Opinion
00 Civ. 2335 (JGK)
March 13, 2001
OPINION AND ORDER
The plaintiff Paul K. Rooney, P.C. has filed this breach of contract action alleging that the defendant Chicago Insurance Company failed to fulfill its obligations under a professional liability insurance policy by refusing to reimburse the plaintiff for expenses the plaintiff incurred in a successful appeal of a sanctions order imposed by another Judge of this Court. The plaintiff first notified the defendant of the sanctions a few days after the district court had imposed them. In response, the defendant advised the plaintiff that the policy did not cover the sanctions and that the plaintiff's failure to give timely notice of a claim when the sanctions motion was made excused the defendant from defending or indemnifying the plaintiff under the policy. After appealing the district court's sanctions order and obtaining a reversal, the plaintiff notified the defendant and requested reimbursement of its appellate expenses. The defendant also denied this request. The plaintiff then brought this lawsuit. The defendant now moves pursuant to Fed.R.Civ. p. 56 for summary judgment. The plaintiff has cross-moved for summary judgment. For the reasons that follow, the defendant's motion for summary judgment is granted and the plaintiff's cross-motion for summary judgment is denied.
I. A.
The standard for granting summary judgment is well established. Summary judgment may not be granted unless "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986); Gallo v. Prudential Residential Servs., Ltd. Partnership, 22 F.3d 1219, 1223 (2d Cir. 1994). In determining whether summary judgment is appropriate, a court must resolve all ambiguities and draw all reasonable inferences against the moving party.See Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (citing United States v. Diebold, Inc., 369 U.S. 654, 655 (1962)); see also Gallo, 22 F.3d at 1223. Summary judgment is improper if there is any evidence in the record from any source from which a reasonable inference could be drawn in favor of the nonmoving party. See Chambers v. TRM Copy Ctrs. Corp., 43 F.3d 29, 37 (2d Cir. 1994). "In considering the motion, the court's responsibility is not to resolve disputed issues of fact but to assess whether there are factual issues to be tried." Knight v. U.S. Fire Ins. Co., 804 F.2d 9, 11 (2d Cir. 1986)
On a motion for summary judgment, once the moving party meets its initial burden of demonstrating the absence of a genuine issue of material fact, the nonmoving party must come forward with specific facts to show there is a factual question that must be resolved at trial. See Fed.R.Civ. p. 56(e). The non-moving party must produce evidence in the record and "may not rely simply on conclusory statements or on contentions that the affidavits supporting the motion are not credible."Ying Jing Gan v. City of New York, 996 F.2d 522, 532 (2d Cir. 1993); see Scotto v. Almenas, 143 F.3d 105, 114-15 (2d Cir. 1998) (collecting cases); Wyler v. United States, 725 F.2d 156, 160 (2d Cir. 1983)
B. 1.
The following facts are undisputed by the parties. The defendant Chicago Insurance Company is an Illinois insurance corporation with its principal place of business in Chicago, Illinois. (Pl.'s Rule 56.1 Stmt. ¶¶ 5-6.) The defendant is authorized to issue professional liability insurance for attorneys and law firms in New York and uses an insurance broker to sell its policies in New York. (Pl.'s Rule 56.1 Stmt. ¶¶ 10-11.) The defendant issued professional liability insurance policy number LWB-3008727-1 (the "Policy") to the plaintiff in New York. (Pl.'s Rule 56.1 Stmt. ¶ 12.) The Policy was first issued for the claims-made period from December 10, 1995 to December 10, 1997. (Def.'s Rule 56.1 Stmt. ¶ 14.) The Policy was renewed for the claims-made period from December 10, 1997 to December 10, 1999. (Def.'s Rule 56.1 Stmt. ¶ 15.)
The Policy names Paul K. Rooney ("Rooney"), an attorney admitted to the New York bar who is the president of, and employed by the plaintiff, as an "insured." (Pl.'s Rule 56.1 Stmt. ¶¶ 3-4, 13.) Pursuant to section I of the Policy, the defendant agreed to:
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 . . . arising out of any negligent act, error, omission, or Personal Injury in the rendering of or failure to render Professional Services by an Insured covered under this policy.
(Ex. A to Declaration of Paul K. Rooney dated Aug. 11, 2000 ("Rooney Decl.") (the "Policy") § I.) The Policy also provides:
The Company shall have the right and duty to defend any suit against the Insured seeking Damages to which this insurance applies even if any of the allegations of the suit are groundless, false or fraudulent.
(Policy § I.)
Rooney represented Schlaifer, Nance Co. ("SNC") in an action filed in February 1990 in the Southern District of New York alleging fraudulent inducement and breach of a licensing agreement against multiple defendants including the Estate of Andy Warhol (the "Estate"). (Def.'s Rule 56.1 Stmt. ¶ 1; Pl.'s Rule 56.1 Stmt. ¶ 26.) In June 1990, the law firm of Powell, Goldstein, Frazer Murphy ("PGFM") replaced Rooney as lead counsel and Rooney became local counsel to SNC in the case. (Pl.'s Rule 56.1 Stmt. ¶ 27.) In June 1995, a jury returned a verdict awarding SNC $63,941.00 in compensatory damages and $3,000,000.00 in punitive damages. (Pl.'s Rule 56.1 Stmt. ¶ 29.) On May 15, 1996, the district court granted the Estate's motion for judgment as a matter of law, which the United States Court of Appeals for the Second Circuit affirmed on July 10, 1997. See Schlaifer Nance Co. v. Estate of Andy Warhol, 927 F. Supp. 650 (S.D.N.Y. 1996), aff'd, 119 F.3d 91 (2d Cir. 1997)
The parties refer interchangeably to the plaintiff Paul K. Rooney, P.C., and Paul K. Rooney, Esq. and there is no difference for purposes of the present motions. The Policy was issued to Paul K. Rooney, P.C., but Paul K. Rooney, Esq. was an insured. The sanctions were imposed on Paul K. Rooney, Esq.
2.
By letter dated October 31, 1997, the Estate sought permission from the district court to seek sanctions against SNC, PGFM, two partners of PGFM, and the plaintiff pursuant to Fed.R.Civ.P. 11 and 26, 28 U.S.C. § 1927 and the court's inherent power. (Def.'s Rule 56.1 Stmt. ¶ 2; Pl.'s Rule 56.1 Stmt. ¶ 31.) In an Order dated November 11, 1997, the district court noted that it would not award sanctions for discovery abuse under Fed.R.Civ.P. 11 because the Estate had not provided the subjects of the motion with an opportunity to comply with the safe harbor provisions of the rule. (P1.'s Rule 56.1 Stmt. ¶ 32; Ex. F to Rooney Decl.) The court also found that it was too late to seek discovery sanctions per se, but allowed the Estate to pursue sanctions on other bases. (Ex. F to Rooney Decl.)
On December 10, 1997, the Estate moved for sanctions against SNC, PGFM, two partners from PGFM, and the plaintiff pursuant to the "old" Fed.R.Civ.P. 11, 28 U.S.C. § 1927, and the district court's inherent power. (Def.'s Rule 56.1 Stmt. ¶ 8; Pl.'s Rule 56.1 Stmt. ¶ 33; Ex. D to Rooney Decl.) The Estate sought sanctions under the version of Rule 11 that existed prior to the December 1, 1993 amendment that created the safe harbor provision of the Rule. The "old Rule 11" was in effect at the time the case had been filed. On May 28, 1998, the district court issued an order directing the lawyers to file affidavits by June 1, 1998 listing the amount of fees charged to their respective clients. (Def.'s Rule 56.1 Stmt. ¶ 12; Pl.'s Rule 56.1 Stmt. ¶ 39; Ex. J to Rooney Decl.) On June 3, 1998, the district court imposed sanctions pursuant to its inherent power to impose sanctions and pursuant to 28 U.S.C. § 1927 in the amount of $400,000.00 jointly and severally against SNC, PGFM, two partners of PGFM, and Rooney. See Schlaifer Nance Co. v. Warhol, 7 F. Supp.2d 364 (1998), rev'd 194 F.3d 323 (2d Cir. 1999).
The district court held that the "old" Rule 11 was not a basis for imposing sanctions. Schlaifer Nance Co., 7 F. Supp.2d at 373-74. The court found that the amended version with its safe harbor should be applied and that no sanctions were appropriate under that version.
To impose sanctions pursuant to its inherent power, the district court was required to find: "(1) the challenged claim was without a colorable basis and (2) the claim was brought in bad faith, i.e., motivated by improper purposes such as harassment or delay." Schlaifer Nance Co., 194 F.3d at 336 (citations omitted). Under 28 U.S.C. § 1927, a court may impose sanctions on any attorney who "so multiplies the proceedings in any case unreasonably and vexatiously." Section 1927 authorizes the imposition of sanctions only where "there is a clear showing of bad faith on the part of the attorney." Schlaifer Nance Co., 194 F.3d at 336 (internal quotation and citation omitted). Thus, bad faith is required before sanctions can be imposed under either the court's inherent power or section 1927 and the only practical difference between the two powers is that sanctions under section 1927 may only be imposed on attorneys or other persons authorized to practice before the courts while sanctions pursuant to the court's inherent power may be imposed on attorneys, parties, or both. Schlaifer Nance Co., 194 F.3d at 336.
In its claim against the Estate, SNC alleged it was fraudulently induced to enter into a licensing agreement with the Estate based on false representations that the Estate owned the copyrights to all of Warhol's works of art. Schlaifer Nance Co., 7 F. Supp.2d at 366. The district court found that SNC's claim of fraudulent inducement was without a colorable basis because SNC and its attorneys knew they could not prove the element of reasonable reliance necessary to sustain a cause of action for fraud. The district court reasoned that SNC could not have reasonably relied on the Estate's representations because SNC and its attorneys knew that the Estate did not own all the copyrights to those works, many of which had fallen into the public domain and the copyrights to certain other works had been granted to others. Schlaifer Nance Co., 7 F. Supp.2d at 366, 375. The district court then concluded that SNC and its attorneys acted in bad faith because their position with respect to reasonable reliance was frivolous and they knew it had no factual basis. Schlaifer Nance Co., 7 F. Supp.2d at 377. The district court also found that SNC and its attorneys acted in bad faith because they pursued the claim in a way that was irrational, vindictive, and excessive. Schlaifer Nance Co., 7 F. Supp.2d at 376-78.
3.
By letter dated June 4, 1998, Rooney advised the defendant's insurance broker of the sanctions and asked it how to proceed. (Pl.'s Rule 56.1 Stmt. ¶ 41; Ex. L to Rooney Decl.) The defendant acknowledged receipt of this letter on June 10., 1998. (Pl.'s Rule 56.1 Stmt. ¶ 43; Ex. M to Rooney Decl.) By letter dated June 29, 1998, the defendant informed Rooney that it was denying coverage on the grounds that the sanctions motion fell outside the scope of the Policy "Coverage" section and did not constitute a "Claim" or seek "Damages" as defined in the Policy, and further that the plaintiff had failed to provide timely notice of a claim. (Def.'s Rule 56.'1 Stmt. ¶ 17; Pl.'s Rule 56.1 Stmt. ¶ 45; Ex. O to Rooney Decl.)
The plaintiff retained the law firm of Weil, Gotshal Manges, L.L.P. to assist it in appealing the sanctions decision to the Second Circuit Court of Appeals. (Pl.'s Rule 56.1 Stmt. ¶ 46.) The Court of Appeals reversed the district court's sanctions order on October 19, 1999. See Schlaifer Nance Co. v. Warhol, 194 F.3d 323 (2d Cir. 1999). The Court of Appeals found that SNC had a reasonable basis to believe it could establish a fraud claim. Schlaifer Nance Co., 194 F.3d at 336-38. The Court of Appeals also concluded that SNC and its attorneys did not act in bad faith because there was "no evidence to suggest that they had utterly no basis for their subjective belief in the merits of their case."Schlaifer Nance Co., 194 F.3d at 340.
On October 22, 1999 and November 5, 1999, the plaintiff requested reimbursement from the defendant for the legal expenses it incurred during the appeal. (Pl.'s Rule 56.1 Stmt. ¶ 48; Ex. P to Rooney Decl.) On January 5, 2000, the defendant informed Rooney that it would not reimburse him for the expenses. (Def.'s Rule 56.1 Stmt. ¶ 19; Pl.'s Rule 56.1 Stmt. ¶ 49; Ex. Q to Rooney Decl.) The plaintiff then commenced this breach of contract action against the defendant seeking to recover the amount of expenses that it incurred in successfully appealing the sanctions order.
II.
The defendant first moves for summary judgment on the ground that it had no duty to defend the plaintiff against the sanctions because they were not imposed for conduct covered by the Policy. The defendant argues that the district court's sanctions order did not require the plaintiff to pay a sum as "Damages" for "Claims," as defined in the Policy, which are the only kind of expenses it is required to indemnify the plaintiff for under the Policy. According to the defendant, there was no "Claim" against the plaintiff as defined in the Policy because the sanctions were not imposed for and could not have been imposed for mere negligence and the sanctions were not Damages because they were a fine or penalty.
A.
This case arises under this Court's diversity jurisdiction pursuant to 28 U.S.C. § 1332 and the parties agree that New York law governs. The Policy requires the insurer to defend the insured against suits seeking "Damages to which this insurance applies" and also requires the insurer to indemnify the insured for certain sums it is obligated to pay as "Damages" for "Claims." (Policy § I.) In New York, the duty of an insurer to defend an insured against claims is broader than its duty to indemnify the insured. See e.g., Seaboard Surety Co. v. Gillette Co., 476 N.E.2d 272, 274-75 (N.Y. 1984); Town of Moreau v. Orkin Exterminating Co., Inc., 568 N.Y.S.2d 466, 468 (App.Div. 199 1). "The duty to defend is measured against the allegations of pleadings but the duty to pay is determined by the actual basis for the insured's liability to a third person." Cowan v. Codelia, No. 98 Civ. 5548, 1999 WL 1029729, at *4 (S.D.N.Y. Nov. 10, 1999) (citing Servidone Constr. Corp. v. Security Ins. Co., 477 N.E.2d 441, 444 (N.Y. 1985)).
However, the Policy and New York law do not require the insurer to defend the insured against all allegations. As the Policy provides, the insurer only has the duty to defend the insured against suits seeking "Damages to which this insurance applies . . . ." (Policy § I.) And under New York law, "[a]n insurer cannot be obliged to defend if there is no legal or factual allegation in the underlying complaint for which the insurer might eventually have to indemnify the insured." Commercial Union Assurance Co. v. Oak Park Marina, Inc., 198 F.3d 55, 59 (2d Cir. 1999) (citations omitted); accord Spoor-Lasher Co., Inc. v. Aetna Casualty and Surety Co., 352 N.E.2d 139, 140 (N.Y. 1976); Tartaglia v. Home Ins. Co., 658 N.Y.S.2d 388, 390 (App.Div. 1997); Town of Moreau, 568 N.Y.S.2d at 468.
Under New York law, the terms of an insurance policy are to be interpreted in light of their natural and reasonable meaning corresponding to the reasonable expectation and purpose of the ordinary businessman. See, e.g., Avondale Indus., Inc. v. Travelers Indemnity Co., 887 F.2d 1200, 1206-07 (2d Cir. 1989) (citations omitted). When there are ambiguities concerning a policy's meaning, the court should construe the policy to embrace coverage. See. e.g., id.
B.
The defendant argues that it had no duty to defend the plaintiff against the sanctions order because those sanctions were not covered by the Policy, which only requires the insurer to indemnify the amounts that the plaintiff is "legally obligated to pay as Damages for Claims . . . ." (Policy § I.) As defined in the Policy, the word Claim:
means a demand for money or services, or the filing of a suit or institution of arbitration proceedings or alternative dispute resolution naming an Insured and alleging a negligent act, error, omission or Personal Injury resulting from the rendering of or failure to render Professional Services. Claim does not include proceedings seeking injunctive or other non-pecuniary relief.
(Policy § VIII.) The gist of the defendant's argument is that the sanctions order was not a Claim because it was imposed for allegedly bad faith conduct by the plaintiff and a Claim must involve an allegation of negligence. Because the sanctions were not a Claim against the plaintiff, the defendant had no duty to indemnify the plaintiff for the sanctions pursuant to the Policy and therefore had no duty to defend the plaintiff against them.
As defined in the Policy, there are three essential elements to a Claim: (1) a demand for money, filing of a suit or institution of proceedings; (2) an allegation of negligence or Personal Injury; (3) resulting from the provision of Professional Services. The sanctions that the district court imposed on Rooney do not meet the second element of a Claim because they did not involve an allegation of a negligent act, error, omission or Personal Injury. There is no allegation in this Case that any Personal Injury was involved and therefore a "Claim" required some allegation of negligence against Rooney.
The Policy defines "Personal Injury" as:
(a) false arrest, detention or imprisonment, wrongful entry or eviction, other invasion of private occupancy; or malicious prosecution; (b) the publication or utterance of libel, slander or other defamatory or disparaging material, or a publication or an utterance in violation of an individual's right of privacy; or (c) injury arising out of an offense occurring in the course of the Named Insured's advertising activities, including but not limited to infringement of copyright, title slogan, patent trademark, trade dress, trade names, service mark or service number.
(Policy § VIII.)
The plaintiff conceded at argument that the definition of "Claim" required negligence and that the District Court had not found negligence. (Tr. at 6-7.) In defining the geographical scope of coverage, the Policy also made it clear that it only covered negligence and personal injury: "The insurance afforded by this policy applies to any negligent act, error, omission, or Personal Injury in the rendering of or failure to render Professional Services taking place anywhere in the world." (Policy § IV.)
The district court imposed sanctions pursuant to 28 U.S.C. § 1927 and its inherent power to impose sanctions because the plaintiff and the other attorneys had acted in bad faith. Bad faith was an essential element for the imposition of sanctions under section 1927 or the Court's inherent power, as the district court acknowledged. Schlaifer Nance Co., 7 F. Supp.2d at 374, 376-77. The sanctions order did not allege that Rooney acted negligently but found that he acted in bad faith by pursuing a non-colorable claim. At that point, when the plaintiff called upon the defendant to defend against the sanctions order by defending the plaintiff on appeal, there was no finding of negligence against Rooney. Moreover, the only two bases for awarding sanctions — section 1927 and the inherent power of the court — both required intentional bad faith and not negligence. Therefore, there was no possibility that Rooney could become legally obligated to pay any sums for negligence based on the district court's sanctions order or any decision by the Second Circuit Court of Appeals upholding the sanctions order. Because under the Policy the defendant was not obligated to indemnify the plaintiff for damages for intentional bad faith conduct as opposed to negligence, the defendant had no duty to defend the plaintiff against allegations that Rooney acted in bad faith.
The defendant had no duty to indemnify the plaintiff under the Policy because the plaintiff was not the subject of a Claim, which required an allegation of negligence of which there was none. Therefore, the defendant had no duty to defend the plaintiff from the sanctions order.
The defendant also argues that it has no duty to defend the plaintiff against the sanctions order because the district court's imposition of sanctions does not qualify as Damages under the Policy. Because the defendant has demonstrated that the plaintiff was not subject to a Claim, it is unnecessary to reach the issue of whether the plaintiff was subject to Damages.
C.
The plaintiff argues that while the sanctions order did not involve allegations of negligent behavior, the plaintiff is nevertheless entitled to reimbursement of its appellate expenses pursuant to a provision contained in the Exclusions section of the Policy, which provides:VII. EXCLUSIONS
This insurance does not apply to Claims:
. . .
B. Arising out of any dishonest, fraudulent, criminal or malicious act, omission or deliberate misrepresentation committed by, at the direction of, or with the knowledge of any Insured; however, the Insured shall be reimbursed for all Claim Expenses which would have been collectible under this policy if it is determined by judgment that the Insured did not commit a fraudulent or dishonest act or Omission . . . .
(Policy § VII (B).) The plaintiff argues that section VII (B) requires reimbursement of expenses that would not otherwise be required under the Policy, if there is a judgment concluding that the plaintiff did not commit a fraudulent or dishonest act. The plaintiff asserts that the Second Circuit Court of Appeals' decision reversing the district court's order entitles it to reimbursement, under section VII (B). The argument is without merit.
Section VII(B) only allows reimbursement for "Claim Expenses" which "would have been collectible under this Policy." "Claim Expenses" is a defined term in the Policy which includes in relevant part "fees, costs, and expenses resulting from the investigation, adjustment, defense and appeal of a Claim, suit or proceeding arising in connection therewith." By definition, the costs of the appeal of the sanctions order did not arise from the appeal of a Claim as that term is defined in the Policy because the sanctions order did not involve any allegation of negligence and therefore was not a Claim. Therefore, there were no "Claim Expenses" to be reimbursed.
The entire definition of "Claim Expenses" is as follows:
(a) Fees charged by an attorney(s), arbitrator(s) or mediator(s) designated by the Company and all other fees, costs, and expenses resulting from the investigation, adjustment, defense and appeal of a Claim, suit or proceeding arising in connection therewith, if incurred by the Company, or by the Insured with written consent of the Company, but does not include salary charges or expenses of regular employees or officials of the Company, or fees and expenses of independent adjustors;
(b) All costs taxed against the Insured in suits or proceedings and all interest on the entire amount of any judgment therein which accrues after entry of the judgment and before the Company has paid or tendered or deposited, whether in court or otherwise, but only as respects that part of the judgment which does not exceed the limit of the Company's liability thereof; and
(c) Premiums on appeal bonds and premiums on bonds to release attachments in such suits, but not for bond amounts in excess of the applicable limit of liability of this policy. The Company shall have no obligation to pay for or furnish any bond.
(Policy § VIII.) There is no issue in this case over items (b) and (c) because there is no claim for costs taxed against the insured or any bond premium. In any event, as explained below, any such expenses would not have been collectible under the Policy.
Moreover, the provision of section VII(B) that removes that exclusion for a favorable judgment only imposes an obligation on the insurance company to pay for expenses "which would have been collectible under this Policy." Because there was never an obligation to defend the plaintiff against the sanctions motion, there were never any expenses that could have been collectible under the Policy. The insurance company never had an obligation to hire an attorney for the plaintiff or to expend any money on the investigation, adjustment, or defense of the sanctions order. Thus, even though the Second Circuit Court of Appeals reversed the sanctions order, the plaintiff is not entitled to reimbursement of its appellate expenses under section VII(B) because none of those expenses were "Claim Expenses" and none of those expenses "would have been collectible under the Policy."
The plaintiff argues that the exception to the exclusion in section VII(B) actually creates a new category of coverage under the Policy. The plaintiff argues that the phrase "would have been collectible" only refers to the different categories of expenses enumerated in the definition of Claim Expenses (Policy § VIII), and does not mean that expenses must arise out of the insurer's duty to defend under the Policy to be reimbursable. The plaintiff contends that section VII(B) requires reimbursement of expenses if it is exonerated of fraud or dishonest behavior even for expenses associated with claims that are not covered by the Policy. But even the plaintiff's strained reading of section VII(B) would not result in reimbursement of its appellate expenses because, as explained above, there is no category of "Claim Expenses" that includes the expenses for which the plaintiff is seeking reimbursement.
In any event the plaintiff's reading of section VII(B) is unreasonable. Under the plaintiff's interpretation, section VII(B) is completely ungrounded in the Policy and could be read to encompass fraud or criminal acts with no relation to an allegation of a negligent act in the rendering of professional services. These are limitations found in the provisions of the Policy defining coverage, the policy territory, and the definition of Claim. The plaintiff's interpretation of section VII(B) would transform a professional liability policy covering claims of negligence for professional service into a policy requiring reimbursement of all expenses incurred by an insured in defending any allegation of fraudulent or criminal activity as long as the insured eventually defeated the allegations.
A policy should not be read in a way to extend coverage unreasonably.See. e.g., State of New York v. Amro Realty Corp., 936 F.2d 1420, 1428 (2d Cir. 1991) ("we decline to obligate an insurer to extend coverage based on a reading of the complaint that is linguistically conceivable but tortured and unreasonable."); Morales v. Allcity Ins. Co., 713 N.Y.S.2d 227, 228 (App.Div. 2000); State Farm Mut. Auto. Ins. Co. v. Bentley, 691 N.Y.S.2d 603, 604 (App.Div. 1999). This is consistent with the principle of New York law that contracts are to be given their reasonable interpretation and are not to be construed in a strained or tortuous fashion. See. e.g., Cooper v. Gottlieb, No. 95 Civ. 10543, 2000 WL 1277593, at *5 (S.D.N.Y. Sept. 8, 2000); Compania Financiera Ecuatoriana de Desarollo v. Chase Manhattan Bank, No. 97 Civ. 5724, 1998 WL 74299, at *4 (S.D.N.Y.), aff'd, 165 F.3d 13 (2d Cir. 1998). The only reasonable interpretation of section VII(B) is that it is an exclusion under the Policy for certain dishonest, fraudulent, criminal, or malicious acts or omissions. If the insurance company does not defend the insured and the insured later obtains a judgment exonerating it of fraud, the insurer would then be required to pay Claim Expenses as defined in the Policy that would have otherwise been collectible under the Policy. However, section VII(B) does not require reimbursement for expenses that do not qualify as Claim Expenses and would not otherwise be collectible under the Policy simply because the insured has been exonerated of wrongdoing. The plaintiff's interpretation of section VII(B) leads to an unreasonable extension of coverage. Thus, the plaintiff's interpretation of section VII(B) must be rejected.
The defendant did not disclaim coverage in this case based on section VII (B).
The plaintiff's argument that section VII(B) of the Policy requires reimbursement for its appellate expenses fails because those expenses were not "Claim Expenses" and were not collectible under the Policy, and section VII(B) does not create a new category of coverage. Because the defendant had no duty to defend the plaintiff against the sanctions order, and the plaintiff is not entitled to reimbursement under section VII(B) of the Policy, the defendant has met its obligations under the Policy and its motion for summary judgment dismissing the plaintiff's breach of contract action must be granted, and the plaintiff's motion for summary judgment must be denied.
III.
The defendant also argues that even if the plaintiff had a Claim under the Policy, summary judgment should be granted because the plaintiff did not give timely notice of a Claim. The parties do not dispute the date when the plaintiff gave the defendant notice of the sanctions order but dispute the date at which the plaintiff was required to give notice to meet its obligations under the Policy and New York law.
The Policy contains both notice of occurrence and notice of claim provisions. See, e.g., American Ins. Co. v. Fairchild Indus., Inc., 56 F.3d 435, 437-38 (2d Cir. 1995) (describing the distinction between these clauses). The notice of occurrence provision provides:
Upon the Insured becoming aware of any negligent act, error, omission or Personal Injury in the rendering of or failure to render Professional Services which could reasonably be expected to be the basis of a Claim covered hereby, written notice shall be given by the Insured . . . together with the fullest information obtainable . . . .
(Policy § IX.B.) The notice of claim provision provides:
If Claim is made or suit is brought against the Insured, the Insured or its representative shall immediately forward to the Company every demand, notice, summons or other process received by the Insured . . . .
(Policy § IX.B.)
The plaintiff argues that the sanctions order was a claim because it was a demand for money while the defendant argues that any demand for money that could be considered a claim arose when the notice of motion for sanctions was filed rather than when the sanctions were actually imposed. A "Claim" as defined in the Policy requires a "demand for money or services or the filing of suit or institution of arbitration proceedings or alternative dispute resolution naming an Insured." Both parties agree that there was a sufficient demand for money to constitute a claim at some point and only disagree as to the timing of when that demand for money arose. Thus, the notice of claim provision applies and required the plaintiff to give immediate notice once the demand for money was made.
Only the timing of the first element of a Claim as defined in the Policy is disputed here, namely, whether a demand for money arose when the notice of motion was filed or when the sanctions order was entered. This dispute is independent of the issue of whether the allegations against the plaintiff met all three elements of the definition of a Claim. For the reasons explained above, the defendant has shown that the plaintiff is not entitled to recover its appellate expenses because there was never any duty to defend against the allegations of intentional bad faith conduct and there was no possibility that the plaintiff would be required to pay any sums for negligence, which is the first element of a Claim as defined by the Policy. Neither party disputes that the allegations against Rooney satisfied the third element of a claim — that Rooney's actions result "from the rendering of or failure to render Professional Services."
Under New York law, the failure of the insured to provide timely notice of a claim excuses the insurer from its obligations to defend or indemnify the insured. See e.g., American Ins. Co., 56 F.3d at 438; State of New York v. Blank, 27 F.3d 783, 793-94 (2d Cir. 1994). The insurer is not required to demonstrate that it was prejudiced by the lack of notice. See, e.g., Blank, 27 F.3d at 797.
The plaintiff cites Stone Webster Mgmt. Consultants, Inc. v. Travelers Indemnity Co., No. 94 Civ. 6619, 1996 WL 180025, at *19 (S.D.N.Y. April 16, 1996) for the proposition that the insurer must demonstrate prejudice from the lack of timely notice to be excused from its obligations under a policy. But this case only held that a corporate parent was not obligated to monitor its non-insured subsidiaries for notice of pollutants in order to recover under its insurance policy. The court mentioned that one reason for its decision not to impose such an obligation on the corporate parent was that the insurer was not prejudiced by the time of notice. The court did not hold that New York law generally requires insurers to demonstrate prejudice for the notice requirement to apply, and New York law is to the contrary.
It is undisputed that while the sanctions motion was filed on December 10, 1997 and the Estate raised the issue of sanctions as early as October 1997, the plaintiff did not give the defendant notice of a claim until June 4, 1998. The plaintiff argues that it was excused from giving notice until June 4, 1998 because there was no demand for money until the district court entered its sanctions order on June 3, 1998. The argument is without merit. It was the sanctions motion which was a demand that the plaintiff and the other subjects of the motion pay money for their sanctionable conduct. If the sanctions order is a demand for money, as the plaintiff argues, then the notice of motion for sanctions was also a demand for money requiring notice.
The Policy and well-established New York law demonstrate that it was the motion for sanctions rather than the sanctions order that triggered any notice of claim requirement. The notice of claim provision requires the insured immediately to forward to the insurer every demand, notice, summons or other process and does not refer to the forwarding of judgments. (Policy § IX(B).) Moreover, under New York law, the institution of proceedings rather than an actual judgment triggers a notice of claim provision. See, e.g., Blank, 27 F.3d at 795-97 (holding that a successive insurer could not wait until judgment was entered to give notice of a claim to a previous insurer); Chicago Ins. Co. v. Halcond, 49 F. Supp.2d 312, 319-20 (S.D.N.Y. 1999) (holding that notice of claim provision requiring notice "as soon as practicable" obligated insured to give notice when it was served with process); Evanston Ins. Co. v. GAB Business Serv., Inc., 521 N.Y.S.2d 692, 695 (App.Div. 1987);American Ins. Co., 56 F.3d at 439-40.
In this case, the Estate actually initiated a formal court proceeding by filing a notice of motion arguing that sanctions should be imposed against the plaintiff and others. The notice of motion rather than the judgment triggered the notice of claim provision and required the plaintiff immediately to give the defendant notice.
The plaintiff's failure to give notice is not excused under New York law. The plaintiff argues that notice was excused because it had a reasonable basis for failing to give notice since it did not believe that sanctions would be imposed on Rooney. However, the plaintiff's argument is really addressed to a possible excuse for a late notice of occurrence and cannot excuse the plaintiff's failure to provide a timely notice of claim when the motion for sanctions was filed. New York law treats excuses by the insured for failing to give notice differently depending on whether the notice is required by a notice of occurrence provision or a notice of claim provision. See. e.g., American Ins. Co., 56 F.3d at 439; Blank, 27 F.3d at 795-97. Under a notice of occurrence provision, notice can be excused if the insured has a reasonable basis for a belief that no claim will be asserted against it. See. e.g., SSBSS Realty Corp. v. Public Serv. Mut. Ins. Co., 677 N.Y.S.2d 136, 137-38 (App.Div. 1998)
However, there is no valid excuse under New York law for failing to give reasonable notice when there is an actual claim that triggers a notice of claim provision requiring immediate notice. See, e.g., American Ins. Co., 56 F.3d at 439; Blank, 27 F.3d at 795; City of Utica, New York v. Genesee Mgmt., Inc., 934 F. Supp. 510, 520 (N.D.N.Y. 1996). As the Second Circuit Court of Appeals explained:
The cases excusing an insured's failure to notify an insurer of an occurrence based on a good faith belief of nonliability are supported by the rationale that if insureds were required to notify insurers of every incident that poses even a remote possibility of liability, insurers would soon be swamped with notice of minor incidents that pose little danger of resulting even in an action by the injured party against the insured, let alone a claim by the insured against the insurer. Once there is a reasonable possibility that the policy will be involved, however, this rationale is no longer applicable. It is true that the insurer may believe in good-faith that it would prevail in court if the insured claims coverage. This belief, however, would no doubt be based upon factual investigation of the occurrence and legal analysis of the claim. The opportunity to conduct such investigation and research is the very reason for the notification requirement. Thus, a good faith belief by an insured that it was not covered under the policy would not excuse unreasonable delay in failing to notify its insurer of a claim.Blanks, 27 F.3d at 795-96 (internal citation and quotations omitted).
While the plaintiff maintains that it believed there was no claim because it thought that it had a convincing response to the allegations made in the sanctions motion, notice under a notice of claim provision is required even if the underlying claim is meritless or even sanctionable.See, e.g., American Ins. Co., 56 F.3d at 439.
The plaintiff also argues that the notice of motion was not a claim because the motion only mentioned Rooney generally and did not specifically describe any wrongdoing on his part. However, the Estate's papers in support of its motion contain allegations of acts of wrongdoing directed at all of SNC's attorneys and sought sanctions against Rooney. (Ex. I to Rooney Decl.) The allegations were made with enough specificity so that Rooney filed an affidavit detailing his opposition to the motion for sanctions. (Ex. G to Rooney Decl.) The plaintiff cannot now argue that the Estate's allegations were so vague that it was excused from giving notice.
The Policy's notice of claim provision requires the insured to forward "immediately" any "demand, notice, summons or other process" to the insurer. (Policy § IX.B.) The plaintiff did not immediately forward the notice of motion for sanctions to the defendant. Thus, it failed to meet its obligation under the notice of claim provision. Moreover, the plaintiff's delay in giving notice was unreasonable under New York law. The plaintiff gave notice of a claim more than five months after the notice of motion for sanctions. In New York, delays of one to two months have been held to be unreasonable as a matter of law. See. e.g., American Ins. Co., 56 F.3d at 440 (noting that delays of one or two months are routinely held to be "unreasonable"); Blank, 27 F.3d at 796-97 (noting that 29 day delay can be unreasonable). The plaintiff's delay in giving notice violated its obligations under the notice of claim provision and was unreasonable as a matter of law.
The plaintiff argues that the notice requirement does not apply because the sanctions arose out of allegedly fraudulent and dishonest behavior and the insured is only required to give notice upon "becoming aware of any negligent act, error, or omission or Personal Injury . . . ." (Policy § IX(B).) The argument is thoroughly misplaced. The plaintiff's citation is to the notice of occurrence provision when it is the notice of a claim that is relevant to this case. The notice of claim provision clearly requires notice once any claim is made. (Policy § IX(B)); see also American Ins. Co., 56 F.3d at 439; Blank, 27 F.3d at 795; City of Utica, New York, 934 F. Supp. at 520.
To the extent that the plaintiff emphasizes that there was no allegation of negligence it reinforces the independent conclusion that there was never any coverage under the Policy for the allegations involved in the sanctions order and thus no duty by the insurer to defend against the sanctions order.
The plaintiff's argument that the defendant waived its right to notice because the defendant would have denied coverage even if it had received notice is also without merit. To establish a waiver, there must be "direct or circumstantial proof that the insurer intended to abandon the defense." Albert J. Schiff Assoc., Inc. v. Flack, 417 N.E.2d 84, 87 (N.Y. 1980) (citation omitted). There is no evidence that the defendant intended to abandon its notice defense. In fact, it relied on that defense in its letter denying coverage. (Ex. O to Rooney Decl.) When the defendant was advised of the plaintiff's demand for a defense it promptly raised the defense of lack of timely notice. The notice requirement was not waived simply because the defendant denied coverage both on the basis that the request for coverage was untimely and, in addition, because it had no merit.
The plaintiff cites State Farm Ins. Co. v. Domotor, 697 N.Y.S.2d 348, 349 (App.Div. 1999) but that case only held that after an insurance company repudiates coverage it cannot thereafter require compliance with the condition precedent in the policy that the insured submit a timely written proof of loss. In this case, the insurance company provided all the grounds for denying coverage at the time it declined to defend the plaintiff.
Thus, the defendant had no obligation to defend or indemnify the plaintiff for its appeal of a sanctions order because the plaintiff failed to give timely notice of a claim. For this additional reason, the defendant's motion for summary judgment dismissing the plaintiff's breach of contract action must be granted and the plaintiff's cross-motion for summary judgment must be denied.
The defendant also argues that the expenses the plaintiff incurred in its appeal of the sanctions order are not insurable because they are precluded as a matter of public policy. Because the plaintiff is not entitled to reimbursement for these expenses under the Policy, it is unnecessary to decide that issue.
CONCLUSION
For the reasons explained above, the defendant's motion for summary judgment is granted. The plaintiff's cross-motion for summary judgment is denied. The plaintiff's claims are dismissed with prejudice. The Clerk of the Court is directed to enter judgment dismissing the Complaint and closing this case.SO ORDERED.