December 28, 2017

Ninth Circuit Affirms District Court Ruling that Claims Against Law Firms are “Related”

An issue that continues to significantly impact both professional liability insurers and their insureds is whether two or more claims are "related" for purposes of determining the applicable number of retentions and policy limits. The Ninth Circuit is the latest court to address this issue.

On December 26, 2017, in an unpublished decision, the Ninth Circuit affirmed the February 23, 2016 order by the United States District Court for the Central District of California ruling that multiple suits against a law firm are "related" and constitute one claim for purposes of the per-claim limit under a professional liability policy issued to the law firm.  (Liberty Insurance Underwriters v. Davies Lemmis Raphaely Law Corporation, 162 F.Supp.3d 1068 (C.D.Cal 2016).  

Liberty Insurance Underwriters ("Liberty") issued claims-made-and-reported professional liability insurance to law firm Davies Lemmis Raphaely Law Corporation ("DLR").  The policy provides in relevant part: "Claims alleging, based upon, arising out of or attributable to the same or related wrongful acts shall be treated as a single claim regardless of whether made against one or more than one of you.  All such claims, whenever made, shall be considered first made during the policy period or any extended reporting period in which the earliest claim arising out of such wrongful acts was first made, and all such claims shall be subject to the same limits of liability." 

Several plaintiffs filed multiple suits against DLR alleging that, in the course of negotiating a property acquisition transaction, DLR made false representations to plaintiff-investors that the sellers would pay all commissions relating to the transaction, when in reality the purchase price of the property was marked up to include a commission payment.  Liberty argued that the suits constituted a single claim, implicating one rather than multiple per-claim policy limits.  DLR argued that a reasonable insured would not have expected the suits to be treated as a single claim.  The District Court disagreed with DLR—finding that the suits all involve a similar alleged scheme—and ruled in favor of Liberty. 

The Ninth Circuit agreed, and held that the District Court did not err in concluding that the common plan alleged in the suits satisfied the "related conduct" language in the policy.  Citing the leading California case on this issue, Bay Cities Paving & Grading, Inc. v. Lawyers’ Mut. Ins. Co., 5 Cal. 4th 854, 873 (1993), the Ninth Circuit held that "[w]hile the underlying actions are not causally related, they are logically related to each other by the 'common purpose or plan'—a scheme to incentivize investments by signifying that sellers would pay commissions, while hiding the fact that the price of the investment included the commissions."

While the Ninth Circuit decision is unpublished, the District Court decision has now been affirmed, and can be cited and/or relied upon by litigants and courts on the issue of whether or not multiple claims are "related" under California law.