Westport Ins. Corp. v. McClellan

Decision Date08 October 2020
Docket NumberCIVIL ACTION NO. 20-1372
Citation493 F.Supp.3d 315
Parties WESTPORT INSURANCE CORPORATION v. Frank M. MCCLELLAN, et al.
CourtU.S. District Court — Eastern District of Pennsylvania

Andrew J. Gallogly, Margolis Edelstein, Philadelphia, PA, Christopher J. Shannon, Robert P. Conlon, Walker Wilcox Matousek LLP, Chicago, IL, for Westport Insurance Corporation.

Robert W. McAndrew, Jonathan P. Vuotto, McAndrew Vuotto, LLC, Morristown, NJ, for Frank M. McClellan.

William L. Gold, Bendit Weinstock PA, West Orange, NJ, Jeffrey A. Krawitz, Stark & Stark, Yardley, PA, Robert L. Sachs, Jr., Shrager & Sachs, Philadelphia, PA, for Cindy Johnson.

MEMORANDUM

KEARNEY, District Judge

An attorney and insurer agreeing to the conditions under which the insurer must tender a defense and indemnify an insured attorney for a timely reported malpractice claim justifiably rely upon the terms of an insurance policy. An insurer tendering a defense to an attorney facing a legal malpractice claim and not reserving rights for years cannot later change its mind. We must estop the insurer from denying a defense or indemnity when it allowed the insured attorney to proceed in justifiable reliance on coverage for years. But if the insurer timely reserves rights and later denies coverage on a new case for fee disgorgement which is unambiguously outside the parties’ agreed terms of coverage, we cannot find the insured attorney justifiably relied on coverage for the newly plead disgorgement case. Following review of an extended record addressing a 2017 legal malpractice case and subsequent defense and a 2019 disgorgement case with prompt reservation and denial of coverage, we today enter judgment declaring the insurer is estopped from denying coverage for costs of defense and indemnity for the 2017 legal malpractice case but is not obligated to defend or indemnify the insured attorney for the 2019 disgorgement case. The insured attorney may not proceed claiming the insurer's bad faith in the 2019 disgorgement case. The underlying plaintiff suing the insured also cannot proceed in claiming rights to coverage under the attorney's insurance policy under the adduced facts.

I. Adduced facts.1

New Jersey citizen Cindy Johnson believed medical professionals caused the untimely death of her husband after he entered the hospital in December 2008. She approached experienced Philadelphia malpractice lawyer Frank M. McClellan of the Frank McClellan Law Office, and asked him to represent her in a medical malpractice action she planned to bring in 2009 on behalf of the estate of her deceased husband.2 As Attorney McClellan did not have a license to practice law in New Jersey, he referred Ms. Johnson to New Jersey lawyer Thomas Ashley to represent her.3 Attorney Ashley then brought a medical malpractice action in the Superior Court of New Jersey for Middlesex County.4 Over time, Ms. Johnson grew unsatisfied with Attorney Ashley's service, so Attorney McClellan referred her to Theresa Blanco, a lawyer at an Allentown, Pennsylvania law firm who had a license to practice law in New Jersey.5 During Attorney Blanco's representation, her law firm dissolved and the case needed to be transferred once again.6 Attorney McClellan referred the case to Aaron J. Freiwald and his law firm Layser & Freiwald, P.C.7 Attorney Freiwald obtained pro hac vice admission to the New Jersey Bar for purposes of representing Ms. Johnson.8 He then litigated and settled the malpractice action for $500,000 in 2014.9 Attorney Freiwald collected one-third of the settlement proceeds, totaling $156,436,25, as his contingency fee, and he distributed $52,145.52 from this amount to Attorney McClellan as a "referral fee."10

After the settlement, Ms. Johnson believed her various attorneys had not properly joined certain culpable defendants to her medical malpractice action, and she decided to file a legal malpractice action in New Jersey Superior Court, Essex County against Attorneys Ashley, Blanco, Freiwald, and McClellan among others (the "2017 Legal Malpractice Action").11 Her sparse three-paragraph complaint filed October 30, 2017 alleged the attorney defendants "represented her in a wrongful death medical malpractice action", "were negligent in representing" her, and caused her harm.12 Ms. Johnson sought "damages, together with interest, cost of suit and such other and further relief that the Court deems equitable and just."13 She did not seek disgorgement.14 She did not specify damages.15

Today's issues concern whether a legal malpractice insurer must provide Attorney McClellan a defense and indemnity from judgment in either the 2017 Legal Malpractice Action or a March 2019 case filed by Ms. Johnson seeking disgorgement of the fee paid to Attorney McClellan

Attorney McClellan's legal malpractice insurance

Insurer Westport Insurance Corporation agreed to defend and indemnify Attorney McClellan for defined losses arising out of legal malpractice claims.16 As material today, Westport and Attorney McClellan agreed to a Lawyers Professional Liability Policy (the "Policy") to address timely reported claims against him accruing during a policy period of November 9, 2012 to November 9, 2013.17

The Policy

Under the Policy, Westport agreed to pay "all LOSS in excess of the deductible which any INSURED becomes legally obligated to pay as a result of CLAIMS first made against any INSURED during the POLICY PERIOD[.]"18 The parties defined the term "LOSS" as "the monetary and compensatory portion of any judgment, award or settlement."19 The parties agreed "LOSS shall not include":

1. civil or criminal fines, penalties, fees or sanctions;
2. matters deemed uninsurable by operation of law;
3. punitive or exemplary damages;
4. the multiplied portion of any multiple damages;
5. the return by any INSURED of any fees or remuneration paid to any INSURED; or
6. any form of non-monetary relief.20

Westport and Attorney McClellan agreed Attorney McClellan would report any claim within the policy period or within the sixty days following the policy period ending January 8, 2014.21 Westport also provided several options for Attorney McClellan to extend the period for reporting claims beyond January 8, 2014.22 Westport offered "Non-Practicing Reporting Period Options," which allowed different extended reporting options based on the insured's reason for terminating his practice of law (i.e. retirement, death, or disability) and the length of time the insured had maintained a policy with Westport.23 The first Non-Practicing Reporting Period Option included an option for an insured who "during the POLICY PERIOD, retires or voluntarily ceases, permanently and totally the private practice of law" as long as: (1) the insured "has not had his or her professional license to practice law suspended or surrendered at the request of any disciplinary or regulatory authority"; (2) the insured "has been continuously insured by the Company for at least three full consecutive years"; (3) the Policy "was not cancelled for non-payment of premium or non-renewed"; (4) the insured "complied with all the terms and conditions of the POLICY"; and (5) the insured "gives written notification of retirement or the termination of the private practice of law within sixty (60) days after the termination date of the POLICY PERIOD."24 This particular option "is provided until the INSURED resumes the private practice of law.25

Westport did not define what it means to "retire" or to "resume the private practice of law."26

Attorney McClellan retires from his practice.

During the policy period in 2013, Attorney McClellan informed Westport of his retirement from the practice of law and asked Westport to issue him a "fee tail insurance policy" by the end of the policy period, November 18, 2013.27 Westport issued Mr. McClellan an endorsement, which "change[d] the policy."28 Under the endorsement, Westport and Attorney McClellan agreed: "[c]overage shall apply to CLAIMS arising out of any WRONGFUL ACT which took place prior to the end of the POLICY PERIOD and on or after the RETROACTIVE DATE, if any, are reported to the Company during the following Non-Practicing Extended Reporting Period(s): From: 11/19/2013 To: Unlimited."29 The parties did not specify coverage or unlimited reporting period would end if Attorney McClellan resumed the practice of law.30

Two years later, Attorney McClellan decided to become Special Counsel at the Freiwald Firm.31 As Special Counsel, Attorney McClellan mainly supervised law students working in a health law practicum, supervised new lawyers hired to develop a new health law practice, evaluated potential cases and offered strategic assessments on identified cases.32

Attorney McClellan notifies Westport of Ms. Johnson's claim

Attorney McClellan immediately emailed Westport to "provide notice of a claim against him" under his "tail policy," the Policy at issue today.33 He explained "he was the referring attorney in this medical malpractice case that was successfully litigated and settled by Aaron Freiwald, an attorney in Philadelphia, to whom I referred the case after I initially referred it to Thomas Ashley."34 Attorney McClellan did not disclose his receipt of a referral fee in this email to Westport.35 He closed by asking Westport to "advise [him] how to proceed in supplying the information you need to provide representation in this matter."36

Donna Asta, the Westport Claims Specialist assigned to Attorney McClellan's claim, replied a few weeks later.37 Claims Specialist Asta confirmed Attorney McClellan's Policy had "an Extended Reporting Period of November 13, 2013 to Unlimited."38 Claims Specialist Asta represented "[a]t this time, there are no apparent coverage issues" with the caveat Westport would "continue to investigate ... and review coverage upon receipt of new information."39 She assured him, "[i]f coverage issues do arise, we shall provide you with our position in writing."40 She also told Attorney McClellan she forwarded the matter to two...

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