United States Court of Appeals
For the First Circuit
No. 99-1909
THE HOME INSURANCE COMPANY,
Plaintiff, Appellant,
v.
ST. PAUL FIRE & MARINE INSURANCE COMPANY, ET AL.,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MAINE
[Hon. Gene Carter, U.S. District Judge]
Before
Boudin, Circuit Judge
Bownes, Senior Circuit Judge
and Lynch, Circuit Judge.
David A. Grossbaum, with whom Maura K. McKelvey and Cetrulo
& Capone were on brief, for appellant.
Richard L. Suter, with whom Suter & Associates was on brief,
for appellee.
October 11, 2000
LYNCH, Circuit Judge. In 1995, the Maine law firm of Smith
& Elliott (S&E) was sued for malpractice. 1 S&E held lawyers'
professional liability insurance from both The Home Insurance
Company and St. Paul Marine & Fire Insurance Company. The Home
defended the firm in the 1995 suit and eventually settled. In
the meantime, The Home brought this suit, seeking a declaration
that St. Paul was obligated to share the costs of defending and
indemnifying S&E. The magistrate judge recommended granting
summary judgment to St. Paul. The district court affirmed the
magistrate's recommended decision. We reverse and remand with
instructions.
I.
In 1989, S&E represented a number of investors in the
purchase and rehabilitation of a hotel in Kennebunk, Maine,
called the Shawmut Inn. The project fell through, and in 1995
the investors sued S&E for malpractice. Investors Bernard F.
Shadrawy, Jr. and Joseph D'Jamoos brought suit in early 1995.
Other investors Ralph Bruno, Port Resort Realty Corporation,
and Harbor Lights Realty Trust brought a separate suit around
November of the same year. The costs of defending and
1 At the time when the events underlying this case began,
S&E was known as Smith, Elliott, Smith & Garmey. For the sake
of simplicity, we use the firm's current name throughout this
opinion.
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settling the Bruno suit are the subject of the controversy in
this case.
Initially, the Bruno suit was concerned solely with acts
S&E committed in 1989, while representing the plaintiffs in
the Shawmut Inn project. The Bruno plaintiffs charged that
S&E failed to obtain a written loan commitment from the Bank
of New England, and that consequently the Bank declined to
honor its oral agreement to lend the plaintiffs $4 million in
construction funds, causing the project's collapse. However,
in February of 1996, in response to a motion to dismiss based
on the statute of limitations, the Bruno plaintiffs amended
their complaint, adding charges that in 1995 S&E breached
various ethical duties owed to the Bruno plaintiffs.
Specifically, the amended Bruno complaint alleged that in
1995, while S&E was defending itself in the two malpractice
suits, S&E (1) disclosed the Bruno plaintiffs' files to
Shadrawy and D'Jamoos without proper authorization; (2)
wrongfully obtained a statement from Bruno for use in the
Shadrawy suit; (3) contacted other prior counsel of the Bruno
plaintiffs in an effort to obtain confidential information;
and (4) refused to turn over the Bruno plaintiffs' files at
their request.
The Home and St. Paul disagreed from the start over which
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company was responsible for defending and indemnifying S&E in
the Bruno suit. Both companies' policies were applicable,
though for different reasons. The Home had issued S&E a
lawyers' professional liability policy for the period of April
6, 1991 to April 6, 1992. St. Paul had issued S&E a similar
policy for the period of April 6, 1995 to April 6, 1996. Each
policy was a "claims made" policy as opposed to an
"occurrence" policy: that is, each extended coverage to any
claims made within the policy period, even if the acts on
which those claims were based occurred prior to the policy
period (though with important conditions, as will be seen).
Thus, both policies potentially applied to claims that S&E
committed malpractice in 1989, if such claims were made within
the policies' respective periods. The Bruno claim clearly was
made within St. Paul's 1995-1996 policy period: the suit was
brought in or about November 1995. However, The Home had to
treat the Bruno claim as if it had been made during The Home's
1991-1992 policy period as well. S&E was first threatened
with a lawsuit in connection with the Shawmut Inn project in
September of 1991, during The Home's policy period.2 S&E
reported the claim to The Home at the time. Thus, when the
2 The suit was threatened by the Bank of New England.
From the record, it appears that the Bank's threat never
materialized.
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Bruno claim was brought in 1995, The Home considered the claim
to be related to the 1991 claim and so, under a provision in
The Home's policy requiring The Home to treat related claims
as the same claim, it had to treat the Bruno claim as if it
had been made in 1991, during its policy period.3
The Home agreed to defend the Bruno suit, while fully
reserving its rights. As for St. Paul, even though the Bruno
suit was a claim made during its policy period, St. Paul
initially disclaimed any obligation to defend or indemnify
S&E; eventually, it agreed to provide coverage on an excess
basis only, in the event that The Home's coverage was
exhausted. For justification, St. Paul cited the "prior acts"
provision of its policy, which stated that St. Paul would
cover claims based on acts committed prior to the policy
period only if "[a]ny other insurance covering the claim has
been used up." In response, The Home pointed St. Paul to the
"other insurance" provision in The Home's policy, which stated
that, in general, if "other insurance" was available to pay
for a claim covered by The Home's policy, The Home would cover
3 The relevant clause of The Home's policy reads:
"Related acts, errors or omissions shall be treated as a single
claim. All such claims, whenever made, shall be considered
first made during the policy period . . . in which the earliest
claim arising out of such act, error or omission was first made
. . . ."
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the claim on an excess basis only. Thus, each insurer
concluded its policy was excess to the other. Seeking to
split the difference, The Home sought to persuade St. Paul
that The Home's "other insurance" clause and St. Paul's "prior
acts" clause were mutually repugnant -- that is, the two
cancelled each other out; therefore, under Maine law, the two
insurers were obligated to split the costs of defending and
indemnifying S&E on a pro rata basis. St. Paul disagreed and
continued to deny concurrent coverage.
After the Bruno complaint was amended to include the
allegations of ethical misconduct occurring in 1995, a further
disagreement arose between the two insurers. The Home argued
that these new claims and the acts upon which they were based
both fell within St. Paul's policy period, and hence St. Paul
was responsible for covering them. St. Paul disclaimed
responsibility on the grounds that S&E was no longer
representing the Bruno plaintiffs at the time the acts
occurred, so the acts were not "committed in the performance
of legal services" and thus did not fall under the literal
terms of its policy.
Its attempts to persuade St. Paul through correspondence
having failed, The Home filed the instant action on June 22,
1998. The Home sought a declaration that St. Paul provided
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coverage as to the Bruno suit concurrently with The Home and
was obligated to share costs accordingly. Six months later,
The Home settled the Bruno suit. By this point, it had
expended nearly $500,000 in defense and settlement of the
case.4
After settling, The Home moved to amend its complaint to
include the allegation that, because St. Paul breached its
duty to defend S&E, St. Paul now bears the burden of proving
how the Bruno settlement is to be apportioned as between S&E's
1989 acts and its 1995 acts; in particular, St. Paul must show
that the settlement was not paid entirely to compensate for
S&E's 1995 acts, for which The Home alleges St. Paul is
exclusively responsible. Because this is an impossible burden
to meet, the allegation continues, St. Paul must pay for the
entire Bruno settlement.
The Home and St. Paul both moved for summary judgment.
The magistrate recommended granting summary judgment to St.
Paul. The magistrate ruled, first, that the St. Paul policy
does not cover the 1995 acts alleged in the amended Bruno
complaint because the acts were not "committed in the
4 These expenses did not exceed The Home's $3 million
policy limit, so it has never been claimed that St. Paul's
obligations as an excess insurer were triggered by the Bruno
suit.
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performance of legal services." Second, the magistrate ruled
that The Home's "other insurance" clause and St. Paul's "prior
acts" clause are not mutually repugnant, as contended by The
Home; rather, The Home policy provides primary coverage while
the St. Paul policy provides excess coverage. Third, having
found that St. Paul had no duty to defend S&E, the magistrate
denied The Home's motion to amend its complaint on the grounds
that the amendment would be futile. The district court
affirmed the magistrate's recommended decision in a paragraph
order. The effect was to leave The Home with all of the costs
of defending and indemnifying S&E in the Bruno suit. The Home
now appeals.
II.
We address the issues raised in the case in the following
order: first, whether The Home's "other insurance" clause and
St. Paul's "prior acts" clause are mutually repugnant, making
the two insurers jointly responsible for defending and
indemnifying S&E as to the 1989 acts alleged in the Bruno
complaint; second, whether either insurer had a duty to defend
or indemnify S&E as to the 1995 acts alleged in the Bruno
complaint; and third, whether The Home should be granted leave
to amend its complaint to demand that St. Paul pay the entire
Bruno settlement. Our review is de novo. See Thomas v.
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Eastman Kodak Co., 183 F.3d 38, 47 (1st Cir. 1999) (review of
district court's decision on summary judgment is de novo),
cert. denied, ___ U.S. ___, 120 S.Ct. 1174 (2000). Maine law
governs.
A. Coverage of 1989 Acts
Although this case presents an apparently rare clash
between an "other insurance" clause from one policy and a
"prior acts" clause from another, it is in the end just a
slight variation on the standard mutual repugnancy case in
which two "other insurance" clauses conflict with one another.
Accordingly, we begin our analysis by discussing the doctrine
that applies to the standard case, and then we consider
whether the variation presented here requires any deviation
from this norm.
"Other insurance" clauses limit an insurer's
responsibility for a claim if "other insurance" is available
to cover it. Originally, the clauses appeared in property
insurance policies and were intended to eliminate the problem
of fraudulent claims induced by over-insuring. See Carriers
Ins. Co. v. American Policyholders' Ins. Co., 404 A.2d 216,
218 (Me. 1979). In a context such as the one here, the
clauses function not so much as to deter fraudulent claims as
simply to limit an insurer's exposure where the insured
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happens to hold multiple insurance policies covering the same
loss. Cf. id.; see also R. J. Robertson, Jr., "Other
Insurance" Clauses in Illinois, 20 S. Ill. U. L.J. 403, 405
(1996).
"Other insurance" clauses come in three types. The
first, an "escape" clause, is the most basic: it simply denies
any coverage for a claim if other insurance is available. The
second, a "pro rata" clause, extends coverage to a portion of
the total loss claimed, usually based on the limits of the
applicable policies.5 The third, an "excess" clause, is the
type at issue in this case; it extends coverage only to the
extent that other available insurance is insufficient to cover
the claim.6 See Carriers, 404 A.2d at 218.
"Other insurance" clauses are not necessarily
problematic. For example, if a claim is covered by two
policies each with pro rata clauses, then the insurers each
pay a pro rata share of the claim. Or if one policy contains
no "other insurance" clause at all while the second contains
5 For example, if insurer A's policy limit is $1 million
and insurer B's policy limit is $3 million, a pro rata clause in
A's policy would require A to pay one-fourth of any claim
covered by both A and B (up to $1 million).
6 For example, if insurer A and B both cover a claim, and
B's policy limit is $3 million, an excess clause in A's policy
would require A to pay out on the claim only to the extent that
the claim exceeded $3 million (up to A's policy limit).
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an excess clause, then the first policy covers the claim and,
if the first is insufficient, the second covers the excess.
In these scenarios, both policies interact harmoniously and
the claim goes wholly insured. But frequently, policies
contain "other insurance" clauses that are incompatible in the
sense that, if each is given full effect, claims covered by
both policies will go under-insured. In particular, where two
policies each contain excess "other insurance" clauses, giving
effect to both will leave a claim completely uninsured. For
the first policy provides coverage only in excess of the
second, but the second provides coverage only in excess of the
first; the result is a standoff, in which each insurer refuses
to cover the claim before the other.
In order to break the tie in such situations, courts
early on experimented with various rules for declaring one
insurer the "primary" insurer and the other the "excess"
insurer. One such rule was to consider the primary insurer to
be the one "first in time"; a second rule considered the
primary insurer to be the one whose "other insurance" clause
was more general in scope; a third rule considered the primary
insurer to be the one whose policy more specifically covered
the claim at issue. See Carriers, 404 A.2d at 219 (collecting
cases).
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In time, however, most courts came to reject such rules,
favoring instead the doctrine of mutual repugnancy, under
which two insurers' excess clauses are thought to cancel each
other out, and both insurers are made, in Solomonic fashion,
to split the costs of coverage between them pro rata. See 69
A.L.R. 2d 1122, 1124 (1960). The Maine Supreme Judicial Court
adopted this approach in Carriers, supra. Finding the earlier
rules "arbitrary," "mechanical," and tending toward "semantic
microscopy," the court chose to "abandon[] the search for the
mythical 'primary' insurer and insist[] instead that both
insurers share in the loss." Id. at 219-20. Such an
approach, the court explained, not only best carries out the
intent of both insurers to limit their exposure, but also
discourages insurers from engaging in draftsmanship battles
and wasteful litigation in order to avoid providing primary
coverage. See id.
The essential difference between Carriers and this case
is that here, the clash of clauses is not between two "other
insurance" clauses, but rather is between an "other insurance"
clause and a "prior acts" clause containing "other insurance"
language. Toward the end of The Home policy, in a section
labeled "Conditions," which comes after a section labeled
"Coverage," The Home's policy contains an "other insurance"
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clause, which provides in pertinent part:
II. Other Insurance: . . . [T]his insurance shall be in
excess of . . . any other valid and collectible insurance
available to the Insured whether such other insurance is
stated to be primary, pro rata, contributory, excess,
contingent or otherwise, unless such other insurance is
written only as a specific excess insurance over the
limits of liability provided in the policy.7
In contrast, near the middle of St. Paul's policy, under a
section labeled "When This Agreement Covers," is St. Paul's
"prior acts" clause, specifying under what conditions St. Paul
will cover claims based on acts committed prior to the policy
period. It provides as follows:
Prior acts. We'll cover claims based on wrongful acts
that occurred before the effective date of this
agreement, but only if all the following conditions are
met: . . .
• Any other insurance covering the claim has been used
up.
There is no question that if the "other insurance" language of
St. Paul's "prior acts" clause had instead appeared in a
catchall "other insurance" clause such as the one in The Home
policy, the two insurers would be required to share coverage
7 By "specific excess insurance" is meant insurance
providing coverage only in excess of some other specifically
identified policy -- which here would be The Home policy. See
Wright v. Newman, 598 F. Supp. 1178, 1196 (W.D. Mo. 1984),
aff'd, 767 F.2d 460 (8th Cir. 1985). St. Paul's policy is not
of this sort; there is no dispute that, if The Home policy did
not exist, St. Paul's policy would provide coverage as to S&E's
1989 acts.
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under Carriers. The question, then, is whether it makes any
difference that the language appears in the "prior acts"
clause.
The magistrate judge held that it does, and that Maine's
usual mutual repugnance rule therefore does not apply. The
magistrate found only four cases -- none of them from Maine --
bearing precisely on the question, and of these four, three
found no mutual repugnance. See Evanston Ins. Co. v.
Affiliated FM Ins. Co., 556 F. Supp. 135, 138 (D. Conn. 1983)
(finding no mutual repugnance); Smith v. Neumann, 682 N.E.2d
1245, 1251-52 (Ill. App. Ct. 1997) (same); Chamberlin v.
Smith, 72 Cal. App. 3d 835, 850-51 (Cal. Ct. App. 1977)
(same); Fremont Indem. Co. v. New England Reinsurance Co., 815
P.2d 403, 407-08 (Ariz. 1991) (finding mutual repugnance).
Following the guidance of this "meagre but distinct majority,"
the magistrate judge reasoned as follows: The Home's "other
insurance" clause appears after the coverage section of its
policy, whereas the "other insurance" language in St.Paul's
"prior acts" clause appears within the coverage section of its
policy; consequently, under The Home's policy, coverage for
S&E's 1989 acts is initially triggered in the coverage section
and only rescinded if the "other insurance" clause later kicks
in, while under St. Paul's policy, coverage is never triggered
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in the first place; so, because St. Paul's coverage is never
triggered, The Home's "other insurance" clause never kicks in,
its coverage is never rescinded, and The Home is left as the
primary insurer. Put succinctly, the magistrate found that
St. Paul's "prior acts" clause effects "not a post hac escape
clause, but rather an explicit, initial exclusion from
coverage," Evanston, 556 F. Supp. at 138, and, for that
reason, it trumps The Home's "other insurance" clause.
We think such reasoning turns too much on the sort of
"semantic microscopy" that the Maine Supreme Judicial Court
disfavored in Carriers; to accept it would encourage the very
draftsmanship battles and wasteful litigation that the
Carriers Court sought to prevent. Simply because The Home's
"other insurance" clause appears outside a section expressly
labeled "Coverage" does not mean that coverage is not limited
by the provision, or that the provision should be given any
less weight than if it appeared inside such a section. Nor is
it correct to conceive of St. Paul's policy as "initially"
excluding coverage, or The Home's policy as initially
extending it and only later attempting taking it away, as if
one section of an insurance policy were metaphysically prior
to another. Under Maine law the coverage provided by an
insurance policy is determined by the policy as a whole. "All
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parts and clauses, including exceptions and conditions, must
be considered together . . . ." Baybutt Constr. Corp. v.
Commercial Union Ins. Co., 455 A.2d 914, 921 (Me. 1983),
overruled on other grounds by Peerless Ins. Co. v. Brennon,
564 A.2d 383 (Me. 1989). Read as a whole, The Home's policy
covers claims only on an excess basis if other insurance is
available; St. Paul's policy does the same where the claims
are based on prior acts. Thus, each policy purports to
provide only excess coverage for S&E's 1989 acts if the other
policy is available. In such a situation, Carriers demands
proration. We do not think Carriers countenances different
outcomes depending on whether St. Paul's language was in an
"other insurance" clause relating to prior acts or in a "prior
acts" clause relating to other insurance. Such an approach
would tend to encourage insurers to jockey for best position
in choosing where to locate "other insurance" language,
needlessly complicating the drafting of policies, inducing
wasteful litigation among insurers, and delaying settlements -
- all ultimately to the detriment of the insurance-buying
public. See Fremont, 815 P.2d at 407; cf. Carriers, 404 A.2d
at 220.
The magistrate judge thought that the Maine Supreme
Judicial Court "would not be so quick to collapse the
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distinction between the coverage portions of a policy and a
catchall 'other insurance' clause." For support, it cited the
Maine Supreme Judicial Court's decision in Royal Globe
Insurance Co. v. Hartford Accident & Indemnity Co., 485 A.2d
242 (Me. 1984). There, the Court found no mutual repugnance
where one policy contained a catchall "other insurance" clause
and the other contained a clause making coverage for the
insured's employees (but not for the insured itself) available
on an excess basis only. Royal Globe, 485 A.2d at 243-44.
The magistrate judge drew an analogy with the instant case:
"Just as the . . . insurer in Royal Globe extended coverage in
a specific instance (involving employees) only upon exhaustion
of other available insurance, St. Paul extends coverage in a
specific instance (involving prior acts) only upon such
exhaustion."
There are several problems with this analogy. As an
initial matter, the analogy does not support the posited
thesis -- that St. Paul's "prior acts" clause trumps The
Home's "other insurance" clause because of its location in the
coverage portions of St. Paul's policy. Indeed, Royal Globe
does not mention the location of the clauses at issue there.
Rather, what the analogy seems to suggest is that St. Paul's
"prior acts" clause trumps The Home's "other insurance" clause
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because it applies more specifically to the claim at issue
here -- i.e., it applies specifically to claims based on prior
acts, whereas The Home's "other insurance" clause applies to
claims generally.
The difficulty is that such a conclusion is flatly at
odds with Carriers, which explicitly rejected the rule that,
as between two "other insurance" clauses, the specific trumps
the general. Carriers, 404 A.2d at 219. There is no reason
to think that Royal Globe revives this rule. Indeed, Royal
Globe is distinguishable from both Carriers and this case in
that it involved a conflict not between two excess "other
insurance" clauses, but rather between an excess clause and a
pro rata clause. Courts treat conflicts between two excess
clauses differently from conflicts between an excess clause
and a pro rata clause: while the majority rule for the former
is to apply the doctrine of mutual repugnance, the majority
rule for the latter is that the excess clause trumps the pro
rata clause. Compare 69 A.L.R.2d 1122, 1124 (1960)
(describing majority rule for excess vs. excess cases) with 12
A.L.R.4th 993, 997 (1982) (describing majority rule for excess
vs. pro rata cases); see also Robertson, supra, at 414, 418.
Thus, the more straightforward reading of Royal Globe -- and
the reading more compatible with Carriers -- is simply that it
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adopts the majority rule for conflicts between excess clauses
and pro rata clauses. See Royal Globe, 485 A.2d at 244-45
(finding pro rata clause not a clear indicator of whether
policy is primary or excess, so, by default, policy with pro
rata clause is to be considered primary).
Finally, St. Paul asks us to consider expert testimony
regarding how conflicts between successive insurers, such as
the conflict in this case, are settled within the industry.
Perhaps in some other setting it might be appropriate to
consider such evidence, but we do not think it would be
appropriate here. The relevant policy language is unambiguous
and the dispute presented can be resolved through ordinary
judicial methods of contractual interpretation. See Hanover
Ins. Co. v. Crocker, 688 A.2d 928, 930 (Me. 1997) ("In cases
involving the construction of the language of an insurance
contract, the meaning of unambiguous language is a question of
law."). Moreover, the expert testimony presented by St. Paul
is ultimately irrelevant. The testimony was that within the
insurance industry, if one insurer was on risk at the time an
act occurred, and the other was on risk at the time a claim
based on the act was made, the former insurer is expected to
cover the claim on a primary basis. However, The Home was not
on risk at the time the 1989 acts alleged in the Bruno
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complaint occurred. The only reason The Home's policy covers
the Bruno claim is that The Home was on risk in 1991, when the
first claim against S&E based on the 1989 acts was reported;
because the Bruno claim relates back to this claim, The Home's
policy provides coverage.
In conclusion, seeing no reason to consider St. Paul's
"prior acts" clause to trump The Home's "other insurance"
clause, we find the two clauses mutually repugnant.
Accordingly, St. Paul is responsible for a pro rata share of
the costs of defending and indemnifying S&E as to the 1989
acts alleged in the Bruno complaint.
B. Coverage of 1995 Acts
We next consider whether St. Paul had a duty to defend
and indemnify S&E as to the 1995 acts -- the breaches of
ethical duties -- alleged in the amended Bruno complaint. The
Home contends that these allegations constitute a separate
claim from the allegations based on S&E's 1989 acts, and that
The Home is not responsible for this claim because it is based
on acts that occurred neither prior to nor during its policy
period. Rather, The Home argues, the 1995 acts occurred and
the claim based upon them was made during St. Paul's policy
period, so St. Paul is exclusively responsible for providing
coverage. St. Paul responds, first, that its policy does not
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cover the 1995 acts because none qualify as "a negligent act,
error, or omission committed in the performance of legal . . .
services," and second, that The Home's policy does cover the
1995 acts because they sufficiently relate to the 1989 acts,
for which The Home concedes coverage.8
There are two questions to be decided: first, whether
either insurer had a duty to defend as to the 1995 acts, and
second, whether either insurer had a duty to indemnify. See
Lewiston Daily Sun v. Hanover Ins. Co., 407 A.2d 288, 291-92
(Me. 1979) (comparing duty to defend with duty to indemnify);
American Policyholders' Ins. Co. v. Cumberland Cold Storage
Co., 373 A.2d 247, 250-51 (Me. 1977) (same).
1. Duty to Defend
Under Maine law, "[t]he scope of a duty to defend is
determined by 'comparing the provisions of the insurance
contract with the allegations in the underlying complaint. If
there is any legal or factual basis that could be developed at
trial, which would obligate the insurer to pay under the
policy, the insured is entitled to a defense.'" Burns v.
8 The magistrate judge agreed with St. Paul that the 1995
acts were not "committed in the performance of legal . . .
services." Rather, he found, the acts were committed in the
course of S&E's conduct as a defendant in a malpractice case.
The magistrate judge made no finding as to whether The Home's
policy covered the 1995 acts.
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Middlesex Ins. Co., 558 A.2d 701, 702 (Me. 1989) (quoting
J.A.J., Inc. v. Aetna Cas. & Sur. Co., 529 A.2d 806, 808 (Me.
1987)) (emphasis in original); see also United Bank v. Chicago
Title Ins. Co., 168 F.3d 37, 39 (1st Cir. 1999). Maine law
favors an expansive view of an insurer's duty to defend; any
ambiguity in policy language is to be construed in favor of
the insured. See Union Mut. Fire Ins. Co. v. Inhabitants of
Topsham, 441 A.2d 1012, 1015 (Me. 1982).
Given that Maine has so placed its thumb on the scales,
we think that St. Paul most likely had a duty to defend S&E as
to the 1995 acts. St. Paul's primary argument is that the
acts occurred after S&E had ceased representing the Bruno
plaintiffs, and so the acts cannot be said to have been
"committed in the performance of . . . legal services," as its
policy requires.9 We think it at least arguable, however,
that a lawyer's honoring of his continuing ethical duties,
arising as they do out of the attorney-client relationship, is
itself a "legal service" the lawyer provides to his clients,
see Regas v. Continental Cas. Co., 487 N.E.2d 105, 109 (Ill.
App. Ct. 1985) (construing "services" in legal malpractice
9 The policy states in pertinent part: "We'll pay amounts
you . . . are legally required to pay to compensate others for
loss that results from a negligent act, error, or omission
committed in the performance of legal or notary services."
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policy to encompass "any sort of service . . . [that] requires
the use of any degree of legal knowledge or skill") (citations
omitted), and that the 1995 acts could, under some legal
theory or factual showing, each be proven a "negligent act,
error, or omission" committed in the performance of such
service, see Travelers Indem. Co. v. Dingwell, 414 A.2d 220,
226 (Me. 1980) ("The correct test is whether a potential for
liability within the coverage appears from whatever
allegations are made.") (emphasis in original).10
In the end, though, we need not resolve the question. We
have already concluded that St. Paul had a duty to defend S&E
as to the 1989 acts alleged in the Bruno complaint. And under
Maine law, if an insurer has a duty to defend against one
10 St. Paul objects that the Bruno plaintiffs could never
have proven the 1995 acts to constitute error because Maine Bar
Rule 3.6(h)(3) permits a lawyer to disclose a client's
confidential information if necessary to defend himself in a
malpractice suit. We note first that this provision would
excuse only one of the 1995 acts -- S&E's disclosure of the
Bruno's files to others. Second, it was possible that the Bruno
plaintiffs could have proven at trial that this disclosure was
not reasonably necessary to S&E's malpractice defense and so was
wrongful notwithstanding Rule 3.6(h)(3). St. Paul further
objects that the 1995 acts were all intentional in nature, and
so do not fall under the scope of its coverage, which is for
loss resulting from a " negligent act, error, or omission." But,
given Maine's policy of resolving ambiguities in favor of the
insured, we do not think this language should be read so
narrowly. See USM Corp. v. First State Ins. Co., 652 N.E.2d
613, 614-15 (Mass. 1995) (collecting cases for reading
"negligent" to modify only the term "act," not "error" or
"omission").
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count of a complaint, it has a derivative duty to defend
against other counts if they are sufficiently related that
apportioning defense costs as between the two is not
practicable. See Gibson v. Farm Family Mut. Ins. Co., 673
A.2d 1350, 1353 (Me. 1996). This is the majority rule. See
Titan Holdings Syndicate, Inc. v. Keene, 898 F.2d 265, 269
(1st Cir. 1990) (citing 41 A.L.R.2d 434, 436-38 (1980 Supp.)
(collecting cases)). In this case, the allegations of the
1995 acts are sufficiently intertwined with the allegations of
the 1989 acts so that The Home's defense costs cannot readily
be retrospectively apportioned as between the two. The 1995
acts arose out of the same attorney-client relationship and
ultimately relate back to the same botched real estate
transaction as the 1989 acts; defending against allegations of
the former required knowledge of the latter. Cf. Gibson, 673
A.2d at 1354. Moreover, as discussed below, S&E's defense as
to the 1995 acts was merely incidental to its defense as to
the 1989 acts. The great bulk of the Bruno suit concerned the
1989 acts; the allegations of the 1995 acts were defended
against merely in order to prevent the Bruno plaintiffs from
escaping a statute of limitations problem affecting the
allegations of the 1989 acts. Given these circumstances, St.
Paul had a duty to defend as to the 1995 acts as well as the
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1989 acts, regardless of whether the 1995 acts independently
fall within its coverage.
For its part, The Home appears to concede that, under
Gibson, supra, it was obliged to defend as to the 1995 acts as
well as the 1989 acts. Only with respect to the duty to
indemnify as to the 1995 acts does The Home claim that such
duty was St. Paul's alone. Thus, given that The Home and St.
Paul were both obliged to defend against the 1989 allegations,
we hold that both insurers had a derivative duty to defend
against the 1995 allegations. St. Paul therefore must share
with The Home the costs of defending the entire Bruno suit,
not merely the costs of defending against the allegations of
the 1989 acts.
2. Duty to Indemnify
In contrast to the duty to defend, the duty to indemnify
is narrower: while the duty to defend depends only on the
allegations made against the insured, the duty to indemnify
depends upon the facts established at trial and the theory
under which judgment is actually entered in the case.
Cumberland Cold Storage, 373 A.2d at 250. However, the Bruno
suit was settled prior to trial, so no facts were ever
established nor judgment ever entered in the case. In such a
situation, this court has held, the duty to indemnify is
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determined by the basis for the settlement. See Travelers
Ins. Co. v. Waltham Indus. Labs. Corp., 883 F.2d 1092, 1099
(1st Cir. 1989). Accordingly, whether St. Paul or The Home
had a duty to indemnify S&E as to the 1995 acts turns on
whether any portion of the settlement was made in compensation
for the 1995 acts, and, if so, whether the 1995 acts fall
under either insurer's coverage.
We again avoid answering the latter question, for we
think it is clear from the record that the Bruno settlement
was made entirely in compensation for the 1989 acts; no
significant portion was directed to the 1995 acts. The Bruno
complaint, as originally filed, alleged only the 1989 acts;
those acts were the raison d'etre for the suit. The complaint
was amended to include the 1995 allegations only after S&E
moved to dismiss the original complaint on statute of
limitations grounds. In its motion to strike the amended
Bruno complaint and its subsequent motion for summary judgment
in the case, S&E made clear that it considered the added
allegations frivolous, in violation of Rule 11, and intended
solely as an end run around the statute of limitations. From
a correspondence file kept on the case, it appears that the
1995 acts were not even considered by S&E's defense team in
analyzing the case's settlement value. Likewise, the Bruno
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plaintiffs did not consider the allegations of the 1995 acts
to carry any significant value relative to the allegations of
the 1989 acts. In assessing their damages in a motion for
attachment filed in the case, the plaintiffs focused entirely
on the damages caused by the 1989 acts; they did not so much
as mention the 1995 acts. The same is true of Ralph Bruno's
enumeration of his losses in an affidavit he submitted in the
case. The only evidence in the record that plaintiff Bruno
considered the 1995 acts to have caused any damages appears in
his answers to an interrogatory directly posing the question.
Bruno stated vaguely that the files that S&E disclosed to
others contained embarrassing material and that S&E's failure
to turn the files over to him made it harder for his lawyers
to conduct the Bruno case, increasing his legal fees. By
comparison, the Bruno plaintiffs described in comprehensive
detail various tangible losses they suffered as a result of
the 1989 acts. According to the plaintiffs, those losses
totaled approximately $29 million. The settlement, plus The
Home's attorney's fees, totaled about $500,000.
We thus find no genuine issue of material fact concerning
the apportionment of the Bruno settlement. Compared to a
failed real estate transaction in which the Bruno plaintiffs
lost millions, S&E's alleged acts of mischief in the resulting
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malpractice actions -- the improper handling of a file, the
improper taking of a statement, and the improper contacting of
a former attorney -- appear entirely inconsequential. It
simply cannot be seriously contended -- especially given the
circumstances under which the acts were alleged -- that
anything more than a de minimis portion of the Bruno
settlement could have been intended to compensate for the 1995
acts. Accordingly, we hold that neither The Home nor St. Paul
had a duty to indemnify S&E as to the 1995 acts, so St. Paul
owes The Home nothing for indemnifying as to the 1995 acts.
Nonetheless, St. Paul still owes The Home for all of its
indemnification costs, because the whole of the Bruno
settlement, and so all of The Home's indemnification costs,
related to the 1989 acts.
C. Motion to Amend
Finally, we address The Home's motion to amend its
complaint. The Home moved to amend its complaint after
settling the Bruno action, seeking to raise a new theory of
liability based on St. Paul's refusal to participate in the
settlement. The theory is as follows. Under Maine law -- or
so The Home argues -- if an insurer breaches its duty to
defend a suit, and the suit settles, then the insurer bears
the burden of allocating the settlement and proving that at
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least some of the settlement was paid for claims that its
policy does not cover.11 Yet, the argument continues, because
the settlement agreement in the Bruno case does not specify
how the settlement was intended to be allocated, St. Paul's
burden of allocating the settlement is impossible to carry.
Consequently, St. Paul cannot prove that the settlement was
not paid entirely for the 1995 acts, as to which The Home
alleges St. Paul alone had a duty to indemnify. Therefore,
supposing The Home is correct that St. Paul alone had a duty
to indemnify as to the 1995 acts, it must be assumed that the
settlement was paid entirely for those acts, in effect
rendering St. Paul responsible for the whole settlement.
The magistrate dismissed The Home's motion to amend on
futility grounds, because it rejected the premise of The
Home's theory that St. Paul had an exclusive duty to indemnify
S&E as to the 1995 acts. We similarly reject that premise.12
Obviously, given our holding in the previous section, we
11 The Home cites Elliott v. Hanover Ins. Co., 711 A.2d
1310, 1313-1314 (Me. 1998) (citing Polaroid Corp. v. Travelers
Indem. Co., 610 N.E.2d 912, 922 (Mass. 1993)), as the relevant
authority. St. Paul argues that the citation does not support
The Home's argument. Because we do not take up The Home's
argument, we do not weigh in on this dispute.
12 We reject it, however, for different reasons. As noted
earlier, the magistrate judge held that St. Paul had no duty to
indemnify as to the 1995 acts because the acts did not fall
within the scope of St. Paul's coverage.
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disagree with The Home that, merely because the Bruno
settlement agreement does not itself describe how the
settlement was allocated as between the 1989 acts and 1995
acts, there is no way to prove that the settlement was not
paid entirely for the 1995 acts. To the contrary, we think
that evidence extrinsic to the settlement agreement shows
conclusively that the settlement was paid entirely for the
1989 acts. Accordingly, we reject The Home's proposed theory
and do not disturb the magistrate's dismissal of The Home's
motion to amend. See Demars v. General Dynamics Corp., 779
F.2d 95, 99 (1st Cir. 1985).
III.
We briefly summarize our holding. First, we find The
Home's "other insurance" clause and St. Paul's "prior acts"
clause to be mutually repugnant; consequently, both insurers
had a duty to defend and indemnify S&E as to the 1989 acts.
Second, we find that both insurers had a derivative duty to
defend S&E as to the 1995 acts; by contrast, we find that
neither insurer had a duty to indemnify as to the 1995 acts,
but only because no portion of the Bruno settlement was
allocated to those acts. The effect is that St. Paul is
obligated to reimburse The Home for a pro rata share of all of
its defense and indemnification costs. To that extent,
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summary judgment should be granted to The Home. We reverse
and remand for proceedings consistent with this opinion.
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