The opinion of the court was delivered by: Neal P. McCurn, Senior District Judge
Memorandum, Decision, and Order
Presently before the court in this diversity action is defendant's
motion for summary judgment, and plaintiffs' cross-motion for summary
to Rule 56 of the Federal Rules of Civil Procedure. Each party has
opposed the respective motions. Decision on the pending motions is
based entirely on the submitted papers, without oral argument. For the
reasons that follow, defendant's motion is granted in part and denied
in part and plaintiffs' cross-motion is granted in part and denied in
II. Procedural Background
Plaintiffs commenced this action in New York State Supreme Court, Tompkins County on January 13, 2010, which was removed to this court on February 11, 2011. In their original complaint, Schlather, Stumbar, Parks & Salk, LLP ("the Firm"*fn1 ), et al. (collectively "Plaintiffs"), set forth three causes of action against One Beacon Insurance Company ("Defendant" or "One Beacon") for (1) declaratory relief, (2) breach of contract, and (3) "breach of covenant of good faith and fair dealing" stemming from Plaintiffs' claimed coverage under a professional liability insurance policy executed between the parties, which Defendant denied. After removal to this court, Defendant filed a motion to dismiss the third cause of action pursuant to Rules 8(a)(2), 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure. Plaintiffs thereafter amended their complaint pursuant to Rule 15(a) of the Federal Rules of Civil Procedure, expanding the allegations in support of the third cause of action. This Court granted Defendant's motion and dismissed the third cause of action as set forth in the amended complaint. See Schlather, Stumbar, Parks & Salk, LLP v. One Beacon Ins. Co., No. 5:10-cv-0167, 2011 WL 222235, at *1 (N.D.N.Y. Jan. 21, 2011).
In moving for summary judgment, Defendant argues that the insurance policy's known claims exclusion bars coverage of a certain malpractice action against Plaintiffs. Defendant also notes that it disclaimed coverage because that action arose from a claim that had been made before the insurance policy came into effect.
In support of their cross-motion for summary judgment, Plaintiffs argue that (1) Defendant improperly disclaimed coverage; (2) Defendant had a duty to provide a defense; and (3) Defendant breached the parties' contract by failing to defend and indemnify Plaintiffs.
The following facts are not in dispute.
The Firm had professional liability insurance with Zurich Insurance Company ("Zurich"), which expired on September 30, 2008. Prior to the expiration, an insurance broker contacted David M. Parks ("Parks"), then the Firm's managing partner, and provided Parks with an application for professional liability insurance through One Beacon. Two of the questions appearing on the application were "(a) Has any professional liability claim or suit been made against you, your firm or any other member of your firm in the past five (5) years?" and "(b) Are you or any members or employees aware of any fact, circumstance or situation which may give rise to a claim?" Ex. A. to Aff. of Sarah R. Schmitz, Feb. 11, 2011 ("Schmitz Aff."), at 3, Dkt. No. 23-48. Parks checked the boxes labeled "No" in response to those questions. Id. Parks signed and dated the application on September 10, 2008. Id. Thereafter, One Beacon issued an insurance policy to the Firm, which coverage was to start at 12:01 A.M. on October 1, 2008, and end at 12:01 A.M. on October 1, 2009.
Diane L. Campbell ("Campbell") began working for the Firm in February 2000, and became a partner in January 2005. She continued as partner in the Firm and its successor entities until April 6, 2007. In the spring of 2002, Campbell began representing Sandra Stoel ("Stoel") in a worker's compensation case arising from the death of Stoel's husband in a work-related accident that occurred in February 2002. In or about January 2004, Stoel told Campbell that she was interested in filing a wrongful death action against her deceased husband's employer, Leprino Foods, Inc. That action was filed in New York State Supreme Court, Tioga County on February 13, 2004 ("Leprino Action"). The Leprino Action was then removed to the United States District Court for the Northern District of New York on or about September 22, 2004, and was dismissed on August 22, 2006.
On May 24, 2007, Stoel learned from a paralegal at the Firm that the Leprino Action had been dismissed. Stoel met with Raymond M. Schlather ("Schlather"), another partner at the Firm, on June 28, 2007, to discuss the Leprino Action. At this meeting, Stoel gave Schlather three typewritten pages of notes that were critical of Campbell's performance, and the notes asked a number of questions regarding the Firm's work on the case.
After this meeting, Schlather intended to review the case file and to send Stoel a letter to explain what had happened. Schlather sent a later, dated July 31, 2007, explaining that the wrongful death action was dismissed because "Campbell determined that [it] did not have merit and elected not to prosecute it further." Ex. A to Aff. of Raymond M. Schlather, Feb. 24, 2011, Dkt. No. 27-7 ("Schlather Aff."). Schlather also described a February 26, 2006, meeting where Campbell advised Stoel that the case "did not have merit and requested [Stoel's] assent to discontinue the action," but Stoel responded that she "wanted to think about what [Campbell] had said," and that she would later follow-up. Id. Schlather also noted that the Firm's records "indicate that as of March 8, 2005, . . . Campbell had not heard back from [Stoel] and advised opposing counsel -- who then advised the court -- accordingly." Id. Schlather also apologized for the Firm's failure to notify Stoel of the dismissal. Id. Stoel responded to this letter on August 7, 2007, stating, among other things, that she did not consent to the dismissal of the Leprino Action. See Ex. B to Schlather Aff., Dkt. No. 27-9 ("Stoel Letter").*fn2
On December 5, 2008, Patrick J. Higgins ("Higgins") of Powers & Santola, LLP ("Powers & Santola"), in a letter addressed to Schlather, "demand[ed] . . . all damages, loss and harm arising from legal practice in" the Firm's handling of the Leprino Action. Ex. D. to Schlather Aff. ("Higgins Letter"). By his letter, Higgins also instructed Schlather to "notify the legal malpractice carriers for [the Firm], its partners, and all predecessor firms and partners" that Powers & Santola was making a demand on those policies. Id. Five days later, Schlather wrote a letter to Zurich and One Beacon requesting that they represent the Firm. See Ex. C to Schmitz Aff. at 2-3, Dkt. No. 23-50.
A malpractice action on behalf of Stoel and against the Firm, Schlather, and Campbell was commenced on or about January 5, 2009 ("Stoel Malpractice Action"). The next day, Schlather sent a fax to One Beacon's Chief Claims Officer to repeat his request that One Beacon "enter and defend" the Firm in the Stoel Malpractice Action. Ex. C to Schmitz Aff. at 1. Included in the fax were two letters between the Firm and Stoel; Schlather's initial letter to One Beacon seeking representation; and the Higgins Letter.
On February 25, 2009, One Beacon Claims Attorney Sarah R. Schmitz ("Schmitz") notified Schlather that One Beacon had "agreed to provide a defense to" the named defendants in the Stoel Malpractice Action, "subject to a reservation of rights." Ex. F. to Schlather Aff. at 1, Dkt. No. 27-13. Approximately six months later, on September 9, 2009, Schmitz sent a letter to Schlather notifying him that One Beacon "will no longer provide for [the Firm's] defense and will not provide indemnity coverage" in the Stoel Malpractice Action because the Policy did not cover the claims arising from that action. Ex. J to Schmitz Aff. at 1, Dkt. No. 23-57 ("Disclaimer Letter").
In the Disclaimer Letter, Schmitz stated that the "claim was first made in August 2007 at a time when no policy was yet in force." Id. Schmitz further stated that Campbell "made a conscious decision to allow the dismissal" of the wrongful death action, and that the Firm was aware in the summer of 2007 that Stoel was angry about the dismissal. Id. at 2. Schmitz specifically cited to the following portions of the Policy:
We agree to pay on your behalf all damages in excess of the deductible amount and up to the limits of liability stated in the Declarations provided such damages: A. result from claims: 1) first made against you during the policy period[.]*fn3 . . . .
This policy does not apply to: A. any claim arising out of a wrongful act occurring prior to the policy period if, prior to the effective date of [the Policy]: . . . 2. you had a reasonable basis to believe that you had committed a wrongful act or engaged in professional misconduct; [or]
3. you could foresee that a claim would be made against you[.]*fn4
Ex. J to Schmitz Aff. at 1-2 (emboldened in original). See also Ex. B to Schmitz Aff. at 11, 20.
A. Legal Standards Governing Motions for Summary Judgment
A motion for summary judgment shall be granted "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." FED. R. CIV. P. 56(a). The movant has the initial burden to show why it is entitled to summary judgment. See Salahuddin v. Goord, 467 F.3d 263, 272 (2d Cir. 2006) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S. Ct. 2548 (1986)). If the movant meets its burden, the burden shifts to the non-movant to identify evidence in the record that creates a genuine issue of material fact. See id. at 273 (citing Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S. Ct. 1348 (1986)). A party's factual assertions must be supported by
(A) citing to particular parts of materials in the record, including depositions, documents, electronically stored information, affidavits or declarations, stipulations (including those made for purposes of the motion only), ...