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Schlather, Stumbar, Parks & Salk, Llp, et al v. (Npm/Dep

January 21, 2011

SCHLATHER, STUMBAR, PARKS & SALK, LLP, ET AL., PLAINTIFFS,
v.
(NPM/DEP) ONE BEACON INSURANCE COMPANY, DEFENDANT.



The opinion of the court was delivered by: Neal P. McCurn, Senior District Judge

Memorandum, Decision and Order

I. Introduction

This insurance action was removed to this court, which has jurisdiction pursuant to 28 U.S.C. § 1332. By their complaint, plaintiffs, Schlather, Stumbar, Parks & Salk, LLP, et al. ("Plaintiffs") purport to set forth three causes of action against defendant, One Beacon Insurance Company ("Defendant") for declaratory relief, breach of contract, and "breach of covenant of good faith and fair dealing." Compl. ¶¶ 42-59. Plaintiffs seek, among other things, a declaratory judgment, money damages in the amount of $5,000.000 and punitive damages.

After removal of this action, Defendant filed a motion to dismiss Plaintiffs' third cause of action for breach of the covenant of good faith and fair dealing pursuant to Rules 8(a)(2), 9(b) and 12 (b)(6) of the Federal Rules of Civil Procedure. By its motion, Defendant also seeks an order striking Plaintiffs' demand for punitive damages.

Plaintiffs thereafter amended their complaint pursuant to Rule 15(a) of the Federal Rules of Civil Procedure. The Amended Complaint contains no demand for punitive damages, but includes expanded allegations in support of the third cause of action for breach of the covenant of good faith and fair dealing. Am. Compl. ¶¶ 54-60. Accordingly, Defendant's motion is moot insofar as it seeks an order striking Plaintiffs' demand for punitive damages.

Plaintiffs oppose Defendant's motion to dismiss the claim for breach of the covenant of good faith and fair dealing and Defendant replies. Decision regarding the pending motion is rendered on the papers submitted, without oral argument.

II. Factual Background

In August of 2008, a broker contacted plaintiff David M. Parks ("Parks"), managing partner of plaintiff law firm ("the Firm"), concerning the renewal of the Firm's professional liability insurance policy. The broker sent Parks an application for professional liability coverage by Defendant, but did not send a copy of the policy. Parks completed the application form and submitted it to Defendant in September of 2008. Defendant accepted the application and committed in writing to providing Plaintiffs professional liability coverage effective October 1, 2008, but did not set forth any policy exclusions. Shortly thereafter, Defendant issued a lawyer's liability policy to Plaintiffs ("the Policy"), attached to the Amended Complaint as exhibit A. The Policy provides coverage for claims made against the insureds during the period October 1, 2008 through October 1, 2009, in the amount of $1,000,000 per claim, including defense costs. The Policy was renewed in October of 2009 for the period October 1, 2009 through October 1, 2010.

In December of 2008, a former client notified Plaintiffs of her claim against them for legal malpractice. The action against Plaintiffs was commenced in January of 2009. Plaintiffs promptly notified Defendant of the lawsuit, with a demand for defense and indemnification. Defendant appeared and provided a defense to Plaintiffs.

In February of 2009, Defendant issued a reservation of rights letter, attached to the Amended Complaint as exhibit B. Defendant continued to provide a defense to Plaintiffs until September 9, 2009, when it withdrew its provision of a defense in writing, which is attached to the Amended Complaint as exhibit C.

In Count I of the Amended Complaint, Plaintiffs allege that Defendant failed to perform under the insurance contract and seek a declaratory judgment that Defendant is obligated to provide Plaintiffs a defense and indemnification. In Count II of the Amended Complaint, Plaintiffs allege that Defendant breached the insurance contract, thereby damaging Plaintiffs by, among other things, loss of insurance coverage; incursion of defense costs; loss of peace of mind and related security, financial and otherwise; and other consequential damages in the amount of $5,000,000.

Count III of the Amended Complaint, labeled "breach of covenant of good faith and fair dealing" includes the allegation that Defendant has "intentionally, knowingly and unreasonably denied claims for professional liability coverage." Am. Compl. ¶ 55. In addition, Plaintiffs allege that Defendant engaged in "systematic and exclusionary conduct" including soliciting insurance and using an application form therefor that is deceptive and misleading when compared to the terms of the policy; selling a professional liability insurance policy that provides a claimed coverage that is illusory; incorporating exclusions into the policy that are impossible to anticipate or overcome in the application process; declining to provide a copy of the policy language before the application therefor; abandoning the defense of its insureds in the middle of litigation; failing to negotiate the underlying claim in good faith; and otherwise acting in bad faith.

Am. Compl. ¶ 56.

As an "example" Plaintiffs allege that the application for coverage asks "are you or any member or employee aware of any fact, circumstance or situation which may give rise to a claim?" However, Plaintiffs allege, the actual Policy language is more broad and excludes any claim arising from a wrongful act if the insured "had a reasonable basis to believe that [the insured] had committed a wrongful act or engaged in professional misconduct." Am. Compl. ΒΆ 57(a), citing Ex. A, at 11. Plaintiffs allege that while the application refers only to potential claims, the actual Policy exclusions include "a whole ...


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