Summary
In Fuchsberg Fuchsberg v. Chicago Insurance Co., 2001 WL 484013 at *7 (S.D.N.Y. May 7, 2001), the court concluded that a prior acts provision, with language identical to that of the prior acts provision in this case, did not preclude coverage under a claims made policy where an associate in a law firm did not inform the partners in the firm that, due to his negligence, a medical malpractice case had been dismissed before the inception date of the policy.
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00 CIV. 3118 (DLC)
May 7, 2001
For Plaintiffs: Jeffrey G. Stark, Meyer, Suozzi, English Klein, P.C. Mineola, NY.
For Defendant Chicago Insurance Company: Kevin F. Cavaliere, Steinberg Cavaliere, LLP, White Plains, NY.
OPINION AND ORDER
Defendant Chicago Insurance Company ("Chicago") removed this action, filed in state court on March 28, 2000, on the basis of diversity of citizenship. Plaintiffs seek a declaratory judgment that Chicago is obligated to defend and indemnify Fuchsberg Fuchsberg ("Fuchsberg"), a law firm, and each of its partners, pursuant to a "claims-made" policy of legal malpractice insurance. Fuchsberg seeks insurance coverage to defend against a lawsuit filed by a former client, whose medical malpractice action was marked off the state court trial calendar due to the neglect of a former Fuchsberg associate, Allan Jacobs ("Jacobs"). Chicago seeks a declaration that it is not obligated to provide a defense or indemnity coverage to plaintiffs. Chicago asserts, among other things, that coverage is not available to plaintiffs because Fuchsberg had a reasonable basis to believe that Jacobs had committed malpractice.
Plaintiffs have voluntarily discontinued their first cause of action against Anna Galizia.
Chicago had also asserted that plaintiffs gave untimely notice of the alleged malpractice to Chicago, but has not pursued this defense.
The parties have agreed to convert cross-motions for summary judgment to a bench trial, and have consented to submit this case on the basis of affidavits, documentary exhibits, and deposition testimony of Bernard Turkewitz ("Turkewitz"), Preston J. Douglas ("Douglas"), and Jacobs. Plaintiffs submitted the affidavits of Douglas, Abraham Fuchsberg, and Turkewitz, three Fuchsberg partners. Chicago submitted the affidavits of Kevin F. Cavaliere, Chicago's counsel, and Joseph C. Rizzo, a legal assistant employed by Chicago's counsel. In light of the evidence submitted in this case, the following constitutes this Court's findings of fact and conclusions of law.
Findings of Fact
A. Finkelstein v. Gelernt
On March 30, 2000, Stephen J. Finkelstein ("Finkelstein") brought a legal malpractice claim against Fuchsberg and several of its attorneys: partners Abraham Fuchsberg, Seymour Fuchsberg, and Douglas, associate Fred L. Epstein ("Epstein"), and former associate Jacobs, based on Fuchsberg's alleged malpractice in Finkelstein v. Gelernt. In 1980, Finkelstein retained Fuchsberg to handle his medical malpractice claim against Doctor Irwin Gelernt, Mount Sinai Hospital, and various Mount Sinai employees.
Fuchsberg filed Finkelstein v. Gelernt in 1980, in New York Supreme Court, Kings County ("Supreme Court"). The complaint in that action alleged that Finkelstein had lost a kidney as a result of medical malpractice.
On October 15, 1983, Fuchsberg associate Epstein filed a Note of Issue in Finkelstein v. Gelernt, placing the case on the court's calendar to await trial. See N.Y. C.P.L.R. § 3402(a). On June 4, 1984, defendants moved to strike plaintiff's Note of Issue and to strike the case from the trial calendar on the basis that plaintiff failed to comply with the court's order requiring him to submit to a physical examination and produce medical records. On July 31, 1984, the court granted defendants' motion on default because plaintiff's counsel did not appear to argue the motion, and Finkelstein v. Gelernt was stricken from the trial calendar.
Approximately seven years later, by letter dated July 19, 1991, counsel for the defendants in the Finkelstein matter wrote Fuchsberg and requested that plaintiff provide certain medical authorizations. Another year and a half passed. On February 3, 1993, the Clerk of the Supreme Court entered a certificate of abandonment and neglect to prosecute Finkelstein v. Gelernt as of August 1, 1985. Despite this entry, several exhibits demonstrate that Fuchsberg attorneys acted as if the case were still active in 1993: for example, expert reports were signed in October 1993, and a letter was sent to a medical expert in December 1993.
On May 19, 1994, Fuchsberg filed a Request for Judicial Intervention in Supreme Court for a motion to restore Finkelstein v. Gelernt to the trial calendar. The return date of the motion was June 1, 1994. The calendar maintained by the clerk of Fuchsberg's medical malpractice department shows a court appearance scheduled for June 1, 1994, for a motion to restore Finkelstein v. Gelernt to the trial calendar. An order restoring the case was never signed nor filed. Fuchsberg's internal records, however, contain entries that made it appear that the matter had been restored to the trial calendar. Since the mid-1980s, Fuchsberg's medical malpractice department has maintained a computer database for the cases handled by the department. The cases are tracked using software designed for that purpose. The database is printed as a "desk book" several times per year. The desk book lists all of the department's cases, summarizes the nature and status of each case, and shows which attorney is assigned to each case. As the supervisor of Fuchsberg's medical malpractice department from 1969 until May 1995, Turkewitz reviewed the cases in the desk book with the attorney assigned to each case at least twice a year. Douglas succeeded Turkewitz and continued the practice. Each desk book is updated by hand and a new desk book is printed after the new material is entered into the computer database.
While Fuchsberg speculates that a motion to restore Finkelstein v. Gelernt to the trial calendar was argued and granted on June 1, 1994, there is no evidence to support its contention other than hearsay statements and the unreliable calendar maintained by the clerk of Fuchsberg's medical malpractice department.
From October 25, 1993 through June 24, 1994, Fuchsberg's desk books include the notation "needs motion for leave to file N/I" with respect to Finkelstein v. Gelernt. This notation indicates that a motion was required to restore Finkelstein v. Gelernt to the trial calendar. The desk book for the period from June 24, 1994 through November 21, 1994, shows that the notation "needs motion for leave to file N/I" was crossed out by hand, and was replaced by "Judge Bellard" and "N/I." This replacement notation indicates that the motion to restore had been made and granted by Judge Bellard. The notation "N/I" indicates that the case was on the court's trial calendar. The desk books from November 21, 1994, until March 1997, also indicate that the case was on the trial calendar.
Between 1975 and 1991, there was a medical malpractice panel system in place in New York state courts. No medical malpractice case was permitted to go to trial until it had been presented to a tribunal consisting of a doctor, lawyer, and a judge. Because the doctors were volunteers, they were in short supply.
According to Fuchsberg, it was not unusual during these years for cases to be on the calendar awaiting their panel for five years or more. Fuchsberg represents that a number of the malpractice cases that it handled during this time period were over ten years old when they were resolved. Thus, the fact that a case was over ten years old would not in and of itself signal a problem.
In October 1993, Fuchsberg learned that Jacobs had told a firm client that his case had been settled when it had not. Turkewitz removed Jacobs from primary responsibility for all of his cases and did not assign new cases to him. Between 1993 and 1995, Finkelstein v. Gelernt was assigned to at least two other Fuchsberg associates, Ira Fogelgaren and Joseph Amato. As of December 14, 1995, following Amato's departure from the firm, Jacobs was reassigned to the Finkelstein case.
In 1997, Jacobs deleted Finkelstein v. Gelernt from Fuchsberg's computer database and, after March 1997, no record of Finkelstein v. Gelernt appears in Fuchsberg's desk books. Between December 14, 1995 and September 3, 1999, however, Jacobs repeatedly and falsely informed Finkelstein that Finkelstein v. Gelernt was on the state court calendar awaiting trial.
On September 13, 1999, while Jacobs was on vacation, Finkelstein called Fuchsberg to inquire about his case. After speaking with Finkelstein, Douglas discovered that Finkelstein v. Gelernt was not listed in the department's desk book. Douglas searched Jacobs' office and found the file. Douglas then learned that the case had never been restored to the trial calendar; he also learned that five other cases had also been deleted from the firm's desk book by Jacobs. When Fuchsberg discovered what Jacobs had done, it fired him, notified the Grievance Committee of the Appellate Division, and met with Finkelstein to tell him that Jacobs had misled him and that his case had been dismissed.
B. Finkelstein v. Fuchsberg
By letter dated September 29, 1999, Fuchsberg informed Chicago of six "possible claims which were discovered [on] September 13, 1999, as a consequence of calls which came in during the vacation of a long term associate of the firm, named Allan A. Jacobs." The letter mentioned Finkelstein v. Gelernt as one of the six. Fuchsberg gave Chicago additional information regarding Finkelstein and other matters in November 1999.
In mid-March 2000, Fuchsberg advised Chicago that Finkelstein had served a summons and complaint upon it and requested that Chicago provide a defense and indemnify the law firm. Specifically, Finkelstein alleged in his pleadings that (1) Fuchsberg was negligent in prosecuting his medical malpractice action; (2) Fuchsberg breached its contract for legal services by, among other things, failing to move to restore Finkelstein v. Gelernt to the state court trial calendar; (3) Fuchsberg misrepresented the status of Finkelstein v. Gelernt to Finkelstein; and (4) Fuchsberg was negligent and reckless in employing Jacobs and in representing that he was competent. By letter dated March 17, 2000, Chicago disclaimed coverage of the Finkelstein matter, citing Paragraph B.2 of the "Coverage" section as well as the "Conditions" section of the 1999 Policy.
C. The Chicago Policy
On March 30, 2000, Fuchsberg and its partners and employees were covered by a professional liability insurance policy issued by Chicago that provided up to $2 million in coverage for claims made during the policy period May 15, 1999 through May 15, 2000 (the "1999 Policy"). The 1999 Policy was one of a series of one-year renewal policies that Fuchsberg had purchased from Chicago since 1995.
Before purchasing the 1995 Professional Liability Policy issued by Chicago (the "1995 Policy"), Fuchsberg was insured by Home Insurance Company ("Home") under a New York State Bar Association ("NYSBA") program administered by Bertholon-Rowland Corporation ("B-R"). The effective date of the Home policy was May 15, 1989. In 1995, NYSBA notified members who were Home policyholders that malpractice coverage would now be provided by Chicago and its parent company, Interstate Insurance Group. The NYSBA sent those members a marketing packet prepared by B-R, the administrator for both Home and Chicago, which stated: "When you renew coverage under the new plan, you will receive full prior acts coverage [back to] your existing retroactive date, if applicable. . . . Under our new plan, tail coverage is not necessary since full prior acts coverage is provided back to your existing retroactive date at renewal." The packet included a "simplified renewal application and a premium quotation." By letter dated May 16, 1995, B-R wrote Fuchsberg and stated: "The following proposal is for a claims-made policy with a retro date of May 15, 1989."
Abraham Fuchsberg completed the "simplified renewal application" for the 1995 Policy offered by Chicago. The application sought information regarding changes "since your last application," and required the completion of a "new lawyer supplement" for each person who had joined the firm since May 15, 1994. After receiving Fuchsberg's simplified renewal application, Chicago issued the 1995 Policy through B-R. A "Bulletin" attached to the 1995 Policy stated: "Please understand that your policy provides for full prior acts coverage unless a prior acts exclusion endorsement is listed under item 7 of your policy declarations page and is attached to the policy." Item 7 of the Policy declarations page refers to attached form POE-2220.
That form contained the following endorsement which announced "CHANGES THE POLICY": "In consideration of the premium charged, this policy specifically excludes loss resulting from Claims made against any Insured arising from any negligent act, error, omission, or Personal Injury occurring or alleged to have occurred prior to May 15, 1989." (boldface in original). This endorsement was also attached to the 1999 Policy.
Finkelstein filed and served his claim against Fuchsberg during the 1999 policy period. Paragraph B.2 of the "Coverage" section of the 1999 Policy states that Chicago will cover Fuchsberg for malpractice prior to the effective date of the policy only if "the Named Insured, any partner, shareholder, employee . . . had no reasonable basis to believe that the Insured had breached a professional duty or to foresee that Claim would be made against the Insured."
Conclusions of Law
A. Choice of Law
The parties have not addressed the issue of which law the Court should apply. Both parties rely on New York law, thus implicitly agreeing that New York provides the applicable law. The insurance policy at issue contains no choice of law provision. In a diversity action, the choice of law analysis is based on the forum state's choice of law rules. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496-97 (1941). In New York, choice of law issues involving contractual disputes are resolved by an "interest analysis," and "therefore 'the law of the jurisdiction having the greatest interest in the litigation' controls." Wm. Passalacqua Builders, Inc. v. Resnick Developers South, Inc., 933 F.2d 131, 137 (2d Cir. 1991) (citation omitted).
In performing this analysis, courts usually look to factors such as the place of:
(1)contracting, (2) negotiation of the contract, (3) performance, (4) the location of the subject matter of the contract, and (5) the domicile, residence, nationality, place of incorporation, and place of business of the parties.
Id.
In this case, the insurance policy was written by Chicago, a company headquartered in Illinois, but that maintains an office in New York. The policy was sold to a New York firm, and contains a "New York Amendatory Adjustment". Chicago's broker, B-R, is listed on the insurance policy with a New York address, and an "Authorized Representative" of B-R countersigned the policy in New York. The malpractice claim underlying the present insurance dispute arose in New York, and Fuchsberg has been sued for malpractice in New York state court. Thus, the critical events in this action, forming the basis of plaintiffs' claims, occurred in New York. Under these circumstances, and in conjunction with the parties' reliance on New York law in their submissions on this motion, the Court will apply New York law. See Hannex Corp. v. GMI, Inc., 140 F.3d 194, 203 n. 7 (2d Cir. 1998); American Fuel Corp. v. Utah Energy Dev. Co., 122 F.3d 130, 134 (2d Cir. 1997).
B. Collateral Estoppel
Plaintiffs argue that, based on the decision in Holloway v. Sacks and Sacks Esqs., 713 N.Y.S.2d 162, 164 (App.Div. 2000), Chicago is barred from relitigating its obligation to defend and indemnify plaintiffs by the doctrine of collateral estoppel.
"'[T]he preclusive effect of a state court determination in a subsequent federal action is determined by the rules of the state where the prior action occurred.'" Wight v. Bankamerica Corp., 219 F.3d 79, 87-88 (2d Cir. 2000) (citation omitted). Under New York law, collateral estoppel "'precludes a party from relitigating in a subsequent action or proceeding an issue clearly raised in a prior action or proceeding and decided against that party . . ., whether or not the tribunals or causes of action are the same.'" Leather v. Ten Eyck, 180 F.3d 420, 425 (2d Cir. 1999) (citation omitted) (emphasis in original).
Collateral estoppel will bar relitigation in the following circumstances:
(1) the issues of both proceedings must be identical,
(2) the relevant issues [must have been] actually litigated and decided in the prior proceeding,
(3) there must have been a 'full and fair opportunity' for the litigation of the issues in the prior proceeding, and
(4) the issues [must have been] necessary to support a valid and final judgment on the merits.
Id. at 426 (citations omitted) (alterations and emphasis in original).
The doctrine of collateral estoppel "'is grounded on concepts of fairness and should not be rigidly or mechanically applied.'" In re Sokol, 113 F.3d 303, 306 (2d Cir. 1997) (citation omitted). Collateral estoppel will apply only if it is "quite clear" that the elements have been met so that a party is not "precluded from obtaining at least one full hearing on his or her claim." Colon v. Coughlin, 58 F.3d 865, 869 (2d Cir. 1995) (citing Gramatan Home Investors Corp. v. Lopez, 414 N.Y.S.2d 308, 311 (N.Y. 1979)). Regarding whether an issue was necessarily decided, "[t]he prior decision need not have been explicit on the point, since '[i]f by necessary implication it is contained in that which has been explicitly decided, it will be the basis for collateral estoppel.'" BBS Norwalk One, Inc. v. Raccolta, Inc., 117 F.3d 674, 677 (2d Cir. 1997) (citation omitted); see also Winters v. Lavine, 574 F.2d 46, 60-61 (2d Cir. 1978).
Because Fuchsberg seeks to apply collateral estoppel, it has the burden of showing that the issues are identical and were necessarily decided in the prior action. In opposing the application of collateral estoppel, Chicago has the burden of showing that the prior action did not afford a full and fair opportunity to litigate the issues. In re Sokol, 113 F.3d at 306. Fuchsberg has met its burden with respect to one issue in dispute here. Based on the Sacks decision, Chicago is barred from relitigating the issue of whether, under the terms of Chicago's insurance policy, an associate's knowledge of his or her own wrongdoing serves to exclude coverage for the law firm.
In Sacks, Chicago insured the law firm of Sacks Sacks ("Sacks") pursuant to a 1995 policy through a NYSBA program administered by B-R. As in the instant case, Chicago had replaced Home as Sacks' insurer. In 1996, Sacks sought coverage for an act of alleged malpractice that occurred before the date of the firm's first Chicago policy, but while the Home policy was in effect. The alleged malpractice was committed by an associate who had concealed the malpractice from the firm. Sacks, 713 N.Y.S.2d at 164. In Sacks, Chicago disclaimed coverage based on one of the same policy provisions at issue here — the "Coverage" provisions under Paragraph B.2.
In a March 9, 1999 decision, the trial court ruled that Chicago was entitled to rescind coverage. The court found that the law firm had made material misrepresentations on its application for insurance coverage by answering "no" to the question: "Having inquired of all partners, officers and professional employees, are there any circumstances which may result in a claim being made against the firm . . .?" The court did not find that the inquiring partner actually knew that his answer was false. The court found, however, that even an innocently made misrepresentation may void an insurance contract if the insurer, knowing the facts misrepresented, would have refused to issue the contract.
On September 21, 2000, the Appellate Division reversed, and ruled that Chicago was not entitled to rescind the policy and held that it must defend and indemnify the firm. The court stated:
While an innocently made material misrepresentation may serve to void an insurance contract, the precise issue here is whether the defendants should have had actual or constructive knowledge of the associate's misconduct. There was no actual knowledge on the part of the inquiring partner and there is insufficient evidence on which he or the firm could be deemed to have had constructive knowledge. The former associate concealed his misconduct and there is no basis for either imputing his knowledge to defendants or for finding that they should have known of such misconduct.
Sacks, 713 N.Y.S.2d at 164 (citation omitted).
In its appeal to the Appellate Division, the law firm argued that the trial court had erred in concluding that Chicago was entitled to rescind the policy because the inquiring partner did not actually know of the malpractice and thus did not misrepresent the facts. The law firm also argued that Chicago had waived its right to rescind the policy because it had retained the insurance premiums paid by it. Chicago responded that, in the event the trial court's rescission decision were reversed, Paragraph B.2 of the policy nonetheless excluded coverage because a Sacks associate knew that he had mishandled a client's case before the policy period. This section of the policy provides for full coverage for acts occurring during the "policy period," but limits coverage for acts occurring prior to the "policy period." For prior acts, coverage is provided only if the firm, its partners and employees "had no reasonable basis to believe" that malpractice had occurred and "no reasonable basis . . . to foresee" that a claim would be made. The policy protects Chicago against claims based on reasonably foreseeable but undisclosed risks. Paragraph B.2 of the Sacks' policy — which is identical to that on which Chicago relies here — reads in context as follows:
The Company will pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as Damages for Claims first made against the Insured and reported to the Company during the Policy Period or Extended Reporting Period, as applicable, arising out of any negligent act, error, omission or Personal Injury in the rendering of or failure to render Professional Services by an Insured covered under this policy. Provided always that such Professional Services or Personal Injury happen:
A. during the Policy Period ; or
B. prior to the Policy Period provided that prior to the effective date of the first Lawyers Professional Liability Insurance Policy issued by this Company to the Named Insured or Predecessor in Business, and continuously renewed and maintained in effect to the inception of this policy period: . . .
2. the Named Insured, any partner, shareholder, employee, or where appropriate the Named Insured's management committee or any member thereof, had no reasonable basis to believe that the Insured had breached a professional duty or to foresee that a Claim would be made against the Insured.
(boldface in original and underscoring supplied).
In holding that Chicago was obligated to defend and indemnify the law firm, the Appellate Division necessarily rejected Chicago's argument concerning Paragraph B.2. Although the court did not discuss Paragraph B.2, it necessarily decided that Paragraph B.2 did not preclude coverage to the law firm where one of its associates had concealed his own malpractice. See BBS Norwalk, 117 F.3d at 677. Collateral estoppel therefore applies to the legal issue of whether an associate's knowledge of his own wrongdoing can be charged or imputed to the law firm for purposes of denying insurance coverage under Paragraph B.2 of the policy. Accordingly, based upon the Appellate Division's decision in Sacks, Jacobs' knowledge of his own wrongdoing does not preclude insurance coverage to Fuchsberg under Paragraph B.2 of the policy. Chicago argues that it did not have a full and fair opportunity to litigate the coverage issue in Sacks. This argument is unconvincing. Under New York law, to determine whether a full and fair hearing was provided, a court must consider the "'realities of the [prior] litigation,' including the context and other circumstances which . . . may have had the practical effect of discouraging or deterring a party from fully litigating the determination which is now asserted" against the party. In re Sokol, 113 F.3d at 307 (citation omitted). Factors to be considered include:
Chicago cites Moccio v. New York State Office of Court Admin., 95 F.3d 195 (2d Cir. 1996), and AXA Marine and Aviation Ins. Ltd. v. Seajet Indus., Inc., 84 F.3d 622, 626 (2d Cir. 1996), to support its argument that collateral estoppel does not apply because the Appellate Division did not explicitly reach its arguments concerning Paragraph B.2. Nothing in Moccio suggests that collateral estoppel should not apply to an issue "necessarily decided in a prior proceeding." Moccio, 95 F.3d at 200. AXA Marine does not address the issue of collateral estoppel.
1) the nature of the forum and the importance of the claim in the prior litigation; 2) the incentive to litigate and the actual extent of the litigation in the prior forum; and 3) the foreseeability of future litigation (because of its impact on the incentive to litigate in the first proceeding).
Id.
Applying these factors, Chicago had a full and fair opportunity to litigate the coverage issue in Sacks. Sacks had brought a third-party action in New York Supreme Court seeking a declaratory judgment that Chicago was obligated to defend and indemnify it against a legal malpractice claim. Chicago was represented by the same attorneys who represent it here and had the same incentives in Sacks as it has here to litigate the applicability of Paragraph B.2. Chicago's arguments that it did not have a full and fair opportunity to litigate the issue because the New York Court of Appeals declined to hear an appeal from the First Department's decision or because the First Department must have ruled as it did based on new standards of which Chicago had no notice can be swiftly rejected. While appellate review plays "a critical role" in assuring the accuracy of rulings, Johnson v. Watkins, 101 F.3d 792, 795 (2d Cir. 1996), the failure to obtain a hearing before the highest court of the state does not preclude application of the doctrine of collateral estoppel. Collateral estoppel applies "when there is discretion in the reviewing court to grant or deny review and review is denied." Restatement (Second) of Judgments § 28(1) cmt. a (1982). Chicago was not deprived of an opportunity to appeal, nor did the Court of Appeals affirm on a ground other than the one at issue here. See Gelb v. Royal Globe Ins. Co., 798 F.2d 38, 44-45 (2d Cir. 1986). As the Honorable Charles S. Haight observed in I. Apfel Corp. v. Katz, No. 99 Civ. 0045 (CSH), 1999 WL 287370, at *2 (S.D.N.Y. May 6, 1999), most of the cases applying New York law in which the courts have held that "a party's inability to appeal an adverse decision in the prior proceeding" bars application of collateral estoppel, have involved "issues resolved in a suppression hearing in a criminal case in which the defendant's subsequent acquittal" made an appeal unnecessary for the defendant and impossible for the Government.
While collateral estoppel applies to the legal issue of whether, under the policy, an associate's knowledge of his own wrongdoing may be charged or imputed to the law firm, plaintiffs argue that collateral estoppel also bars Chicago from relying to any extent on the provisions of Paragraph B.2. In this case, however, Chicago relies on Paragraph B.2 to disclaim coverage based on not only the negligent associate's knowledge, but also the knowledge it contends others in the law firm had of the associate's misconduct. There is no collateral estoppel bar with respect to that latter issue, which was not at issue in Sacks, and is in any event, a fact specific inquiry.
C. Chicago's Disclaimers
Finkelstein filed and served his claim against Fuchsberg during the 1999 policy period. Relying on provisions of the 1999 Policy, Chicago argues that coverage is not available to plaintiffs because the alleged malpractice occurred prior to the "effective date" of the first policy issued by Chicago, which it contends is May 15, 1995. Chicago argues that because Fuchsberg partners and the firm itself had reason to know of the malpractice before 1995, coverage is barred by Paragraph B.2.
Under New York law, "'an insurance contract is interpreted to give effect to the intent of the parties as expressed in the clear language of the contract. [T]he initial interpretation of a contract is a matter of law for the court to decide.'" Bowman v. Allstate Ins. Co., 238 F.3d 468, 470 (2d Cir. 2001) (citation omitted) (alteration in original).
1. Effective Date
Chicago first contends that the "effective date" of the policy is the date that Chicago first insured Fuchsberg, that is May 15, 1995, as opposed to May 15, 1989, the date of the first Home policy and the date which plaintiffs contend is the "effective date." Chicago relies on the endorsement to the 1999 Policy that limits the duty to defend and indemnify to claims arising after the "effective date of the earliest policy issued by the Company." (emphasis supplied). "Company" is defined in the policy as Chicago. The endorsement reads in pertinent part as follows:
In consideration of the premium charged, it is hereby agreed that the Company shall not be obligated to pay any Damages and/or Claims Expense or to provide a defense in connection with any Claim(s) based upon, arising from, or relating to any prior and/or pending Claim as of the inception of this insurance, or the effective date of the earliest policy issued by the Company to which this policy is a renewal, whichever is earlier, or any circumstance, act, error, omission or Personal Injury alleged in such Claim.
(boldface in original and underscoring supplied). This language is sufficiently clear and unambiguous to make May 15, 1995 the effective date of the Chicago policy. Plaintiffs base their argument that the effective date of the policy is May 15, 1989, on (1) the 1995 representations made by B-R, which was Chicago's agent, and (2) the Prior Acts Exclusion ("PAE") endorsement to the Chicago policy, which lists May 15, 1989 as the "retro date." Chicago argues that the policy should be enforced according to its terms, and that B-R's representations should not be allowed to change the effective date of the policy from 1995 to 1989. B-R's Representations B-R clearly was Chicago's agent. As noted in the findings of fact, B-R represented to Fuchsberg that the Chicago policy would provide "full prior acts coverage" and that "tail coverage" would be unnecessary. B-R also represented that "[t]he following proposal [by Chicago] is for a claims-made policy with a retro date of May 15, 1989." A "Bulletin" accompanying the 1999 Policy states:
B-R not only sent Fuchsberg marketing materials offering it professional liability insurance from Chicago, but it also facilitated Fuchsberg's switch from Home to Chicago's insurance. B-R's insignia appears on Fuchsberg's applications for insurance, and it is listed as the "Producer" and the insurance broker on the Chicago policies. Further, the "Claims Handling Procedures" explain that the "Chicago Insurance Company and Bertholon-Rowland Corp. are committed to providing insureds and clients with effective claim services," and direct insureds to send notices of each incident to Chicago in care of B-R. See American Nat'l Fire Ins. Co. v. Kenealy, 72 F.3d 264, 267 (2d Cir. 1995) (finding that representative was insurance company's agent).
The term "tail coverage" is not defined in any of the documents submitted, however the New York Official Compilation of Codes, Rules, and Regulations defines "tail coverage" as:
coverage for that period of time specified in the policy wherein claims first made after termination of coverage under the policy, for injury or damage that occurs during the policy term, or that occurs on or after the retroactive date, if any, will be considered made during the policy term.
N.Y. Comp. Codes R. Regs. tit. 11, § 73.1(d) (2001).
Your policy provides for full prior acts coverage unless a Prior Acts Exclusion is listed under Item 7 of your policy Declarations Page. If prior acts coverage is restricted, the retro date of coverage can be found on the Prior Acts Exclusion Endorsement which is signed by the firm and becomes part of the policy.
The plaintiffs have not shown that any of these statements is necessarily inconsistent with the terms of the policy, and in any event, B-R's representations cannot change the plain terms of the policy without a showing that they were materially false, or at least that Fuchsberg relied on them. "Both insured and insurer are alike subject to the obligations and entitled to the benefit of all the terms of contracts of insurance." Axelrod v. Metropolitan Life Ins. Co., 267 N.Y. 437, 451 (N.Y. 1935). The policy explicitly provides that it represents the entire understanding of the parties. The policy includes an integration provision: "By acceptance of this policy, the Insured agrees that . . . this policy embodies all agreements existing between himself and the Company or any of its agents relating to this insurance." See Wageman v. Metropolitan Life Ins. Co., 18 N.Y.2d 777, 779 (N.Y. 1966) (insured could not rely on agent's purported advice as an explanation for materially false statements on application); Ezrasons, Inc v. American Credit Indemnity Co., 683 N.Y.S.2d 264, 266 (App.Div. 1999) (agent cannot orally modify policy where agent's authority limited by policy terms). Compare American Nat'l Fire Ins. Co. v. Kenealy, 72 F.3d 264, 268 (2d Cir. 1995) (agent with apparent authority could bind insurance company where there was not a clause restricting the agent's authority in the policy).
Plaintiffs do not identify any legal theory that would permit B-R's representations to amend or replace the terms of the contract. They have not proven that the Chicago policy was a renewal of their Home policy, nor that B-R's representations effected such a renewal. Moreover, they do not argue fraudulent inducement or detrimental reliance based on the representations made by B-R. See, e.g., Warner Theater Assocs. Ltd, P'ship v. Metropolitan Ins. Co., 149 F.3d 134, 136 (2d Cir. 1998); Progressive Casualty Ins. Co. v. C.A. Reaseguradora Nacional de Venezuela, 991 F.2d 42, 46-47 (2d Cir. 1993); Gaidon v. Guardian Life Ins. Co., 94 N.Y.2d 330, 348 (N.Y. 1999) (where insured purchased life insurance based on agent's representations, to state a claim for fraudulent inducement insured must show a misrepresentation or material omission by defendant that induced plaintiff to purchase policy, as well as scienter, reliance, and injury); Weinberg v. Insurance Co. of N. Am., 388 N.Y.S.2d 69, 70 (App.Div. 1976) (where insured relied on representations in insurance company's advertising brochure at variance with ambiguous policy terms, insured entitled to coverage).
PAE Endorsement Fuchsberg also argues that the effective date is 1989, based on the PAE endorsement to the Chicago policy. The PAE endorsement, however, does not address the effective date of the policy. The PAE endorsement, which accompanied the initial Chicago policy issued in 1995, functions to exclude coverage for acts committed before May 15, 1989. The PAE endorsement states:
In consideration of the premium charged, this policy specifically excludes loss resulting from Claims made against any Insured arising from any negligent act, error, omission, or Personal Injury occurring or alleged to have occurred prior to May 15, 1989.
(boldface in original). In sum, the effective date of the policy is May 15, 1995, and pursuant to Paragraph B.2 of the policy, Chicago's duty to defend and indemnify for acts of malpractice occurring before that date is limited.
2. Duty to Defend and Indemnify
"[A]n insurer's duty to defend is 'exceedingly broad' and is separate from and more expansive than the duty to indemnify." Commercial Union Assurance Co., PLC v. Oak Park Marina, Inc., 198 F.3d 55, 59 (2d Cir. 1999) (citation omitted). Under New York law, an insurer's duty to defend must be determined from the allegations of the complaint. "Where the complaint contains allegations that bring the claim even potentially within the policy's coverage, the insurer is obligated to defend." Ogden Corp. v. Travelers Indemnity Co., 924 F.2d 39, 41 (2d Cir. 1991); see also First Investors Corp. v. Liberty Mutual Ins. Co., 152 F.3d 162, 165-66 (2d Cir. 1998); Incorporated Village of Cedarhurst v. Hanover Ins. Co., 89 N.Y.2d 293, 298 (N.Y. 1996).
This is so "'even though facts outside the four corners of [the] pleadings indicate that the claim may be meritless or not covered.'" State of New York v. Amro Realty Corp., 936 F.2d 1420, 1426 (2d Cir. 1991) (citation omitted). "An insurer can escape the duty to defend only if there is no legal or factual basis in the complaint upon which the insurer might eventually have to indemnify the insured." McCostis v. Home Ins. Co. of Indiana, 31 F.3d 110, 112 (2d Cir. 1994). Further, "'[t]o negate coverage by virtue of an exclusion, an insurer must establish that the exclusion is stated in clear and unmistakable language, is subject to no other reasonable interpretation, and applies in the particular case.'" Village of Sylvan Beach v. Travelers Indemnity Co., 55 F.3d 114, 115-16 (2d Cir. 1995) (citation omitted); see also State of New York v. New York State Dep't of Envtl. Conservation, 27 F.3d 783, 788 (2d Cir. 1994) (citation omitted). "This burden is 'heavy,' especially when the insurer is seeking to avoid the duty to defend" by relying on an exclusion in the policy. Commercial Union, 198 F.3d at 60 (citation omitted). Accordingly, Chicago can be excused from its duty to defend "only if it can be determined as a matter of law that there is no possible basis in law or fact upon which [it] might be held to indemnify" Fuchsberg. Avondale Indus., Inc. v. Travelers Indemnity Co., 887 F.2d 1200, 1205 (2d Cir. 1989).
In "exceptional circumstances," a court may resort to extrinsic evidence outside the four corners of the complaint to evaluate the claim in determining whether there is a duty to defend. Avondale Indus., Inc. v. Travelers Indem. Co., 774 F. Supp. 1416, 1424 (S.D.N.Y. 1991). These exceptional circumstances exist where a court can determine conclusively that there is no genuine dispute as to an extrinsic fact which, when applied to the underlying allegations, limits them to a claim not covered by the policy. Id.
Since the duty to defend "is broader" than the duty to indemnify,
"an insurer may be contractually bound to defend even though it may not ultimately be bound to pay, either because its insured is not factually or legally liable or because the occurrence is later proven to be outside the policy's coverage."
Cowan v. Codelia, P.C., No. 98 Civ. 5548 (JGK), 1999 WL 1029729, at *4 (S.D.N.Y. Nov. 10, 1999) (quoting Fitzpatrick v. American Honda Motor Co., Inc., 78 N.Y.2d 61, 65 (N.Y. 1991)); see also Avondale Indus., 887 F.2d at 1204. Under New York law, there is no general duty to indemnify — indemnity arises in specific situations from an express contract or "may be implied in law 'to prevent a result which is regarded as unjust or unsatisfactory.'" Rosado v. Proctor Schwartz Inc., 66 N.Y.2d 21, 24 (N.Y. 1985) (citation omitted); see also American Transtech Inc. v. U.S. Trust Corp., 933 F. Supp. 1193, 1202 (S.D.N.Y. 1996) (discussing situations in which implied duty arises). In construing the contract, policy exclusions "must be specific and clear in order to be enforced" and courts should not extend such exclusions "by interpretation or implication," but rather should strictly and narrowly construe them. Seaboard Surety Co. v. Gillette Co., 64 N.Y.2d 304, 311 (N.Y. 1984).
Chicago has the duty to defend the plaintiffs in Finkelstein v. Fuchsberg. The claims in that lawsuit arguably arose during the period between 1989 and 1995. The law firm failed in 1994 to obtain an order restoring Finkelstein v. Gelernt to the trial calendar. Pursuant to its policy, Chicago has the duty to defend or indemnify Fuchsberg for claims arising from that period so long as Fuchsberg had no reasonable basis to believe that a professional duty had been breached or to foresee that a claim would be brought against the firm. There is both a legal and a factual basis upon which to find that under the terms of its policy, Chicago might have to indemnify the plaintiffs. Chicago also has to indemnify the plaintiffs. Chicago has failed to prove that Fuchsberg or any of its attorneys other than Jacobs had a reasonable basis before 1995, to believe that malpractice had occurred or to foresee that a claim would be brought against the firm. Chicago relies on the fact that the firm learned in 1993, that Jacobs had misrepresented the status of one of his other cases to a client and considered firing him at that time. While the age of the lawsuit, filed in 1980, and the discovery of Jacobs' misconduct in 1993, should have caused a responsible person to review the Finkelstein v. Gelernt file carefully in 1993, there is no evidence that anyone did. Since the exclusion in Paragraph B.2 is premised on knowledge that would provide a reasonable basis to believe that malpractice had occurred or to foresee the filing of a claim, the firm's failure to conduct the investigation that it should have conducted does not relieve Chicago of the duty to indemnify the firm. Chicago's contention that there is no duty to indemnify, or even to defend, because the alleged acts of malpractice occurred before 1989, is also unavailing. The alleged acts were part of a continuous course of conduct by one or more Fuchsberg attorneys beginning in 1984, and continuing through at least 1994. The defendants in Finkelstein v. Gelernt continued to act as if the case were still alive after 1989, as did attorneys at Fuchsberg. Even the certificate of dismissal did not issue until 1993.
Given this conclusion it is unnecessary to decide whether Chicago waived its right to rely on the exclusion for claims arising before 1989, by failing to identify it in either its disclaimer letter or in its answer in this action.
Under New York law, "an insurer is liable to its insured when the insured committed a continuous error or omission, even if some of the alleged harmful acts occurred before the policy was in effect." JCD Int'l Gem Corp. v. Evanston Ins. Co., 94 Civ. 5315 (MBM), 1995 WL 491337, at *4 (S.D.N.Y. Aug. 17, 1995) (citing Levine v. Lumbermen's Mutual Cas. Co., 538 N.Y.S.2d 263, 264-65 (App.Div. 1989)). Accordingly, Chicago is obligated to indemnify plaintiffs. Conclusion Plaintiffs' claim for a declaration that Chicago is required to defend and indemnify them is granted. Chicago's claim for a declaration that it is not obligated to defend and indemnify plaintiffs is denied. The Clerk of Court shall enter judgment for the plaintiffs and close the case.
SO ORDERED: