Insurance Law

What Could Have Been: Court Holds That Policy With Eroding Limits Does Not Violate Public Policy

Westport Insurance Company v. Mylonas, No. 14-5760 (E.D. Pa. July 15, 2015), [subscribers can access an enhanced version of this opinion: lexis.com | Lexis Advance], is one of those cases involving a very interesting issue -- but that will likely go by the wayside with nary a peep ever to heard from it. But if the decision had gone the other way it would have had some real consequences.

Westport issued a legal malpractice policy to the Law Offices of Peter George Mylonas, P.C. Westport defended Peter Mylonas and the firm in a state court action filed by Anastasios Papadopoulos. Papadopoulos received a judgment in his favor in the amount of $525,000 and Westport’s defense of the Mylonas Defendants under the policy continues on.

The policy has a limit of liability of $500,000 per claim and $1,000,000 in the aggregate. The policy has “eroding limits,” meaning that the limits of liability are diminished by the payment of defense costs. Westport filed an action seeking a declaration that its liability under the policy is limited to $500,000 on the basis that the underlying action constitutes only one “claim.” But that’s not what this summary is about.

Papadopoulos seeks a declaration that “eroding insurance policies for legal professionals are against public policy and void as a matter of law, and, in the alternative, that such policies are void to the extent they reduce available coverage below $100,000 per year per claim and $300,000 per year on aggregate.”

His argument is based on Rule 1.4(c) of the Pennsylvania Rules of Professional Conduct that states that “A lawyer in private practice shall inform a new client in writing if the lawyer does not have professional liability insurance of at least $100,000 per occurrence and $300,000 in the aggregate per year, subject to commercially reasonable deductibles, retention or co-insurance, and shall inform existing clients in writing at any time the lawyer’s professional liability insurance drops below either of those amounts or the lawyer’s professional liability insurance is terminated.”

Papadopoulos conceded that the Rules of Professional Conduct are “silent regarding eroding policies.” However, he argued that Rule 1.4(c) makes it “clear that the [Pennsylvania] Supreme Court intended to prohibit insurance companies from reducing the required amounts of coverage.” “Papadopoulos further contends that an ‘eroding policy offends traditional notions of fairness’ because ‘[a]ttorneys purchase liability insurance to protect their clients.’ An eroding policy ‘subverts that intent by using liability coverage to pay the insurance company’s litigation expenses and attorney’s fees, rather than protecting the attorney by making the injured party whole against their losses.’”

Looking at what it takes under Pennsylvania law, for a court to declare a contract void on the basis of public policy, the Mylonas court – following a very lengthy analysis -- rejected Papadopoulos’s argument:

“In the present case, Papadopoulos points to no ‘plain indication’ through long governmental practice, statutory enactments, or obvious ethical and moral standards that it is against the ‘dominant public policy’ of Pennsylvania for lawyers to carry professional liability insurance policies with eroding limits. Despite this absence, Papadopoulos bases his position on Rule 1.4(c) of the Pennsylvania Rules of Professional Conduct quoted above. However, the type of insurance policy Papadopoulos seeks to have the Court declare void as against the ‘dominant public policy’ of Pennsylvania does not violate this Rule.Rule 1.4(c) is placed in a section of the Rules entitled ‘Communication,’ and only requires an attorney to ‘inform a new client in writing’ if the lawyer does not have professional liability insurance of at least $100,000 per occurrence and $300,000 in the aggregate per year. The Rule does not prohibit a lawyer from carrying professional liability insurance in less than these amounts, and it is silent on eroding insurance policies. Accordingly, a lawyer does not violate Rule 1.4(c) by merely carrying an eroding policy, even if the coverage amount has eroded below $100,000 per occurrence and $300,000 in the aggregate. Moreover, a violation of a Rule of Professional Conduct by itself does not subject an attorney to legal liability.”

While the court rejected the public policy argument, concerning the enforceability of an eroding limits policy, it is hard to say that it was not a clever one. And not out of the realm of reasonableness that a different court may adopt it.

If the court had found in favor of Papadopoulos then the decision would offer something to talk about. But since it didn’t, the case is likely to enter the black hole of judicial opinions, unless the issue is raised in another case. But, again, Papadopoulos gets credit for cleverness.

Coverage Opinions is a bi-weekly (or more frequently) electronic newsletter reporting or providing commentary on just-issued decisions from courts nationally addressing insurance coverage disputes. Coverage Opinions focuses on decisions that concern numerous issues under commercial general liability and professional liability insurance policies. For more information visit www.coverageopinions.info.

The views expressed herein are solely those of the author and not necessarily those of his firm or its clients. The information contained herein shall not be considered legal advice. You are advised to consult with an attorney concerning how any of the issues addressed herein may apply to your own situation. Coverage Opinions is gluten free but may contain peanut products.

    Randy Maniloff is Counsel at White and Williams, LLP in Philadelphia. He previously served as a firm Partner for seven years and transitioned to a Counsel position to pursue certain writing projects including Coverage Opinions . Nonetheless he still maintains a full-time practice at the firm. Randy concentrates his practice in the representation of insurers in coverage disputes over primary and excess obligations under a host of policies, including commercial general liability and various professional liability policies, such as public official’s, law enforcement, educator’s, media, computer technology, architects and engineers, lawyers, real estate agents, community associations, environmental contractors, Indian tribes and several others. Randy has significant experience in coverage for environmental damage and toxic torts, liquor liability and construction defect, including additional insured and contractual indemnity issues. Randy is co-author of “General Liability Insurance Coverage - Key Issues In Every State” (Oxford University Press, 2nd Edition, 2012). For the past twelve years Randy has published a year-end article that addresses the ten most significant insurance coverage decisions of the year completed.

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