Chicago Insurance Company v. Paulson & Nace, Pllc ( 2014 )

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
____________________________________
)
CHICAGO INSURANCE COMPANY, )
)
Plaintiff, )
)
v. ) Civil Action No. 12-2068 (ABJ)
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PAULSON & NACE, PLLC, et al., )
)
Defendants. )
____________________________________)
MEMORANDUM OPINION
In this case, an insurance carrier seeks a declaratory judgment holding that it is not bound
to cover the costs of a legal malpractice action brought against a District of Columbia law firm
and two of its attorneys. Invoking this Court’s diversity jurisdiction, plaintiff Chicago Insurance
Company (“CIC”) brings this action against defendants Paulson & Nace, PLLC (“Paulson &
Nace”), Barry J. Nace, Gabriel Assaad, and Sarah Gilbert. Paulson & Nace is a law firm at
which attorney Barry J. Nace practices. Gabriel Assaad, also an attorney, was formerly an
associate at Paulson & Nace. 1 Sarah Gilbert is a former Paulson & Nace client. In July 2007,
CIC issued a professional liability insurance policy to Paulson & Nace and Barry J. Nace, which
defendant Nace renewed for the July 2008–July 2009 period.
On November 1, 2013, the Circuit Court for the City of Richmond, Virginia awarded
defendant Gilbert a $1.75 million legal malpractice judgment against the attorney defendants.
According to CIC, the attorney defendants should have been aware of defendant Gilbert’s
1 The Court will refer to Paulson & Nace, Barry J. Nace, and Gabriel Assaad collectively
as the “attorney defendants.”
potential claim before the inception of the CIC–Nace insurance policy, and they failed to notify
CIC as required by the policy. Therefore, CIC seeks a declaratory judgment from this Court that
it has no obligation to indemnify the attorney defendants for the damages, costs, or fees incurred
in connection with the Gilbert legal malpractice lawsuit.
After completing discovery in this action, defendants Barry J. Nace, Paulson & Nace,
and Sarah Gilbert, and plaintiff CIC all moved for summary judgment. 2 Defendants contend
that Virginia substantive law should apply in this diversity case, and that Virginia law precludes
judgment for CIC. They further argue that the attorney defendants were not aware of defendant
Gilbert’s potential claim until 2009, and that CIC has waived its defense to coverage, or in the
alternative, that CIC is estopped from asserting it because CIC did not reserve its rights until
2012. Plaintiff maintains that District of Columbia law applies to this case, that the attorney
defendants reasonably should have known that defendant Gilbert had a potential claim against
them before the inception of the insurance policy, and that the doctrines of waiver and estoppel
do not bar its defense to coverage.
The Court finds that District of Columbia law applies to this case, that the attorney
defendants should have known of defendant Gilbert’s potential claim before they even applied
for the CIC insurance policy, that the attorney defendants failed to notify CIC of the potential
2 Defendant Gilbert has joined the briefing of defendants Barry J. Nace and Paulson &
Nace in full. See Def. Sarah Gilbert’s Resp. to Defs. Paulson & Nace, PLLC’s & Barry J. Nace’s
Mem. of P. & A. in Supp. of Their Mot. for Summ. J. at 1 (joining motion for summary
judgment) [Dkt. # 21]; Def. Sarah Gilbert’s Resp. to Pl.’s Mot. for Summ. J. & Joinder of Opp.
Filed by Defs. at 2 (joining opposition to CIC’s motion for summary judgment) [Dkt. # 39].
Defendant Assaad has joined only the opposition to CIC’s motion for summary judgment. Def.
Gabriel Assaad’s Joinder of Defs. Paulson & Nace, PLLC & Barry Nace’s Opp. to Pl.’s Mot. for
Summ J. at 1 [Dkt. # 38]. For the sake of simplicity, the Court will refer to these filings as
having been submitted by “defendants.”
2
claim, and that CIC’s defense to coverage is not barred by the doctrines of waiver or estoppel.
Therefore, the Court will grant plaintiff’s motion for summary judgment and deny defendants’
motion.
BACKGROUND
I. Factual Background 3
A. The Gilbert Medical Malpractice Lawsuit
On July 28, 2004, Sarah Gilbert underwent spinal surgery to correct her scoliosis, and the
surgery rendered her a paraplegic. Statement of Material Facts in Supp. of Chi. Ins. Co.’s Mot.
for Summ. J. ¶ 3 [Dkt. # 18] (“CIC SOF”). Ms. Gilbert was a minor at the time. Id. ¶ 4. In
December 2004, her parents, Richard and Rosie Gilbert, retained defendant Barry J. Nace and his
law firm, defendant Paulson & Nace, to pursue a claim of medical malpractice and negligence on
behalf of their daughter in Virginia. Id. Defendant Gabriel Assaad, then an associate attorney at
Paulson & Nace who, unlike Nace, was admitted to the Virginia bar, see Ex. W to CIC SOF,
Decl. of Gabriel Assaad ¶ 3 [Dkt. # 18-23]; Ex. W to CIC SOF, Aff. of Barry J. Nace ¶ 4 [Dkt.
# 18-23], assisted in the representation of Ms. Gilbert. 4 See Ex. G to CIC SOF at 2 [Dkt. 18-7]
3 The parties have submitted four statements of material fact. Statement of Material Facts
Not in Dispute, Defs. Paulson & Nace, PLLC’s & Barry J. Nace, Esq.’s Mot. for Summ. J. [Dkt.
# 14-2]; Statement of Material Facts in Supp. of Chi. Ins. Co.’s Mot. for Summ. J. [Dkt. # 18];
Pl.’s Resp. in Opp. to the Nace Defs.’ Statement of Material Facts not in Dispute & Pl.’s
Additional Statement of Undisputed Material Facts in Supp. of Pl.’s Opp. [Dkt. # 23]; Defs.
Paulson & Nace, PLLC, & Barry Nace’s Statement of Genuine Issues of Material Fact Necessary
to Be Litigated [Dkt. # 24-1]. Except where noted, all of the facts in this section are undisputed.
4 Mr. Assaad is no longer an associate with Paulson & Nace. See Paulson & Nace, PLLC
& Barry J. Nace Answer & Grounds for Relief ¶ 5 [Dkt. # 5].
3
(transcript of Virginia court proceeding indicating defendant Assaad’s appearance on behalf of
defendant Gilbert).
The attorney defendants filed a complaint in the Gilbert medical malpractice lawsuit on
July 24, 2006, in the Circuit Court for the City of Richmond. Statement of Material Facts Not in
Dispute, Defs. Paulson & Nace, PLLC’s & Barry J. Nace, Esq.’s Mot. for Summ. J. ¶ 3 [Dkt.
# 14-2] (“Nace SOF”). The statute of limitations on Ms. Gilbert’s claim expired four days later,
on July 28, 2006. 5 CIC SOF ¶¶ 5–6. The court dismissed this complaint without prejudice on
February 26, 2007, because the complaint did not identify Richard and Rosie Gilbert as Sarah
Gilbert’s “next friend,” as required by Virginia law. Nace SOF ¶ 6; see also Va. Code § 8.01-8
(2013) (“Any minor entitled to sue may do so by his next friend. Either or both parents may sue
on behalf of a minor as his next friend.”). In the meantime, though, the attorney defendants
recognized their error and on October 25, 2006, they filed a second complaint in the same court
with a style that comported with Virginia law. Nace SOF ¶ 7. On June 18, 2007, the Virginia
judge ruled from the bench and dismissed the second complaint with prejudice as untimely. Ex.
G to CIC SOF at 31–32, 44 (transcript of court proceedings). Defendant Gabriel Assaad
represented Ms. Gilbert at that hearing and acknowledged the court’s ruling against his client.
Id. at 32 (“MR. ASSAAD: Your Honor, I understand your ruling. Note my exception to it.”)
5 The attorney defendants state that “it is alleged” that the statute of limitations on Sarah
Gilbert’s claim ran out on July 28, 2006, Nace SOF ¶ 4, but a Virginia court ultimately dismissed
the claim as untimely for precisely this reason. See Ex. H to CIC SOF at B93–B94 [Dkt. # 18-8]
(order of the Circuit Court of the City of Richmond dismissing Ms. Gilbert’s medical
malpractice claim as untimely).
4
(emphasis added). The court subsequently issued an order memorializing its ruling on August 3,
2007. Ex. H to CIC SOF at B93-B95 [Dkt. # 18-8].
The attorney defendants’ attempts to appeal that ruling were unsuccessful, and the
Supreme Court of Virginia finally disposed of Sarah Gilbert’s untimely medical malpractice
claim on December 15, 2009. Nace SOF ¶ 13. In addition, the attorney defendants nonsuited the
remaining claims of Richard and Rosie Gilbert, which had not been dismissed, on May 19, 2009.
Id. ¶ 11. On January 29, 2011, counsel for defendant Gilbert in this case, Herman Aubrey Ford,
III, informed defendant Nace by letter that he would be taking over representation of Richard and
Rosie Gilbert at their request. Ex. AA to Mem. of P. & A. in Supp. of CIC’s Resp. in Opp. to the
Nace Defs.’ Mot. for Summ. J. at 1–2 [Dkt. # 23-3].
B. The CIC Insurance Policy
On July 18, 2007, after the Virginia court had ruled from the bench and dismissed the
Gilbert case as untimely, defendant Barry J. Nace applied for a “claims-made” professional
liability insurance policy from plaintiff, Chicago Insurance Company. 6 CIC SOF ¶ 14. At the
time, the attorney defendants held a policy from the Philadelphia Insurance Company that was
set to expire July 24, 2007. Defs. Paulson & Nace, PLLC, & Barry Nace’s Reply to Pl.’s Opp. to
their Mot. for Summ. J. at 19 [Dkt. # 29] (“Defs.’ Reply”); Ex. DD to Pl.’s Sur-Reply in Supp. of
CIC’s Opp. to Nace Defs.’ Mot. for Summ. J. at PIIC 010 [Dkt. # 32-1]. Plaintiff issued a
“Lawyers Professional Liability Policy” to the attorney defendants for the July 24, 2007–July 24,
6 A “claims-made” policy is one in which “the insurer agrees to indemnify the insured
party against all claims made during the period of the policy, regardless whether the incident that
gave rise to the claim occurred during the policy term.” Nat’l R.R. Passenger Corp. v. Lexington
Ins. Co., 365 F.3d 1104, 1105 (D.C. Cir. 2004), citing Black’s Law Dictionary 809 (7th ed.
1999).
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2008 period, and defendant Barry J. Nace renewed that policy for the July 24, 2008–July 24,
2009 period. Nace SOF ¶¶ 14, 15.
In the application for the initial policy, Mr. Nace answered “no” to the following
question: “Having inquired of all partners, officers, owners and employed lawyers, are there any
circumstances which may result in a claim being made against the firm, its predecessors or any
current or past partner, officer, owner or employed lawyer of the firm?” CIC SOF ¶ 15.
Additionally, the 2008–2009 insurance agreement provided as follows:
INSURING AGREEMENTS
I. COVERAGE
The Company will pay on behalf of the Insured all sums which the Insured shall
become legally obligated to pay as Damages for Claims first made against the
Insured and reported to the Company during the Policy Period or Extended
Reporting Period, as applicable, arising out of any negligent act, error, omission
or Personal Injury in the rendering of or failure to render Professional Services
for others by an Insured covered under this policy. Provided always that such
Professional Services or Personal Injury happen:
A. during the Policy Period; or
B. prior to the Policy Period provided that prior to the effective date of
the first Lawyers Professional Liability Insurance Policy issued by this
Company to the Named Insured or Predecessor in Business, and
continuously renewed and maintained in effect to the inception of this
policy period:
1. the Insured did not give notice to any prior insurer of any such
act, error, omission or Personal Injury;
2. the Named Insured, any partner, shareholder, employee, or
where appropriate the Named Insured's management
committee or any member thereof, had no reasonable basis to
believe that the Insured had breached a professional duty or to
Reasonably Foresee that a Claim would be made against the
Insured; and
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3. there is no prior policy or policies which provide insurance
(including any Automatic or Optional Extended Reporting
Period or similar provision) of such policies for such Claim,
unless the available limits of liability of such prior policy or
policies are insufficient to pay any Claim, in which event this
policy will be specific excess over any such prior coverage,
subject to this policy's terms, limits of liability, exclusions and
conditions.
CIC SOF ¶ 24 (emphasis added by CIC). The agreement further defined the term “reasonably
foresee” as follows:
Reasonably Foresee(n) means:
1. Claims or incidents reported to any prior insurer;
2. unreported Claims or suits of which any Insured had received notice prior to
the effective date of the first policy with the Company;
3. incidents or circumstances that involve a particular person or entity which an
Insured knew might result in a Claim or suit prior to the effective date of the
first policy issued by the Company to the Named Insured, and which was not
disclosed to the Company.
Id. ¶ 26 (emphasis added by CIC).
The attorney defendants did not alert CIC to Sarah Gilbert’s potential legal malpractice
claim until May of 2009. CIC SOF ¶ 18. At that time, the attorney defendants informed CIC
that the “alleged error” with respect to defendant Gilbert had occurred in 2008. Id. The attorney
defendants never informed their prior insurer, the Philadelphia Insurance Company, of Ms.
Gilbert’s potential claim. See Defs.’ Reply at 23–24.
CIC claims that it issued a general reservation of rights letter to the attorney defendants in
July 2009, shortly after defendant Nace alerted plaintiff to defendant Gilbert’s potential claim.
CIC SOF ¶ 20. This letter acknowledged that CIC was on notice of the potential claim and that
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CIC would investigate it, but further stated: “[n]othing contained herein constitutes a waiver of
any of our potential rights and defenses. CIC reserves all of its rights under the policy and, in
particular, reserves the right to assert coverage or policy defenses, if any, at such time when
pertinent facts and circumstances or their significance are disclosed or otherwise become known
to CIC.” Id. ¶ 21. Defendant Nace claims that he never received this letter. Pl.’s Resp. in Opp.
to the Nace Defs.’ Statement of Material Facts not in Dispute & Pl.’s Additional Statement of
Undisputed Material Facts in Supp. of Pl.’s Opp. ¶ 28 [Dkt. # 23] (“CIC SOF Resp.”).
CIC retained a law firm to represent the attorney defendants against defendant Gilbert’s
potential malpractice action. Defs. Paulson & Nace, PLLC, & Barry Nace’s Statement of
Genuine Issues of Material Fact Necessary to Be Litigated ¶ 22 [Dkt. # 24-1]. On March 8,
2010, CIC received several litigation documents from the underlying Gilbert medical malpractice
action. Nace SOF ¶¶ 19–20. CIC did not review these records, however, and did not discover
the timing of the dismissal of the Gilbert medical malpractice action until November 2011. CIC
SOF ¶ 22. CIC asserts that it did not review the documents it received in March 2010 for a
timeliness issue because it relied on defendant Nace’s representation that the “alleged error” had
occurred in 2008, and because defendant Gilbert had not yet filed a claim. CIC SOF Resp. at 17.
Nevertheless, CIC’s own records indicate that, starting in 2009, its claims adjusters repeatedly
noted that CIC had “insufficient facts” about the potential Gilbert claim and needed more
information. Ex. Y to Mem. of P. & A. in Supp. of CIC’s Resp. in Opp. to the Nace Defs.’ Mot.
for Summ. J. at CIC 000493–95 [Dkt. # 23-1].
On January 13, 2012, CIC sent letters to defendants Nace and Assaad stating that “CIC
reserves its rights to deny coverage [of the potential Gilbert claim] to the extent that an insured
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had a reasonable basis to believe that a professional duty had been breached or to ‘reasonably
foresee’ that a ‘claim’ would be made against the insured before the CIC policy incepted on July
24, 2007.” Ex. Q to CIC SOF at CIC 000022, CIC 000029. CIC further stated that it would
“continue to monitor and investigate [the] potential [Gilbert] claim under a strict reservation of
rights including, but not limited to, the right to bring a declaratory action seeking a declaration of
no coverage or a rescission action.” Id. at CIC 000017, CIC 000024–25. It is undisputed that
CIC never sent a reservation of rights notice to defendant Gilbert. CIC SOF Resp. at 9.
C. The Gilbert Legal Malpractice Action
Defendant Sarah Gilbert filed a legal malpractice claim against the attorney defendants in
Richmond Circuit Court on March 13, 2012. Nace SOF ¶ 24. CIC received notice of this
lawsuit on April 12, 2012, and issued a second reservation of rights letter to defendants Nace and
Assaad on April 21, 2012. CIC SOF ¶¶ 29–30; Ex. T to CIC SOF at CIC 000444, CIC 000520.
A jury awarded Ms. Gilbert $4,000,000, which the court reduced to $1,750,000 pursuant to
Virginia law on November 1, 2013. Ex. A to Gilbert Resp. at 2 [Dkt. # 21-1].
II. Procedural Background
On December 27, 2012, plaintiff CIC filed this diversity action seeking a declaratory
judgment that it is not obligated to continue defending the attorney defendants. 7 Compl. at 1
[Dkt. # 1]. The parties conducted discovery, and defendants Paulson & Nace and Barry J. Nace
filed a motion for summary judgment on August 8, 2013, [Dkt. # 14]. They argue that this case
7 CIC had previously filed a virtually identical action against the same defendants in the
United States District Court for the Eastern District of Virginia, which was dismissed for lack of
subject matter jurisdiction on December 3, 2012. Ex. 8 to Defs. Paulson & Nace, PLLC’s &
Barry J. Nace, Esq.’s Mot. for Summ. J. at 2 [Dkt. # 14-10].
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is controlled by Virginia law, and that under Virginia law, plaintiff has waived or is estopped
from asserting its defense to coverage. Defs. Paulson & Nace, PLLC’s, and Barry J. Nace’s
Mem. of P. & A. in Supp. of Their Mot. for Summ. J. at 1 (“Defs.’ Mem.”) [Dkt. # 14-1].
Defendant Gilbert joined the defendants’ motion on December 12, 2013. Def. Sarah Gilbert’s
Resp. to Defs. Paulson & Nace, PLLC’s & Barry J. Nace’s Mem. of P. & A. in Supp. of Their
Mot. for Summ. J. at 1 [Dkt. # 21] (“Gilbert Resp.”).
Plaintiff CIC filed a cross-motion for summary judgment on September 19, 2013, [Dkt.
# 18], contending that District of Columbia (“District” or “D.C.”) law applies to this action and
that plaintiff is entitled to a declaratory judgment as a matter of law. Mem. of P. & A. in Supp.
of CIC’s Mot. for Summ. J. at 11–16 [Dkt. # 18] (“Pl.’s Mem.”). Defendants Paulson & Nace
and Barry J. Nace opposed that motion on December 12, 2013, [Dkt. # 24]. Defendant Assaad
joined the opposition on March 18, 2014, [Dkt. # 38], and defendant Gilbert joined the
opposition on March 26, 2014, [Dkt. # 39].
STANDARD OF REVIEW
Summary judgment is appropriate “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). The party seeking summary judgment bears the “initial responsibility of informing the
district court of the basis for its motion, and identifying those portions of the pleadings,
depositions, answers to interrogatories, and admissions on file, together with the affidavits, if
any, which it believes demonstrate the absence of a genuine issue of material fact.” Celotex
Corp. v. Catrett, 477 U.S. 317, 323 (1986) (internal quotation marks omitted). To defeat
summary judgment, the non-moving party must “designate specific facts showing that there is a
10
genuine issue for trial.” Id. at 324 (internal quotation marks omitted). The existence of a factual
dispute is insufficient to preclude summary judgment. Anderson v. Liberty Lobby, Inc., 477 U.S.
242, 247–48 (1986). A dispute is “genuine” only if a reasonable fact-finder could find for the
non-moving party; a fact is only “material” if it is capable of affecting the outcome of the
litigation. Id. at 248; Laningham v. U.S. Navy, 813 F.2d 1236, 1241 (D.C. Cir. 1987). In
assessing a party’s motion, the court must “view the facts and draw reasonable inferences ‘in the
light most favorable to the party opposing the summary judgment motion.’” Scott v. Harris, 550
U.S. 372, 378 (2007) (alterations omitted), quoting United States v. Diebold, Inc., 369 U.S. 654,
655 (1962) (per curiam).
“The rule governing cross-motions for summary judgment . . . is that neither party waives
the right to a full trial on the merits by filing its own motion; each side concedes that no material
facts are at issue only for the purposes of its own motion.” Sherwood v. Wash. Post, 871 F.2d
1144, 1148 n.4 (D.C. Cir. 1989), quoting McKenzie v. Sawyer, 684 F.2d 62, 68 n.3 (D.C. Cir.
1982). In assessing each party’s motion, “[a]ll underlying facts and inferences are analyzed in
the light most favorable to the non-moving party.” N.S. ex rel. Stein v. District of Columbia, 709
F. Supp. 2d 57, 65 (D.D.C. 2010), citing Anderson, 477 U.S. at 247.
ANALYSIS
I. District of Columbia law applies to this case.
As a preliminary matter, the Court must determine whether District of Columbia law or
Virginia law applies in this case because a federal court sitting in diversity “must apply state law
to the substantive issues before it.” A.I. Trade Fin., Inc. v. Petra Int’l Banking Corp., 62 F.3d
1454, 1458 (D.C. Cir. 1995), citing Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938); see also
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Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496–97 (1941). To determine which state’s
substantive law to apply, a court must “apply the choice-of-law rules of the forum state.”
Republican Nat’l Comm. v. Taylor, 299 F.3d 887, 890 (D.C. Cir. 2002). Thus, District of
Columbia choice-of-law principles will guide the Court’s inquiry.
Under D.C. law, a court must “first determine whether there is a conflict” between D.C.
and Virginia law in the case. Eli Lilly & Co. v. Home Ins. Co., 764 F.2d 876, 882 (D.C. Cir.
1985), citing Fowler v. A & A Co., 262 A.2d 344, 348 (D.C. 1970); see also Capitol Specialty
Ins. Corp. v. Sanford Wittels & Heisler, LLP, 793 F. Supp. 2d 399, 407 (D.D.C. 2011). If no
conflict exists, the court need not proceed with the choice of law analysis. Eli Lilly, 764 F.2d at
882.
Defendants appear to believe that a conflict exists between District and Virginia law.8
Specifically, defendants point to the requirement under Virginia law that, when a liability insurer
“discovers a breach of the terms or conditions of the insurance contract by the insured, the
insurer shall notify the claimant or the claimant’s counsel of the breach . . . within forty-five
days” of either the insurer’s discovery of the breach or of the claimant’s claim. Va. Code § 38.2-
2226 (2013). It is undisputed that District of Columbia law does not contain a similar notice
requirement. It is also undisputed that plaintiff did not provide any notice to the claimant in this
case, defendant Gilbert, until it filed its initial declaratory judgment action in the United States
District Court for the Eastern District of Virginia. CIC SOF Resp. at 9.
8 Defendants do not address the first step of the D.C. choice of law analysis and therefore
do not expressly contend that a conflict exists between District and Virginia law. Nevertheless,
they strongly urge the Court to conduct the District’s choice-of-law analysis and to conclude that
Virginia law applies. Defs.’ Mem. at 7–11.
12
Assuming without deciding that these circumstances present a conflict between D.C. and
Virginia law, 9 the second step is to apply a multi-factor test that draws from the Restatement
(Second) of Conflict of Laws and is referred to alternatively as the “governmental interest” or
“more substantial interest” test. 10 See Adolph Coors Co. v. Truck Ins. Exch., 960 A.2d 617, 620–
21 (D.C. 2008) (“governmental interest”); see also Eli Lilly, 764 F.2d at 882 (“more substantial
interest”). This test examines the following factors:
(1) the place of contracting; (2) the place of negotiation of the contract; (3) the
place of performance; (4) the location of the subject matter of the contract; (5) the
residence and place of business of the parties; and (6) the principal location of the
insured risk.
Adolph Coors, 960 A.2d at 620, citing Restatement (Second) of Conflict of Laws §§ 188, 193
(1971).
Taken together, these factors overwhelmingly indicate that District of Columbia law
“controls the interpretation and enforcement” of the insurance contract at issue in this case. CIC
is an Illinois company that issued an insurance policy to the attorney defendants in the District of
9 Plaintiff argues that the Virginia notice requirement is “procedural,” not substantive, and
therefore that it “cannot and should not be enforced” by this Court. Mem. of P. & A. in Supp. of
CIC’s Resp. in Opp. to the Nace Defs.’ Mot. for Summ. J. at 17 [Dkt. # 23] (“Pl.’s Opp.”). But
neither plaintiff nor defendants have conducted the Erie analysis that would determine whether a
federal court could or should apply this provision of Virginia law. See Burke v. Air Serv. Int’l,
Inc., 685 F.3d 1102, 1107 (D.C. Cir. 2012) (“The Supreme Court has evolved a set of tests to
determine whether a law is substantive or procedural for Erie purposes.”); see also Erie, 304
U.S. 64. Plaintiff also contends that, even if Virginia law applied in this case, this provision of
the Virginia Code would not be relevant because plaintiffs do not claim that the attorney
defendants “breached” the policy, but rather “fail[ed] to perform a condition precedent” to
coverage. Pl.’s Opp. at 24–25. The Court need not address either of these arguments because it
finds that District of Columbia law applies in this case.
10 The insurance contract itself appears to be silent on the choice of law question, see Ex. L
to CIC SOF [Dkt. 18-12], and none of the parties alleges otherwise.
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Columbia. Defs.’ Mem. at 10–11. Barry J. Nace is a resident of the District, and Paulson &
Nace is organized under the laws of the District of Columbia, engaged in the practice of law in
the District, with its principal place of business in the District. Id. at 10; CIC SOF ¶ 37.
Therefore, the place of contracting and negotiation, the location of the subject matter of the
contract, and the principal location of the insured risk (the law firm and its lawyers) is the
District of Columbia. See Defs.’ Mem. at 10. Moreover, while the legal action underlying the
coverage dispute was filed in Virginia, the subject matter of the insurance contract, i.e. the
attorney defendants’ professional activities, was located in the District. Id. And despite
defendants’ insistence to the contrary, the question here is what law governs the insurance
contract between CIC and the attorney defendants, and not what law governs the legal
malpractice claim underlying this case. 11 See Defs.’ Mem. at 10–11. Thus, after applying the
D.C. choice of law analysis, the Court concludes that the law governing the attorney defendants’
insurance contract with CIC is the law of the District of Columbia.
11 The Court further notes that, when before the United States District Court for the Eastern
District of Virginia, the attorney defendants insisted that the Virginia federal court “[did] not
have in personam jurisdiction arising out of” the insurance contract because the contract
“[n]egotiations took place in Washington, D.C., the contract, which was delivered in
Washington, D.C., is subject to Washington, D.C. law interpretation, and any performance or
misrepresentation alleged in the Complaint occurred in Washington, D.C.” Ex. V to CIC SOF at
2, 5 [Dkt. # 18-22] (attorney defendants’ memorandum in support of their motion to dismiss
CIC’s complaint in the Virginia federal court). The attorney defendants attempt to explain their
apparent reversal of position by arguing that defendant Gilbert is nevertheless “entitled to the
protections of Virginia law.” Defs.’ Reply at 12. But as the attorney defendants themselves
explained to the Virginia federal court, “[t]he only issue before the Court in the present action is
the insurance contract, not the underlying tort claim,” Ex. V to CIC SOF at 5, and that contract
is governed by the laws of the District.
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II. The insurance policy does not obligate CIC to defend or indemnify the attorney
defendants in the Gilbert legal malpractice case.
Applying District of Columbia law, the Court concludes that the attorney defendants
failed to report Ms. Gilbert’s potential legal malpractice claim to CIC on a timely basis, and that
CIC is therefore not obligated to defend or indemnify them against those claims. The Court
finds that the attorney defendants reasonably should have known about defendant Gilbert’s
potential claim prior to the July 24, 2007 inception of the CIC policy, and therefore, they did not
satisfy an essential prerequisite to coverage of her claim. Second, the Court finds that although
CIC could – and perhaps should – have reserved its rights with respect to the defense it asserts in
this case (the “prior knowledge” defense) much sooner, CIC did not waive this defense, and it is
not estopped from asserting it here.
A. The attorney defendants had a reasonable basis to believe that they had breached a
professional duty to defendant Gilbert prior to the inception of the CIC liability
insurance policy.
In the District of Columbia, “[a]n insurance policy is a contract between the insured and
the insurer, and in construing it [a court] must first look to the language of the contract.”
Travelers Indem. Co. of Ill. v. United Food & Commercial Workers Int’l Union, 770 A.2d 978,
986 (D.C. 2001), quoting Cameron v. USAA Prop. & Cas. Ins. Co., 733 A.2d 965, 968 (D.C.
1999). “‘Where insurance contract language is not ambiguous . . . a written contract duly signed
and executed speaks for itself and binds the parties without the necessity of extrinsic evidence.’”
Id., quoting In re Corriea, 719 A.2d 1234, 1239 (D.C. 1998). Moreover, “notice provisions in
insurance contracts are deemed ‘of the essence of the contract’ and are given effect ‘to promote
the efficient and economic liability insurance administration.’” Columbia Cas. Co. v. Columbia
15
Hosp. for Women, 633 F. Supp. 697, 699 (D.D.C. 1986), quoting Diamond Serv. Co. v. Utica
Mut. Ins. Co., 476 A.2d 648, 652 (D.C. 1984).
Looking to the language of the contract here, the 2008–2009 liability insurance policy
obligated CIC to cover incidents that took place prior to the inception of the policy as long as it
received appropriate notice of potential claims. Specifically, the policy provided coverage if,
“prior to the effective date of the first . . . Policy issued by [CIC] to the Named Insured . . . the
Named Insured, . . . [or any] employee . . . had no reasonable basis to believe that the Insured
had breached a professional duty or to Reasonably Foresee that a Claim would be made against
the Insured.” CIC SOF ¶ 24. The policy further defined “Reasonably Foresse(n)” to include
“incidents or circumstances that involve a particular person or entity which an Insured knew
might result in a Claim or suit prior to the effective date of the first policy . . . and which was not
disclosed to [CIC].” Id. ¶ 26.
The parties do not dispute the meaning of the language of the contract itself, but rather
the date on which the attorney defendants should have notified CIC of defendant Gilbert’s
potential claim. CIC argues that the attorney defendants had a “reasonable basis to believe” that
they had “breached a professional duty,” or to “Reasonably Foresee” that defendant Gilbert
would bring a claim, as early as February 26, 2007, when the court dismissed the first medical
malpractice complaint for an improper style, and certainly no later than June 18, 2007, when the
court dismissed the second medical malpractice complaint from the bench with prejudice. Pl.’s
Mem. at 24. The attorney defendants counter that there was no reason to believe they had
breached a professional duty with respect to defendant Gilbert because the error leading to the
dismissal was a mere “misnomer.” Defs.’ Paulson & Nace, PLLC, & Barry Nace’s Opp. to Pl.’s
16
Mot. for Summ. J. at 15–16 [Dkt. # 24] (“Defs.’ Opp.”). Therefore, they claim, they could not
reasonably have foreseen defendant Gilbert’s claim prior to the inception of the CIC policy. Id.
at 15. They further contend – without citing any relevant authority12 – that CIC is required to
provide expert testimony to establish when they reasonably could have foreseen that defendant
Gilbert would bring a legal malpractice claim. Id. at 13–14.
The Court finds that the attorney defendants had a reasonable basis to believe that they
had breached a professional duty to defendant Gilbert no later than the date of the Virginia
court’s ruling on June 18, 2007, and that expert testimony is not necessary in this case. Whether
the attorney defendants had a “reasonable basis to believe” that a breach of professional duty had
occurred is an objective inquiry that asks what a reasonable attorney would have done in the
same circumstances. 13 See Capitol Specialty, 793 F. Supp. 2d at 411 (“[T]he correct standard is
the objective, reasonable attorney one, not whether the lawyer in fact had a subjective belief that
a malpractice action was probable.”); see also Colliers Lanard & Axilbund v. Lloyds of London,
12 Rather, defendants cite two cases that hold that expert testimony is required to establish
whether legal malpractice has occurred, O’Neil v. Bergan, 452 A.2d 337 (D.C. 1982); Seaward
Int’l, Inc. v. Price Waterhouse, 391 S.E.2d 283 (1990), and one case applying Pennsylvania law,
Foster v. Westchester Fire Ins. Co., No. 09-1459, 2012 WL 2402895, *1 (W.D. Pa. June 26,
2012).
13 The Court notes that, under the definition provided in the CIC insurance contract,
whether the attorney defendants “reasonably foresaw” defendant Gilbert’s claim appears to be a
subjective inquiry, as it looks to “incidents or circumstances . . . which an Insured knew might
result in a Claim or suit.” CIC SOF ¶ 24 (emphasis added); see Colliers Lanard & Axilbund v.
Lloyds of London, 458 F.3d 231, 237 (3d Cir. 2006) (identifying the subjective and objective
elements of a liability insurance contract). But because the policy is worded in the alternative,
requiring that an insured have “no reasonable basis to believe that [it] had breached a
professional duty or to Reasonably Foresee” a future claim, CIC SOF ¶ 24 (emphasis added),
what the attorney defendants subjectively knew at the inception of the CIC insurance contract
does not control when, objectively, they should have recognized the professional error.
17
458 F.3d 231, 237 (3d Cir. 2006) (“[W]e conclude that this part of the exclusion gives rise to an
objective test: whether a reasonable professional in the insured’s position might expect a claim
or suit to result.”). “[T]he question whether the insured has acted reasonably becomes a question
of law only when reasonable persons can draw but one inference.” Travelers Indem. Co., 770
A.2d at 991. Moreover, under D.C. law, an expert witness is required to establish the standard of
care or the contractual duty “when ‘the subject in question is so distinctly related to some
science, profession or occupation as to be beyond the ken of the average layperson,’” Capitol
Sprinkler Inspection, Inc. v. Guest Servs., Inc., 630 F.3d 217, 225 (D.C. Cir. 2011), quoting
Briggs v. Wash. Metro. Area Transit Auth., 481 F.3d 839, 845 (D.C. Cir. 2007) (citation and
internal quotation marks omitted), but that is not the case here. See also Daskalea v. District of
Columbia, 227 F.3d 433, 445 (D.C. Cir. 2000) (same).
Here, the attorney defendants filed a medical malpractice complaint on behalf of
defendant Gilbert in 2006 that did not comport with the Virginia Code requirement that a minor
must sue by a “next friend.” See Ex. B to CIC SOF at 1; see also Va. Code § 8.01-8. The statute
of limitations on defendant Gilbert’s claim expired before the attorney defendants were able to
correct their mistake, and thus their error became fatal to defendant Gilbert’s claims. See Ex. G
to CIC SOF at 31–32, 44 (transcript of hearing in which Virginia judge dismissed Gilbert’s
claims with prejudice). The attorney defendants’ efforts to minimize the seriousness of their
naming mistake are unavailing: not only did this last-minute “misnomer” cost defendant Gilbert
the right to bring her medical malpractice claim in court, but also it led a Virginia jury to find the
attorney defendants liable for legal malpractice. See Ex. A to Gilbert Resp. at 2. The Court finds
that under these circumstances, “reasonable persons can draw but one inference”: that the
18
attorney defendants had a “reasonable basis to believe” that they had “breached a professional
duty” to defendant Gilbert no later than June 18, 2007, when the Virginia judge dismissed her
medical malpractice claims with prejudice. See Capitol Specialty, 793 F. Supp. 2d at 411(“[T]he dismissal of a lawsuit because of attorney error would clearly put a lawyer on notice of
the possibility of a malpractice claim.”).
The Court further finds that this question is not “so distinctly related to some science,
profession, or occupation as to be beyond the ken of the average layperson.” Capitol Sprinkler,
630 F.3d at 225; see also Capitol Specialty, 793 F. Supp. 2d at 411 (holding without expert
testimony that attorneys who missed a filing deadline that caused a court to dismiss their clients’
class action claims reasonably should have known that the clients had a potential malpractice
claim against them); Ross v. Cont’l Cas. Co., 420 B.R. 43, 50 (D.D.C. 2009) (holding without
expert testimony that attorney’s failure to timely file an answer, leading to a default judgment
against the client, “might reasonably be expected to be the basis of a claim” under liability
policy); Minn. Lawyers Mut. Ins. Co. v. Hahn, 355 F. Supp. 2d 104, 110–11 (D.D.C. 2004)
(applying Virginia law and holding without expert testimony that attorneys reasonably should
have known that a “[l]etter stating that an attorney ha[d] been ‘authorized to institute legal
proceedings for claims’” constituted notice of a claim for purposes of a professional liability
insurance policy). Therefore, the attorney defendants reasonably should have known of
defendant Gilbert’s potential claim prior to the inception of the CIC policy.
19
B. CIC did not waive its “prior knowledge” defense and is not estopped from asserting it
here.
Defendants contend that even if their notice to CIC of defendant Gilbert’s potential claim
was untimely, CIC has waived its “prior knowledge” defense or is estopped from asserting it
because CIC investigated the potential claim for more than two years before reserving its rights.
Defs.’ Mem. at 19–20; Defs.’ Opp. at 26–28.
Under District of Columbia law, “[w]aiver is an act or course of conduct by the insurer
which reasonably leads the insured to believe that the breach will not be enforced.” Diamond,
476 A.2d at 654. In other words, and in this context, “‘an insurer undertaking the defense of an
insured against a litigious assertion of an unprotected liability, without a disclaimer of
contractual responsibility and a suitable reservation of rights, is foreclosed from thereafter taking
refuge in the policy provisions exempting the liability from coverage.’” Cincinnati Ins. Co. v.
All Plumbing, Inc. Serv., Parts Installation, CV 12-851 (CKK), 2013 WL 5665195, at *4
(D.D.C. Oct. 18, 2013), quoting Nat’l Union Fire Ins. Co. of Pittsburgh v. Aetna Cas. & Sur.
Co., 384 F.2d 316, 318 (D.C. Cir. 1967); see also Cont’l Cas. Co. v. Hartford Fire Ins. Co., 116
F.3d 932, 939 n.8 (D.C. Cir. 1997) (same). “Estoppel, on the other hand, generally results when
an insurance company assumes the defense of an action or claim, with knowledge of a defense of
non-liability under the policy . . . .” Diamond, 476 A.2d at 654. “[A]n insurer may be estopped
from denying coverage,” however, “only if its participation somehow prejudiced the insured by
undermining his ability to defend himself.” Athridge v. Aetna Cas. & Sur. Co., 604 F.3d 625,
629 (D.C. Cir. 2010).
20
Although it may be true that CIC should have uncovered the timing issue in this case
earlier than it did, the Court finds that CIC’s “prior knowledge” defense is not barred by the
doctrines of waiver or estoppel. It is undisputed that CIC could have discovered the facts
underlying its “prior knowledge” defense in March of 2010, NACE SOF ¶¶ 19–20, but it did not
do so until November 2011, CIC SOF ¶ 22, and did not reserve its rights with respect to that
defense until January 13, 2012. 14 Ex. Q to CIC SOF at CIC 000022, CIC 000029. But D.C. law
required CIC to reserve its rights before “undertaking the defense” of the attorney defendants
“against a litigious assertion of an unprotected liability.” See Cincinnati Ins. Co., 2013 WL
5665195, at *4. Given that defendant Gilbert did not file her legal malpractice claim until March
13, 2012, exactly three months after CIC reserved its “prior knowledge” defense, the timing of
CIC’s reservation of rights notice met this requirement of D.C. law. See Cincinnati Ins. Co.,
2013 WL 5665195, at *4.
Moreover, the twenty-two months that elapsed between the earliest date on which CIC
could have become aware of its prior knowledge defense (March 8, 2010) and the date on which
it issued its reservation of rights (January 13, 2012) did not prejudice defendants because CIC
had taken no actions that “hampered or harmed” the defendants’ “ability to defend
[themselves].” See Diamond, 476 A.2d at 658. In Diamond, the court held that an insurance
company had not foregone its coverage defenses when there was a “seven-month delay between
14 CIC asserts that, in July 2009, shortly after Nace notified it of defendant Gilbert’s
potential claim, it issued a general reservation of rights letter to the attorney defendants. CIC
SOF ¶ 20. Defendant Nace contends that he never received that letter. CIC SOF Resp. at 15.
This factual dispute is immaterial, however, because the Court finds that the timing of the
January 2012 reservation of rights notice does not bar CIC from asserting its “prior knowledge”
defense.
21
the time [the insurer] knew there was a good possibility it would withdraw” and the time it did
withdraw, because the insurer had merely “advise[d] [the insured] on answering interrogatories
and . . . file[d] an answer to the amended complaint.” 476 A.2d at 656–57. Likewise, in Capitol
Specialty, there was no prejudice when the insurer withdrew coverage nine months after
receiving notice of the claim, having only “advised defendants that coverage [was] available for
[their] claim” and “undert[aken] their defense in the Malpractice Action.” 793 F. Supp. 2d at412–13 & n.8. By contrast, in Cincinnati Ins. Co., the court did find prejudice when the insurer
“controlled the defense of the . . . action for approximately five months before disclaiming
coverage and . . . undertook several important defensive actions,” including removing the case to
federal court, opposing a motion for class certification, and agreeing to stay the case pending
resolution of a motion to remand. 2013 WL 5665195, at *5.
Again, and unlike the insurers in all of these cases, CIC reserved its rights with respect to
its “prior notice” defense before defendant Gilbert even filed her complaint. 15 Moreover, the
only actions CIC undertook prior to reserving its rights were to investigate defendant Gilbert’s
potential claim and to retain counsel to represent the attorney defendants. It is true that CIC
continued to defend the attorney defendants through the conclusion of the Gilbert legal
malpractice lawsuit, but the attorney defendants were undisputedly on notice of CIC’s defense at
15 Defendant Gilbert asserts that it is “self-evident” that she has suffered prejudice in this
case. But in the District of Columbia, “[a]n insurer’s obligation to provide notification of its
reservation of rights under an insurance policy is to the insured, not to the party seeking a
judgment from the insured.” Cincinnati Ins. Co., 2013 WL 5665194, at *4. Further, defendant
Gilbert has not offered any arguments or authority that would clarify her rights in this case under
District of Columbia law. Therefore, the Court will not consider the issue of prejudice with
respect to her.
22
that time. None of CIC’s actions impeded the attorney defendants from obtaining their own
counsel, or prevented defendants from negotiating settlement and avoiding a trial.
In their reply, defendants also contend that had CIC reserved its rights sooner, the
attorney defendants would have “notif[ied] and pursu[ed] other potential insurers,” including
their immediately prior insurer, Philadelphia Insurance Company. Defs.’ Reply at 23–24. But
that policy expired in July 2007, and it is not clear that such a claim could have been successful,
since the very earliest date CIC could have discovered its defense and notified the defendants
was March 2010. See Ex. DD to Pl.’s Sur-Reply at PIIC 012, PIIC 027 [Dkt. # 32-1] (copy of
the attorney defendants’ Philadelphia Insurance Company policy stating that the insured could
only purchase “Extended Reporting Period” coverage within sixty days after the termination of
the policy period).
The Court cannot conclude, therefore, that CIC’s actions prejudiced the attorney
defendants or “undermin[ed] [their] ability to defend [themselves].” See Athridge, 604 F.3d at
629. Nor were CIC’s actions “a course of conduct . . . which reasonably [led] the insured to
believe that the breach [would] not be enforced.” Diamond, 476 A.2d at 654. Therefore, CIC’s
“prior knowledge” defense is not barred by the doctrines of waiver or estoppel, and the Court
will grant its motion for summary judgment.
23