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CHICAGO INS. CO. v. BORSODY

September 27, 2001

CHICAGO INSURANCE COMPANY, PLAINTIFF,
V.
ROBERT P. BORSODY, DEFENDANT.



The opinion of the court was delivered by: Sweet, District Judge.

OPINION

Defendant Robert P. Borsody ("Borsody") has moved for summary judgment pursuant to Rule 56, Fed.R.Civ.P., to declare that the plaintiff Chicago Insurance Company ("CIC") has an obligation under a lawyer's professional liability insurance policy to defend and indemnify him arising out of an action Allstate Insurance Company, et ano. v. Northfield Medical Center, P.C., et al., Docket No. MRL-L-3228-99, pending in the Superior Court of New Jersey, Morris County (the "Allstate Action") and in connection with a cross-claim against him asserted by defendant Scott Neuner ("Neuner") in that action. CIC has also moved for summary judgment declaring the absence of any duty to defend and indemnify and for reimbursement of expenses incurred in connection with its defense of the Neuner cross-claim. For the reasons set forth below, the CIC motion is granted, and the Borsody motion is denied.

This coverage dispute between a lawyer and the company which issued a professional liability policy turns on the fraud exception to the policy when a lawyer is alleged to have participated in a fraud under a state regulatory statute and to an interpretation of the requirements of immediate notice under the policy when a cross-claim is made in the same action by a former client, also a defendant.

Prior Proceedings

This action was commenced by CIC on June 29, 2000, seeking a declaration that it had no duty to defend and indemnify Borsody as a result of the Allstate Action and that it was entitled to the cost of its defense of the counterclaim asserted by Neuner in that action. On September 11, 2000, Borsody counterclaimed seeking coverage for both the Allstate Action and the Neuner cross-claim.

The instant motions for summary judgment were heard and marked fully submitted on June 13, 2001.

The Facts

The underlying facts relative to this coverage action are not in dispute, and are set forth in the parties' respective Local Rule 56.1 Statements.

CIC is a corporation organized and existing under the laws of Illinois, with a principal place of business in the State of Illinois, and is authorized to issue insurance policies in the State of New York.

Borsody is an attorney duly licensed to practice law in the State of New York and currently maintains an office for such purpose at 909 Third Avenue, New York, New York. His practice has focused on business and financial issues involving health care law. He has written articles for various publications concerning the legal requirements of the formation of "multidisciplinary" medical practices, and has spoken to health care practitioners and their professional advisors, i.e. physicians, chiropractors, physical therapists, attorneys, accountants, businessmen, etc., at numerous seminars.

CIC issued a lawyer's professional liability insurance policy to Borsody, No. LWB3007967-1, effective for the claims-made period from October 1, 1998 to October 1, 2000 (the "Policy").

In the fall of 1999, CIC proposed revisions of its lawyer's professional liability insurance policy form to the New York State Department of Insurance. Those revisions were approved by the Department of Insurance on February 29, 2000. CIC adopted those revisions effective February 29, 2000.

In December 1999, Borsody was served with a summons and complaint in the Allstate Action. The 64-page complaint ("the Complaint") alleged among other things that Borsody is a New York attorney, and that certain of the defendants, including Borsody, colluded to defraud Allstate, the insurance industry and the ratepayers of New Jersey by creating a sham medical corporation and entering into agreements for the purpose of circumventing New Jersey statutes and the Administrative Code regulating the providing of health care in New Jersey. It alleged that Borsody participated in this conspiracy, by speaking at a seminar and by assisting the defendants.

On December 1, 1999, Borsody sent a copy of the Allstate Action complaint to Bertholon-Rowland, the managing general agent of CIC, with a cover letter requesting that CIC defend the Allstate Action claim, stating therein that while the plaintiff Allstate was not a client of his "the action certainly seems to arise out of my legal practice."

On December 14, 1999, CIC sent a letter to Borsody disclaiming coverage under the Policy on the grounds that the Policy only provides coverage for liability or damages "arising out of any negligent act, error, omission or Personal Injury in the rendering of or failure to render Professional Services" and that the Policy excludes coverage for acts "arising out of any dishonest, fraudulent, criminal or malicious act, omission or deliberate misrepresentation committed by or at the direction of, or with the knowledge of any Insured."

Following receipt of CIC's disclaimer, Borsody retained counsel to represent his interests in the Allstate Action. Borsody's counsel became aware of the possible existence of two criminal investigations of Borsody involving the same or similar issues as alleged in the Allstate complaint.

On or about February 1, 2000, counsel for Borsody filed a motion to dismiss the Allstate action on behalf of Borsody, sought an order dismissing the First, Second and Third Counts due to the misconduct of Allstate's counsel, or in the alternative, an order staying the Allstate Action or compelling discovery into Allstate's role in encouraging a parallel and related criminal investigation or in the alternative severing the First, Second and Third Counts of the complaint.

As a result of a pretrial conference, an agreement was reached with Allstate that the portion of Borsody's motion to stay the proceedings would be withdrawn in exchange for an agreement that discovery would be stayed until such time as Borsody's counsel could consult with the appropriate law enforcement authorities to determine Borsody's status in any pending criminal investigations. It was eventually confirmed that an investigation was being conducted by the Attorney General of the State of New Jersey and that the United States Attorney's Office was not conducting an investigation of matters related to the Allstate Action.

On or about March 8, 2000, counsel to Borsody's office was served with an answer and cross-claim of Neuner in the Allstate Action. Neuner was a former client of Borsody. The cross-claim asserted causes of action against Borsody, including ...


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