New Jersey Federal Court Addresses Related Wrongful Acts

In its recent decision Gladstone v. Westport Insurance Corporation, 2011 U.S. Dist. LEXIS 132100 (D.N.J. Nov. 16, 2011), the United States District Court for the District of New Jersey addressed the concept of related wrongful acts in the context of a lawyers malpractice insurance policy.

The issue presented to the Gladstone court was whether a malpractice lawsuit filed against Westport’s insured, Robert Gladstone, during the policy period was related to a claim first made against Mr. Gladstone prior to the policy’s issuance.  Both claims arose out of a suit in which Mr. Gladstone unsuccessfully represented numerous parties in a zoning ordinance matter.  Sometime after the suit ended, Mr. Gladstone brought a collection action against eleven of his former clients.  In 2006, one of the former clients, Merrick Wilson, filed an answer in which he asserted the affirmative defense that Mr. Gladstone’s work had not met the standards of professional conduct.  In 2007, another of the defendants in the collection action asserted a counterclaim, alleging that Mr. Gladstone committed malpractice in connection with his prosecution of the zoning matter.   Ultimately, Mr. Gladstone settled the collection action, as well as the counterclaim, and obtained releases from each of the defendants, with the exception of Merrick Wilson, who for reasons not clear to the court, was never advised of the settlements or that Mr. Gladstone’s suit was dismissed.

In 2007, Mr. Gladstone joined the New Jersey firm of Szaferman, Lakind, Blumstein & Blader, P.C. (“SLBB”), and SLBB’s malpractice policy, issued by Westport, was endorsed to include coverage for Mr. Gladstone’s work prior to joining the firm.  Westport renewed the policy, with a similar endorsement, for the period July 4, 2008 to July 4, 2009.  In May 2009, Merrick Wilson commenced a malpractice action against Mr. Gladstone for the same zoning ordinance matter.  Westport denied coverage to Mr. Gladstone on the basis that the 2009 claim related back to the counterclaim originally asserted in 2007, and thus constituted a claim first made prior to the inception of the 2008-009 policy.  In doing so, Westport relied on the following policy provision:

Two or more CLAIMS arising out of a single WRONGFUL ACT, as defined in each of the attached COVERAGE UNITS, or a series of related or continuing WRONGFUL ACTS, shall be a single CLAIM.  All such CLAIMS whenever made shall be considered first made on the date on which the earliest CLAIM was first made arising out of such WRONGFUL ACT …

The court agreed that, at a minimum, the counterclaim asserted in 2007 constituted a “claim” that was first asserted prior to the 2008-2009 policy period.  Thus, the questions for the court were: (a) whether the related acts provision was enforceable and (b) was whether Mr. Merrick’s 2009 lawsuit was sufficiently related to the earlier counterclaim such that it should be deemed first made prior to the policy’s date of inception.

The insured argued that the related wrongful act provision was ambiguous and unenforceable under New Jersey law.  In considering the issue, the Gladstone court observed that New Jersey’s Supreme Court had not yet addressed the issue of related claims in a professional liability policy.  This concept had been addressed, however, by the United States District Court for the District of New Jersey in G-I Holdings v. Hartford Fire Ins. Co., 2007 U.S. Dist. LEXIS 19069 (D.N.J., Mar. 16, 2007), aff’d, 586 F.3d 247 (3d Cir. 2009) and by a New Jersey state appellate level court in Passaic Valley Sewerage Commissioner v. St. Paul Fire and Marine Ins. Co., 2010 N.J. Super. Unpub. LEXIS 475 (N.J. Super. Ct. App. Div. Mar. 8, 2010), aff’d, 2011 N.J. LEXIS 686 (N.J., June 21, 2011).  In both cases, the courts held that related wrongful act provisions were unambiguous and enforceable under New Jersey law.  From these cases, the Gladstone court concluded that the provision in the Westport policy should be enforced.  As the court explained, the provision:

… is not unclear.  It does not include any undefined terms and is not so lengthy or convoluted that the average insured (especially the average lawyer!) would be unable to predict its effect in cases such as this one.

After determining that the provision was enforceable, the court considered whether it should be.  The standard for determining “relatedness,” explained the court, is whether “there is a logical connection between [the claims], even if different plaintiffs brought them.”  Thus, finding that the malpractice alleged in the 2007 counterclaim was identical to that alleged in Merrick Wilson’s 2009 malpractice suit, the court held that “[n]o reasonable jury could stray from the conclusion that the … [c]ounterclaim and the 2009 Wilson Malpractice Complaint arose from the same related wrongful acts – Mr. Gladstone’s alleged negligence during his work on the Hopewell Zoning Matter.”  Accordingly, the court concluded that Westport properly denied coverage for the Merrick suit on the basis that it was properly deemed a claim first made prior to the policy period.