Professional liability coverage only defends and indemnifies insureds from claims arising from allegations of malpractice in providing the specialized services an insured offers in the markeplace. However, independent agents and attorneys who have professional clients involved in legal disputes with former partners or associates may wish to consider that a professional liability policy may offer unexpected defense coverage, if not indemnity coverage.
The recent decision of the United States District Court in the case of David M. Governo and Governo Law Firm, LLC v. Allied World Insurance Company entered on August 27, 2019, offers an example of this type of unexpected coverage. The federal court’s decision awarded summary judgment to Attorney David M. Governo (Attorney Governo) and his law firm, Governo Law, summary judgment against his legal malpractice insurer, Allied World Insurance Company (Allied World) requiring Allied World to defend a countersuit brought by six former attorneys Governo Law sued after they set up a competing law firm.at
A failed buyout leads to lawsuits and a countersuit between Governo Law’s lawyers
Governo Law specializes in defense of asbestos and toxic tort litigation for insurance companies on a countrywide basis. Attorney Governo founded the firm and acted as its managing partner. In 2016, The firm had sixteen attorneys of whom seven were partners. In the summer of 2016, a group of the firm’s partners offered to purchase Governo Law and its assets.
The major assets of the firm consisted of the client file materials and a database assembled over the years consisting of case decisions, medical evidence, pleadings and other relevant information relating to the defense of asbestos and toxic tort claims.
After negotiations became stalled for the purchase of the firm, the disaffected partners set up a new professional corporation to practice law on November 1, 2016. The new law firm had the cryptic name, CMBG3 Law LLC (“CMBG3”).
On Friday, November 18, 2016, at 11:00 a.m., the disaffected partners presented Attorney Governo their resignations and what Attorney Governo called a “low-ball” take-it-or-leave it offer to buy Governo Law. The offer gave Attorney Governo until 5:00 p.m. the same day to accept the offer. When Attorney Governo refused the offer, the partners terminated their employment effective Sunday, November 20, 2016.
Within three days after their departure, the former Governo Law partners began soliciting their former law firm’s clients. As a result, over fifty (50%) percent of Governo Law’s clients moved their files to CMBG3.
Based on his investigation, Attorney Governo claimed that the departing partners had improperly taken with them proprietary databases created by Governo Law at costs in the hundreds of thousands of dollars. He also claimed that the departing partners had taken the firm’s laptop computers and iPads containing some of the firm’s confidential client information
After the departing partners refused to return the laptops, iPads, or data, Attorney Governo and Governo Law filed suit against the departing partners in Suffolk Superior Court Business Litigation Session.
The complaint alleged conversion of property, misappropriation of trade secrets, breach of the departing partners’ duty of loyalty, tortious interference with contractual and advantageous relations, civil conspiracy, and unfair and deceptive trade practices.
The departing partners denied the complaint’s allegations and asserted counterclaims against Governo Law and Attorney Governo. The counterclaims sought a declaratory judgment on the ownership of the database, the failure to pay wages and benefits, and interference with the CMBG3’s contractual or advantageous business relations by Governo Law and Attorney Governo refusing to cooperate, as required, in notifying clients about Governo Law’s former partners setting up a new law firm.
Claim for coverage on the counterclaims against Governo Law’s professional liability policy
Governo Law had a Lawyers Professional Liability Policy with Allied World insurance company, an indirect subsidiary of Fairfax Financial Holdings. The policy had a $5 million per Claim and aggregate Limit of Liability, inclusive of Claims Expenses. The policy also has a $20,000 per Claim Retention for the policy period from March 15, 2016, to March 15, 2017 (the “policy”).
Governo Law and Attorney Governo made a claim against Allied World asserting that Allied World had at least a duty to defend the counterclaim based upon the policy language and Massachusetts law concerning a liability insurer’s duty to defend if a suits allegations are “reasonably susceptible” of an interpretation that states a claim or indirectly states a possible claim.
According to Governo Law and Attorney Governo, the counterclaim, in part, alleged a “Legal Service Wrongful Act.” It claimed that Governo Law and Attorney Governo wrongfully refused to notify their clients that the departing partners had left the firm to start CMBG3, and had also wrongfully refused to provide client file materials to those clients that wished to transfer their files from Governo Law to CMBG3. Both these actions, if proven, could establish violations of the legal rules applicable to attorneys.
Allied World denied the claim based upon its view that the alleged acts and omissions of the counterclaim did not come with the policy’s insuring agreement as they did not fall under the policy’s definition of “Legal Services” because:
- The alleged acts or omissions were not done on behalf of Governo Law’s clients but to the departing partners who were not clients of the firm;
- The counterclaim relates to a business dispute, and not Legal Services, between the firm’s present and departed lawyers;
- The counterclaim did not involve ‘solely’ Legal Services performed by Governo Law or Attorney Governo.
The lawsuit against Allied World for coverage removed and decided in federal court
On July 25, 2017, Governo Law and Attorney Governo sued Allied World in state court seeking in their two-count complaint (1) a declaratory judgment that Allied World had an obligation to defend them in the counterclaim, and (2) damages for breach of their insurance contract with Allied World. Allied World exercised its right as a non-Massachusetts corporation to remove the lawsuit to federal court.
Soon after removing the suit to federal court, Allied World moved to dismiss claiming that the counterclaim did not allege a claim that fell under Allied World’s policy’s coverage and that, in any case, policy exclusions preclude coverage.
On September 28, 2018, the federal judge assigned the lawsuit, denied the motion to dismiss ruling that the coverage complaint sufficiently stated potential claims against Allied World.
After the initial disclosures required under the Federal Rules of Civil Procedure, the parties filed cross-motions for summary judgment.
On Allied World’s motion the court ruled the parts of the counterclaim that related to declaratory judgment on the ownership of the database and the payment of wages and benefits, the court agreed with Allied World there was no coverage. The policy specifically excluded declaratory judgments as covered claims and the payment of wages or benefits was not a legal service lawyers perform in the ordinary course of their professional practice.
On the reaming count of the counterclaim, the court agreed with Governo Law and Attorney Governo that Allied World had a duty to defend the claims that included allegations that:
[Governo Law] and Governo intentionally frustrated and interfered with clients which chose to transfer legal matters to the Departing Attorneys and CMBG3 Law by failing or refusing to cooperate reasonably with the Departing Attorneys and CMBG3 Law on client notification; providing unfair notice to clients of the departure and change in affiliation of the Departing Attorneys and the opening of CMBG3 Law…”
And allegations that:
[Governo Law] and Governo interfered with the relationships between clients and the Departing Attorneys at CMBG3 Law with the improper motive of attempting to disrupt their new firm out of spite and ill-will; or, by improper means of withholding client property or client file materials necessary and required to represent clients in legal matters in violation of client choice and the Massachusetts Rules of Professional Conduct governing the practice of law…”
The court noted that this second counterclaim alleges, among other things, that Governo Law and Attorney Governo provided “unfair notice to clients,” failed “to transfer and release full and complete client file materials,” and violated “client choice and the Massachusetts Rules of Professional Conduct.”
The alleged actions to the court involved the “real-world practice of law” such that the transfer of files, notifying clients about lawyers changing firms and their right to have their lawyer of choice represent them were regulated by Massachusetts case law and the ethical rules of the Supreme Judicial Court.
As a result, the court found that the second counterclaim was “reasonably susceptible” to a claim under the policy, and therefore Allied World had a duty to defend this second counterclaim.
Also, as a result, of Governo Law and Attorney Governo successfully suing to establish Allied World’s duty to defend, per Massachusetts law, they obtained the right to recover their legal fees for the coverage suit.
The court, however, did deny Governo Law’s request for Allied World to defend the whole lawsuit in its entirety because the issues in Governo Law’s claims against the former partners parallel and are “inextricably linked” to the allegations in the counterclaims, namely who owns the client files and databases. The court found that under Massachusetts law, Allied World only was obligated to pay for the cost to defend the counterclaims against Governo Law and Governo, not to prosecute the firm’s affirmative claims.
Federal court’s final order and a postscript on the $900,000 jury verdict against the former partners
The final order of the federal judge ordered Allied World to pay defense costs but for Governo Law and Attorney Governo to allocate those costs from the underlying suit stating:
Allied World owes plaintiffs a duty to defend in the underlying state court action, which it breached by failing to do so. Allied World is responsible for fees associated with the defense of the counterclaims and this litigation. Plaintiffs bear the burden of allocating between prosecuting and defensive attorneys’ fees and costs. The affidavit of fees to be submitted within 14 days of the completion of the state court action.
While this suit over defense costs proceeded in federal court, the underlying suit by Governo Law against its former partners went on to a jury trial.
On June 18, 2019, after more than two weeks of evidence, the jury found that each of the former partner-defendants had converted Governo Law’s documents, files, or information for use in their new firm, CMBG3 and awarded $900,000 to fairly compensate Governo Law for the defendants’ misuse of the documents or databases.
With interest, the total judgment entered was almost $1,200,000.