Civil Litigation FlashPoints November 2007

Breaking up is hard to do, particularly when your relationship is a legal partnership. Sometimes the break-up is amicable, but more often than not, it gets nasty and leads to litigation. The Illinois Appellate Court, First District, recently analyzed insurance coverage issues that arise when a legal partnership hits the rocks.

In Andreou & Casson, Ltd., et al., v. Liberty Insurance Underwriters, Inc., No. 01-06-2754, -- N.E.2d --, 2007 WL 2769252 (1st Dist. Sept. 24, 2007), the court considered whether the defendant insurer had a duty to defend its insured, a law firm, in an underlying lawsuit brought by a former employee. The former employee, Dana Kurtz, filed a complaint against Andreou & Casson, Ltd., (“A&C”) and its representatives alleging, among other things, that they publicly disparaged her professionalism and integrity (the “Kurtz action”). According to Kurtz’s complaint, Kurtz was “a young attorney induced to join a partnership based on representations that were false and intended ultimately to deprive her of her attorney’s fees from several lucrative cases.” Kurtz alleged that she entered into a verbal agreement with Frank Andreou and Luke Casson to join the firm A&C under certain conditions, including the condition that she would be an equal partner in all respects and that the firm name would be changed to include her own. Kurtz alleged that A&C breached the partnership agreement and engaged in various acts of wrongful conduct, including breach of fiduciary duties, fraud, disparagement, defamation and humiliation.

The day after the Kurtz action was filed, A&C tendered the defense of the lawsuit to its insurer, Liberty Insurance Underwriters, Inc., (“Liberty”) because the alleged wrongful acts occurred during the period of an existing insurance policy (the “Liberty Policy”). Liberty in turn refused the tender and denied coverage for a variety of reasons, including the fact that the policy contained an insured versus insured exclusion that bars coverage for claims between insureds under the policy. A&C filed a declaratory judgment action seeking a declaration that the policy provided coverage to A&C for the Kurtz action. Liberty responded with a counterclaim seeking a declaration that the policy did not provide coverage for the Kurtz action for several reasons, including that the insured versus insured exclusion barred any duty to defend or indemnify A&C.

In the meantime, the Kurtz action plodded along and eventually went to trial. At the trial, A&C claimed that Kurtz was an employee of A&C, had never been a partner, and had been terminated from her employment. The trial court in the Kurtz action ruled in favor of Kurtz. The trial court found that Kurtz was a partner of the firm and that A&C breached the partnership agreement. Armed with the trial court’s ruling in the underlying action, Liberty filed a motion for summary judgment in the insurance coverage action. The trial court in that case granted Liberty’s motion for summary judgment and specifically found that the insured versus insured exclusion barred coverage. A&C appealed.

The Appellate Court began its analysis with basic insurance coverage law. It initially noted that “the duties to defend and to indemnify are not coextensive, the obligation to defend being broader than the obligation to pay.” International Minerals and Chemical Corp. v. Liberty Mutual Insurance Co., 168 Ill.App.3d 361 (1988). In determining whether an insurer has a duty to defend its insured, a court looks to the allegations in the underlying complaint and compares them to the relevant provisions of the insurance policy. Outboard Marine Corp. v. Liberty Mutual Insurance Co., 154 Ill.2d 90, 107-108 (1992). If it is clear from the face of the complaint that the allegations failed to state facts that bring the case within or potentially within the policy’s coverage then the insurer may properly refuse to defend.

The court reviewed Kurtz’s allegations in the underlying lawsuit. Kurtz specifically alleged that she had a verbal agreement to join the law firm as an equal partner. She also alleged that this agreement included a name change that would reflect her status as an equal partner in the firm. Moreover, the court found that it was judicially determined in the underlying suit that A&C operated as a partnership and not as a professional corporation, and that Kurtz was, in fact, a partner of that partnership.

The court then compared these facts with the plain language of the insurance policy. The policy included the following insured versus insured exclusion: “For the purposes of this sub-section the term ‘insured’ shall mean ‘you’. The policy does not apply to any claim made by one or more insured against another insured ….” The policy defined “you” in the following way: “if the named insured is a partnership or a limited liability partnership, such partnership or limited liability partnership and each lawyer who is a partner there of, including any incorporated partner and each shareholder of any such incorporated partner.”

After comparing the underlying complaint to the language of the insurance policy, the court found that Kurtz “was a partner, or at least a member of a professional corporation, and hence an insured.” The court ruled that the insured versus insured exclusion did apply and operated to preclude coverage to A&C in the Kurtz action since Kurtz was an insured under the Liberty Policy at the time of the alleged wrongful conduct. Therefore, the trial court was correct in holding that Liberty properly denied coverage.

Practitioner’s Note: When dealing with professional liability insurance coverage, the old adage Buyer Beware rings true. Prospective policyholders must be cognizant of the fact that insurance companies maintain a well-stocked arsenal of reasons to deny coverage. Exclusions are some of their favorite weapons of choice. This case should serve as a cautionary tale for all prospective policyholders. An insured, whether it be a law firm or a business, must be diligent in understanding and negotiating the language of its insurance policy.