Chicago Insurance Company v. Paulson & Nace, PLLC

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued March 10, 2015 Decided April 21, 2015
No. 14-7063
CHICAGO INSURANCE COMPANY,
APPELLEE
v.
PAULSON & NACE, PLLC AND BARRY JOHN NACE,
APPELLANTS
GABRIEL ASSAAD AND SARAH GILBERT,
APPELLEES
Appeal from the United States District Court
for the District of Columbia
(No. 1:12-cv-02068)
Stephen A. Horvath argued the cause and filed the briefs
for appellants.
Paulette S. Sarp argued the cause for appellee Chicago
Insurance Company. With her on the brief was David
Hudgins.
Carla D. Brown was on the brief for appellee Sarah
Gilbert.
2
Before: HENDERSON, SRINIVASAN and WILKINS, Circuit
Judges.
Opinion for the Court filed by Circuit Judge WILKINS.
WILKINS, Circuit Judge: A law firm was engaged to
bring a medical malpractice action on behalf of a young
woman who had become paralyzed after surgery. Roughly a
year and a half after the engagement, the firm filed two
complaints in Virginia state court, each of which was
dismissed: the first without prejudice for failure to correctly
caption a pleading; the second with prejudice for filing outside
the statute of limitations. Shortly thereafter, the law firm
applied for and obtained a new professional liability insurance
policy. A few years later, the aggrieved client sued the law
firm for legal malpractice, and the firm in turn sought coverage
from its insurer.
The insurance coverage dispute at the heart of this appeal
turns on whether, at the time the law firm applied for its new
policy, the firm was on notice that it had committed a breach of
professional conduct, or otherwise should have foreseen that
the dismissals could give rise to a legal malpractice claim. If
so, then the insurer was relieved of any obligation to cover the
malpractice claim under the policy’s “known risk” exclusion.
The District Court found, as a matter of law and without
expert testimony, that the law firm was on notice of the
potential malpractice claim. The District Court also rejected
arguments that the insurer had forfeited or waived its right to
deny coverage. We agree with the District Court’s resolution
of each of these issues, and therefore affirm its decision
granting summary judgment in favor of the insurer.
3
I.
On July 28, 2004, Sarah Gilbert, a fourteen-year-old girl
residing in Virginia, underwent a spinal surgery that left her
paralyzed. Five months later, Ms. Gilbert’s parents retained
the law firm of Paulson & Nace, PLLC, to pursue a claim of
medical malpractice on her behalf. J.A. 842. The firm filed a
medical malpractice complaint in Virginia on July 24, 2006,
four days before the statute of limitations expired on Gilbert’s
claims. See July 24, 2006 Compl., J.A. 98.
The caption on this complaint read: “Richard Gilbert and
Rosie Lee Gilbert, Individually and on behalf of their daughter,
Sarah Gilbert, a minor.” Id. Under Virginia Code § 8.01-8
and Virginia case law, however, the caption should have read:
“Sarah Gilbert, by her parents and next friends Richard Gilbert
and Rosie Lee Gilbert, and Richard Gilbert and Rosie Lee
Gilbert, Individually.” See Herndon v. St. Mary’s Hosp. Inc.,
266 Va. 472, 476 (2003). After the medical practice moved to
dismiss based on this error, Paulson & Nace filed a properly
captioned complaint in a separate civil action. See October
25, 2006 Compl., J.A. 104.
The Virginia court dismissed the claims in the first case
without prejudice on February 27, 2007, based on the caption
error. First Dismissal Order, J.A. 143. During a hearing on
June 18, 2007, the same court stated that it would dismiss the
second complaint with prejudice on statute of limitations
grounds. Transcript of Motions Hearing at 31-32, J.A.
176-77. Paulson & Nace appealed the trial court’s decision
but was unsuccessful.
On July 18, 2007, while the state court appeal was still
pending, the firm’s sole member, Barry J. Nace, applied for a
new insurance policy with Chicago Insurance Company.
4
Claims-Made Application, J.A. 200-09. Nace was asked
whether there were “any circumstances which may result in a
claim being made against [his] firm.” Id., J.A. 204. Despite
the recent dismissal of Gilbert’s claims, Nace responded “no.”
Id.
Chicago Insurance subsequently issued Paulson & Nace a
“claims-made” liability insurance policy – that is, coverage for
all claims made within the policy period, regardless of when
the events giving rise to the claim occurred. But the policy
also contained a standard known risk exclusion, meaning
pre-policy conduct would not be covered if the firm had a
reasonable basis “to believe that the [firm] had breached a
professional duty” prior to the policy’s issuance or to otherwise
foresee that pre-policy conduct might result in a claim against
the firm. Insurance Policy, J.A. 523, 527-28. 1
Paulson & Nace eventually informed Chicago Insurance
in May 2009 of the Gilbert incident, though it represented that
the potential malpractice had occurred in 2008, not 2006.
Incident Information Form, J.A. 254. Shortly thereafter,
Chicago Insurance provided Paulson & Nace with an attorney,
who submitted relevant case files and other materials to
Chicago Insurance throughout 2010 and 2011. In November
2011, the insurance company noticed that Paulson & Nace had
made the caption error in 2006 – prior to the policy period.
On January 13, 2012, Chicago Insurance notified Paulson &
Nace that it reserved its rights to deny coverage under the
known risk exclusion if a malpractice suit arose. J.A. 847-48.
1
This type of provision is routinely referred to as a “prior
knowledge,” “known risk,” or “known loss” exclusion. See 7
Couch on Ins. §§ 102:9, 102:11 (3d ed. 2013).
5
Ms. Gilbert eventually filed a legal malpractice action
against the law firm in March 2012, and she was awarded
$1,750,000 by a Virginia court in 2013. Chicago Insurance
brought this declaratory judgment action premised on diversity
jurisdiction, contending that Paulson & Nace should have
known of the potential claim when it applied for the insurance
policy and that the known risk exclusion therefore applied.
The District Court granted summary judgment in favor of
Chicago Insurance. Chicago Ins. Co. v. Paulson & Nace,
PLLC, 37 F. Supp. 3d 281 (D.D.C. 2014). Paulson & Nace
appeals. 2
II.
We review de novo the District Court’s grant of summary
judgment. See Hidalgo v. FBI, 344 F.3d 1256, 1258 (D.C.
Cir. 2003). Summary judgment is appropriate only if the
evidence in the record shows that, first, “there is no genuine
dispute as to any material fact,” and, second, “the movant is
entitled to judgment as a matter of law.” FED. R. CIV. P. 56(a);
see Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247 (1986).
In making this determination, we “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) (internal quotation marks and
brackets omitted). Choice of law questions are also subject to
de novo review. City of Harper Woods Emps.’ Ret. Sys. v.
Olver, 589 F.3d 1292, 1298 (D.C. Cir. 2009).
2
Chicago Insurance brought this action against the following
defendants: Paulson & Nace; Barry Nace; one of the firm’s
associates, Gabriel Assaad; and Sarah Gilbert. Only Paulson &
Nace and Barry Nace appeal the District Court’s decision. For
convenience, the term Paulson & Nace is used to refer collectively to
the firm and Barry Nace.
6
III.
A.
The principal question in this case is whether a reasonable
attorney in Paulson & Nace’s position would have been on
notice by July 2007 of a possible breach of professional duty or
a potential malpractice claim, such that there was an obligation
to disclose the underlying incident to the insurer. See Ross v.
Cont’l Cas. Co., 420 B.R. 43, 48 (D.D.C. 2009), aff’d, 393 F.
App’x 726 (D.C. Cir. 2010) (interpreting known risk clause as
“incorporating a subjective look at the insured’s actual
knowledge and an objective consideration of ‘whether a
reasonable professional in the insured’s position might expect
a claim or suit to result’”) (quoting Colliers Lanard &
Axilbund v. Lloyds of London, 458 F.3d 231, 237 (3d Cir.
2006)). This question is appropriate for summary judgment
only if a reasonable jury “can draw but one inference and that
inference points unerringly to the conclusion that the insured
has not acted reasonably under the circumstances.” Starks v.
N. E. Ins. Co., 408 A.2d 980, 982 (D.C. 1979) (internal
quotation marks omitted); accord Travelers Indem. Co. of Ill.
v. United Food & Commercial Workers Int’l Union, 770 A.2d
978, 991 (D.C. 2001).
We agree with the District Court that no reasonable jury
could have found against Chicago Insurance on this question.
It is undisputed that Paulson & Nace was aware that the first
complaint was improperly captioned, as evidenced by its
attempt to correct the error in October 2006 and by the
dismissal of the complaint on the basis of the captioning error
in February 2007. It also is undisputed that Paulson & Nace
knew that its attempt to correct the error had failed at the trial
level, and that Ms. Gilbert’s claims were going to be dismissed
with prejudice.
7
Under such circumstances – that is, where an attorney is
aware that he committed a procedural error that resulted in an
unfavorable outcome – there is no triable question with respect
to a lawyer’s duty to inform his insurer of the potential claim.
See Koransky, Bouwer & Poracky, P.C. v. Bar Plan Mut. Ins.
Co., 712 F.3d 336, 343-44 (7th Cir. 2013) (concluding as a
matter of law that a law firm whose associate had failed to
deliver an executed sales contract to the seller, jeopardizing the
sale, was on notice of a potential malpractice claim); Capitol
Specialty Ins. Corp. v. Sanford Wittels & Heisler, LLP, 793 F.
Supp. 2d 399, 411 (D.D.C. 2011) (“[T]he dismissal of a lawsuit
because of attorney error would clearly put a lawyer on notice
of the possibility of a malpractice claim.”); Ross, 420 B.R. at
46, 49-50 (holding on summary judgment that an attorney who
failed to timely file an answer, leading to a default judgment,
was on notice that a malpractice claim might be filed against
him).
Paulson & Nace points out that Virginia’s caption rule is
unevenly enforced, see Appellants’ Br. 24-25, and that it
believed the captioning error would be forgiven on appeal, see
id. at 7. But these assertions do not create a genuine question
as to whether a reasonable attorney would have been on notice
of the existence of the error or a potential claim. See
Koransky, Bouwer & Poracky, 712 F.3d at 343 (noting that law
firm was on notice of potential claim even though there was a
chance the mistake could be fixed); Coregis Ins. Co. v. Baratta
& Fenerty, Ltd., 264 F.3d 302, 307 (3d Cir. 2001) (affirming
grant of summary judgment for insurer where attorneys knew
that client’s complaint was dismissed for lack of activity, even
though attorneys believed legal malpractice suit was
time-barred).
Relatedly, Paulson & Nace tells us that expert testimony
should have been required to determine what a reasonable
8
attorney might have foreseen. But this misses the point. It is
true that expert testimony is routinely required in legal
malpractice actions where lay jurors are ill-equipped to
evaluate the merits of an attorney’s strategic decisions. See
O’Neil v. Bergan, 452 A.2d 337, 341 (D.C. 1982); Applegate v.
Dobrovir, Oakes & Gebhardt, 628 F. Supp. 378, 382 (D.D.C.
1985) (ruling that the complexity of client’s claim, the
extensive attorney preparations and pretrial rulings, and the
difficulty of evaluating last-minute settlements rendered
malpractice issue “not cognizable by layman judging on the
basis of common knowledge and common sense, unaided by
expert testimony”), aff’d, 809 F.2d 930 (D.C. Cir. 1987). But
no expert testimony is required if an “attorney’s lack of care
and skill is so obvious that the trier of fact can find negligence
as a matter of common knowledge.” Forti v. Ashcraft &
Gerel, 864 A.2d 133, 138 (D.C. 2004) (quoting O’Neil v.
Bergan, 452 A.2d at 341) (internal quotation mark omitted).
The Virginia state court did all the expert legal work
needed here in dismissing the cases based on Paulson & Nace’s
procedural error prior to decision on the merits. Nothing more
than this dismissal with prejudice – which can be explained to a
jury through lay testimony and court records – was needed to
establish that Gilbert’s legal malpractice claim was reasonably
foreseeable. 3
3
Appellants do not cite any cases holding that expert testimony is
necessary to determine when a law firm should have known to notify
its professional liability insurer of a possible claim, and we have not
found any such cases. To the contrary, there are many cases in
which no such testimony has been required. See, e.g., Koransky,
Bouwer & Poracky, 712 F.3d 336; Capitol Specialty, 793 F. Supp.
2d 399; Ross, 420 B.R. 43; City of Brentwood, Mo. v. Northland Ins.
Co., 397 F. Supp. 2d 1143 (E.D. Mo. 2005).
9
B.
We next turn to Paulson & Nace’s contention that Chicago
Insurance forfeited its right to a known risk denial of coverage
by failing to comply with Virginia Code § 38.2-2226, which
requires a liability insurer that discovers a breach of the terms
or conditions of an insurance contract by the insured to notify a
claimant “within forty-five days after discovery by the insurer
of the breach or of the claim, whichever is later.” The District
Court correctly rejected this argument, concluding that District
of Columbia law governed this contract between the
D.C.-based law firm and its Illinois-based insurer. See
Chicago Ins. Co., 37 F. Supp. 3d at 290-92 (concluding that the
“government interest” test heavily favored application of D.C.
law, in light of appellants’ residence and professional activities
in the District of Columbia, among other factors) (citing
Adolph Coors Co. v. Truck Ins. Exch., 960 A.2d 617, 620-21
(D.C. 2008)). The parties agree that there is no
notice-to-claimant requirement under D.C. law.
Perhaps recognizing that the government interest test
clearly favors the application of D.C. law, Paulson & Nace
does not argue that the contract is always governed by Virginia
law, but rather that Virginia’s notice-to-claimant provision
somehow alters the parties’ obligations in this particular case
because the underlying lawsuits were filed in Virginia. See
Appellants’ Br. 10-11, 16. The firm cites no on-point case
law to support this argument. We do not strain to find such
authority, because even if Virginia law could be invoked,
Virginia courts have made clear that Section 38.2-2226 may
not be enforced by the insured – here, Paulson & Nace –
against its insurer. See Dan River, Inc. v. Commercial Union
Ins. Co., 227 Va. 485, 488-91 (1984) (holding that the
predecessor statute of VA Code § 38.2-2226 could not be used
by insured party against insurer); Great Am. Ins. Co. v. Gross,
10
Civil Action No. 3:05-0159, 2008 WL 376263, at *11 (E.D.
Va. Feb. 11, 2008) (“[Section] 38.2-2226 serves to protect
claimants, who are strangers to the contract, and not the
insured”); see also Morrel v. Nationwide Mut. Fire Ins. Co.,
188 F.3d 218, 226 (4th Cir. 1999) (explaining that § 38.2-2226
applies when a claimant unable to collect a judgment from an
insured party sues an insurer directly under Va. Code
§ 38.2-2200). 4
C.
Finally, Paulson & Nace argues that a reasonable jury
could have found that Chicago Insurance waived its right to
deny coverage by failing to timely inform the firm of its
intention. “Waiver is an act or course of conduct by the
insurer which reasonably leads the insured to believe that the
breach will not be enforced.” Williams v. First Gov’t Mortg.
& Investors Corp., 225 F.3d 738, 750 (D.C. Cir. 2000)
(quoting Diamond Serv. Co. v. Utica Mut. Ins. Co., 476 A.2d
648, 654 (D.C. 1984)) (internal quotation mark omitted).
Waiver of one’s rights generally requires actual knowledge of
those rights. Travelers Indem. Co., 770 A.2d at 992
(“Ordinarily, a waiver requires an intentional relinquishment
of a known right.”) (internal quotation marks omitted); see also
Zuckerman Spaeder, LLP v. Auffenberg, 646 F.3d 919, 922
(D.C. Cir. 2011) (“Waiver refers to a party’s intentional
4
It is not clear whether Sarah Gilbert could have brought a claim on
her own behalf against Chicago Insurance, as the insurance policy
was issued in Illinois and delivered in Washington, D.C. Cf. Va.
Code § 38.2-2200 (requiring only that policies “issued or delivered”
in Virginia allow direct suits by claimants). In any event, Ms.
Gilbert’s right to a direct suit against Chicago Insurance was neither
litigated below nor raised in this appeal, which relates solely to
Paulson & Nace’s rights under the insurance contract.
11
relinquishment or abandonment of a known right.”) (internal
quotation marks omitted).
Paulson & Nace does not contend that Chicago Insurance
had actual knowledge of its known risk defense prior to
November 2011, but rather argues that this is irrelevant.
Appellants’ Br. 28-29. The law firm asserts that the relevant
date is March 2010, when Chicago Insurance received
documents that contained the correct dates of the medical
malpractice proceedings. Thus, according to Paulson & Nace,
Chicago Insurance had constructive knowledge of its defense
nearly two years before invoking it.
There may be instances under D.C. law in which
constructive knowledge suffices to result in waiver. See, e.g.,
Gov’t Emps. Ins. Co. v. Govan, 451 A.2d 884, 886 (D.C. 1982)
(holding that an insurer had constructive knowledge of
insured’s driving history, where the insurer possessed actual
knowledge that the insured had misrepresented her driving
record on her insurance application, and where a reasonable
inquiry would have revealed the insured’s true driving record).
But this is not such a case. Paulson & Nace initially informed
Chicago Insurance that the alleged malpractice occurred within
the policy period, see Incident Information Form, J.A. 254, and
it never expressly alerted the insurer to its error. Chicago
Insurance was under no duty during the preliminary stages of
the claim process to sift and verify the information provided by
Paulson & Nace. See Burlington Ins. Co. v. Okie Dokie, Inc.,
368 F. Supp. 2d 83, 90 (D.D.C. 2005) (noting that under D.C.
law, an insurer “generally has the right to rely on statements
made in an insurance application; the insurer need not conduct
an independent investigation unless it has reason to doubt the
statements”). Because there is no genuine question as to
Chicago Insurance’s actual knowledge, and because Paulson &
Nace has not cited any reason why knowledge should be
12
imputed here, its waiver argument can be rejected as a matter
of law. 5
IV.
For the foregoing reasons, Chicago Insurance was entitled
to summary judgment in this case and the District Court’s
decision awarding summary judgment in its favor is:
Affirmed.
5
Furthermore, as the District Court observed, Chicago Insurance
had not undertaken any meaningful defense of Paulson & Nace
before it reserved its rights. Chicago Ins. Co., 37 F. Supp. 3d at
295-96. It therefore is highly doubtful that the insurance company
can be said to have engaged in “an act or course of conduct . . . which
reasonably [led] the insured to believe that the breach will not be
enforced.” Williams, 225 F.3d at 750 (quoting Diamond Serv., 476
A.2d at 654).