Contempt Sanctions Not Insurable Damages

Lawyers Held In Contempt Cannot Receive Defense or Indemnity From E&O Insurer

Lawyers acting badly can cause problems for others. When a group of lawyers violated a court order and caused a company to be sued who would never have been sued but for the contumacious action of the lawyers sued to seek coverage from their lawyers malpractice insurer.  In Jones, Foster, Johnston & Stubbs, P.A. v. Prosight-Syndicate 1110 At Lloyd’s, United States Court of Appeals, Eleventh Circuit, No. 15-12399, 2017 WL 586450 (February 14, 2017) the Eleventh Circuit was asked by the lawyers to compel their insurer to provide defense and indemnity for their wrongful conduct.

FACTS

The Elevent Circuit was asked hether professional liability insurer ProSight-Syndicate 1110 at Lloyd’s (“ProSight”) was contractually obligated to defend several attorneys employed by its insured, Jones, Foster, Johnston & Stubbs, P.A. (“Jones Foster”), against a motion for an order to show cause why they should not be held in contempt and sanctioned. After Prosight refused to provide a defense, Jones Foster sued seeking both damages for breach of contract and declaratory relief. The District Court granted Prosight’s motion to dismiss with prejudice.

Prosight issued a Primary Lawyer’s Professional Liability Insurance Certificate (the “Policy”) to Jones Foster. The Policy purported to cover “all sums which the Insured shall become legally obligated to pay as damages for claims … arising out of any act, error, [or] omission … in the rendering of or failure to render Professional Services by any Insured covered under this policy.” Under the Policy, a claim is “a demand for money or services … [but does not] include proceedings seeking injunctive or other non-pecuniary relief.” And, damages are “compensatory judgments, settlements or awards [not including] punitive or exemplary damages, sanctions, fines or penalties assessed directly against any insured.” (emphasis added)

Attorneys employed by Jones Foster were representing Gary Donald Carroll in a defamation suit filed in the Circuit Court of the Fifteenth Judicial Circuit of Florida, in and for Palm Beach County, against TheStreet.com, Inc., an online news source. One issue in that litigation involved whether the Florida statutory journalist’s privilege extended to protect TheStreet.com’s sources, the identities of which the TheStreet.com had inadvertently disclosed to Carroll during discovery. Pertinent to the instant case, the Circuit Court entered an order granting TheStreet.com’s motion for a protective order concerning those disclosures that barred Carroll from any further use of, reference to, or reliance on, the privileged information. Following an extensive investigation, Carroll claimed that he had independently identified Third Point as the source of the defamatory statements, and amended his complaint to add Third Point as a defendant.

Third Point filed a motion that argued that the court should impose sanctions to punish misconduct for, among other things, the filing of an affidavit that Carroll’s lawyers knew to be materially false. The Contempt Motion sought the following remedies for the alleged misconduct of Caroll and his lawyers: (1) removal of all references to Third Point in the lawsuit; (2) dismissal of Carroll’s claims against Third Point with prejudice; and (3) attorneys’ fees and costs incurred by Third Point in the litigation.

Jones Foster filed a claim requesting that ProSight defend its lawyers against the Contempt Motion pursuant to the terms of the Policy. After ProSight investigated it refused to defend.

Jones Foster then sued Prosight alleging breach of contract, breach of the covenant of good faith. Days later, Prosight filed a motion to dismiss for failure to state a claim arguing that the plain terms of the Policy specifically excluded coverage for proceedings seeking sanctions and other non-pecuniary forms of relief. The District Court agreed and granted Prosight’s motion dismissing Jones Foster’s lawsuit with prejudice.

ANALYSIS

In Florida, a liability insurer’s obligation to defend a claim made against its insured must be determined from the allegations in the complaint. The trial court is restricted to the allegations of the complaint, regardless of what the defendant and others say actually happened.

All doubts regarding the insurer’s potential duty to defend must be resolved in the insured’s favor. The insurer’s duty is not unlimited, and the insurance company is not required to defend if it would not be bound to indemnify the insured even though the plaintiff should prevail in the underlying action. Under Florida law, the terms used in an insurance contract are given their ordinary meaning, and the policy must be construed as a whole giving every provision its full meaning and operative effect

The Eleventh Circuit concluded, as was obvious, that there is no ambiguity in the case. There is no question that the plain terms of the Policy relieve Prosight of any duty to defend against proceedings seeking monetary sanctions or non-pecuniary relief.

A review of the underlying Contempt Motion demonstrates that it was not a suit against Jones Foster, or its attorneys, for a compensatory judgment or award. Instead, the underlying Contempt Motion sought an “order to show cause why … attorneys at Jones Foster … should not be held in contempt and sanctioned for their willful violation of [a court order].” The Contempt Motion further requested that the court sanction the involved attorneys by striking all claims against Third Point from the case and requiring they pay the attorney’s fees and costs incurred by Third Point as a consequence of their misconduct.

There is no suggestion that the Contempt Motion underlying this action involved anything other than an attempt to sanction lawyers employed by Jones Foster for “their contumacious and outrageous conduct.” Since the Policy makes crystal clear that only suits seeking “compensatory judgments, settlements, or awards” trigger a duty to defend on the part of Prosight. In the words of the District Court below, “[b]ecause the contempt motion sought sanctions … [rather than compensatory damages], [Prosight] did not have a duty to defend [Jones Foster].”

Jones Foster tried to avoid this conclusion by arguing that the attorney’s fees and costs sought in the Contempt Motion were compensatory in nature and accordingly the claim below was, at least in part, covered by the terms of the Policy. Although sanctions may serve a remedial, the compensatory purpose they retain their essential character as a punishment.

 The assessment of attorney’s fees and costs pursuant to a contempt finding is a paradigmatic example of a sanction serving a compensatory purpose while still functioning as a punishment.  Although attorney’s fees are necessarily a compensatory award, assessing these fees pursuant to a contempt finding effectively penalizes the wrongdoer.

Existing case law discussing compensatory awards made pursuant to a contempt of court judgment also uniformly refers to those awards as sanctions.  Although Florida law makes clear that ambiguities in an insurance contract must be “construed in favor of coverage,” the policy “must actually be ambiguous” to allow for such a construction.

It is evident, based on the terms of the Policy as a whole, that the fraud Exclusion Clause does not fashion new obligations; instead, it acts as a bar to claims that otherwise would be covered pursuant to the Policy—claims seeking “compensatory judgments, settlements or awards.” The exclusion for claims arising out of dishonest or fraudulent conduct becomes relevant only if coverage would exist under the Policy in the first instance. Here, there is no duty to defend, and so the Exclusion Clause never comes into play.

The underlying Contempt Motion asserts no theory of vicarious liability to the law firm.  The Contempt Motion sought sanctions only against the attorneys actually involved in the underlying action, particularly Wilkins and Rothman. The Contempt Motion did not advance any theory that would implicate the firm as an independent entity subject to sanctions for the actions of its individual lawyers.

The Policy at issue in this case unambiguously provides that Prosight’s duty to defend extends only to claims for compensatory damages, not sanctions. It is equally clear that Jones Foster requested a defense to a Contempt Motion that sought only sanctions and other forms of non-pecuniary relief, all expressly disclaimed by the Policy’s plain terms.  Prosight did not breach the terms of the Policy by refusing to defend Jones Foster or its lawyers.

ZALMA OPINION

One would expect lawyers able to read an insurance policy. To bring this case seeking coverage for contumacious conduct by lawyers part of a law firm where all that was being sought by the other party was contempt and sanctions neither of which sought damages insured against by the policy. Their attempts were creative and lawyer-like but were simply and clearly wrong.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Libraryat www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972

Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

 

 

About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
This entry was posted in Zalma on Insurance. Bookmark the permalink.