Ross v. Continental Casualty Company

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA

____________________________
)
BRYAN S. ROSS, )
)
Plaintiff, )
)
v. ) Civil Action No. 07-1450 (RWR)(AK)
)
CONTINENTAL CASUALTY CO., )
)
Defendant. )
____________________________)

MEMORANDUM OPINION

Plaintiff, Chapter 7 bankruptcy trustee Bryan Ross, brought

this action against defendant Continental Casualty Company

(“Continental”) arguing that Continental breached a contract by

failing to defend and indemnify the Law Offices of Stanley H.

Goldschmidt, P.C. (“Goldschmidt, P.C.”) for liability arising

from a malpractice lawsuit. Continental filed a counterclaim

seeking a declaratory judgment that the policy did not cover

Goldschmidt, P.C.’s claim. Continental has moved for judgment on

the pleadings, or in the alternative for summary judgment, and

Magistrate Judge Alan Kay recommends that Continental’s motion

for summary judgment be granted. Because the undisputed facts

reflect that the professional liability policy did not require

Continental to defend and indemnify Goldschmidt, P.C., Magistrate

Judge Kay’s recommendation will be adopted and Continental’s

motion for summary judgment will be granted.
 - 2 -

BACKGROUND

Stanley Goldschmidt (“Goldschmidt”) represented Restaurant

Equipment and Supply Depot, Inc. (“RESD”) in a lawsuit filed

against it in Superior Court for the District of Columbia. Rest.

Equip. & Supply Depot, Inc. v. Gutierrez, 852 A.2d 951 (D.C.

2004). Goldschmidt failed to file a timely answer on behalf of

RESD and default was entered. Goldschmidt moved unsuccessfully

to vacate the entry of default, and the Superior Court entered

final default judgment against RESD for over $800,000 on May 1,

2001 after a trial on damages. Id. at 954. (See Def.’s Stmt. of

Material Facts (“Def.’s Stmt.”) ¶ 8.) Goldschmidt filed an

unsuccessful appeal for RESD with the District of Columbia Court

of Appeals (“Court of Appeals”). Gutierrez, 852 A.2d at 957.

While RESD’s appeal was pending, Continental issued a

professional responsibility liability policy to Goldschmidt,

P.C.1 that provided coverage for claims made and reported from

May 1, 2003 to May 1, 2004. (Def.’s Stmt. ¶¶ 18, 20.) This

policy was renewed until it was cancelled as of July 1, 2005.

(Id. ¶ 18.) Upon cancellation, Goldschmidt, P.C. purchased an

unlimited extended reporting period (id. ¶ 19), which created a

“period of time after the end of the policy period for reporting

1
Goldschmidt, the principal of Goldschmidt, P.C. at the
time (Pl.’s Opp’n to Mot. for Summ. J., Decl. of Stanley H.
Goldschmidt ¶ 2), was also an insured under the policy. (Def.’s
Mem. of P. & A. in Supp. of Mot. for J. on the Pldgs., Decl. of
Kelly V. Overman, Ex. A, Lawyers Professional Liability Policy
§ III.G) (defining “insured.”)
 - 3 -

claims by reason of an act or omission that occurred prior to the

end of the policy period and is otherwise covered by [the]

policy.”2 (Def.’s Mem. of P. & A. in Supp. of Mot. for J. on the

Pldgs., or in the Alt., Mot. for Summ. J. (“Def.’s Mem.”), Decl.

of Kelly V. Overman, Ex. A, Lawyers Professional Liability Policy

(“Liability Policy”) § VI.)

In September 2005, RESD filed for bankruptcy and Ross was

appointed trustee of the bankruptcy estate. (Def.’s Stmt. ¶ 13.)

Goldschmidt, P.C. notified Continental in January 2006, during

the policy’s extended reporting period, that Ross contemplated

asserting a malpractice claim against Goldschmidt, P.C.3 (Def.’s

Stmt. ¶ 19; Pl.’s Stmt. of Undisputed Material Facts (“Pl.’s

Stmt.”) ¶¶ 20, 21.) Under the policy, Continental agreed to

pay on behalf of the Insured all sums in excess of the
deductible that the Insured shall become legally
obligated to pay as damages and claim expenses because
of a claim that is both first made against the Insured

2
Plaintiff objected to defendant's factual statement that
the insurance policy at issue was a renewal of a policy first
issued for the period of May 1, 2003 to May 1, 2004, but
plaintiff provided no alternative statement of fact on this issue
to controvert the defendant. (Pl.'s Obj'n to Def.'s Stmt. ¶¶ 18,
20.) Moreover, the defendant alleged the same facts in its
counterclaim (Countercl. ¶¶ 34, 36), and the plaintiff admitted
them in his reply to the counterclaim. (Reply to Countercl.
¶¶ 34, 36.) Thus, paragraphs 18 and 20 of the defendant's
statement of facts will be treated as admitted. See Local Civil
Rule 7(h)(1).
3
Continental attached to its memorandum a copy of the
policy that covered May 1, 2005 to May 1, 2006. Ross does not
contest the validity of this policy, which covered the
malpractice claim against Goldschmidt, P.C. for its
representation of RESD.
 - 4 -

and reported in writing to the Company during the
policy period by reason of an act or omission in the
performance of legal services by the Insured or by any
person for whom the Insured is legally liable, provided
that . . . prior to . . . the inception date of the
first policy issued by the Company . . . , if
continuously renewed . . .[,] no Insured had a basis to
believe that any such act or omission, or related act
or omission, might reasonably be expected to be the
basis of a claim[.]

(Liability Policy § I.A (emphasis added).)

Ross later filed a malpractice lawsuit against Goldschmidt,

P.C. (Def.’s Stmt. ¶ 14.) Ross and Goldschmidt, P.C. reached a

settlement in which judgment was entered against Goldschmidt,

P.C., and Goldschmidt, P.C. assigned its rights under the

liability policy to Ross. (Id. ¶¶ 15-16; Pl.’s Stmt. ¶ 26.)

Goldschmidt, P.C. notified Continental of the adverse judgment.

(Def.’s Opp’n to Pl.’s Stmt. ¶ 22.) Continental denied coverage

of Goldschmidt, P.C.’s policy claim. (Def.’s Stmt. ¶ 24; Pl.’s

Stmt. ¶¶ 23, 25.)

Ross alleges that Continental breached the contract by

failing to defend and indemnify Goldschmidt, P.C. for liability

arising from the RESD malpractice lawsuit. (Compl. ¶ 44.)

Continental has filed a counterclaim seeking a declaratory

judgment that the policy barred coverage of the claim against

Goldschmidt, P.C., and has moved for summary judgment, arguing

that Goldschmidt, P.C. had a basis to know before the policy was

issued that its representation of RESD might trigger a

malpractice lawsuit. (Def.’s Mem. at 7-14.) Ross opposes
 - 5 -

Continental’s motion for summary judgment. He argues that D.C.

Code § 31-4314 bars Continental from denying coverage unless

Goldschmidt, P.C. subjectively intended in its policy application

to deceive Continental and the deception was material, for

neither of which there is any evidence. (Pl.’s Opp’n to Mot. for

Summ. J. (“Pl.’s Opp’n”) at 7-10.)

The magistrate judge recommends that Continental’s motion

for summary judgment be granted. The magistrate judge concluded

that no material facts remained in dispute as to whether

Goldschmidt, P.C. knew of prior events that could have triggered

a claim, and that § 31-4314 did not govern this dispute. (Report

& Recommendation (“R. & R.”) at 10-12.) Ross filed an objection

claiming that § I.A of the policy is ambiguous and should be

interpreted in Ross’ favor, that Continental had to show

materiality of a false statement or intent to deceive in the

application to deny coverage, and that an issue of fact exists as

to whether Goldschmidt’s actions might reasonably have been

expected to be the basis of a claim. (Pl.’s Obj’n to

Magistrate’s R. & R. (“Pl.’s Obj’n”) at 1-2, 5-6, 9.)

DISCUSSION

Under Local Civil Rule 72.3(c), “[a] district judge shall

make a de novo determination of those portions of a magistrate

judge’s findings and recommendations to which objection is made.”

Local Civil Rule 72.3(c); Ames v. Yellow Cab of D.C., Inc., Civil
 - 6 -

Action No. 00-3116 (RWR), 2006 WL 2711546, at *4 (D.D.C.

Sept. 21, 2006).

On a motion for summary judgment, “[t]he inquiry performed

is the threshold inquiry of determining whether there is the need

for a trial -- whether, in other words, there are any genuine

factual issues that properly can be resolved only by a finder of

fact because they may reasonably be resolved in favor of either

party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250

(1986). Summary judgment may be granted only where “the

pleadings, the discovery and disclosure materials on file, and

any affidavits show that there is no genuine issue as to any

material fact and that the movant is entitled to judgment as a

matter of law.” Fed. R. Civ. P. 56(c); see also Moore v.

Hartman, 571 F.3d 62, 66 (D.C. Cir. 2009). A material fact is

one that is capable of affecting the outcome of the litigation.

Liberty Lobby, Inc., 477 U.S. at 248. A genuine issue is one

where the “evidence is such that a reasonable jury could return a

verdict for the nonmoving party[,]” as opposed to evidence that

“is so one-sided that one party must prevail as a matter of law.”

Id. at 248, 252. A court considering a motion for summary

judgment must draw all “justifiable inferences” from the evidence

in favor of the nonmovant. Id. at 255. The nonmoving party,

however, must do more than simply “show that there is some

metaphysical doubt as to the material facts.” Matsushita Elec.

Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986).
 - 7 -

Rather, the nonmovant must “come forward with specific facts

showing that there is a genuine issue for trial.” Id. at 587

(internal quotation marks omitted).

I. D.C. CODE § 31-4314

Under D.C. Code § 31-4314, “[t]he falsity of a statement in

the application for any policy of insurance shall not bar the

right to recovery thereunder unless such false statement was made

with intent to deceive or unless it materially affected either

the acceptance of the risk or the hazard assumed by the

company.”4 D.C. Code § 31-4314. D.C. Code § 31-4314 prevents an

insurer from denying coverage or canceling a policy due to a

false statement in the application unless the applicant intended

to deceive the insurer or the false statement materially affected

the insurer’s decision of whether to insure the applicant.

Westhoven v. New England Mut. Life Ins. Co., 384 A.2d 36, 38

(D.C. 1978); see also Metro. Life Ins. Co. v. Adams, 37 A.2d 345,

348 (D.C. 1944) (noting that the section involves an insurer’s

attempts to “avoid such a policy for material misrepresentation

on account of the answers to the questions in the application”);

Burlington Ins. Co. v. Okie Dokie, Inc., 398 F. Supp. 2d 147, 157

(D.D.C. 2005) (applying § 31-4314 to an attempt to deny coverage

and cancel a policy by an insurer that claimed the application

contained a false statement that materially affected the

4
Section 31-4314 was previously codified as D.C. Code § 35-
414.
 - 8 -

insurer’s decision to issue the policy). Ross objects to the

magistrate judge’s conclusion that Continental does not have to

show intent to deceive or a material effect on the risk taken in

order to deny coverage. (Pl.’s Obj’n at 2.)

Continental did not ground its denial of the insured’s claim

on any assertion that the insured made any false statement in its

application. Continental denied the claim based on the assertion

that when the policy went into effect, Goldschmidt knew that his

representation of RESD that might reasonably be expected to be

the basis of a malpractice claim. (Def.’s Mem. at 1.) Section

I.A. of this “claims made and reported policy” barred claims

where prior to the first policy’s inception date, the “[i]nsured

has a basis to believe that any such act or omission, or related

act or omission, might reasonably be expected to be the basis of

a claim[.]” (Liability Policy § I.A.) See Robert Mallen &

Jeffrey Smith, 5 Legal Malpractice § 36:3 (2008) (stating that

“[a] claims-made policy usually states in the insuring agreements

or by exclusion that it does not apply to claims or known

circumstances that pre-existed the policy inception date, and

that may be or are likely to give rise to a claim”). No false

statement in the application need be present to trigger that bar.

Ross cites to Prudential Ins. Co. of Am. v. Saxe, 134 F.2d 16

(D.C. Cir. 1943), and argues that § 31-4314 cannot be

circumvented by contractual attempts to avoid the attachment of

risk. Id. at 25. However, unlike the insurer in Saxe who argued
 - 9 -

that the false statement in the application prevented the policy

from taking effect, id. at 24, Continental did not deny coverage

by claiming that the policy was void or not in effect.

Continental did not improperly circumvent § 31-4314 as that

statute does not apply to Continental’s decision here.

II. LIABILITY POLICY § I.A

Under District of Columbia law, “when [insurance] contracts

are clear and unambiguous, they will be enforced by the courts as

written, so long as they do not ‘violate a statute or public

policy.’” Hartford Accident & Indem. Co. v. Pro-Football, Inc.,

127 F.3d 1111, 1114 (D.C. Cir. 1997) (quoting Smalls v. State

Farm Mut. Auto. Ins. Co., 678 A.2d 32, 35 (D.C. 1996)). An

insurance contract is not “ambiguous merely because the parties

do not agree on the interpretation of the contract provision in

question.” Travelers Indem. Co. of Ill. v. United Food &

Commercial Workers Int’l Union, 770 A.2d 978, 986 (D.C. 2001).

“Policy language is not genuinely ambiguous unless ‘it is

susceptible of more than one reasonable interpretation.’” Chase

v. State Farm Fire & Cas. Co., 780 A.2d 1123, 1127-28 (D.C. 2001)

(quoting Am. Bldg. Maint. Co. v. L’Enfant Plaza Prop., Inc., 655

A.2d 858, 861 (D.C. 1995)). “[A] court will not torture words to

import ambiguity where the ordinary meaning leaves no room for

ambiguity[.]” Redmond v. State Farm Ins. Co., 728 A.2d 1202,

1206 (D.C. 1999) (internal quotation marks omitted) (first

alteration in original). Unless the policy violates public
 - 10 -

policy or a statute, an exclusion provision must be enforced even

if the insured did not foresee how the exclusion operated because

courts are hesitant to “rewrite insurance policies and reallocate

[the] assignment of risks between insurer and insured.” Chase,

780 A.2d at 1132.

Ross asserts that Liability Policy § I.A is ambiguous

because it is “reasonably open to two constructions.” (Pl.’s

Objection at 6.) He contends that the ambiguity comes from the

use of a subjective word “believe” and an objective word

“reasonably” in the same provision. If § I.A is ambiguous, Ross

argues, the ambiguity should be construed in favor of the insured

under District of Columbia law and the subjective belief of the

insured should govern. However, the inclusion of both subjective

and objective language does not necessarily cause § I.A to be

ambiguous.

Courts have applied insurance policy provisions with

subjective and objective language like that in § I.A. Such

provisions incorporate both a subjective consideration of the

facts known by the insured and an objective analysis of whether a

future malpractice claim might reasonably be expected to arise.

Colliers Lanard & Axilbund v. Lloyds of London, 458 F.3d 231 (3d

Cir. 2006) interpreted a provision stating that coverage would be

available “provided that the insured had no knowledge of any

suit, or any act or error or omission, which might reasonably be

expected to result in a claim or suit as of the date of signing
 - 11 -

the application for this insurance” as incorporating a subjective

look at the insured’s actual knowledge and an objective

consideration of “whether a reasonable professional in the

insured’s position might expect a claim or suit to result.” Id.

at 237; cf. Skinner v. Aetna Life & Cas., 804 F.2d 148, 150-51

(D.C. Cir. 1986) (stating that a provision using the phrase “to

the best of [the insured’s] knowledge and belief” “must be

assessed in the light of [the insured’s] actual knowledge and

belief”). Morever, the court in Westport Ins. Corp. v. Lilley,

292 F. Supp. 2d 165, 171 (D. Me. 2003), found that a provision

which prevented coverage “if any insured at the effective date

knew or could have reasonably foreseen that such act, error,

omission [or] circumstance . . . might be the basis of a claim,”

to be unambiguous, and “[w]hether the . . . defendants could have

reasonably foreseen [the lawyer’s] malpractice claim is an

objective test that can be determined as a matter of law, but it

must be determined based only on those facts and circumstances

that the . . . defendants were subjectively aware of.” See also

City of Brentwood, Mo. v. Northland Ins. Co., 397 F. Supp. 2d

1143, 1146, 1148 (E.D. Mo. 2005) (interpreting a provision that

extended coverage when “no Insured had any knowledge of any

circumstance likely to result in or give rise to a claim nor

could have reasonably foreseen that a claim might be made” to

mean that a court should “first look at the insured’s subjective

knowledge and then the objective understanding of a reasonable
 - 12 -

attorney with that knowledge” (internal quotation marks

omitted)). Section I.A incorporates a subjective consideration

of the insured’s knowledge and an objective consideration of

whether an act or omission “might reasonably be expected to be

the basis of a claim.” (Liability Policy § I.A.)

Ross argues that the magistrate judge erred in relying on

the Third Circuit case of Selko v. Home Ins. Co., 139 F.3d 146,

151-52 (1998), because Selko was later rejected in New Jersey by

Liebling v. Garden State Indem., 767 A.2d 515 (N.J. Super. Ct.

App. Div. 2001). As the Third Circuit thereafter explained,

Selko interpreted under Pennsylvania law an insurance policy

provision stating “the insured had no basis to believe that the

insured had breached a professional duty” to require that the

court consider “(1) the subjective question of whether the

insured knew of certain facts; and (2) the objective question of

whether a reasonable lawyer in possession of such facts would

have had a basis to believe that the insured breached a

professional duty.” Colliers Lanard & Axilbund, 458 F.3d at 237.

Liebling “acknowledge[d] that [Selko’s] interpretation is sound

as a matter of logic,” 767 A.2d at 523, but it departed from

Selko under the New Jersey doctrine that “in exceptional

circumstances, even the plain language of an exclusion can be set

aside if it is contrary to the objectively reasonable

expectations of the insured.” Colliers Lanard & Axilbund, 458

F.3d at 238. While Selko interpreted “basis to believe” to
 - 13 -

require both subjective and objective inquiries, Colliers Lanard

& Axilbund, 458 F.3d at 237, § I.A clearly has a “basis to

believe” requirement that is distinct from the plainly objective

“might reasonably be expected” component. The policy provision

at issue in this case unambiguously requires an objective inquiry

into what might have been reasonably expected to form a claim

based on the knowledge Goldschmidt possessed when the policy took

effect.5

Ross concedes that Goldschmidt knew the facts surrounding

the entry of default against RESD. Goldschmidt knew he did not

file an answer on behalf of RESD, unsuccessfully sought to have

Superior Court vacate the entry of default, and knew that the

Superior Court entered a default judgment against RESD before the

liability policy went into effect. (Pl.’s Opp’n, Decl. of

Stanley H. Goldschmidt ¶¶ 5-7.) See also Gutierrez, 852 A.2d at

953-54. Moreover, Goldschmidt’s known failure to file an answer

“might reasonably be expected to be the basis of a claim.”

(Liability Policy § I.A.) An attorney’s failure to file an

answer resulting in a court’s entry of default can constitute a

basis for a malpractice suit. See Kaempe v. Meyers, 367 F.3d

958, 966 (D.C. Cir. 2004) (stating that allowing entry of default

5
Ross argues that § I.A conflicts with § 31-4314. (Pl.’s
Obj’n at 8 n.2.) However, as is discussed above, § 31-4314
applies to denials of coverage based on false statements in an
application and not a denial based on the exclusion found in the
policy’s terms.
 - 14 -

judgment against a client by an attorney is an example of an act

or omission that is “so obvious that the trier of fact can find

negligence [by the attorney] as a matter of common knowledge”);

Hamilton v. Needham, 519 A.2d 172, 174-75 (D.C. 1986) (noting

that “permitting entry of default against a client” is an example

of negligence in a legal malpractice action); Lockhart v. Cade,

728 A.2d 65, 68 (D.C. 1999) (stating that “entry of a default

operates as an admission by the defaulting party that there are

no issues of liability”) (internal quotation marks omitted).

Although Goldschmidt was contesting the default judgment with the

Court of Appeals and believed that he would be successful, § I.A

does not require certainty that a malpractice claim will be

filed. Accordingly, § I.A prevents coverage of a malpractice

claim in connection with Goldschmidt’s representation of RESD.

CONCLUSION

Because § 31-4314 does not apply and the Liability Policy

barred coverage of Goldschmidt, P.C.’s claim, Magistrate Judge

Kay’s recommendation will be adopted, and Continental’s motion

for summary judgment will be granted. A final order accompanies

this Memorandum Opinion.

SIGNED this 2nd day of December, 2009.

/s/
RICHARD W. ROBERTS
United States District Judge