Commercial Litigation and Arbitration

Sanctions Exclusion in Legal Malpractice Policy Does Not Bar Coverage of Sanctions Motion Joined in by Lawyer’s Own Client

The plaintiffs in Post v. St. Paul Travelers Ins. Co., 2009 U.S. Dist. LEXIS 641 (E.D. Pa. Jan. 7, 2009), were lawyers who had represented Mercy Hospital in a medical malpractice case. Mercy Hospital put the lawyers on notice that it intended to pursue a legal malpractice claim against them, contending that counsel’s discovery abuse forced it to settle the underlying medical malpractice case. Thereafter, the med mal plaintiffs filed a sanctions motion against the same counsel for the same discovery abuse, and Mercy (the lawyers’ clients) joined in the sanctions motion. The lawyers brought this action for coverage after the carrier denied coverage based on the exclusion in the policy for “civil or criminal fines, forfeitures, penalties, or sanctions.” Held, once the lawyers’ client joined the motion, having previously put the lawyers on notice of a legal malpractice claim, the sanctions motion was in substance a malpractice claim and was not excluded from coverage as seeking “sanctions” within the meaning of the policy:

The term "sanctions" was undefined in the Liability Policy. If an attorney errs, his or her client typically seeks malpractice damages, not relief in the form of the excluded damages in the above list. Sanctions, in particular, are understood by the legal community to be sought by opposing counsel. Under Pennsylvania law, sanctions based upon a party's violation of discovery rules may only be imposed by the court on motion of a party and cannot be imposed sua sponte. Pennsylvania Rule of Civil Procedure 4019(a)(1). As Gregory Joseph says, "Rule 11 jurisprudence is often looked to when sanctions are considered under rules or other powers." Gregory P. Joseph, Sanctions: The Federal Law of Litigation Abuse § 1, 2 (4th ed. 2008). ***

In this case, Mercy requested relief from Post in the form of "sanctions or any other relief the Court deems just and equitable under the unique and serious circumstances presented before it." The sanctions exclusion in the Liability Policy, however, under the commonly understood definition of sanctions as discussed above, refers to sanctions motions brought by opposing counsel. This exclusion does not preclude from coverage a sanctions petition joined by a lawyer's former client, particularly one brought in anticipation of a malpractice suit based on identical allegations of wrongdoing. The attorney-client relationship between Post and Mercy indicates that the damages Mercy requested in the sanctions petition were actually malpractice damages, though Mercy termed them "sanctions." As Post's former client, the facts alleged by Mercy in the sanctions petition sound in malpractice, even though brought under a cause of action for sanctions. It is the facts in the complaint that dictate whether the exclusion in the liability policy applies, not the cause of action selected by Mercy. If the sanctions petition were excluded from coverage, Mercy could choose whether to proceed with an action where Post was covered by his insurance carrier, or an action where Post was not, and potentially be awarded similar relief in either action.

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