Mercy’s
participation in conference calls with Judge Olszewski and its
insisting on receiving copies of all discovery produced in the
sanctions proceedings, “that Mercy became sufficiently
involved in the [sanctions] [p]etition to have ‘joined’ the
proceedings from the day the [p]etition was filed, on
November 21, 2005.” No amount of participation by Mercy
in the sanctions proceedings would be sufficient prior to the
filing of a “suit”—which means under the Policy “a civil
proceeding that seeks damages”—a prerequisite to Travelers’
liability. As noted below, that prerequisite was satisfied on
February 8, 2006, the date on which Mercy filed its answer to
the sanctions petition and sought damages against Post.
Second, the District Court’s conclusion goes against
two canons of contract interpretation. Under the principle of
ejusdem generis, “[i]t is widely accepted that general
expressions such as ‘including, but not limited to’ that
precede a specific list of included items should not be
construed in their widest context, but apply only to persons or
things of the same general kind or class as those specifically
mentioned in the list of examples.” McClellan v. Health
Maint. Org. of Pa., 686 A.2d 801, 805 (Pa. 1996). Similarly,
“[t]he ancient maxim ‘noscitur a sociis’ summarizes the rule
that the meaning of words may be indicated or controlled by
those words with which they are associated. Words are
known by the company they keep.” Northway Vill. No. 3,
Inc. v. Northway Props., Inc., 244 A.2d 47, 50 (Pa. 1968).
The “cost of the proceedings involved in the suit” includes
“court reporter’s, arbitrator’s, and mediator’s fees,”
not attorneys’ fees. Attorneys’ fees traditionally are
distinguished from costs. See, e.g., Fed. R. Civ. P. 54(d)
(differentiating between “costs” and “attorney’s fees”). The
Policy recognizes this distinction, addressing attorneys’ fees
40
in a separate bullet-point in the definition of “defense
expenses.”
In this context—i.e., in the absence of a “suit” (“a civil
proceeding that [sought] damages”)—the Policy’s “involved
in” language cannot apply. Hence, Travelers did not owe a
duty to defend Post in connection with the sanctions petition
at the time the petition was filed by the Bobbetts on
November 21, 2005.
However, Mercy’s answer to the sanctions petition,
filed on February 8, 2006 and which included a prayer for
relief requesting “any other relief [that] this Court deems just
and equitable under the unique and serious circumstances
presented before it, and award costs, attorneys’ fees and
expenses,” triggered coverage under the Policy. While Mercy
did not explicitly request “damages” as an item of relief, the
prayer in its answer did generally request “any other [just and
equitable] relief” as well as “costs, attorneys’ fees and
expenses.” It is debatable whether the general prayer for
“other relief” rendered Mercy’s answer a “civil proceeding
that seeks damages.” Compare Meth v. Meth, 62 A.2d 848,
849 (Pa. 1949) (“Under the prayer for general relief, a decree
which accords with the equities of the cause may be shaped
and rendered; the court may grant any appropriate relief that
conforms to the case made by the pleadings although it is not
exactly the relief which [h]as been asked for[.]”), with Baird
v. First Pa. Bank, N.A., 1 Pa. D. & C. 3d 665, 666, 1976 WL
491, at *1 (Pa. Ct. Com. Pl. 1976) (holding that a request for
“such other equitable relief as the Court deems appropriate”
is, by itself, no claim for relief at all, and requiring the
plaintiff to amend the complaint). Mercy’s specific request
for “costs, attorneys’ fees and expenses” nonetheless was
sufficient to do so because attorneys’ fees—both amounts
paid by the client to the negligent attorney as well as expenses
incurred by the client to prosecute its malpractice claim
41
against the attorney—are an item of damages in a legal
malpractice claim. See Bailey v. Tucker, 621 A.2d 108, 115
(Pa. 1993) (holding that plaintiff in legal malpractice action
could recover amounts paid to his attorney as damages); Feld
and Sons, Inc. v. Pechner, Dorfman, Wolfee, Rounick, and
Cabot, 458 A.2d 545, 554 (Pa. Super. Ct. 1983) (stating that
clients could recover fees paid to their lawyer who violated
professional obligations owed to clients); 3 Ronald E. Mallen
& Jeffrey M. Smith, Legal Malpractice § 21.6, at 22-26
(2009) (attorneys’ fees incurred in legal malpractice action
may be recoverable as consequential damages). Because
Mercy requested its attorneys’ fees as an item of relief in its
February 8, 2006 answer to the sanctions petition, the
sanctions proceeding at that time became a “civil proceeding
that [sought] damages,” and thus a “suit,” thereby triggering
coverage under the Policy.
In addition, Mercy’s answer to the sanctions petition
(in reality, its joining with the Bobbetts against Post, Reid,
Barton Post, and Post & Post) admitted and/or alleged facts
potentially giving rise to a covered malpractice claim under
the Policy. Mercy admitted and/or alleged that Post was its
former counsel, that he failed to exercise ordinary skill or
knowledge by unethically and improperly redacting and/or
withholding discoverable information, and that his failure to
exercise ordinary skill and knowledge subjected him to
sanctions and liability for attorneys’ fees—in essence, stating
the elements of a malpractice claim. See Bailey, 621 A.2d at
112 (explaining that, to state a claim for legal malpractice
under Pennsylvania law, an aggrieved client must allege that:
(1) the parties were in an attorney-client relationship; (2) the
attorney failed to exercise ordinary skill or knowledge; and
(3) the attorney’s failure to exercise ordinary skill and
knowledge was the proximate cause of damage to the client).
42
Moreover, because (1) Mercy sought damages in
addition to sanctions, and (2) the facts admitted and alleged
by Mercy in its answer to the sanctions petition stated a
potentially covered malpractice claim, the Policy’s sanctions
exclusion does not shield Travelers from its duty to defend
Post. See Caplan, 68 F.3d at 831 n.1 (“Under Pennsylvania
law, when an insured tenders multiple claims to an insurer for
defense, the insurer is obligated to undertake defense of the
entire suit as long as at least one claim is potentially covered
by the policy.”). This exclusion would only excuse
Travelers’ duty to defend Post if the possibility of Mercy’s
recovery could be confined solely to sanctions. See Am.
Contract Bridge, 752 F.2d at 75 (“the insurer is obligated to
fully defend its insured until it can confine the possibility of
recovery to claims outside the coverage of the policy”).
Mercy’s potential recovery could not be so confined.
iii. The Policy Does Not Cover
Post v. Mercy
We believe also the District Court should not have
held that Post’s suit against Mercy—filed in Philadelphia
County in February 2008—was covered under the Policy on
the basis that it was inextricably intertwined with Mercy’s
malpractice claim against Post.
Had Post asserted counterclaims in Mercy’s suit
against him, no doubt the expenses incurred by him to
prosecute the counterclaims would have been covered by the
Policy. See TIG Ins. Co. v. Nobel Learning Cmtys., No. Civ.
A. 01-4708, 2002 WL 1340332, at *14-15 (E.D. Pa. June 18,
2002) (holding that counterclaims that were inextricably
intertwined with the defense of the initial claims were
“logically encompassed” by duty to defend); Safeguard
Scientifics, Inc. v. Liberty Mut. Ins. Co., 766 F. Supp. 324,
333-34 (E.D. Pa. 1991) (holding that the insurer’s duty to
43
defend extended to counterclaims raised in the same
proceeding because “the pursuit of the counterclaims was
inextricably intertwined with the defense . . . and was
necessary to the defense of the litigation as a strategic
matter”).
However, Post did not simply assert counterclaims in
the same proceeding; rather, he filed a separate civil action in
a different venue. While Post’s new action in Philadelphia
County surely related to the case instituted by Mercy in
Luzerne County, to hold that Post’s separate action was
covered by the Policy simply because it related to Mercy’s
suit would condone, and perhaps even encourage, the
multiplicity of litigation. Such a holding also would place
insurers in the difficult and unenviable situation of having to
determine whether related cases are related enough—i.e.,
“inextricably intertwined”—to trigger coverage for the
insured’s counterclaims. Both of these results are highly
undesirable and, therefore, we cannot adopt such a rule.
As Judge Savage persuasively stated in Amquip Corp.
v. Admiral Insurance Co.,
[i]f courts were to consider the
costs an insured incurred by
instituting its own action for the
purpose of bringing pressure on
the other party under the guise of
a litigation defense, it would
encourage and endorse
multiplicity of litigation. This is
much different than requiring the
insurer to reimburse the insured
for the cost of prosecuting
counterclaims raised in the same
action.
44
No. Civ. A. 03-4411, 2005 WL 742457, at *7 (E.D. Pa. Mar.
31, 2005)(Savage, J.).
Rather than require insurers to decide whether they
have a duty to cover an insured’s expenses in a separate
action based on a highly contextual and subjective inquiry
into whether it is “sufficiently related to the underlying
action” (the rule that the District Court applied here), Amquip
provides a bright-line and sensible rule that an insurer has a
duty to cover an insured’s expenses for prosecuting
counterclaims in the initial proceeding, but that insurer has no
duty to cover the expenses incurred by an insured in
prosecuting an entirely new and separate action (even if that
action is related to the underlying case). While there
certainly may be tactical reasons for an insured to file a
related suit in a different venue, we believe that discouraging
multiple litigation and providing clear coverage guidelines for
insurers are more important considerations. The rule in
Amquip will provide clarity to insurers and insureds, as well
as conserve their legal costs and expenses (not to mention
judicial resources), and thus will better serve insurance
coverage litigants. Because Amquip provides a better rule of
law, we hereby adopt it.
Accordingly, Travelers is not required to cover the
expenses incurred by Post in connection with the separate
action he filed against Mercy in Philadelphia County.
c. Conclusion Re Duty To Defend
Travelers owed Post a duty to defend against (1)
Mercy’s malpractice claim from October 12, 2005 onward,
and (2) the sanctions petition subsequent to the filing of
Mercy’s answer on February 8, 2006. However, Travelers is
not liable for the expenses incurred by Post in connection
with the separate action he filed in Philadelphia County.
45
2. Insurance Bad Faith
a. Legal Standard
To recover for bad faith, “a plaintiff must show by
clear and convincing evidence that the insurer (1) did not
have a reasonable basis for denying benefits under the policy
and (2) knew or recklessly disregarded its lack of a
reasonable basis in denying the claim.” Condio v. Erie Ins.
Exch., 899 A.2d 1136, 1143 (Pa. Super. Ct. 2006). “Thus, an
insurer may defeat a claim of bad faith by showing that it had
a reasonable basis for its actions.” Amica Mut. Ins. Co. v.
Fogel, 656 F.3d 167, 179 (3d Cir. 2011). “[T]he essence of a
bad faith claim” is “the unreasonable and intentional (or
reckless) denial of benefits.” UPMC Health Sys., 391 F.3d at
506.
The Superior Court of Pennsylvania has explained:
“Bad faith” on [the] part of [an]
insurer is any frivolous or
unfounded refusal to pay proceeds
of a policy; it is not necessary that
such refusal be fraudulent. For
purposes of an action against an
insurer for failure to pay a claim,
such conduct imports a dishonest
purpose and means a breach of a
known duty (i.e., good faith and
fair dealing), through some
motive of self-interest or ill will;
mere negligence or bad judgment
is not bad faith.
46
Terletsky v. Prudential Prop. & Cas. Ins. Co., 649 A.2d 680,
688 (Pa. Super. Ct. 1994) (quoting Black’s Law Dictionary
139 (6th ed. 1990)).
“A reasonable basis is all that is required to defeat a
claim of bad faith.” J.C. Penney Life Ins. Co. v. Pilosi,
393 F.3d 356, 367 (3d Cir. 2004). Moreover, “mere
negligence or bad judgment does not constitute bad faith;
knowledge or reckless disregard of a lack of a basis for denial
of coverage is necessary.” Frog, Switch & Mfg., 193 F.3d at751 n.9.
While an insurer has a duty to accord the interests of
its insured the same consideration it gives its own interests,
“an insurer is not bound to submerge its own interest in order
that the insured’s interests may be made paramount, and an
insurer does not act in bad faith by investigating and litigating
legitimate issues of coverage.” J.C. Penney, 393 F.3d at 368(citation and internal quotation marks omitted).
Even questionable conduct giving the appearance of
bad faith is not sufficient to establish it so long as the insurer
had a reasonable basis to deny coverage. Id. (affirming
summary judgment in insurer’s favor on bad faith claim
because there was a reasonable basis to deny coverage, even
though insurer took inconsistent coverage positions in other
situations and made false statements in its marketing
materials). See O’Donnell v. Allstate Ins. Co., 734 A.2d 901,
906-10 (Pa. Super. Ct. 1999) (explaining that, while bad faith
“may also extend to the insurer’s investigative practices,” in
the absence of evidence of a dishonest purpose or ill will, it is
not bad faith for an insurer to take a stand with a reasonable
basis or to “aggressively investigate and protect its interests”).
Bad faith “must be proven by clear and convincing
evidence and not merely insinuated.” Terletsky, 649 A.2d at
47
688. This heightened standard requires evidence “so clear,
direct, weighty and convincing as to enable a clear
conviction, without hesitation, about whether or not the
defendants acted in bad faith.” Bostick v. ITT Hartford Grp.,
56 F. Supp. 2d 580, 587 (E.D. Pa. 1999) (citations omitted).
“Thus, the plaintiff’s burden in opposing a summary
judgment motion is commensurately high in light of the
substantive evidentiary burden at trial.” J.C. Penney, 393
F.3d at 367. “In a bad faith case, summary judgment [in
favor of the insurer] is appropriate when there is no clear and
convincing evidence that [its] conduct was unreasonable and
that it knew or recklessly disregarded its lack of a reasonable
basis in denying the claim.” Bostick, 56 F. Supp. 2d at 587.
b. Merits
The District Court correctly granted summary
judgment in favor of Travelers on Post’s insurance bad faith
claim brought pursuant to 42 Pa. Cons. Stat. § 8371. The
sanctions exclusion in the Policy provided Travelers a
reasonable basis for declining to provide a defense to Post,
and there is nothing in the record—let alone clear and
convincing evidence—indicating that Travelers’ purported
mishandling of Post’s claim was motivated by a dishonest
purpose or ill will.
With his primary bad faith argument foreclosed by our
(and the District Court’s) conclusion that Travelers had a
reasonable basis for declining coverage, Post asserts that
Travelers engaged in bad faith conduct by, among other
things, ignoring communications from the insured, violating
its own policies and procedures, agreeing to pay for defense
counsel for Post & Schell but not him, and keeping crucial
information from Anesh as he made his coverage
determination. This mishandling of his claim, Post contends,
48
is a basis for finding bad faith, irrespective of the final
decision on the issue of coverage.
In support of his contention, Post principally relies on
our non-precedential case of Gallatin Fuels, Inc. v.
Westchester Fire Insurance Co., which he cites for the
proposition that “a finding that the insure[r] did not ultimately
have a duty to cover the plaintiff’s claim does not per se make
the insure[r]’s actions reasonable.” 244 F. App’x at 435.
While that statement is no doubt true, Post’s reliance on
Gallatin Fuels is misplaced.
As explained above, while under Pennsylvania law bad
faith may extend to an insurer’s investigation and other
conduct in handling the claim, that conduct must “import a
dishonest purpose.” Brown v. Progressive Ins. Co., 860 A.2d
493, 501 (Pa. Super. Ct. 2004) (citation and internal quotation
marks omitted). Invariably, this requires that the insurer lack
a reasonable basis for denying coverage, as mere negligence
or aggressive protection of an insurer’s interests is not bad
faith. See Frog, Switch & Mfg., 193 F.3d at 751 n.9
(explaining that “mere negligence or bad judgment does not
constitute bad faith”); O’Donnell, 734 A.2d at 910(explaining that an insurer may “aggressively investigate and
protect its interests”).
Indeed, Gallatin Fuels underscores this rule. In that
case, both the insurer and the insured mistakenly believed that
the insurance policy remained in full force when, in fact, the
policy had been canceled. 244 F. App’x at 427-28. Before
realizing that the policy had been canceled, however, the
insurer denied the insured’s claim without a reasonable basis.
Id. at 428. The insurer also “misrepresented the terms of the
policy, dragged its feet in the investigation of the claim, hid
information from [the insured], and continued to shift its basis
for denying the claims.” Id. at 435. Based on these facts, we
49
held that “a jury could have found—and, indeed, did find—
that [the insurer] acted in bad faith given its working
assumption that the policy had not been canceled.” Id.
Because of the misrepresentations and dishonesty of the
insurer in denying the claim without a reasonable basis for
doing so (though there was a reason about which the insurer
did not yet know), we cautioned that Gallatin Fuels was “one
of the exceedingly rare cases in which an insurer can be liable
for bad faith” even though there was no duty to provide
coverage. See id.
That is not the case here, where Post assails largely
benign claims-handling conduct—conduct that certainly does
not “import a dishonest purpose”—simply because he
disagrees with Travelers’ decision to deny coverage on the
plausible basis that the sanctions exclusion precluded
coverage. Thus, Gallatin Fuels would not be helpful to
Post’s case even were it precedential. See generally 3d Cir.
I.O.P. 5.7 (“The court by tradition does not cite to its not
precedential opinions as authority. Such opinions are not
regarded as precedents that bind the court because they do not
circulate to the full court before filing.”).
Post also relies on Giangreco v. United States Life
Insurance Co., 168 F. Supp. 2d 417 (E.D. Pa. 2001). The
relevant issue there was whether an intoxication exclusion in
a car insurance policy provided the insurer a reasonable basis
to deny coverage. See id. at 422-23. On learning that the
insured was intoxicated, the insurer denied coverage, a
decision it stuck to despite evidence later uncovered that the
insured did not cause the accident and may not have been able
to avoid it even if unimpaired. Id. at 422-23. The District
Court denied the insurer’s motion for summary judgment as
to the bad faith claim, reasoning that a jury could reasonably
conclude “that [the insurer] denied plaintiffs’ claim without
conducting a reasonable investigation and without a
50
reasonable basis. It would not be unreasonable to conclude
. . . that [the insurer] reflexively denied the claim upon
learning that the insured was intoxicated without
meaningfully pursuing issues of causation.” Id. at 423.
Citing Giangreco, Post argues that Travelers
reflexively denied coverage by relying on the sanctions
exclusion in the Policy and “latching onto the subsequent
filing of the sanctions proceedings as an excuse for
disclaiming coverage of the broader malpractice claim.” But
the record belies this argument. Travelers did not
automatically deny coverage, as evidenced by, among other
things: (1) Spinelli’s review of, and work performed in
connection with, Post’s coverage claim; (2) Travelers’
retention of Anesh as outside counsel to provide a coverage
opinion (even though the documents provided were not
comprehensive); (3) Travelers’ reconsideration of its
declining coverage; (4) its continued investigation into the
coverage issues; (5) the extensive and ongoing dialogue
among Spinelli, Anesh, and Bochetto; and (6) Travelers’
negotiations with Bochetto resulting in its compromise offer
and letter agreement to cover a portion of Post’s defense
expenses. Further, unlike in Giangreco where the insurer’s
reasonable basis to deny coverage disappeared in light of new
evidence, Travelers’ reasonable basis remained. Giangreco is
thus distinguishable.
c. Conclusion Re Bad Faith
Travelers did not frivolously decline to provide a
defense to Post; rather, after an investigation and retention of
outside counsel, Travelers reasonably concluded that the
sanctions exclusion in the Policy applied to Post’s claim and
denied coverage. Even if Travelers’ claims-handling
processes were not ideal, there is no evidence in the record—
let alone clear and convincing evidence—to indicate that
51
Travelers’ purported mishandling of Post’s claim was
motivated by a dishonest purpose or ill will. Because it
performed what appears to be an adequate investigation, and
because the sanctions exclusion in the Policy provided it a
reasonable basis for denying coverage, Travelers did not
engage in insurance bad faith.
* * * * *
While we affirm the District Court’s March 31, 2009
Order (Dist. Ct. ECF No. 109) granting summary judgment in
Travelers’ favor on Post’s bad faith claim, we vacate its July
6, 2010 Order (Dist. Ct. ECF No. 193) entering judgment in
Post’s favor in the amount of $921,862.38 on the breach of
contract claim. Under the Policy, Travelers is responsible for
all costs incurred by Post in connection with Mercy’s
malpractice claim from October 12, 2005 forward and for all
costs incurred by Post to defend the sanctions proceedings
from February 8, 2006 forward.
With respect to those defense costs incurred by Post
related to the malpractice claim, due to the broad scope of an
insurer’s duty to defend, Travelers is liable for all of Post’s
defense costs except for those costs that relate solely to the
Bobbetts’ sanctions petition. Travelers is liable for all of
Post’s defense costs incurred from February 8, 2006 that
relate to the malpractice claim and/or the sanctions
proceedings. However, Travelers is not liable for the
expenses incurred by Post with respect to the separate action
he filed against Mercy in Philadelphia.
We remand the case to the District Court to recalculate
the amount of fees and expenses incurred by Post that are to
be reimbursed by Travelers.
52
HARDIMAN, Circuit Judge, concurring in part and
dissenting in part.
I agree with Judge Ambro’s excellent opinion for the
Court in all respects save one. Unlike my colleagues, I would
hold that Travelers owed no duty to defend any portion of the
sanctions proceeding the Bobbetts initiated against attorney
Post.
As the majority notes, the Policy excluded sanctions
from coverage, stating that Travelers would not “consider
damages to include any: civil or criminal fines, forfeitures,
penalties or sanctions.” And the Bobbetts’ petition bore all
the hallmarks of a typical motion for disciplinary sanctions.
See, e.g., Black’s Law Dictionary 1458 (9th ed. 2009)
(defining “sanction” as “[a] penalty or coercive measure that
results from failure to comply with a law, rule, or order” and
listing as an example “a sanction for discovery abuse”).
Thus, I concur that Mercy’s informal participation in the
sanctions proceedings could not impose on Travelers a duty
to defend Post in those proceedings. I part ways with the
majority with respect to whether Mercy’s answer to the
Bobbetts’ petition converted the sanctions proceeding into a
“suit” as defined by the Policy, that is, “a civil proceeding
that seeks damages.”
The majority concludes that Mercy’s boilerplate prayer
for relief—which requested that the court impose
“sanction[s]” and “any other relief[] this Court deems just and
equitable under the unique and serious circumstances
presented before it, and award costs, attorneys’ fees and
expenses”—sought “damages” because attorneys’ fees are
recoverable in a suit for legal malpractice. The majority
further reasons that Mercy “in essence” stated the elements of
1
a legal malpractice claim through its admissions in its answer.
In support of this view, the majority cites cases involving
legal malpractice lawsuits. See Bailey, 621 A.2d 108; Feld &
Sons, 458 A.2d 545. While it is undoubtedly true that
plaintiffs who bring such lawsuits may obtain compensatory
damages that include attorneys’ fees, I find no authority for
the proposition that a plaintiff may pursue such relief merely
by responding to a sanctions petition with averments that
might, in a separate lawsuit, form the basis for a legal
malpractice claim. Indeed, the District Court correctly
recognized that “[s]anctions, particularly those for violations
of discovery rules, are understood to be sought by the
opposing party on motion, while a client’s remedy for his or
her attorney’s errors is a malpractice suit.” (App. 1221–22);
cf. Rohm & Haas Co. v. Lin, 992 A.2d 132 (Pa. Super. Ct.
2010) (“[T]he purpose of discovery sanctions is to secure
compliance with our discovery rules and court orders in order
to move the case forward and protect the substantive rights of
the parties, while holding those who violate such rules and
orders accountable.”).
The Pennsylvania Superior Court has recognized the
fundamental distinction between disciplinary sanctions and
compensatory damages:
Sanctions, including monetary sanctions paid to
an adversary in the form of fees or costs,
address the interests of the court and not those
of the individual. A litigant cannot rely on a
sanction motion to seek compensation for every
injury that the sanctionable conduct produces.
Rather, an injured party must request tort
damages to protect his personal interest in being
2
free from unreasonable interference with his
person and property.
Werner v. Plater-Zyberk, 799 A.2d 776, 784 (Pa. Super. Ct.
2002) (citations omitted). Under the majority’s reasoning,
Mercy could have obtained damages caused by Post’s
negligence without ever proving to a judge or jury the
elements of legal malpractice. Such an award would be
unprecedented in my experience.
Moreover, an innocent explanation for Mercy’s
participation in the sanctions proceeding belies the majority’s
inference that Mercy’s true objective in that proceeding was
to obtain compensation for Post’s malpractice. The state
court required Mercy to file a responsive pleading as the price
of admission to participate in the sanctions proceeding, which
implicated not only Mercy’s former outside counsel, but also
its own employees and corporate documents. In fact, Mercy
indicated in its opposition to Post’s motion to strike its
answer that it intervened because it “was required to
participate in the search, review and production of
documents, and to produce witnesses for depositions.”
For these reasons, I would hold that Travelers owed
Post no duty to defend the sanctions proceeding, even after
Mercy filed its answer.
3