PAGE WELLCOME, PRO. SERVICE v. Home Ins. Co.

Citation758 F. Supp. 1375
Decision Date14 January 1991
Docket NumberNo. CV-89-055-BU-PGH.,CV-89-055-BU-PGH.
PartiesPAGE WELLCOME, PROFESSIONAL SERVICE CORP., and Page Wellcome, individually, Plaintiffs, v. The HOME INSURANCE COMPANY, Defendant.
CourtUnited States District Courts. 9th Circuit. United States District Court (Montana)

Page Wellcome, Bozeman, Mont.

Page Wellcome, Leibman, Reiner & McNeil, San Diego, Cal.

Robert Emmons, Great Falls, Mont., for Page Wellcome.

Dennis McCafferty, James, Gray & McCafferty, Great Falls, Mont., for defendant.

MEMORANDUM AND ORDER

HATFIELD, Chief Judge.

The plaintiff, Page Wellcome, an attorney admitted to the Bar of the State of Montana, and practicing law as a professional service corporation entitled Page Wellcome, PSC, brings this breach of contract action against the defendant, The Home Insurance Company ("Home"), seeking a declaration of the parties' rights and liabilities under a policy of professional liability insurance issued to Wellcome by the Home. Specifically, Wellcome seeks a declaration that Home breached the terms of the insurance contract by failing to indemnify Wellcome for a certain monetary sanction imposed upon Wellcome by the District Court of the Eighteenth Judicial District of the State of Montana. The sanction was imposed upon Wellcome for his conduct during the course of a civil trial held before that tribunal in 1985. See, Kuhnke v. Fisher, 210 Mont. 114, 683 P.2d 916 (1984) ("Kuhnke I"); Kuhnke v. Fisher, 227 Mont. 62, 740 P.2d 625 (1987) ("Kuhnke II"). Wellcome also predicates his claim for breach of contract upon the additional ground that Home, contrary to the provisions of the subject policy, failed to provide Wellcome's defense in regard to proceedings resulting in imposition of the sanctions at issue.

The matter is presently before the court on cross-motions for summary judgment. By order entered March 1, 1989, the United States Magistrate for the District of Montana, the Honorable Robert M. Holter, was designated, under authority of 28 U.S.C. § 636(b)(1)(B) and (C), to conduct a hearing, and to submit to the court his proposed findings of fact and recommendations for the disposition of the pending motions for summary judgment. The Magistrate filed his report with the court on November 17, 1989, recommending that summary judgment be entered in favor of Home Insurance. Wellcome timely filed his objections to the Magistrate's findings and recommendation, requesting the court, in essence, to reject in whole the findings and recommendations made by the Magistrate. In accordance with the prescription of 28 U.S.C. § 636(b)(1), the court undertakes a de novo determination of the issues addressed by the Magistrate's report.

I.

This action has its genesis in a medical malpractice lawsuit wherein Wellcome represented one of the named defendants in that action. The facts underlying the malpractice action, which are succinctly set forth in the Montana Supreme Court's opinion in Kuhnke II, are of no pertinence to the case at bar. The first trial of the malpractice action resulted in a jury verdict in favor of the defendants, but the judgment was reversed upon appeal and the case remanded for a new trial based upon the misconduct of Wellcome during the course of trial. Kuhnke I, 683 P.2d at 919-923. The malpractice action again proceeded to trial, with the jury ultimately entering a verdict against one of the defendants but not against Wellcome's client. See, Kuhnke II, 740 P.2d at 627. Kuhnke filed a motion for new trial and/or judgment notwithstanding the verdict and requested the trial court to impose sanctions against Wellcome for his conduct during the course of trial. The trial court ultimately denied the motion for new trial and judgment notwithstanding the verdict, but imposed a sanction in the amount of $20,000.00 against Wellcome individually and as agent of Aetna Insurance Company, the liability insurance carrier for Wellcome's client. Kuhnke II, 740 P.2d at 627-628. In sanctioning Wellcome, the trial court stated:

The Court believes in the proper administration of justice and in the inherent powers of the Court to see that cases are properly tried according to the Canons of Ethics and the Court and Legislative Rules. Case law demands that sanctions be imposed against Mr. Wellcome and his carrier Aetna.... The Court warned Mr. Wellcome at preliminary and pretrail sic conferences that any conduct resulting in the reversal of the first case would not be tolerated, and that if it did occur the Court would grant a mistrial and impose the cost of ... against Mr. Wellcome and his carrier. Warning was clearly made and consented to by Mr. Wellcome. Notwithstanding that understanding, counsel persisted in injecting positions in voir dire, examination of witnesses, and in argument to the jury, which were contrary to the orders of the court and the mandates of Kuhnke I.

The issue placed before the court for determination by the parties' cross-motions for summary judgment is whether the sanction imposed by the trial court against Wellcome falls within the coverage afforded by the contract for professional liability insurance extant between Wellcome and Home Insurance. The correlative claim pressed by Wellcome is whether under the terms of the insurance policy Home was required to provide a defense to Wellcome, regardless of the fact coverage for the sanction did not exist under the terms of the policy.

II.

Analysis must necessarily begin with a recitation of those provisions of the insurance contract which bear upon the dispute. The pertinent provisions provide:

COVERAGE
Professional Liability and Claims Made Clause. Pay on behalf of the Insured all sums in excess of the deductible amount stated in the Declarations which the insured shall become legally obligated to pay as a result of CLAIMS FIRST MADE AGAINST THE INSURED DURING THE POLICY PERIOD.
(a) by reasons of any act, error or omission in professional services rendered or that should have been rendered by the Insured or by any person for whose acts, errors or omissions the Insured is legally responsible, and arising out of the conduct of the Insured's profession as a lawyer or notary public;
(b) because of personal injury and arising out of the professional services of the Insured as a lawyer or notary public;
* * * * * *
Damages, whenever used in this policy, means a monetary judgment or settlement and does not include fines or statutory penalties whether imposed by law or otherwise, nor the return of or restitution of legal fees, costs and expenses arising therefrom.
* * * * * *
EXCLUSIONS
I. This policy does not apply:
(a) to any judgment or final adjudication based upon or arising out of any dishonest, deliberately fraudulent, criminal, maliciously or deliberately wrongful acts or omissions committed by the Insured. However, notwithstanding the foregoing, the Company will provide a defense for any such claims without any liability on the part of the Company to pay such sums as the Insured shall become legally obligated to pay as damages.

The Home initially denied Wellcome's claim for indemnification, having concluded the sanction did not constitute "damages" as defined in the subject policy. The sanction, in Home's view, constituted a "fine" or "statutory penalty" which, of course, are specifically excluded in the definition of "damages". As an alternate basis for denying coverage, Home relied upon the "wrongful acts exclusion" contained in the exclusions section of the subject policy, as set forth verbatim above. Home's reliance upon the wrongful acts exclusion was based upon its opinion that the trial conduct of Wellcome, which compelled the trial court to impose a sanction, was "deliberately wrongful" as that term is contemplated by the exclusion provision of the policy.

Wellcome presses that the sanction imposed by the trial court was not a "fine" or "statutory penalty" paid to the court. Rather, he submits the sanction constituted, in essence, damages awarded to a party, under authority of Mont.Code Ann. § 37-61-421 (1985), for excess costs incurred by the plaintiff as a result of the adverse party's conduct.1

The order of the trial court imposing the sanction was issued December 11, 1985. Wellcome advised Home Insurance by correspondence November 19, 1985, of the impending sanction. Home informed Wellcome of its decision declining coverage on January 2, 1986. Home referred Wellcome to the definition of "damages" set forth in the coverage section of the insurance policy necessarily implying that the sanctions were tantamount to "fines" or "statutory penalties" expressly excluded from the definition of "damages" as contemplated by the policy. The rights and obligations of the parties under the policy, Wellcome submits, were to be determined as of that point in time, and Home, having failed to indicate its reliance upon any exclusion contained in the policy, is precluded from relying upon any other exclusion to defeat Wellcome's claim for breach of contract. Restated, Wellcome contends Home's purported breach of contract must be determined solely with reference to the grounds asserted by Home in initially denying coverage, since the rights and obligations of the parties were "fixed and determined at that point." From this premise, Wellcome suggests any exclusions of the insurance policy later relied upon by Home and any observations by the Supreme Court in Kuhnke II are extraneous to a determination of whether Home breached the terms of the insurance contract when it denied coverage on January 2, 1986.

For purposes of analysis, the court accepts Wellcome's premise and resultant conclusions pertaining to the irrelevancy of the policy exclusions and the observations rendered by the Montana Supreme Court in Kuhnke II.2 The assumption stated, the court proceeds to determine whether or not it may be determined as a matter of law that Home breached the terms of the subject insurance contract by refusing to indemnify Wellcome for the sanctions imposed by the...

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