Ross v. Continental Casualty Co.

420 B.R. 43 (2009)

Bryan S. ROSS, Plaintiff,
v.
CONTINENTAL CASUALTY CO., Defendant.

Civil Action No. 07-1450 (RWR)(AK).

United States District Court, District of Columbia.

December 2, 2009.

Michael E. Tucci, Jaime Sue Dibble, Stinson Morrison Hecker, LLP, Washington, DC, for Plaintiff.

Richard Albert Simpson, Kelly Vest Overman, Wiley Rein LLP, Washington, DC, for Defendant.

MEMORANDUM OPINION

RICHARD W. ROBERTS, District Judge.

Plaintiff, Chapter 7 bankruptcy trustee Bryan Ross, brought this action against defendant Continental Casualty Company ("Continental") arguing that Continental breached a contract by failing to defend and indemnify the Law Offices of Stanley H. Goldschmidt, P.C. ("Goldschmidt, P.C.") for liability arising from a malpractice lawsuit. Continental filed a counterclaim seeking a declaratory judgment that the policy did not cover Goldschmidt, P.C.'s claim. Continental has moved for judgment on the pleadings, or in the alternative for summary judgment, and Magistrate Judge Alan Kay recommends that Continental's motion for summary judgment be granted. Because the undisputed facts reflect that the professional liability policy did not require Continental to defend and indemnify Goldschmidt, P.C., Magistrate Judge Kay's recommendation will be adopted and Continental's motion for summary judgment will be granted.

BACKGROUND

Stanley Goldschmidt ("Goldschmidt") represented Restaurant Equipment and Supply Depot, Inc. ("RESD") in a lawsuit filed against it in Superior Court for the District of Columbia. Rest. Equip. & Supply Depot, Inc. v. Gutierrez, 852 A.2d 951 (D.C.2004). Goldschmidt failed to file a timely answer on behalf of RESD and default was entered. Goldschmidt moved unsuccessfully to vacate the entry of default, and the Superior Court entered final default judgment against RESD for over $800,000 on May 1, 2001 after a trial on damages. Id. at 954. (See Def.'s Stmt. of Material Facts ("Def.'s Stmt.") ¶ 8.) Goldschmidt filed an unsuccessful appeal for RESD with the District of Columbia Court of Appeals ("Court of Appeals"). Gutierrez, 852 A.2d at 957.

While RESD's appeal was pending, Continental issued a professional responsibility liability policy to Goldschmidt, P.C.^[1] that provided coverage for claims made and reported from May 1, 2003 to May 1, 2004. (Def.'s Stmt. ¶¶ 18, 20.) This policy was renewed until it was cancelled as of July 1, 2005. (Id. ¶ 18.) Upon cancellation, Goldschmidt, P.C. purchased an unlimited extended reporting period (id. ¶ 19), which created a "period of time after the end of the policy period for reporting claims by reason of an act or omission that occurred prior to the end of the policy period and is otherwise covered by [the] policy."^[2] (Def.'s Mem. of P. & A. in Supp. of Mot. for J. on the Pldgs., or in the Alt., Mot. for Summ. J. ("Def.'s Mem."), Decl. of Kelly V. Overman, Ex. A, Lawyers Professional Liability Policy ("Liability Policy") § VI.)

In September 2005, RESD filed for bankruptcy and Ross was appointed trustee of the bankruptcy estate. (Def.'s Stmt. ¶ 13.) Goldschmidt, P.C. notified Continental in January 2006, during the policy's extended reporting period, that Ross contemplated asserting a malpractice claim against Goldschmidt, P.C.^[3] (Def.'s Stmt. ¶ 19; Pl.'s Stmt. of Undisputed Material Facts ("Pl.'s Stmt.") ¶¶ 20, 21.) Under the policy, Continental agreed to

pay on behalf of the Insured all sums in excess of the deductible that the Insured shall become legally obligated to pay as damages and claim expenses because of a claim that is both first made against the Insured and reported in writing to the Company during the policy period by reason of an act or omission in the performance of legal services by the Insured or by any person for whom the Insured is legally liable, provided that. . . prior to . . . the inception date of the first policy issued by the Company . . ., if continuously renewed . . . [,] no Insured had a basis to believe that any such act or omission, or related act or omission, might reasonably be expected to be the basis of a claim[.]

(Liability Policy § I.A (emphasis added).)

Ross later filed a malpractice lawsuit against Goldschmidt, P.C. (Def.'s Stmt. ¶ 14.) Ross and Goldschmidt, P.C. reached a settlement in which judgment was entered against Goldschmidt, P.C., and Goldschmidt, P.C. assigned its rights under the liability policy to Ross. (Id. ¶¶ 15-16; Pl.'s Stmt. ¶ 26.) Goldschmidt, P.C. notified Continental of the adverse judgment. (Def.'s Opp'n to Pl.'s Stmt. ¶ 22.) Continental denied coverage of Goldschmidt, P.C.'s policy claim. (Def.'s Stmt. ¶ 24; Pl.'s Stmt. ¶¶ 23, 25.)

Ross alleges that Continental breached the contract by failing to defend and indemnify Goldschmidt, P.C. for liability arising from the RESD malpractice lawsuit. (Compl. ¶ 44.) Continental has filed a counterclaim seeking a declaratory judgment that the policy barred coverage of the claim against Goldschmidt, P.C., and has moved for summary judgment, arguing that Goldschmidt, P.C. had a basis to know before the policy was issued that its representation of RESD might trigger a malpractice lawsuit. (Def.'s Mem. at 7-14.) Ross opposes Continental's motion for summary judgment. He argues that D.C.Code § 31-4314 bars Continental from denying coverage unless Goldschmidt, P.C. subjectively intended in its policy application to deceive Continental and the deception was material, for neither of which there is any evidence. (Pl.'s Opp'n to Mot. for Summ. J. ("Pl.'s Opp'n") at 7-10.)

The magistrate judge recommends that Continental's motion for summary judgment be granted. The magistrate judge concluded that no material facts remained in dispute as to whether Goldschmidt, P.C. knew of prior events that could have triggered a claim, and that § 31-4314 did not govern this dispute. (Report & Recommendation ("R. & R.") at 10-12.) Ross filed an objection claiming that § I.A of the policy is ambiguous and should be interpreted in Ross' favor, that Continental had to show materiality of a false statement or intent to deceive in the application to deny coverage, and that an issue of fact exists as to whether Goldschmidt's actions might reasonably have been expected to be the basis of a claim. (Pl.'s Obj'n to Magistrate's R. & R. ("Pl.'s Obj'n") at 1-2, 5-6, 9.)

DISCUSSION

Under Local Civil Rule 72.3(c), "[a] district judge shall make a de novo determination of those portions of a magistrate judge's findings and recommendations to which objection is made." Local Civil Rule 72.3(c); Ames v. Yellow Cab of D.C., Inc., Civil Action No. 00-3116(RWR), 2006 WL 2711546, at *4 (D.D.C. Sept.21, 2006).

On a motion for summary judgment, "[t]he inquiry performed is the threshold inquiry of determining whether there is the need for a trial — whether, in other words, there are any genuine factual issues that properly can be resolved only by a finder of fact because they may reasonably be resolved in favor of either party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S. Ct. 2505, 91 L. Ed. 2d 202 (1986). Summary judgment may be granted only where "the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c); see also Moore v. Hartman, 571 F.3d 62, 66 (D.C.Cir.2009). A material fact is one that is capable of affecting the outcome of the litigation. Liberty Lobby, Inc., 477 U.S. at 248, 106 S. Ct. 2505. A genuine issue is one where the "evidence is such that a reasonable jury could return a verdict for the nonmoving party[,]" as opposed to evidence that "is so one-sided that one party must prevail as a matter of law." Id. at 248, 252, 106 S. Ct. 2505. A court considering a motion for summary judgment must draw all "justifiable inferences" from the evidence in favor of the nonmovant. Id. at 255, 106 S. Ct. 2505. The nonmoving party, however, must do more than simply "show that there is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S. Ct. 1348, 89 L. Ed. 2d 538 (1986). Rather, the nonmovant must "come forward with specific facts showing that there is a genuine issue for trial." Id. at 587, 106 S. Ct. 1348 (internal quotation marks omitted).

I. D.C. CODE § 31-4314

Under D.C.Code § 31-4314, "[t]he falsity of a statement in the application for any policy of insurance shall not bar the right to recovery thereunder unless such false statement was made with intent to deceive or unless it materially affected either the acceptance of the risk or the hazard assumed by the company."^[4] D.C.Code § 31-4314. D.C.Code § 31-4314 prevents an insurer from denying coverage or canceling a policy due to a false statement in the application unless the applicant intended to deceive the insurer or the false statement materially affected the insurer's decision of whether to insure the applicant. Westhoven v. New England Mut. Life Ins. Co., 384 A.2d 36, 38 (D.C.1978); see also Metro. Life Ins. Co. v. Adams, 37 A.2d 345, 348 (D.C.1944) (noting that the section involves an insurer's attempts to "avoid such a policy for material misrepresentation on account of the answers to the questions in the application"); Burlington Ins. Co. v. Okie Dokie, Inc., 398 F. Supp. 2d 147, 157 (D.D.C. 2005) (applying § 31-4314 to an attempt to deny coverage and cancel a policy by an insurer that claimed the application contained a false statement that materially affected the insurer's decision to issue the policy). Ross objects to the magistrate judge's conclusion that Continental does not have to show intent to deceive or a material effect on the risk taken in order to deny coverage. (Pl.'s Obj'n at 2.)

Continental did not ground its denial of the insured's claim on any assertion that the insured made any false statement in its application. Continental denied the claim based on the assertion that when the policy went into effect, Goldschmidt knew that his representation of RESD that might reasonably be expected to be the basis of a malpractice claim. (Def.'s Mem. at 1.) Section I.A. of this "claims made and reported policy" barred claims where prior to the first policy's inception date, the "[i]nsured has a basis to believe that any such act or omission, or related act or omission, might reasonably be expected to be the basis of a claim[.]" (Liability Policy § I.A.) See Robert Mallen & Jeffrey Smith, 5 Legal Malpractice § 36:3 (2008) (stating that "[a] claims-made policy usually states in the insuring agreements or by exclusion that it does not apply to claims or known circumstances that pre-existed the policy inception date, and that may be or are likely to give rise to a claim"). No false statement in the application need be present to trigger that bar. Ross cites to Prudential Ins. Co. of Am. v. Saxe, 134 F.2d 16 (D.C.Cir.1943), and argues that § 31-4314 cannot be circumvented by contractual attempts to avoid the attachment of risk. Id. at 25. However, unlike the insurer in Saxe who argued that the false statement in the application prevented the policy from taking effect, id. at 24, Continental did not deny coverage by claiming that the policy was void or not in effect.

Continental did not improperly circumvent § 31-4314 as that statute does not apply to Continental's decision here.

II. LIABILITY POLICY § I.A

Under District of Columbia law, "when [insurance] contracts are clear and unambiguous, they will be enforced by the courts as written, so long as they do not `violate a statute or public policy.'" Hartford Accident & Indem. Co. v. Pro-Football, Inc., 127 F.3d 1111, 1114 (D.C.Cir. 1997) (quoting Smalls v. State Farm Mut. Auto. Ins. Co., 678 A.2d 32, 35 (D.C.1996)). An insurance contract is not "ambiguous merely because the parties do not agree on the interpretation of the contract provision in question." Travelers Indem. Co. of Ill. v. United Food & Commercial Workers Int'l Union, 770 A.2d 978, 986 (D.C.2001). "Policy language is not genuinely ambiguous unless `it is susceptible of more than one reasonable interpretation.'" Chase v. State Farm Fire & Cas. Co., 780 A.2d 1123, 1127-28 (D.C.2001) (quoting Am. Bldg. Maint. Co. v. L'Enfant Plaza Prop., Inc., 655 A.2d 858, 861 (D.C.1995)). "[A] court will not torture words to import ambiguity where the ordinary meaning leaves no room for ambiguity[.]" Redmond v. State Farm Ins. Co., 728 A.2d 1202, 1206 (D.C.1999) (internal quotation marks omitted) (first alteration in original). Unless the policy violates public policy or a statute, an exclusion provision must be enforced even if the insured did not foresee how the exclusion operated because courts are hesitant to "rewrite insurance policies and reallocate [the] assignment of risks between insurer and insured." Chase, 780 A.2d at 1132.

Ross asserts that Liability Policy § I.A is ambiguous because it is "reasonably open to two constructions." (Pl.'s Objection at 6.) He contends that the ambiguity comes from the use of a subjective word "believe" and an objective word "reasonably" in the same provision. If § I.A is ambiguous, Ross argues, the ambiguity should be construed in favor of the insured under District of Columbia law and the subjective belief of the insured should govern. However, the inclusion of both subjective and objective language does not necessarily cause § I.A to be ambiguous.

Courts have applied insurance policy provisions with subjective and objective language like that in § I.A. Such provisions incorporate both a subjective consideration of the facts known by the insured and an objective analysis of whether a future malpractice claim might reasonably be expected to arise. Colliers Lanard & Axilbund v. Lloyds of London, 458 F.3d 231 (3d Cir.2006) interpreted a provision stating that coverage would be available "provided that the insured had no knowledge of any suit, or any act or error or omission, which might reasonably be expected to result in a claim or suit as of the date of signing the application for this insurance" 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." Id. at 237; cf. Skinner v. Aetna Life & Cas., 804 F.2d 148, 150-51 (D.C.Cir. 1986) (stating that a provision using the phrase "to the best of [the insured's] knowledge and belief" "must be assessed in the light of [the insured's] actual knowledge and belief"). Moreover, the court in Westport Ins. Corp. v. Lilley, 292 F. Supp. 2d 165, 171 (D.Me.2003), found that a provision which prevented coverage "if any insured at the effective date knew or could have reasonably foreseen that such act, error, omission [or] circumstance. . . might be the basis of a claim," to be unambiguous, and "[w]hether the . . . defendants could have reasonably foreseen [the lawyer's] malpractice claim is an objective test that can be determined as a matter of law, but it must be determined based only on those facts and circumstances that the . . . defendants were subjectively aware of." See also City of Brentwood, Mo. v. Northland Ins. Co., 397 F. Supp. 2d 1143, 1146, 1148 (E.D.Mo.2005) (interpreting a provision that extended coverage when "no Insured had any knowledge of any circumstance likely to result in or give rise to a claim nor could have reasonably foreseen that a claim might be made" to mean that a court should "first look at the insured's subjective knowledge and then the objective understanding of a reasonable attorney with that knowledge" (internal quotation marks omitted)). Section I.A incorporates a subjective consideration of the insured's knowledge and an objective consideration of whether an act or omission "might reasonably be expected to be the basis of a claim." (Liability Policy § I.A.)

Ross argues that the magistrate judge erred in relying on the Third Circuit case of Selko v. Home Ins. Co., 139 F.3d 146, 151-52 (1998), because Selko was later rejected in New Jersey by Liebling v. Garden State Indem., 337 N.J.Super. 447, 767 A.2d 515 (2001). As the Third Circuit thereafter explained, Selko interpreted under Pennsylvania law an insurance policy provision stating "the insured had no basis to believe that the insured had breached a professional duty" to require that the court consider "(1) the subjective question of whether the insured knew of certain facts; and (2) the objective question of whether a reasonable lawyer in possession of such facts would have had a basis to believe that the insured breached a professional duty." Colliers Lanard & Axilbund, 458 F.3d at 237. Liebling "acknowledge[d] that [Selko's] interpretation is sound as a matter of logic," 767 A.2d at 523, but it departed from Selko under the New Jersey doctrine that "in exceptional circumstances, even the plain language of an exclusion can be set aside if it is contrary to the objectively reasonable expectations of the insured." Colliers Lanard & Axilbund, 458 F.3d at 238. While Selko interpreted "basis to believe" to require both subjective and objective inquiries, Colliers Lanard & Axilbund, 458 F.3d at 237, § I.A clearly has a "basis to believe" requirement that is distinct from the plainly objective "might reasonably be expected" component. The policy provision at issue in this case unambiguously requires an objective inquiry into what might have been reasonably expected to form a claim based on the knowledge Goldschmidt possessed when the policy took effect.^[5]

Ross concedes that Goldschmidt knew the facts surrounding the entry of default against RESD. Goldschmidt knew he did not file an answer on behalf of RESD, unsuccessfully sought to have Superior Court vacate the entry of default, and knew that the Superior Court entered a default judgment against RESD before the liability policy went into effect. (Pl.'s Opp'n, Decl. of Stanley H. Goldschmidt ¶¶ 5-7.) See also Gutierrez, 852 A.2d at 953-54. Moreover, Goldschmidt's known failure to file an answer "might reasonably be expected to be the basis of a claim." (Liability Policy § I.A.) An attorney's failure to file an answer resulting in a court's entry of default can constitute a basis for a malpractice suit. See Kaempe v. Myers, 367 F.3d 958, 966 (D.C.Cir.2004) (stating that allowing entry of default judgment against a client by an attorney is an example of an act or omission that is "so obvious that the trier of fact can find negligence [by the attorney] as a matter of common knowledge"); Hamilton v. Needham, 519 A.2d 172, 174-75 (D.C.1986) (noting that "permitting entry of default against a client" is an example of negligence in a legal malpractice action); Lockhart v. Cade, 728 A.2d 65, 68 (D.C.1999) (stating that "entry of a default operates as an admission by the defaulting party that there are no issues of liability") (internal quotation marks omitted). Although Goldschmidt was contesting the default judgment with the Court of Appeals and believed that he would be successful, § I.A does not require certainty that a malpractice claim will be filed. Accordingly, § I.A prevents coverage of a malpractice claim in connection with Goldschmidt's representation of RESD.

CONCLUSION

Because § 31-4314 does not apply and the Liability Policy barred coverage of Goldschmidt, P.C.'s claim, Magistrate Judge Kay's recommendation will be adopted, and Continental's motion for summary judgment will be granted. A final order accompanies this Memorandum Opinion.

REPORT AND RECOMMENDATION

ALAN KAY, United States Magistrate Judge.

This matter was referred to the undersigned for full case management including pre-trial conference, pursuant to a Minute Order dated November 27, 2007, and Local Civil Rule 72.3(5), providing that "a magistrate judge may conduct hearings, . . ., and submit to the judge proposed findings of fact and recommendations for the disposition of motions for judgment on the pleadings [and] for summary judgment, . . . ." Upon consideration of the Defendant Continental Casualty Company's Motion for Judgment on the Pleadings, or in the Alternative, Motion for Summary Judgment ("Motion") [12]; Plaintiffs opposition thereto ("Opposition") [15]; and Defendant's reply ("Reply") [16], and for the reasons set forth below, the undersigned recommends that Defendant's Motion for Summary Judgment be granted and the civil action against Defendant be dismissed.^[1]

I. Background

On August 10, 2007, Plaintiff Bryan S. Ross, Chapter 7 Trustee ("Plaintiff or "Ross") brought an action against Defendant Continental Casualty Company ("Defendant" or "Continental") for declaratory judgment and breach of contract regarding duty to defend and indemnify. (08/01/07 Complaint [1].) The issue before the trial court is whether Lawyers Professional Liability Policy No. LAW XXXXXXXXX, which was issued by Continental to the Law Offices of Stanley H. Goldschmidt, P.C. ("Goldschmidt") provides coverage for the legal malpractice claims asserted by the Plaintiff [bankruptcy trustee] in the lawsuit captioned Ross, Trustee in Bankruptcy for Restaurant Equipment & Supply Depot, Inc. v. The Law Offices of Stanley H. Goldschmidt, P. C., Case No. 05-01316, in the United States Bankruptcy Court for the District of Columbia. (Memorandum in support of Motion ("Memorandum") at 6.)^[2]

The underlying legal action in this matter giving rise to the allegation of legal malpractice was spawned by a civil action brought by four individuals against Restaurant Equipment & Supply Depot, Inc. ("RES") in the District of Columbia Superior Court, captioned Gutierrez, et al. v. Restaurant Equipment and Supply Depot Inc., Case No. 00-1165. (Plaintiffs Statement of Undisputed Material Facts ("Statement") at ¶ 1.) Goldschmidt represented Restaurant Equipment and Supply Depot ("RES") in the lawsuit. (Statement at ¶ 2.) After the trial court denied RES's motion to dismiss, Goldschmidt did not file a timely answer and the trial judge entered a default in January, 2001, in favor of Plaintiffs and against RES. (Statement at ¶ 5.) On January 17, 2001, Goldschmidt filed an expedited motion to vacate the order of default, which was denied by the trial court. (Statement at ¶ 6; Pleadings at ¶ 15.)^[3] On March 7, 2001, Goldschmidt filed a motion for reconsideration of the entry of judgment by default, which was denied by the trial court on April 12, 2001. (Pleadings at ¶ 15.)

The trial court held a jury trial on damages beginning on April 23, 2001, and in early May 2001, the court entered judgment against RES in excess of $800,000. (Statement at ¶ 7, Pleadings at ¶¶ 17-18.) Plaintiffs subsequently filed a motion for attorneys' fees and costs, which was granted. (Pleadings at ¶ 19.) Goldschmidt filed a notice of appeal on behalf of RES on May 16, 2001, and oral argument was heard on April 22, 2004. (Pleadings at ¶ 20.) On July 1, 2004, the District of Columbia Court of Appeals affirmed the trial court's ruling. See Restaurant Equipment & Supply Depot, Inc. v. Gutierrez, 852 A.2d 951 (D.C.2004). (Pleadings at ¶ 22; Statement at ¶ 14.) Goldschmidt filed a Petition for en banc review with the District of Columbia Court of Appeals, which was denied on October 28, 2004. (Pleadings at ¶ 23.)

On May 1, 2003, Continental Casualty Company issued Lawyers Professional Liability Policy No. LAW XXXXXXXXXX (the "Policy") to Goldschmidt, P.C. (Statement at ¶ 16.) On September 2, 2005, RES filed a voluntary petition for bankruptcy under Chapter 7 of the Bankruptcy Code. (Pleadings at ¶ 26, Statement at ¶ 19.) By letter dated January 6, 2006, Bryan Ross, Trustee, advised Goldschmidt that there may be a basis for a legal malpractice claim. (Pleadings at ¶ 28, Statement at ¶ 20.) In February 2006, the Trustee filed the malpractice lawsuit against Goldschmidt. (Statement at ¶ 22; Pleadings at ¶ 29.) Judgment was entered against Goldschmidt in the malpractice lawsuit, in the amount of $909,277.98 [underlying judgment plus award of attorneys' fees], plus interest. (Pleadings at ¶ 31.)

By electronic mail dated March 3, 2006, Continental denied coverage of Goldschmidt's insurance claim. (Statement at ¶ 23.) Continental confirmed its denial of coverage on April 27, 2006. (Statement at ¶ 25.) The Trustee subsequently entered into a settlement of the malpractice claim with Goldschmidt and accepted an assignment of Goldschmidt's rights under the Policy. (Pleadings at ¶¶ 32-33, Statement at ¶ 26.)^[4]

II. Legal Standard

Fed.R.Civ.P. 12(c) provides that a party may move for judgment on the pleadings after the pleadings are closed but early enough not to delay trial. Courts grant a judgment on the pleadings pursuant to Rule 12(c) "only if it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations" [in the complaint.] Longwood Village Rest. Ltd. v. Ashcroft, 157 F. Supp. 2d 61, 66 (D.D.C.2001) (citation omitted.) The standard of review under Rule 12(c) is similar to that for a motion to dismiss for failure to state a claim under Rule 12(b)(6); a court must accept the nonmovant's allegations as true and should view the facts in the light most favorable to the nonmoving party. See Barr v. Clinton, 370 F.3d 1196, 1199 (D.C.Cir.2004) (citation omitted.) A court should grant a motion for judgment on the pleadings if the movant "is entitled to judgment as a matter of law." See Burns Int'l Servs. v. Int'l Union, 47 F.3d 14, 16 (2d Cir.1995).

Pursuant to Fed.R.Civ.P. 56(c), a court should grant summary judgment if "the pleadings, depositions, answers to interrogatories and admissions . . ., together with the affidavits, if any, show there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." See Fed. R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S. Ct. 2548, 91 L. Ed. 2d 265 (1986); Diamond v. Atwood, 43 F.3d 1538, 1540 (D.C.Cir.1995). In ruling on a motion for summary judgment, the court must draw all justifiable inferences in the nonmoving party's favor and accept the nonmoving party's evidence as true. Anderson v. Liberty Lobby, 477 U.S. 242, 255, 106 S. Ct. 2505, 91 L. Ed. 2d 202 (1986). Although a court should draw all reasonable inferences from the records submitted by the nonmoving party, the mere existence of a factual dispute, by itself, is insufficient to bar summary judgment. See id., 477 U.S. at 248, 106 S. Ct. 2505.

The nonmoving party must demonstrate specific facts in the record which create a genuine issue as to a material fact to oppose the motion for summary judgment. To be genuine, the issue must be supported by sufficiently admissible evidence such that a reasonable trier of fact could find for the nonmoving party; to be material, the factual assertion must be capable of affecting the substantive outcome of the litigation. Anderson, 477 U.S. at 248, 106 S. Ct. 2505; see also Laningham v. U.S. Navy, 813 F.2d 1236, 1242-43 (D.C.Cir. 1987).

Mere allegations or denials in the adverse party's pleadings are insufficient to defeat an otherwise proper motion for summary judgment. The nonmoving party must establish more than "the mere existence of a scintilla of evidence" to support its position. Anderson at 252, 106 S. Ct. 2505 The moving party may defeat summary judgment through factual representations made in a sworn affidavit if he can provide "direct testimonial evidence," Arlington v. United States, 473 F.3d 329, 338 (D.C.Cir.2006) or "support his allegations. . . with facts in the record," Greene v. Dalton, 164 F.3d 671, 675 (D.C.Cir.1999) (quoting Harding v. Gray, 9 F.3d 150, 154 (D.C.Cir.1993)). The court may grant summary judgment if there is no significantly probative evidence tending to support the complaint. Shields v. Eli Lilly, 895 F.2d 1463 (D.C.Cir.1990).

III. Analysis

A. Policy Language

The insurance policy issued to Goldschmidt was issued for the May 1, 2003 to May 1, 2004 policy period. (Memorandum at 9.) The Policy states in relevant part that coverage is provided for:

all sums in excess of the deductible that the Insured shall become legally obligated to pay as damages and claim expenses because of a claim that is both first made against the Insured and reported in writing to the Company during the policy period by reason of an act or omission in the performance of legal services by the Insured or by any person for whom the Insured is legally liable . . .

(Exhibit A, Policy, § I.A.) It is Continental's duty to pay sums on behalf of its insured on the condition that:

3. prior to:

a. the inception date of the first policy issued by the Company or any subsidiary or affiliate of the Company, if continuously renewed; or,

b. the date the Insured first became a member or employee of the named Insured or a predecessor firm,

whichever is later, no Insured had a basis to believe that any such act or omission, or related act or omission, might reasonably be expected to be the basis of a claim . . .

(Id. at § I.A.3.) There is no dispute that Goldschmidt's firm is the "named Insured" or that Goldschmidt [individually] is an "Insured" under the Policy.

B. Is the Policy Language Ambiguous?

The Policy at issue in this case is a "claims made" policy providing coverage for all claims "first made against the Insured and reported in writing to [Continental] during the policy period." (Policy, § I.A.) As a prerequisite to coverage, the Policy requires that "no Insured had a basis to believe that any [ ] act or omission, or related act or omission [by the insured], might reasonably be expected to be the basis of a claim [against the insured]." (Motion, Exh. A.) Plaintiff argues that the policy language is ambiguous and asserts that "ambiguities in an insurance policy are construed against the insurer. . . ." (Opposition at 11.)

Defendant contends that "[c]ountless courts that have addressed this issue have determined that the language in Section I.A.3 and similar exclusionary language, is unambiguous and enforceable." (Reply at 10, citing Selko v. Home Ins. Co., 139 F.3d 146 (3rd Cir.1998); 5 Ronald E. Mallen and Jeffrey M. Smith, LEGAL MALPRACTICE, § 35:14, at 84 (citing nationwide authority.)) See Westport Insurance Corp. v. Lilley, 292 F. Supp. 2d 165, 171 (D.Me.2003) (noting that the exclusionary language in a claims made policy is generally viewed as unambiguous) (omitting string citation of cases from numerous jurisdictions.) Nor is such language found to be against public policy. See Truck Ins. Exch. v. Ashland Oil, Inc., 951 F.2d 787, 790 (7th Cir.1992) ("Like the exclusion of a known preexisting condition from a health insurance policy, the exclusion from a claims-only policy of claims based on conduct that occurred before the policy was issued and that was known to have claim potential is uncontroversially proper.") (citation omitted.) "The insurance company is entitled to protect itself against the professional who, recognizing his past error or omission, rushes to purchase a `claims-made' policy before the error is discovered and a claim is asserted against him." Zuckerman v. Nat'l. Union Fire Ins. Co., 100 N.J. 304, 495 A.2d 395, 403-04 n. 3 (1985) (citation omitted). The undersigned's review of the Policy provision and the law interpreting similar insurance policy provisions leads to the conclusion that the Policy provision is not ambiguous on its face nor is it against public policy.

C. Objective or Subjective Standard Applied

Defendant argues that courts apply a reasonable person standard for evaluating whether the insured was "aware of any incident that could reasonably result in a claim being made against [it]." Minn. Lawyers Mut. Ins. Co. v. Hahn, 355 F. Supp. 2d 104, 106 (D.D.C.2004).^[5]See, e.g., Cont'l Cas. Co. v. Graham & Schewe, 339 F. Supp. 2d 723, 727 (E.D.Va.2004) (applying an objective standard to evaluate an insured's prior knowledge in a professional liability insurance case); Westport, 292 F.Supp.2d at 171 (holding that the court must decide whether a reasonable attorney in possession of the facts known to the party in the case would reasonably foresee that a malpractice claim was forthcoming, and that such test incorporates objective and subjective elements.) "Whether the [insurance claimant] could have reasonably foreseen [a] malpractice claim is an objective test that can be determined as a matter of law, but it must be determined based only on those facts and circumstances [of which the claimant was] subjectively aware. . . ." Id. (citations omitted.)

Plaintiff asserts that, applying a subjective standard, there is no evidence that "Goldschmidt believed the firm would be the subject of a malpractice claim" at the time he signed the policy, and Goldschmidt's Declaration confirms this.^[6] There is no dispute however that, at the time of the inception of the First Policy, Goldschmidt was aware that the firm had failed to file an answer on behalf of RES, which resulted in a default being entered against RES.^[7] Goldschmidt was further aware that the court had denied its motion to vacate the default and motion for reconsideration. Goldschmidt was additionally aware that the trial court had entered a damages verdict in excess of $800,000.00 against RES. Awareness of these circumstances would lead a reasonable attorney to recognize that such omission [failing to file an answer on behalf of RES] "might reasonably be expected to form the basis of [a malpractice] claim." See Coregis Ins. Co. v. Wheeler, 24 F. Supp. 2d 475 (E.D.Pa. 1998) (knowledge of counsel's failure to timely assert a valid claim against a hospital in a medical malpractice case was sufficient knowledge of circumstances that could be the basis of a legal malpractice claim.)

In Selko, 139 F.3d at 151-52, the Court of Appeals for the Third Circuit analyzed the "basis to believe" language and confirmed that it reflects an objective standard, in terms of the insured's knowledge. The Selko court commented that: "[h]ad the provision been meant to stand or fall on the individual insured's subjective assessment of the known facts, it could have easily used the words `knew" or `believed,'. . . Instead by using the words `basis to believe,' the policy pointed to an objective criterion." Id. at 152.

Plaintiff argues however that Goldschmidt believed "that the default judgment entered against RES by the trial court was entered in error and would be vacated on appeal" and further that "Goldschmidt P.C's painstaking research and investigation showed that its belief was both justified and reasonable." (Opposition at 1.) Accordingly, Goldschmidt did not recognize any omission that would give rise to a claim. While Goldschmidt conceivably may have had a good faith belief that the trial court's decision would be overturned on appeal, Goldschmidt could not turn a blind eye to the record in this case which included entry of a default against RES because of action (or inaction) by Goldschmidt; the trial court's subsequent denial of Goldschmidt's motions to vacate and for reconsideration; the trial court's award of a significant judgment against RES and Goldschmidt's filing of an appeal.^[8]See Culver v. Cont'l Ins. Co., 11 Fed.Appx. 42, 1999 WL 503527 *3 (4th Cir.1999) (rejecting the insured's argument that the foreseeable claims exclusion requires an applicant for malpractice coverage to disclose only those claims that the applicant in his subjective judgment deems reasonable.)

In a further attempt to justify the grounds for its good faith belief, Plaintiff states that "RES never once indicated that they had been damaged or believed Goldschmidt had committed malpractice, . . . ." (Opposition at 5.) In establishing prior knowledge, there is no requirement that the client complain ahead of time or indicate that it will file a claim against the insured. Home Indemnity Co. v. Toombs, 910 F. Supp. 1569, 1574 (N.D.Ga.1995); Mt. Airy Ins. Co. v. Thomas, 954 F. Supp. 1073, 1080 (W.D.Pa.1997) ("Any dispute over whether the defendant believed [that the client would make the claim], on the basis of his relationship with his client or [what] his impression [was] of that client's reaction to the situation, . . . is not relevant to our analysis"), aff'd., 149 F.3d 1165 (3d Cir.1998). Defendant asserts that it is not relevant whether Goldschmidt believed that any malpractice claims against his firm would have merit. See Tewell, Thorpe & Findlay, Inc., P.S. v. Cont'l Cas. Co., 64 Wash.App. 571, 825 P.2d 724, 728 (1992).

A review of the record of proceedings in the trial court, whether viewed subjectively or objectively, leads ineluctably to the conclusion that a malpractice claim against Goldschmidt was a reasonably foreseeable event. Goldschmidt does not and cannot deny that its failure to file an answer on behalf of RES led to the entry of default against RES and ultimately to entry of a significant judgment against RES. Thus, the undersigned finds that events resulting in the judgment against RES "might reasonably have been expected to be the basis of a [legal malpractice] claim" and under the terms of the Policy should have been disclosed to Defendant Continental.

D. Applicability of D.C Code § 31-4314

Plaintiff also argues that D.C.Code Annotated § 31-4314 governs this dispute and Defendant's motion fails for not having addressed it. Plaintiff contends that this statutory section "forbids Continental from denying Goldschmidt P.C. coverage under the Policy unless Goldschmidt P.C. intended to deceive Continental, or Continental's acceptance of the risk or hazard assumption was materially affected." (Opposition at 7.)

Section 31-4314 is entitled "False statements in application for policy" and it provides that:

The falsity of a statement in the application for any policy of insurance shall not bar the right to recovery thereunder unless such false statement was made with intent to deceive or unless it materially affected either acceptance of the risk or the hazard assumed by the company.

Plaintiff asserts that Goldschmidt did not submit a false statement to Continental nor did it intend to deceive Continental; neither has Continental shown that any false statement materially affected its acceptance of the risk or hazard assumed.

Continental asserts that Section 31-4314 is a rescission statute, inapplicable in this case because Continental did not elect to rescind the Policy for Goldschmidt's failure to disclose the claim on the application, but instead, Continental "denied coverage on the basis of Policy § I.A.3." (Reply at 3.) Continental argues that if it had elected to rescind the policy, it would have filed a declaratory judgment action seeking to rescind the policy (Reply at 8) but instead, Continental denied coverage pursuant to the Policy § I.A.3. (Reply at 9.) Continental asserts that "[m]ultiple courts have asserted that the prior knowledge policy exclusionary language, such as Policy § I.A.3, is entirely distinct from rescission." (Reply at 4.) See Maynard v. Westport Ins. Co., 208 F. Supp. 2d 568, 575 (D.Md.2002) ("Exclusion of prior acts from coverage under a contractual provision . . . [such as § I.A3 here] is a ground for denying coverage distinct from rescission on the basis of material misrepresentation"), aff'd, 55 Fed.Appx. 667, 2003 WL 264704 (4th Cir. Feb.10, 2003); Westport Ins. Corp. v. Hanft & Knight, P. C., 523 F. Supp. 2d 444, 457-58 (M.D.Pa.2007) ("the prior knowledge exclusion operates to bar coverage independent of any policy application").

The undersigned finds that Section 31-4314 is inapplicable to the circumstances of this denial of coverage case, which does not involve a rescission of the policy. Continental's denial of coverage is supported by the terms of the Policy and District of Columbia law mandating enforcement of clear policy terms, as written. See, e.g., Chase v. State Farm Fire & Cas. Co. 780 A.2d 1123, 1132 (D.C.2001); Hartford Accident & Indem. Co. v. Pro-Football, Inc., 127 F.3d 1111, 1114 (D.C.Cir.1997).

IV. Recommendation

The undersigned finds that the language of the Policy is not against public policy nor is it ambiguous. The trial court should employ an objective standard to determine whether a reasonable attorney would have anticipated a legal malpractice claim, in light of the knowledge possessed by Goldschmidt regarding the default against RES and the subsequent judgment. The undersigned further finds that Code Section § 31-4314, dealing with rescission, is inapplicable to the instant case, where the Policy was not rescinded by Continental, but rather, coverage was denied. The undersigned recommends that Continental's Motion for Summary Judgment should be granted with the effect that the Trustees's [Plaintiff's] claims against Defendant should be dismissed.

V. Review by the District Court

The parties are hereby advised that under the provisions of Local Rule 72.3(b) of the United States District Court for the District of Columbia, any party who objects to the Report and Recommendation must file a written objection thereto with the Clerk of this Court within 10 days of the party's receipt of this Report and Recommendation. The written objections must specifically identify the portion of the report and/or recommendation to which objection is made, and the basis for such objections. The parties are further advised that failure to file timely objections to the findings and recommendations set forth in this report may waive their right of appeal from an order of the District Court that adopts such findings and recommendation. See Thomas v. Arn, 474 U.S. 140, 106 S. Ct. 466, 88 L. Ed. 2d 435 (1985). If this Report and Recommendation is served on the parties by mail, calculation of the time period for filing written objections is as follows: 10 business days (excluding weekends and holidays) plus three calendar days (including weekends and holidays). See CNPq-Conselho National de Desenvolvimento Cientificoe Technologico v. Inter-Trade, Inc., 50 F.3d 56, 58 (D.C.Cir.1995) (per curiam).

NOTES

[1] Goldschmidt, the principal of Goldschmidt, P.C. at the time (Pl.'s Opp'n to Mot. for Summ. J., Decl. of Stanley H. Goldschmidt ¶ 2), was also an insured under the policy. (Def.'s Mem. of P. & A. in Supp. of Mot. for J. on the Pldgs., Decl. of Kelly V. Overman, Ex. A, Lawyers Professional Liability Policy § III.G) (defining "insured.")

[2] Plaintiff objected to defendant's factual statement that the insurance policy at issue was a renewal of a policy first issued for the period of May 1, 2003 to May 1, 2004, but plaintiff provided no alternative statement of fact on this issue to controvert the defendant. (Pl.'s Obj'n to Def.'s Stmt. ¶¶ 18, 20.) Moreover, the defendant alleged the same facts in its counterclaim (Countercl. ¶¶ 34, 36), and the plaintiff admitted them in his reply to the counterclaim. (Reply to Countercl. ¶¶ 34, 36.) Thus, paragraphs 18 and 20 of the defendant's statement of facts will be treated as admitted. See Local Civil Rule 7(h)(1).

[3] Continental attached to its memorandum a copy of the policy that covered May 1, 2005 to May 1, 2006. Ross does not contest the validity of this policy, which covered the malpractice claim against Goldschmidt, P.C. for its representation of RESD.

[4] Section 31-4314 was previously codified as D.C.Code § 35-414.

[5] Ross argues that § I.A conflicts with § 31-4314. (Pl.'s Obj'n at 8 n. 2.) However, as is discussed above, § 31-4314 applies to denials of coverage based on false statements in an application and not a denial based on the exclusion found in the policy's terms.

[1] Continental has styled its Motion as either a Motion for Judgment on the Pleadings or Motion for Summary Judgement. The undersigned notes that Continental supports its Motion with the Declaration of Kelly V. Overman and several exhibits, and Plaintiff's Opposition utilizes the Declaration of Stanley H. Goldschmidt. Accordingly, the trial court should treat Continental's Motion as a motion for summary judgment.

[2] The pagination referenced corresponds to the page numbers assigned under the electronic case filing system.

[3] The references to "Pleadings" are drawn from Defendant's Statement of Material Facts as to Which There is No Genuine Dispute [12-3].

[4] Continental contends that it did not provide a written consent to such assignment, as required by the Policy (Pleadings at ¶ 33) but it has elected not to brief this issue because it "believes this matter can be resolved wholly on the threshold coverage issue. . . ." (Memorandum at 9, n. 1.)

[5] The Hahn case involved a liability insurance company's request for declaratory judgment that it could rescind a policy issued to a law firm based on the firm's failure to give notice of a claim or potential claim prior to the policy being issued.

[6] Notably, the Plaintiff provides no independent support for the contention that Section I.A.3 is ambiguous.

[7] In his brief filed with the Court of Appeals, Goldschmidt admitted that it had erred in "failing to `calendar' the due date for the answer" and by "for[getting] about the answer." 852 A.2d 957 n. 7.

[8] Defendant comments that "[n]o attorney could think that reversal on appeal is ever a sure thing[,][a]nd, even if Mr. Goldschmidt had obtained a reversal, his client still would have had a valid malpractice claim based on the additional attorneys' fees incurred as a result of the default." (Reply at 6.)