We have seen a recent rash of cases where defending insurers are stretching to new lengths to force their insureds to contribute substantially more that the deductible bargained for in the policy, often grasping at the straw that the negligent acts alleged against the insured were actually intentional—perhaps even uninsurable.  We used to call this “post-claim underwriting” because, in effect, the insurers are re-writing the policies to include large self-insured retentions.

We have also seen insurers argue that since the insured was urging settlement (in a matter where the damages were substantial and liability reasonably clear), they must contribute a portion to the settlement.  Why? Because the insured wanted “peace of mind” and (contrary to decades of advertising), “peace of mind” was not covered!  We have also seen insurers argue an insured must contribute sums above the deductible in order to settle a case, because the loss claimed against the insured were not really damages.

This unique insurance sleight of hand occurred in a case where an insured lawyer had represented a client who was a defendant in a lawsuit. In the course of the underlying matter, the Court awarded costs against the client. The client paid the award and more expense to settle the case. The client then brought malpractice claims against the lawyer.  The allegations were the standard claims of professional negligence and resulting damages.  Insurer defended but then balked at settling—claiming the Court award against the client amounted to uninsurable sanctions, ignoring the actual claimsthe client made.  Instead, the insurer demanded the insured pay some portion of any settlement above its deductible.

It is perhaps not a surprise that no California court has addressed this insurance company excuse not to pay a claim. However, a Pennsylvania federal court decision directly addressed this rather aggressive coverage defense, which could be helpful to practitioners faced with similar tactics from insurers. In Post v. St. Paul Travelers Ins. Co., 593 F. Supp. 2d 766 (E.D. Pa. 2009), an insured lawyer filed a coverage suit against his malpractice insurer who refused coverage.  The insured lawyers represented a client, Mercy Hospital in an underlying medical malpractice case.  During trial of that case the parties reached a settlement.  Mercy claimed they had to settle because of alleged discovery abuses by their defense counsel, and was contemplating a lawsuit against their lawyers.  The lawyers put Travelers on notice of the potential claim.

The underlying plaintiffs then brought a sanctions motion against the lawyers, which Mercy joined!  Mercy’s lawyer then asked Travelers to defend the motion for sanctions as it would be defense of the stated malpractice claim. Travelers refused, and the lawyers then sued Travelers for breach of contract and bad faith.  In deciding the cross-motions in the coverage case, the Court examined whether Travelers had a duty to defend the sanctions motion and the malpractice claims because both might result in malpractice damages.

First the Court easily found the duty to defend the malpractice claim and the petition for sanctions once Mercy joined it. Second, on the duty to indemnify, the Court easily discarded Travelers argument that because Mercy’s malpractice claims were based in part on discovery sanctions against the lawyers, their claims could not be for damages.  Rather the Court found: “The term “sanctions” was undefined in the Liability Policy. If an attorney errs, his or her client typically seeks malpractice damages, not sanctions or penalties.  Sanctions, in particular, are understood by the legal community to be sought by opposing counsel. The Court found the “sanctions exclusion” as in the Travelers policy is “commonly understood” to “refer to sanctions motions brought by opposing counsel.” Thus the Court found that the actual sanctions Mercy sought in the sanctions petition were really malpractice damages “even though brought under a cause of action for sanctions”!

What next will we see?  Insurers are employing imaginative coverage counsel so no argument is too outlandish.