Opinion
02 Civ. 2195 (RWS)
October 24, 2002
Rivkin Radler LLP, Attorney for Plaintiff, By: William M. Savino, Esq., Stephen J. Smirti, JR., Esq., M. Paul Gorfinkel, Esq., Of Counsel
Proskauer Rose LLP, Attorney for Defendants, By: John Gross, Esq. Sari Rafiy, Esq., Of Counsel
OPINION
__________Plaintiff Admiral Insurance Company ("Admiral") has moved pursuant to Rule 12(c) of the Federal Rules of Civil Procedure for judgment (On the pleadings, and defendants Weitz Luxenberg, Perry Weitz and Robert Gordon (the "WL Defendants") have cross-moved for partial summary judgment pursuant to Fed.R.Civ.P. 56.
For the following reasons, Admiral's motion is granted in part and denied in part, and the WL Defendants' motion is granted.
Parties
Admiral is an insurance company incorporated in the State of Delaware and with its principal place of business in the State of New Jersey.
Weitz Luxenberg P.C. ("WL") is a law firm and professional corporation organized under the laws of the State of New York with its principal place of business in New York, New York.
Perry Weitz is an attorney and senior member of WL and is domiciled in the State of New York.
Robert Gordon is an attorney and member of WL and is domiciled in the State of New York.
The Policy
On February 23, 2001, Admiral issued the Policy to the WL Defendants for the policy period December 17, 2000 through December 17, 2001. The Policy provides that Admiral will defend the WL Defendants (i.e. pay claims expense) in any action where a claim is made against WL for any alleged act rendered by the WL Defendants as lawyers.
The Policy provides that it "shall pay on behalf of the Insured all . . . Claims Expenses that the Insured shall become legally obligated to pay . . . for any Wrongful Act." A "Wrongful Act" is defined as "any actual or alleged act, omission or Personal Injury arising out of Professional Services rendered by an Insured or by any person for whose act or omission the Insured is legally responsible." The Policy further defines "Professional Services" as services "(1) rendered by [Weitz Luxenberg, P.C.] solely as a lawyer, mediator, arbitrator or notary public for others . . . A "Claim" is defined as any "written demand for monetary or nonmonetary relief." "Claims Expenses" are defined as "reasonable and necessary fees, costs, and expenses . . . resulting solely from the investigation, adjustment, defense and appeal of a Claim against the Insured . . .
Finally, the Policy provides that Admiral is not required to indemnify the WL Defendants for a judgment arising out of a dishonest, fraudulent, criminal or malicious act. Nevertheless, the insurer is required to provide a defense for such a claim. This provision appears in the "Exclusions" section of the Policy:
The Insurer shall not be liable to make any payment for Damages or Claims Expense in connection with any Claim made against an Insured:
A. Based upon, arising out of, directly or indirectly resulting from or in consequence of, or in any way involving a dishonest, fraudulent, criminal, or malicious act or omission committed by or at the discretion of, or ratified by the Insured; provided, however, the Insurer will provide a defense for any such Claims, without any liability by the Insurer to pay such sums that any Insured shall become legally obligated to pay as Damages . . .The Underlying Action
On January 10, 2001, Holdings, the successor to former asbestos manufacturer GAF, filed the underlying action in the United States District Court for the Southern District of New York against the WL Defendants, among others (the "Underlying Action")
Pursuant to the terms of the Policy at issue here, by letter dated January 18, 2001, the WL Defendants notified Admiral of the Underlying Action through Admiral's claims handler, Monitor Liability Managers, Inc.
On January 31, 2001, Anthony P. Andreano, Esq., the Claims Attorney acting for Admiral, acknowledged that on the basis of "the four corners of the pleading" Admiral has a duty to defend the WL Defendants. In that letter, Admiral also expressly "reserve [d] the right to modify or withdraw our coverage position and to raise additional Policy provisions as may be appropriate."
Soon thereafter, the defendants in the Underlying Action, including the WL Defendants, collectively moved to dismiss each cause of action in Holdings' complaint. Admiral paid WL's attorney's fees and costs in their entirety in connection with this first motion to dismiss.
Holdings withdrew the complaint and on April 30, 2001 filed the First Amended Complaint (the "FAC"). The FAC alleged that the WL Defendants had:
• Maliciously interfered with and conspired to interfere with Holdings' right to petition Congress;
• Tortiously interfered with Holdings' contracts and economic advantage;
• Violated the antitrust laws;
• Violated, and conspired to violate, the Racketeer Influenced and Corrupt Organizations Act ("RICO");
•Breached an alleged contract between WL and Holdings; and
•Fraudulently induced GAF to pay amounts owed under a settlement agreement between GAF and the Center for Claims Resolution ("CCR")
On June 4, 2001, the defendants again moved to dismiss all causes of action in the complaint. Admiral paid the WL Defendants' attorney's fees and costs in their entirely in connection with this second motion to dismiss.
In a Second Amended Complaint, filed on January 25, 2002, Holdings repled certain of its state law claims, asserted a cause of action against Baron Budd for common law fraud, and amended the allegations with regard to its witness tampering theory. Defendants moved to dismiss the Second Amended Complaint, and Weitz Luxenberg moved to strike certain allegations in the complaint.
On March 18, 2002, however, Holdings filed a Third Amended Complaint (the "TAC") in which it added a common law fraud claim against Weitz Luxenberg and amended two paragraphs of its mail and wire fraud allegations against the Baron Budd defendants to identify five cases and asserted on information and belief that "the Baron Budd Memorandum was used to create false product identification and testimony in the deposition of each of the plaintiff's who were deposed in these actions." Holdings also sought the Court's permission to file the Third Amended Complaint after it had already filed it.
At a hearing on April 17, 2002, leave to file the Third Amended Complaint was granted, and the Defendants' motions to dismiss the Second Amended Complaint and strike certain allegations were denied inasmuch as they no longer targeted the current complaint. The Defendants were then given leave to renew their motions with regard to the TAC.
On July 17, 2002, an opinion issued, dismissing all but Count II (tortious interference with economic advantage against all defendants); Count III (tortious interference with contract against all defendants); Count V (RICO claim against Baron Budd); Count VI (RICO claims against Baron and Budd); Count IX (breach of contract against Weitz Luxenberg); Count X (breach of contract against Ness Motley); and Count XII (common law fraud claim against the Baron Budd defendants). Holdings was granted a limited right to replead its Count XIII (common law fraud against the Weitz Luxenberg defendants). Accordingly, a Fourth Amended Complaint (the "FAC") was filed on August 21, 2002, and the Weitz Luxenberg defendants filed a motion to dismiss what is the amended Count XIII in the FAC on October 4, 2002. That motion is set for oral argument on October 30, 2002.
The Instant Proceeding
By letter dated March 19, 2002, Admiral disclaimed its obligation to defend and indemnify the WL defendants in the Underlying Action. On the same date, it also filed this action seeking a declaratory judgment regarding its obligation to the WL Defendants under the Policy.
On May 7, 2002, the WL Defendants answered Admiral's complaint and filed counterclaims seeking a declaration that Admiral has a duty to defend and indemnify WL in the Underlying Action and seeking a judgment in the amount of WL's incurred attorney's fees and defense costs.
The motion was heard and considered fully submitted on September 4, 2002.
Discussion 1. Standard of Review
"Judgment on the pleadings is appropriate if, from the pleadings, the moving party is entitled to judgment as a matter of law." Burns Int'l Security Services, Inc. v. International Union, United Plant Guard Workers of America, 47 F.3d 14, 16 (2d Cir. 1995). "In deciding a Rule 12(c) motion, we apply the same standard as that applicable to a motion under Rule 12(b)(6), accepting the allegations contained in the complaint as true and drawing all reasonable inferences in favor of the nonmoving party." Burnette v. Carothers, 192 F.3d 52, 56 (2d Cir. 1999); see also DePalma v. Realty 10 Corn., No. 01 Civ. 446, 2002 WL 461647, at *2 (S.D.N.Y. March 25, 2002)
II. Admiral Has the Duty to Defend the Claim
Courts in New York have held that an insurer's duty to defend and to pay defense costs under liability insurance policies must be construed broadly in favor of the policyholder. Further, it is broader than the duty to indemnify. Town of Massena v. Healthcare Underwriters Mutual Ins. Co., — N.E.2d — , 2002 WL 31056039 (N.Y. Sept. 17, 2002) (citing Fitzpatrick v. American Honda Motor Co., 78 N.Y.2d 61, 65 (1991)). "[A]n insurer's duty to defend arises whenever the allegations in a complaint state a cause of action that gives rise to a reasonable possibility of recovery under the policy." Id. (citing Fitzpatrick, 78 N.Y.2d at 65). If the allegations of the complaint are even potentially within the language of the insurance policy, there is a duty to defend.Id. (citing Technicon Electronics Corp. v American Home Assur. Co., 74 N.Y.2d 66, 73 (1989); Ruder Finn, Inc. v. Seaboard Sur. Co., 52 N.Y.2d 663, 669-670 (1981)). "If any of the claims against [an] insured arguably arise from covered events, the insurer is required to defend the entire action." Id. (EMU quoting Frontier Insulation Contrs. v. Merchants Mut. Ins. Co., 91 N.Y.2d 169, 175 (1997)). Indeed, "[t]he duty to defend arises whenever the allegations in the complaint against the insured fall within the scope of the risks undertaken by the insurer * * * [and, it is immaterial] that the complaint against the insured asserts additional claims which fall outside the policy's general coverage or within its exclusionary provisions." Id. (quoting Seaboard Surety Co. v. Gillette Co., 64 N.Y.2d 304, 310 (1984) (citations omitted)). The merits of the complaint are irrelevant. Id.
The parties agree that Admiral's duty to defend is determined by matching the allegations in the most recent complaint against the Policy. Admiral's only contentions are that the allegations are not covered because they are not "professional services" as defined in the Policy and are not done "solely" in the defendants' capacities as lawyers.
Admiral first argues that "acts of extortion, backdating of documents and the like can never constitute "Professional Services.'" Pl.'s Reply at 1 (emphasis in original). To support this argument, Admiral cites the Code of Professional Responsibility and a number of cases where similar actions have led to disbarment of attorneys. E.g., Matter of Yao, 250 A.D.2d 221, 223, 680 N.Y.S.2d 546, 548 (1st Dep't 1998) ("The appropriate sanction for an attorney who has committed extortion is disbarment."); Matter of Dries, 159 A.D.2d 198, 559 N.Y.S.2d 357 (2d Dep't 1990) (attorney was disbarred where he, inter alia, postdated a document that had been subscribed in 1986 so as to make it appear that it was subscribed in 1987). If the question before this Court was whether the allegations by Holdings, if proven, could lead to professional discipline of the WL Defendants, such cases would be persuasive. However, the pertinent question is whether the Policy considers such actions — however they might be viewed by ethics panels and disciplining courts — to be "Professional Services." This determination must be based solely on the language of the Policy.
In defining "Professional Services, " the Policy does not explicitly state that criminal, fraudulent, or dishonest acts can not be considered professional services. Construing the Policy in favor of the policyholder, as this Court is required to do, this omission suggests that criminal, fraudulent and dishonest acts may be considered Professional Services. In addition, the Exclusions section states that Admiral must defend against claims of such acts, even though it need not pay damages for them. Because the Policy does not explicitly define Professional Services to exclude such acts, and because the exclusions section implies that coverage applies to such acts, the Policy must consider "dishonest, fraudulent, criminal or malicious acts" that are performed solely as an attorney to be Professional Services. If it did not, such a provision in the Exclusions section would be superfluous and unnecessary.
The parties thus apparently contracted out of the common law rule that, as stated by Admiral in its opening memorandum, there is no duty to defend claims that an insurer will not eventually have to indemnify.E.g., Commercial Union Assurance Co. v. Oak Park Marina, 198 F.3d 55, 59 (2d Cir. 1999); Spoor-Lasher Co. v. Aetna Cas. Surety Co., 39 N.Y.2d 875 (1976).
In response to the "Exclusions" argument, Admiral states that coverage cannot be created from an Exclusion. To bolster this argument, Admiral relies in part on Rooney v. Chicago Ins. Co., No. 00 Civ. 2335, 2001 U.S. Dist. LEXIS 2796 (S.D.N.Y. March 16, 2001) There, the court rejected the plaintiff insured's arguments that an exclusion "require[d] reimbursement of expenses that would not otherwise be required under the Policy." Id. at * 19. The Court had already determined that the policy did not require reimbursement of the expenses to defend or establish a duty to indemnify the plaintiff. Id. This situation differs because it has not been determined that the Policy excludes coverage of the Underlying Action, and thus the argument above does not attempt to create coverage out of an exclusion; it merely reads two provisions of the Policy together to determine the correct interpretation of what is covered. As a result, the Policy must define "Professional Services" more broadly than Admiral suggests.
While the definition of Professional Services must be broader according to the language of the policy, that does not mean that the policy stretches to the hyperbolic lengths that Admiral posits. Clearly, an act of fraud in an attorney's purely personal dealings are not Professional Services and would not be covered. Similarly, the act of murdering a key witness is far removed from the undoubtedly lawyer-like activities of arranging settlements and preparing client affidavits.
Admiral also argues that the WL defendants did not perform the acts alleged in the Complaint solely in their roles as attorneys. Instead, Admiral states that any acts performed solely as attorneys were merely "setting the stage" for other acts that were not performed solely as attorneys. E.g., Albert J. Schiff Assocs. v. Flack, 51 N.Y.2d 692, 435 N.Y.S.2d 972 (1980) (theft of trade secret that is related to the insured's business "sets the stage" for the rendering of professional services, but is not a professional service); Propis v. Fireman's Fund Ins. Co., 66 N.Y.2d 828, 498 N.Y.S.2d 363 (1985) (misconduct in hiring and discharging an employee "set the stage" for performing professional services, but are not professional services). Admiral is correct that the allegations of extortionate threats and witness tampering are too far removed from performing professional services to qualify as such. It is less persuasive with regard to the other allegations, however. The other allegations, although luridly written, boil down to complaints about the WL Defendants' filing amended complaints with the wrong date on them, negotiating settlements, and advising their clients whether they should file suit despite the settlement. These acts are not ancillary to fraud, as Admiral alleges. Instead, it is the fraud that is ancillary to the professional services rendered. As discussed above, the fact that the services are alleged to be tainted with fraud does not render them not Professional Services when construing the Policy in favor of the policyholder.
Because Admiral has the duty to defend the WL Defendants against several of the allegations in the Complaint, it has a duty to defend against the entire complaint.
III. Restitution Need Not Be Paid
The Admiral policy provides that Admiral "shall pay on behalf of the Insured all Damages and Claims Expenses that the Insured shall become legally obligated to pay."
New York law recognizes that the word "Damages" does not include a claim for restitution of money that was wrongfully obtained by an insured. Reliance Group Holdings v. National Union Fire Ins. Co., 188 A.D.2d 47, 594 N.Y.S.2d 20, 24 (1st Dep't 1993); see also DeBruyne v. Clay, No. 94 Civ. 4704, 1999 U.S. Dist. LEXIS 4704 (S.D.N.Y. Oct. 1, 1999) ("[O]ne may not insure against. the orders of a court sitting in equity."); Hatfield v. 96-100 Prince Street, No. 94 Civ. 3917, 1997 U.S. Dist. LEXIS 3804 (S.D.N.Y. April 1, 1997) ("Under New York public policy, one may not insure against the risk of being ordered to return funds that have been wrongfully acquired; such awards are not "damages' within the purview of insurance policies.")
As a result, if Holdings is successful in its pursuit of $200 million in restitution from the WL defendants, Admiral is not required to indemnify it on that claim.
IV. Attorney's Fees
A policyholder may recover attorney's fees incurred in successfully defending itself against an insurer's attempt to free itself from its obligations under an insurance policy. E.g., National Grange Mut. Ins. Co. v. UDAR Corp., N.V., No. 98 Civ. 4650, 2002 WL 373240, at *1 (S.D.N.Y. March 8, 2002) (citing Mighty Midgets, Inc. v. Centennial Ins. Co., 47 N.Y.2d 12, 21 (1979); Employers Mut. Cas. Co. v. Key Pharms., 75 F.3d 815, 824 (2d Cir. 1996)). Further, where a policyholder sued by its insurer files a counterclaim for coverage, the successful policyholder is not required to pro-rate its costs and expenses between the defense of the declaratory judgment and the counterclaim. American Motorists Ins. Co. v. GTE Corp., 99 Civ. 512, 2000 WL 1459813, at *6 (S.D.N.Y. Sept. 29, 2000)
Because the WL Defendants were successful on the primary thrust of this motion regarding Admiral's duty to defend, Admiral is ordered to pay all of the WL Defendant's reasonable costs and expenses, including attorney's fees, in this action.
Conclusion
Admiral's motion is denied in part and granted in part, and the WL Defendant's cross-motion is granted. An application for fees and costs shall be submitted to the Court within thirty (30) days of the issuance of this opinion unless further extension is sought and granted.
An insurer that assumes the defense of an insured under a reservation of rights may withdraw from the defense if it determines that coverage is unavailable. E.g., Utica Mutual Ins. Co. v. 215 West 91st Street Corp., 283 A.D.2d 421, 724 N.Y.S.2d 758 (2d Dep't 2001); Brooklyn Hosp. Center v. Centennial Ins. Co., 258 A.D.2d 491, 685 N.Y.S.2d 267 (2d Dep't 1999)