589 F.2d 761 (4th Cir. 1978), 77-2164, Donnelly v. Transportation Ins. Co.

Docket Nº:77-2164.
Citation:589 F.2d 761
Party Name:John J. DONNELLY, Appellant, v. TRANSPORTATION INSURANCE COMPANY, Continental Casualty Company, Appellees.
Case Date:December 22, 1978
Court:United States Courts of Appeals, Court of Appeals for the Fourth Circuit

Page 761

589 F.2d 761 (4th Cir. 1978)

John J. DONNELLY, Appellant,



Company, Appellees.

No. 77-2164.

United States Court of Appeals, Fourth Circuit

December 22, 1978

Argued April 6, 1978.

As Amended on Denial of Rehearing Jan. 30, 1979.

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Michael McGettigan, Alexandria, Va. (George F. West, Jr., Murphy, McGettigan, McNally & West, Alexandria, Va., on brief), for appellant.

Randell Hunt Norton, Washington, D. C. (James C. Gregg, Washington, D. C., on brief), for appellees.

Before WINTER, BUTZNER and WIDENER, Circuit Judges.

WIDENER, Circuit Judge:

John J. Donnelly, the appellant, sued the two appellee insurance companies for their refusal to defend him under a series of professional liability insurance policies. Jurisdiction is based upon 28 U.S.C. § 1332 (diversity of citizenship). Donnelly claimed as damages the costs of his defense and losses to him occasioned by settlement of a suit against him. The district court, sitting without a jury, found that the insurance companies did not owe Donnelly the duty of

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a defense. 1 Thus, the court never reached the question as to the measure of Donnelly's damages. It is from the order of the district court entering judgment for the defendants that this appeal is taken.

Pertinent provisions of the policies involved are the same and are as follows:

"The Company . . . Agrees . . .

"To pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of any act or omission of the insured . . . and arising out of the performance of professional services for others in the insured's capacity as a lawyer. . . .

"With respect to such insurance as is afforded by this policy, the company shall: (a) defend any suit against the insured alleging such act or omission and seeking damages which are payable under the terms of this policy, even if any of the allegations of the suit are groundless, false or fraudulent; but the company may make such investigation and, with the written consent of the insured, such settlement of any claim or suit as it deems expedient;

"This policy does not apply:

(a) to any dishonest, fraudulent, criminal or malicious act or omission of any insured, partner or employee;"

Beginning in 1970, Donnelly was employed by Catharine W. Kunz as her attorney. The principal nature of the legal services to be rendered by Donnelly to Mrs. Kunz was to help her with problems arising out of the administration of the estate of her deceased husband and to help her in the planning of her own estate. As of August 19, 1971, Donnelly claims to have performed seventeen items of legal service for Mrs. Kunz, including seven trips to California totaling 28 days. For this he claims that he earned a fee of $30,000.00 plus $3,031.86 as reimbursement for expenses, for a total of $33,031.86. He acknowledges receipt of $29,882.47, leaving $3,149.39 which he claims was still owing him on August 19, 1971.

Early in October 1971, Donnelly received a letter dated October 1, 1971 from an attorney representing Mrs. Kunz demanding that specified securities be returned and that an accounting otherwise be made. 2 On

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June 5, 1972, Mrs. Kunz filed suit in the United States District Court for the District of Columbia against Donnelly and Ferris & Company, Incorporated, the brokerage firm through which the stock shares in question were negotiated. On November 21, 1973, an amended complaint was filed which substituted as plaintiff Laureen W. MacNeil, representative of the estate of Catharine W. Kunz, and added two additional causes of action.

The general nature of the amended complaint as understood by the district court is shown by the following quotation from the memorandum opinion and order of the district court: ". . . The amended complaint in that suit sought recovery against Mr. Donnelly on three grounds:

"(1) Unauthorized sale by Mr. Donnelly of securities owned by Mrs. Kunz worth about $17,500;

"(2) Receipt by Mr. Donnelly through misrepresentation of $20,000.00 intended as a loan from Mrs. Kunz to her sister, Mrs. Margaret Clogston; and

"(3) Improper retention of $12,500 paid by Mrs. Kunz to Mr. Donnelly as fees.

The amended complaint sought punitive damages in addition to the amounts listed above. The basis of claim (1) was that Mr. Donnelly had sold securities owned by Mrs. Kunz in order to collect a fee billed to Mrs. Kunz, which fee she claimed had not been earned. Claim (2) involved Mr. Donnelly's use of funds loaned from Mrs. Kunz to her sister. Claim (3), as claim (1), related to Mrs. Kunz' assertion that Mr. Donnelly had not earned money which he claimed as an attorney's fee." The punitive damages which were sought were on claims (1) and (2) only, and the complaint did not disclose that claim (1) arose with respect to attorney's fees.

There is no issue but that Donnelly gave CNA notice of the letter of October 1, 1971, making demand on behalf of Mrs. Kunz, and of the filing of the original suit on June 5, 1972, and of the filing of the amended complaint on November 21, 1973, with requests, on each occasion, that CNA defend Donnelly under its policy. An agreement to defend claim (2) under reservation of right was executed. Later, however, on January 22, 1974, CNA denied coverage either for defense or liability.

Donnelly personally engaged counsel to defend him in the MacNeil action against him. The case was never tried on the merits but was eventually settled in July 1976 by a consent judgment in connection with a divorce proceeding against Donnelly by his wife, Josephine Donnelly. 3

The parties agree that the law of the District of Columbia applies and that if the insurance companies owed the duty to defend one claim in the suit against Donnelly, they owed the duty to defend all of them. With respect to the law of the District of Columbia, we think we should follow Boyle v. National Casualty Co., 84 A.2d 614 (Mun.Ct.App.D.C.1951), so far as it may apply to this case.

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Some generalities may be noted as background to the specific legal issues at hand. Liability insurance frequently involves two obligations on the part of an insurance company: the duty to defend the assured, and the duty to pay a judgment against the assured or to indemnify him if he has been forced to pay one. Generally speaking, these two duties are similar. Thus, there is a body of authority that an insurance company need not defend a case against an assured if the charge against him was entirely foreign to the risk insured against. Such a case is Boyle. In that case, a restaurant owner's risk insured against included personal injury "caused by accident," which "accident" included "assault and battery" "unless committed by or at the direction of the insured." The duty to defend was stated as " 'as respects insurance afforded by this policy' the insurance company should defend 'any suit against the insured alleging such loss and seeking damages on account thereof, even if such suit is groundless, false, or fraudulent.' " A certain Pine was injured in the restaurant and sued the insured for assault and battery committed by the insured personally. The insured successfully defended the suit and sued his insurance company for his attorneys' fees and costs in defending the claim.

The court held that the obligation to defend is measured by the allegations of the complaint, so that if a covered cause of action is alleged, a defense is owed, while if a liability is alleged which is not within the coverage of policy, no defense is owed. In that respect, the court held that "(i)n a case of doubt such doubt ought to be resolved in the insured's favor." p. 616. The court agreed with the insured that "the duty to defend is broader than the duty to pay," p. 616, but described the claim in that suit as "clearly beyond the coverage of the policy" because it was "plain that such a claim was outside the policy coverage," p. 616, and held there was no duty to defend.

Although basically a duty to defend and a duty to pay are to some extent coextensive, the insurance company's duty to defend its assured is usually said to be broader than its duty to pay a judgment against him, Boyle, p. 616. See also Baker v. American Insurance Co. of Newark, N. J., 324 F.2d 748, 750 (4th Cir. 1963), Lee v. Aetna Casualty & Security Co., 178 F.2d 750 (2d Cir. 1949), Gray v. Zurich Ins. Co., 65 Cal.2d 263, 54 Cal.Rptr. 104, 419 P.2d 168, 171 (1966), Babcock & Wilcox Co. v. Parsons Corp., 430 F.2d 531, 536 (8th Cir. 1970), Cadwallader v. New Amsterdam Casualty Co.,396 Pa. 582, 152 A.2d 484, 489 (1959), Lerner v. General Ins. Co. of America, 245 S.E.2d 249 (Va.1978); Appleman, Insurance Law and Practice, § 4684.

A number of reasons are specified in the just cited cases as to why a liability insurer's duty to defend may be broader than its duty to pay a judgment against its assured or to indemnify him. First, whether or not there is a duty to defend is usually determined from the pleadings in a case, but whether there is a duty to pay a judgment or to indemnify an assured who has paid usually cannot be determined until the evidence has been heard. Second, with the great latitude with which pleadings are construed today, and the great latitude of amendment, an insured's right to a defense should not be foreclosed unless such a result is inescapably necessary. Third, if part of a plaintiff's claims against an insured fall within the coverage of a policy and part do not, the company should defend all, although it might eventually be required to pay only some, claims. Fourth, while there may be some policy considerations which preclude protecting a wrongdoer from having to pay for an intentional injury he has caused, those...

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