Benjamin Post v. St Paul Travelers Ins Co

PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

_______________

Nos. 10-3088 & 10-3300

_______________

BENJAMIN A. POST, ESQUIRE

Appellant (No. 10-3088)

v.

ST. PAUL TRAVELERS INSURANCE CO.

Appellant (No. 10-3300)

_______________

On Appeal from the United States District Court

for the Eastern District of Pennsylvania

(D.C. Civil Action No. 2-06-cv-04587)

District Judge: Honorable Anita B. Brody

_______________

Argued January 25, 2012

_______________

Before: AMBRO, CHAGARES

and HARDIMAN, Circuit Judges

(Opinion filed: July 31, 2012)

George A. Bochetto, Esquire (Argued)

Bochetto & Lentz

1524 Locust Street

Philadelphia, PA 19102

Charles S. Fax, Esquire

Rifkin, Livingston, Levitan & Silver

7979 Old Georgetown Road

Bethesda, MD 20814

Marc J. Zucker, Esquire

Weir & Partners

1339 Chestnut Street

The Widener Building, Suite 500

Philadelphia, PA 19107-0000

Counsel for Appellant/Cross-Appellee

Robert L. Byer, Esquire (Argued)

Duane Morris

600 Grant Street, Suite 5010

Pittsburgh, PA 15219-0000

Francis J. Deasey, Esquire

Henri Marcel, Esquire

Stephen J. Parisi, Esquire

Deasey, Mahoney, Valentini & North

1601 Market Street, Suite 3400

Philadelphia, PA 19103-0000

Robert M. Palumbos, Esquire

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Duane Morris

30 South 17th Street, United Plaza

Philadelphia, PA 19103-4196

Counsel for Appellee/Cross-Appellant

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OPINION OF THE COURT

_______________

AMBRO, Circuit Judge

Before us are an appeal and a cross-appeal arising

from an action brought by attorney Benjamin Post (“Post”)

against his legal malpractice insurer, St. Paul Travelers

Insurance Company (“Travelers”), for, among other things,

insurance bad faith and breach of contract. The District Court

granted summary judgment in favor of Travelers on the bad

faith claim, the order from which Post now appeals.

Travelers appeals the District Court’s damage award of

$921,862.38 to Post for breach of contract.

Post argues that his bad faith claim was erroneously

dismissed at summary judgment, and asserts, among other

things, that there was sufficient evidence to create a genuine

issue of material fact that Travelers lacked a reasonable basis

to deny coverage. Travelers contends that the District Court

erred by awarding damages on Post’s breach of contract claim

because the malpractice insurance policy contained an

explicit coverage exclusion for sanctions proceedings.

For the reasons stated below, we affirm the District

Court’s grant of summary judgment in Travelers’ favor on

Post’s bad faith claim, but we vacate and remand with respect

to the District Court’s damage award for breach of contract.

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I. Factual and Procedural Background

A. The Bobbett Case

In 2003, Post and Tara Reid, both employed at the

time by the law firm of Post & Schell, P.C., were retained to

defend Mercy Hospital-Wilkes Barre, Mercy Healthcare

Partners, and Catholic Healthcare Partners (collectively,

“Mercy”) in a medical malpractice action filed in the Court of

Common Pleas of Luzerne County, Pennsylvania, captioned

Bobbett, et al. v. Grabowski, et al., Case No. 4310-C-2003.

In May 2005, Post left Post & Schell to start a new law

firm with his wife—Post & Post, L.L.C. Thereafter, he

continued to represent Mercy in the Bobbett matter, and Reid

joined Post & Post as an associate.

Trial of the Bobbett case began in September 2005.

During its first week, the plaintiffs introduced evidence

suggesting that Post and Reid had engaged in misconduct

during discovery. Specifically, on Friday, September 23,

2005, plaintiffs’ counsel examined a risk manager, Anne

Marie Zimmerman, regarding allegedly undisclosed

redactions from medical policies produced by Mercy in

discovery. Zimmerman testified that Post and Reid were

responsible for the redactions. Plaintiffs’ counsel

characterized Zimmerman’s testimony as “establish[ing] that

[Post and Reid] covertly redacted and withheld information

from documents . . . , and/or simply failed to produce

requested documents without permission from this Court

and/or notice to Plaintiffs’ counsel.” Plaintiffs’ counsel then

suggested to the presiding Judge, Hon. Peter Paul Olszewski,

Jr., that the trial be adjourned for the day. On learning of this

possible discovery misconduct, Mercy replaced Post as its

counsel.

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Fearing that the jury now believed that there had been

a “cover-up” involving its lawyers, and concerned with the

“substantial potential of uninsured punitive exposure,”

Mercy, represented by new counsel, began settlement

negotiations with the plaintiffs over the weekend. The

negotiations resulted in a settlement of $11 million, which

represented the full extent of Mercy’s medical malpractice

policy limits. The settlement was presented to Judge

Olszewski in court on Tuesday, September 27, 2005. It

included a release among the parties, but with one significant

caveat: the settlement agreement did not release Post, Reid,

Post & Schell, and/or Post & Post from any liability they, or

any of them, might have to Mercy for malpractice. Mercy did

in fact threaten Post with a malpractice suit.

B. The Policy

Post & Schell was insured against claims of legal

malpractice by Travelers under Policy #GL09000524 (the

“Policy”). The Policy had an annual premium of $226,500,

and had an occurrence and aggregate limit of $10,000,000.

The Policy insured the firm and “protected persons” (i.e., the

firm’s attorneys) against “claims” and “suits” asserting

malpractice. It thus insured Post for any alleged acts within

the scope of coverage occurring (1) during the Policy’s term

and (2) while Post was employed by Post & Schell.

The Policy defines a “claim” as a “demand that seeks

damages.” It states that a claim is considered “to be first

made or brought” (1) on the date that Travelers or any

protected person “first receives written notice of such claim,”

or (2) when Travelers receives written notice from a protected

person “of a specific wrongful act that caused the loss which

resulted in such claim or suit.” A “suit” is “a civil proceeding

that seeks damages.”

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The Policy imposes on Travelers the “duty to defend

any protected person against a claim or suit . . . even if any of

the allegations of such claim or suit are groundless, false, or

fraudulent.” Travelers’ duty to defend expressly includes the

duty to pay “defense expenses incurred by, or for, the

protected person for the claim or suit.” “Defense expenses”

are “fees, costs, and expenses that result directly from the

investigation, defense, or appeal of a specific claim or suit,”

including “[f]ees, costs, and expenses of hired or appointed

attorneys” and “[t]he cost of the proceedings involved in the

suit, including court reporter’s, arbitrator’s and mediator’s

fees.” The Policy excludes from its definition of “damages”

any “civil or criminal fines, forfeitures, penalties, or sanctions

. . . .” It does not define “sanctions.”

The Policy provides in pertinent part as follows:

What This Agreement Covers

Lawyers professional liability.

We’ll pay amounts any protected

person is legally required to pay

as damages for covered loss that:

• results from the performance

of, or failure to perform, legal

services by or on behalf of

any protected person; and

• is caused by a wrongful act

committed on or after any

retroactive date that applies

and before the ending date of

this agreement.

*****

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Damages means:

• compensatory damages

imposed by law; and

• punitive or exemplary

damages imposed by law if

such damages are insurable

under the law that applies.

But we won’t consider damages

to include any:

• civil or criminal fines,

forfeitures, penalties, or

sanctions; or

• legal fees charged or incurred

by any protected person.

*****

Defense expenses means the

following fees, costs, and

expenses that result directly from

the investigation, defense, or

appeal of a specific claim or suit:

• Fees, costs, and expenses of

hired or appointed attorneys.

• The cost of the proceedings

involved in the suit, including

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court reporter’s, arbitrator’s,

and mediator’s fees.

• Fees for witnesses.

• Independent expert’s and

special investigator’s fees,

costs, and expenses.

*****

Exclusions – What This Agreement Won’t

Cover

Criminal, dishonest, or

fraudulent wrongful acts or

knowing violation of rights or

laws. We won’t cover loss that

results from any criminal,

dishonest, or fraudulent wrongful

act or any knowing violation of

rights or laws committed by:

• any protected person; or

• anyone with the consent or

knowledge of any protected

person.

C. Mercy’s Legal Malpractice Claim Against Post

On Sunday, September 25, 2005, James Saxton, an

attorney with the law firm of Stevens & Lee, Mercy’s newly

retained counsel, advised Post’s father, Barton Post, that

Mercy intended to bring a lawsuit for legal malpractice

against Post, and that the claim should be reported to Post’s

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insurance carrier. Saxton asked for the name of the insurance

carrier so that he could make a report.

Michael Williams, Vice President for Risk and

Insurance for Catholic Healthcare Partners, sent two letters on

October 6 to Post advising him that he was terminated as

Mercy’s counsel and instructing him not to destroy any

documents from the Bobbett case.

On October 12, Williams sent Post a third letter, this

time asserting that the Bobbett settlement was forced on

Mercy because the alleged “cover-up” by Post and Reid

during discovery had caused Mercy “substantial . . .

uninsured punitive exposure.”

Williams stated the following:

[W]hat clearly drove the

settlement was the damage done

during the testimony of Anne

Marie Zimmerman regarding the

document production issues raised

during her testimony. More

specifically is the fact that there

was a claim in front of the jury

that there was a “cover-up” that

appeared to involve our lawyers.

Further, under those

circumstances and knowing that

Ms. Zimmerman would likely

invoke her Fifth Amendment right

or testify under immunity, we

absolutely disagree regarding

your ability to rehabilitate. There

were other aggravating factors

that occurred involving you, your

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father and other members of your

firm; however, this is not the time

to review them.

An unprecedented and certainly

unanticipated situation arose in

which Mercy employees needed

to retain criminal counsel as

directly related to the issue of

redacted policies and procedures;

policies and procedures that you

admitted had been redacted,

notwithstanding your position that

such was not relevant. In fact,

those redactions were most

relevant and[,] as a result, an

irreconcilable conflict developed

with your firm, all of which put us

at tremendous risk. In light of

these dramatic developments, the

physicians’ insurers all tendered

their policy limits and were

prepared to take a joint

tortfeasor’s release. We

determined the case had to be

settled to protect not only the

assets of the Trust but to eliminate

the substantial potential of

uninsured punitive exposure

resulting from the actions of your

firm.

On October 20, 2005, Williams again wrote to Post,

stating:

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Pursuant to our internal protocols,

your former clients, Catholic

Healthcare Partners, Mercy

Health Partners, and Mercy

Hospital Wilkes-Barre are

providing you with a copy of the

executed Release in the above

captioned matter. We ask that

you note the carve-out for third-

party claims.

Please notify your professional

liability insurer of this, and ask a

representative of that Company to

contact me upon receipt.

On October 27, Post & Schell notified Travelers that

Mercy had retained Stevens & Lee as its counsel “to review

the matter for possible professional malpractice implications.”

Post & Schell enclosed the aforementioned letters sent by

Williams.

George Bochetto, counsel for Post, sent a letter to

Travelers on November 3 to put it “on notice of a claim or

potential claim” against Post. He enclosed the October 20

letter from Williams. On receipt of the letter (which was

contemporaneous with its receipt of the October 27 letter

from Post & Schell), Travelers opened a claims file for Post.

Michael Spinelli, a senior claims specialist in

Travelers’ New York office, assumed responsibility for the

claim. During the month of November, Spinelli had

numerous conversations and at least one email exchange with

Post & Schell partner William Sutton regarding Travelers’

retention of counsel to represent the firm in connection with

Mercy’s malpractice claim. There is no evidence that Spinelli

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communicated with Bochetto or Post during this time, not

even to acknowledge receipt of the claim. This was despite a

Travelers’ policy providing that

[t]he claims professional is

instructed to attempt to contact

the insured within 24 hours of

receiving the claim to introduce

yourself to the insured,

acknowledge that you have

received the claim and to speak

with them to find out more

information so you could assist

the insured in the handling of the

matter.

On November 18, 2005, Saxton wrote to Bochetto to

place Post on notice again of Mercy’s malpractice claim. In

relevant part, Saxton’s letter stated:

As a follow-up to the various

letters and discussions regarding

this matter, please be advised that

[Mercy] is in the process of

assigning counsel to pursue its

claims against its former counsel

in the Bobbett case. However,

before getting too far into the

litigation process, I wanted to

further discuss a meeting of the

stakeholders that you first

proposed verbally to my partner,

Jim Schwartzman, Esquire.

While [Mercy] is moving forward

with preparation for litigation, it

remains open to a good-faith

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meeting to discuss possible

resolution prior to suit being filed.

To that end, they will need certain

information from you, namely

confirmation that you notified

your client’s insurers regarding

the potential claim, the name of

the insurance carriers, and the

name of the claims representative,

if assigned.

D. The Sanctions Petition

On November 21, 2005, the plaintiffs in the Bobbett

case filed a 108-page petition for sanctions against Post, Reid,

Barton Post, and Post & Post. Post & Schell was not named

as a respondent. In the petition, the plaintiffs claimed that

Post and Reid violated the Pennsylvania Rules of Civil

Procedure and the Rules of Professional Conduct in their

handling of discovery by (1) failing to produce and/or

producing altered versions of responsive documents, and (2)

misrepresenting to the plaintiffs and the Court what

documents Mercy had in its possession. They asserted also

that Post and Reid had engaged in “dilatory, obdurate,

vexatious, and/or bad faith conduct.” The discovery

misconduct allegedly occurred while Post and Reid were with

Post & Schell and also while with Post & Post. The plaintiffs

sought sanctions against each defendant, as well as “any other

relief this court deems just and equitable . . . .”

By letter dated November 28, 2005, Bochetto advised

Travelers of the sanctions petition and, pursuant to the Policy,

requested that Travelers pay for Post’s defense costs and

indemnify Post with respect to the petition. After receiving

Bochetto’s letter seeking a defense to the petition for

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sanctions, Spinelli had a “lengthy discussion” with Bochetto’s

partner, Jeffrey Ogren, on December 1, 2005 about the

Bobbett case, the sanctions petition, and Mercy’s malpractice

claim. Post contended that Mercy made a malpractice claim

that was covered by the Policy. Spinelli’s view was that the

sanctions petition only sought relief in the form of sanctions,

which are expressly excluded under the Policy. As such,

Spinelli’s inclination was to deny coverage.

On December 1, Travelers retained attorney Mark

Anesh, a partner with the insurance defense firm of Wilson

Elser Moskowitz Edelman & Dicker, as outside counsel to

advise it on its defense and coverage obligations with regard

to Post. Anesh is a New York attorney not licensed to

practice law in Pennsylvania. Despite the fact that Spinelli’s

general practice was to provide coverage counsel with

“anything and everything” he had, he did not provide Anesh

with any information regarding the allegations that Mercy

made in October and November. Spinelli did not even advise

Anesh of Mercy’s letters. Rather, Spinelli sent Anesh only

the petition for sanctions and other documents relating to the

Bobbett case, and Spinelli asked Anesh only for his opinion

on whether there was coverage in connection with the

sanctions petition alone. Thus, in forming his opinion, Anesh

was not aware that a claim for legal malpractice had been

lodged beforehand by Mercy, nor was he aware that the

factual allegations in the sanctions petition were identical to

the factual allegations underlying Mercy’s malpractice claim.

Likewise, Anesh was not aware that Mercy had retained

counsel to pursue its legal malpractice claim.

After Anesh reviewed the materials given to him and

determined Travelers was not obligated to defend or

indemnify Post with respect to the allegations against him in

the petition for sanctions, he informed Bochetto by a

December 8 letter that this was Travelers’ conclusion. Anesh

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also told Bochetto that Travelers had received a draft of the

sanctions petition on October 31, 2005, three weeks before it

had been filed. Anesh explained the declining of coverage as

follows:

The sole and complete relief

sought by the petition at issue is

not for Damages as they are

defined in the Policy, but for

sanctions. Since sanctions are not

included in the definition of

Damages under the Policy, no

coverage, either for defense or

indemnity, will be afforded for the

above mentioned petition or any

hearing subsequently scheduled to

address the contents of the

petition. Furthermore, a Claim is

defined in the Policy as a

“demand that seeks damages”.

Therefore, your request for

defense and indemnity of the

sanctions petition is not a Claim

as defined in the Policy.

Travelers reserved its rights to deny coverage on

several other bases, including the exclusion for “loss that

results from any criminal, dishonest, or fraudulent wrongful

act or any knowing violation of rights or laws.” Nonetheless,

Anesh stated that Travelers was willing to reconsider its

decision if other information warranted it.

In a letter dated December 19, 2005, Bochetto, on

Post’s behalf, requested that Travelers reconsider its denial of

coverage for the sanctions petition, arguing that Travelers

erred on each basis it denied coverage. Travelers determined

15

that a change in coverage position was not warranted, and

again denied that it owed any defense or coverage obligation

to Post.

Post & Schell took the same coverage position as Post,

notwithstanding that the sanctions petition did not even name

the firm as a respondent. Post & Schell contended that

Mercy’s claim for malpractice against it and Post was “so

intertwined” with the sanctions petition that Post & Schell’s

fees and costs incurred in the latter (responding to a document

subpoena and a potential claim by Post for contribution in the

event sanctions were imposed on him) should be paid by

Travelers. Travelers responded that the Policy did not cover

legal fees and costs that the firm incurred in connection with

the sanctions proceedings.

E. Mercy Joins In The Sanctions Proceedings

From the onset of the sanctions proceedings, Mercy

participated in conferences with Judge Olszewski, insisted on

receiving copies of all discovery produced by Post, and

attended depositions relating to the sanctions petition.

On January 20, 2006, Mercy sought to question Post

during his deposition. Post’s counsel objected to the

questioning on the basis that Mercy was not a party to the

petition for sanctions. The parties could not resolve this

discovery dispute on their own and turned to Judge Olszewski

to resolve it. He decided to permit Mercy to participate in the

sanctions proceedings on the condition that Mercy file an

answer to the sanctions petition. On January 30, 2006,

Bochetto wrote to Travelers to inform it of Mercy’s

intervention in the sanctions proceedings. Travelers did not

respond.

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Mercy filed an answer to the petition on February 8,

2006. It joined in the sanctions proceedings because it “was

required to participate in the search, review and production of

documents, and to produce witnesses for depositions.” In

addition, Mercy had an “important interest” in the plaintiffs’

request for sanctions because it was “the misconduct of

[Mercy’s] former counsel that [was] at issue.” Mercy’s

answer admitted that Post and Reid had engaged in discovery

violations—without Mercy’s participation—and that those

violations had prejudiced the plaintiffs. Mercy alleged that

Post had withheld information that he “knew[ ] or should

have known” was discoverable, and had “produced

incomplete copies of policies and/or covered up discoverable

information on policies . . . .” It was in this context that

Mercy claimed it joined the plaintiffs’ request for sanctions.

Mercy’s prayer for relief “request[ed] that th[e] Court hold an

evidentiary hearing and sanction [Post and Reid] for their

conduct, and to enter any other relief [that] this Court

deem[ed] just and equitable under the unique and serious

circumstances presented before it, and award costs, attorneys’

fees and expenses.”

During his deposition in February 2006, Mercy Chief

Executive Officer James May confirmed that Mercy was

seeking money damages in the sanctions proceedings—for,

among other things, the amount of the settlement and the

negative publicity—on account of Post’s alleged misconduct.

On February 20, 2006, Bochetto again wrote to

Travelers, this time to notify it of Mercy’s answer to and

joinder in the sanctions petition, as well as May’s deposition

testimony, all of which made clear that Mercy was seeking

money damages in the sanctions proceedings. Post and Reid

sought a defense to Mercy’s answer to the sanctions petition.

17

Spinelli and Anesh reviewed Mercy’s answer and

determined that, like the petition for sanctions itself, it did not

trigger coverage because it did not allege a claim for

“damages” as defined by the Policy. Anesh informed

Bochetto of Travelers’ coverage decision.

F. The Travelers-Post Letter Agreement

Despite concluding that it owed no defense or

indemnity obligation to Post, Travelers attempted to reach an

accommodation with Post that would reimburse him for some

portion of the defense costs related to the sanctions

proceedings. Travelers did so because, while expressly

reserving its rights on the issue of coverage, it recognized that

(1) there was significant overlap between the sanctions

proceedings and Mercy’s threatened malpractice suit, and (2)

what transpired during the sanctions proceedings could have

an effect on the future malpractice suit with regard to which

Travelers arguably would owe defense and indemnity

obligations.

To that end, in the spring of 2006 Anesh had two

meetings with counsel for Post, Reid, and Post & Schell to

discuss Travelers’ payment of some of their attorneys’ fees

despite its denial of coverage. Bochetto testified that, at the

second meeting, Anesh agreed that Travelers would pay a

“very substantial” amount of the legal fees incurred to date,

an amount that Bochetto understood to be “in the range of

hundreds of thousands of dollars.” However, Bochetto

admitted that Anesh “[n]ever promised . . . an exact dollar

amount . . . [and that a] specific dollar amount was not

mentioned.”

On May 3, 2006, Anesh wrote to Bochetto and Gary

Figore (Reid’s counsel) offering to pay Post’s and Reid’s

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attorneys’ fees in connection with the sanctions proceedings

as follows:

• Travelers would pay an hourly

rate of $225 for partners, $175

for senior associates, and $150

for junior associates;

• Travelers would only pay for

legal services provided on or

after December 15, 2005;

• Travelers would only

reimburse for attorney time

“expended to defend potential

legal malpractice claims”; and

• The $100,000 deductible

would have to be exhausted

prior to reimbursement.

In consideration for this payment, Post would have to

waive any claim for payment of attorneys’ fees and expenses

in the context of the sanctions proceedings except as payable

under the letter agreement.

Post agreed to the terms of the offer letter and

submitted invoices to Travelers for over $400,000 in fees

related to the sanctions proceedings, which amount included

over $250,000 in fees incurred in the sanctions proceedings

prior to Mercy filing its answer to the petition.

After reviewing the invoices, Anesh wrote to Bochetto

on July 26, 2006 stating that Travelers would pay the amount

of $36,220.26. Anesh explained that the reduction in fees—

from the more than $400,000 in invoices submitted—resulted

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from Travelers’ implementation of the terms of the offer letter

as it had interpreted them.

The next day Bochetto wrote to Anesh rejecting

Travelers’ offer of payment and stating that he was

“genuinely offended by the contents of [the] letter” and that

the suggestion that “only $35,000 (out of over $400,000 in

fees and expenses) are reimbursable . . . is beyond ludicrous.”

In August and September 2006, the parties to the

sanctions proceedings began discussing the possibility of a

mediation that would “encompass the sanctions matter and

the potential legal malpractice action.” In light of this

development, Anesh wrote to Bochetto and Figore stating that

Travelers “agree[d] to pay for fifty per cent (50%) of

reasonable preparation time and attendance at the mediation.”

The mediation was scheduled for late November 2006.

G. The Bobbetts Withdraw The Sanctions Petition

In the fall of 2006, Post filed a lawsuit against the

Bobbetts’ lawyer, Joseph Quinn, for defamation and tortious

interference in order to create leverage to persuade Quinn to

withdraw the sanctions petition. Post believed that, if this

tactic succeeded and the Bobbetts discontinued the sanctions

proceedings, Mercy would no longer be able to use the

sanctions proceedings to obtain discovery against Post in aid

of its malpractice claim without the burdens and costs of

filing a direct action for malpractice. Post’s lawsuit achieved

its purpose—on March 23, 2007, the Bobbetts withdrew their

sanctions petition with prejudice.

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H. Mercy Files A Praecipe For Writ Of Summons

Against Post

In late summer 2007, Mercy offered to mediate its

malpractice claim against Post without resorting to litigation.

Post agreed and demanded that Travelers assume all legal

fees incurred by him in connection therewith. Travelers

responded that it had no duty to represent Post in the

mediation nor to reimburse him for the legal fees incurred in

connection with it. Instead, Travelers made a “courtesy”

offer of $3,000 as a “good faith gesture.” Bochetto rejected

this offer, describing it as an “absurdity.” It almost goes

without saying that the mediation between Mercy and Post

was unsuccessful.

On November 19, 2007, Mercy filed a praecipe for

writ of summons against Post in the Court of Common Pleas

of Luzerne County, Pennsylvania. The following February,

Post filed a praecipe for writ of summons against Mercy in

Philadelphia County. In November 2008, final agreement

was reached among all involved parties—Mercy, Post &

Schell, Post, Reid, and Travelers—for discontinuance, with

prejudice, of these two actions. No money was paid to any

person or entity by or on behalf of Post or Post & Schell in

consideration for the mutual discontinuances.

I. This Lawsuit

On October 13, 2006, Post filed a complaint in the

United States District Court for the Eastern District of

Pennsylvania against Travelers, Liberty Surplus Insurance

Company, and Lexington Insurance Company. Liberty

Surplus and Lexington (Post & Schell’s excess insurers) were

dismissed from the case in January 2007.

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On February 7, 2008, Post filed an amended complaint

against Travelers wherein he asserted five claims. Count I

was for breach of contract based on Travelers’ alleged breach

of the Policy. Count II also was for breach of contract, but

was based on Travelers’ putative breach of an oral agreement

between Bochetto and Anesh that Travelers would pay the

costs incurred by Post in connection with the sanctions

proceedings. Count III asserted a claim for insurance bad

faith pursuant to 42 Pa. Cons. Stat. § 8371. In Count IV,

Post asserted promissory estoppel, contending that Travelers

promised to cover his defense costs in connection with the

sanctions proceedings and that Post reasonably relied on

Travelers’ promise to his detriment. Finally, Count V sought

a declaratory judgment that Post was entitled to coverage for

defense costs he incurred in connection with the sanctions

proceedings.

On June 30, 2008, Travelers moved for partial

summary judgment as to Post’s claims for breach of contract,

insurance bad faith and declaratory judgment (Counts I, II,

III, and V), asserting that its duty to defend Post was not

triggered by the Bobbetts’ sanctions petition or by Mercy’s

answer to it because these pleadings related only to sanctions,

and sanctions are expressly excluded from coverage under the

Policy.

On July 31, 2008, Post filed a cross-motion for partial

summary judgment as to his breach of contract and

declaratory judgment claims (Counts I, II, and V). He

argued, among other things, that Travelers was legally

required to defend and indemnify him in connection with the

sanctions proceedings because (1) Mercy’s malpractice claim,

which predated the sanctions petition, triggered coverage, (2)

the malpractice claim and the sanctions proceedings involved

the same facts and were interrelated, and (3) Mercy was using

22

the sanctions proceedings to further its claim of legal

malpractice.

On January 7, 2009, the District Court entered an

Explanation And Order denying Travelers’ motion for

partial summary judgment and granting in part Post’s cross-

motion. Specifically, the Court denied Travelers’ motion for

summary judgment as to Counts I and V with prejudice, and

denied that motion as to Counts II and III without prejudice.

It granted Post’s cross-motion as to Counts I and V, and

denied it as to Count II without prejudice. The Court held

that the Policy covered the sanctions petition, and explained

in pertinent part as follows:

First, . . . Mercy’s malpractice

claim triggered a duty to defend

that included the sanctions

petition after Mercy joined

because that petition was involved

in the covered claim. As long as

Mercy’s malpractice claim could

have resulted in covered loss,

[Travelers] had a duty to defend

all proceedings involved in that

claim.

...

Second, even if the sanctions

petition were not part of Mercy’s

claim, the petition was not

excluded by the Liability Policy

after Mercy joined the petition.

The sanctions exclusion in the

Liability Policy does not exclude

sanctions petitions brought or

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joined by an attorney’s former

client. . . . The term “sanctions”

was undefined in the

Liability Policy. . . . Sanctions,

particularly those for violations of

discovery rules, are understood to

be sought by the opposing party

on motion, while a client’s

remedy for his or her attorney’s

errors is a malpractice suit.

...

The sanctions exclusion in the

Liability Policy . . . under the

commonly understood definition

of sanctions . . . refers to sanctions

motions brought by opposing

counsel. This exclusion does not

preclude from coverage a

sanctions petition joined by a

lawyer’s former client,

particularly one brought in

anticipation of a malpractice suit

based on identical allegations of

wrongdoing. The attorney-client

relationship between Post and

Mercy indicates that the damages

Mercy requested in the sanctions

petition were actually malpractice

damages, though Mercy termed

them “sanctions.” As Post’s

former client, the facts alleged by

Mercy in the sanctions petition

sound in malpractice, even though

brought under a cause of action

24

for sanctions. It is the facts in the

complaint that dictate whether the

exclusion in the liability policy

applies, not the cause of action

selected by Mercy. If the

sanctions petition were excluded

from coverage, Mercy could

choose whether to proceed with

an action where Post was covered

by his insurance carrier, or an

action where Post was not, and

potentially be awarded similar

relief in either action.

A professional liability insurance

carrier should not be able to avoid

coverage for what is essentially a

malpractice claim simply because

of how an attorney’s former client

chooses to term the requested

relief. Because the sanctions

exclusion in the liability policy

was unclear, it must be construed

in favor of the insured. Therefore,

the sanctions petition was not

excluded from coverage under the

liability policy after Mercy joined

the sanctions petition and

[Travelers] had a duty to defend

Post at that time. [Travelers]

breached [its] duty to defend Post

under the Liability Policy and [is]

therefore liable for breach of

contract.

25

On January 23, 2009, the District Court entered an

order expressly granting Travelers permission to file a

renewed summary judgment motion as to bad faith. Travelers

did so on February 9. It asserted that an insurer cannot be

held liable for bad faith when, as here, its denial of coverage

rests on a reasonable foundation and is fairly debatable;

rather, an insurer can only be found to have acted in bad faith

if its refusal to provide coverage was frivolous, unfounded, or

based on a motive of self-interest or ill will.

On March 31, the District Court entered an

Explanation And Order granting Travelers’ motion for

summary judgment as to Post’s bad faith claim. It reasoned:

Post, though he makes many

allegations of misconduct on the

part of [Travelers], cannot prove

that [Travelers] did not have a

reasonable basis to deny coverage

. . . . [T]hough I previously held

that coverage of the

Sanctions Petition was required,

[Travelers] had a reasonable basis

to deny coverage. [It] denied

coverage to Post because the

Sanctions Petition requested relief

in the form of sanctions, which

. . . were excluded from the

Liability Policy. . . . I find that

[Travelers’] denial of coverage

was not legally frivolous or

unfounded. Post cannot maintain

a claim for bad faith even if his

allegations of improper conduct

are true because the sanctions

exclusion in the Liability Policy

26

was a reasonable basis for

denying coverage.

Post filed a motion for reconsideration of this grant of

summary judgment on his bad faith claim, which the Court

denied.

In May 2009, Post withdrew Counts II and IV of the

amended complaint. Thereafter, the District Court presided

over a bench trial to determine the amount of damages to

award Post on Count I. It concluded that he was entitled to

reimbursement in the amount of $921,862.38, which

represented the work relating directly to Mercy’s potential

malpractice claim beginning on October 12, 2005, and the

work done relating to the sanctions petition after

November 21, 2005.

Post now appeals the entry of summary judgment on

his bad faith claim. Travelers cross-appeals from the damage

award on the breach of contract claim. 1

II. Discussion

A. Standard of Review

We review a grant of summary judgment de novo.

Azur v. Chase Bank, USA, Nat’l Ass’n, 601 F.3d 212, 216 (3d

Cir. 2010). “To that end, we are required to apply the same

test the [D]istrict [C]ourt should have utilized initially.”

1

The District Court exercised jurisdiction pursuant to 28

U.S.C. § 1332 based on the diversity of citizenship between

the parties and the fact that the amount in controversy

exceeds $75,000. We have appellate jurisdiction under 28

U.S.C. § 1291.

27

Chambers ex rel. Chambers v. Sch. Dist. of Phila. Bd. of

Educ., 587 F.3d 176, 181 (3d Cir. 2009) (citation and internal

quotation marks omitted). This test requires a court to “grant

summary judgment if the movant shows that there is no

genuine dispute as to any material fact and the movant is

entitled to judgment as a matter of law.”

Fed. R. Civ. P. 56(a). “In determining whether such relief is

warranted, ‘[t]he evidence of the nonmovant is to be believed,

and all justifiable inferences are to be drawn in his favor.’”

Chambers, 587 F.3d at 181 (quoting Anderson v. Liberty

Lobby, Inc., 477 U.S. 242, 255 (1986)). The inquiry is

“whether the evidence presents a sufficient disagreement to

require submission to a jury or whether it is so one-sided that

one party must prevail as a matter of law.” Anderson, 477

U.S. at 251-52.

“We may affirm the District Court’s order granting

summary judgment on any grounds supported by the record.”

Nicini v. Morra, 212 F.3d 798, 805 (3d Cir. 2000) (en banc).

“To the extent that the District Court made conclusions of

law, our review is de novo.” In re Merck & Co., Inc. Sec.,

Derivative & ERISA Litig., 493 F.3d 393, 399 (3d Cir. 2007).

We thus review de novo the District Court’s interpretation of

the Policy. Alexander v. Nat’l Fire Ins. of Hartford, 454 F.3d

214, 219 n.4 (3d Cir. 2006).

We review a district court’s findings of fact following

a bench trial for clear error. Am. Soc’y for Testing &

Materials v. Corrpro Cos., 478 F.3d 557, 566 (3d Cir. 2007).

In so doing, we “must give due regard to the trial court’s

opportunity to judge the witnesses’ credibility.”

Fed. R. Civ. P. 52(a)(6). In contrast, we exercise plenary

review over a trial court’s conclusions of law. Kosiba v.

Merck & Co., 384 F.3d 58, 64 (3d Cir. 2004). We similarly

exercise plenary review over its “choice and interpretation of

28

legal precepts.” Blasband v. Rales, 971 F.2d 1034, 1040 (3d

Cir. 1992).

B. Overview of Issues

The central issue for both Post’s appeal from the

dismissal of his bad faith claim, and Travelers’ cross-appeal

of the damage award on Post’s breach of contract claim, is

whether Travelers had a duty to defend Post in the sanctions

proceedings. In short, Post asserts that Travelers owed such a

duty and denying its defense obligations constituted bad faith;

as such, he contends that the District Court erred by granting

summary judgment in Travelers’ favor on the bad faith claim.

Conversely, Travelers argues that the Policy expressly

excludes sanctions, and, thus, not only was the denial of

coverage entirely reasonable and done in good faith, but the

District Court erred by awarding damages to Post based on

Travelers’ supposed breach of the Policy.

C. The Parties’ Arguments

1. Post’s Appeal As To Bad Faith

On appeal, Post asserts that the District Court erred by

granting Travelers’ motion for summary judgment on bad

faith “because Post had demonstrated that there were

numerous genuine disputes of material fact which mandated

the case being submitted to a jury.” Post contends that he

produced evidence establishing, among other things, that

Travelers:

• ignored Post’s multiple

notifications of Mercy’s legal

malpractice claim;

• “loaded the dice” in seeking a

29

formal coverage opinion from

its outside counsel, who was

not a member of the

Pennsylvania bar and who was

unfamiliar with Pennsylvania

insurance law, and worse,

Travelers concealed from its

outside counsel the existence

of Mercy’s claim;

• failed to investigate the Mercy

malpractice claim;

• communicated freely with, and

favored, Post & Schell at the

expense of Post;

• provided legal representation

to Post & Schell, but not to

Post, under the very same

insurance policy;

• never responded to Post’s

demand for coverage of the

legal malpractice claim as a

whole; instead, it denied

coverage based on the more

narrow issue of the sanctions

proceeding without regard to

the pending Mercy claim;

• ignored that the sanctions

proceeding and the Mercy

malpractice claim were

inextricably intertwined, thus

triggering coverage;

30

• made a bad faith offer to

compromise Post’s coverage

claim in exchange for his

waiving his rights under the

Policy;

• violated its own policies and

procedures, as well as

Pennsylvania law, in its

mishandling of Post’s claim;

and

• concealed documents

(particularly, purported

claims-handling manuals)

during discovery in this case.

Post argues that “mistreatment by an insurer, quite

apart from an unreasonable denial of coverage, can itself give

rise to a claim of bad faith.” As support for this proposition,

he cites an unpublished decision of this Court, Gallatin Fuels,

Inc. v. Westchester Fire Insurance Co., wherein we stated that

“a finding that the insure[r] d[oes] not ultimately have a duty

to cover the plaintiff’s claim does not per se make the

insure[r]’s actions reasonable.” 244 F. App’x 424, 435 (3d

Cir. 2007) (citing Frog, Switch & Mfg. Co. v. Travelers Ins.

Co., 193 F.3d 742, 751 n.9 (3d Cir. 1999) (“Bad faith is a

frivolous or unfounded refusal to pay, lack of investigation

into the facts, or a failure to communicate with the insured.”)

(emphasis in Gallatin Fuels)).

Travelers disagrees with Post’s interpretation of

Pennsylvania law. According to Travelers, a bad faith claim

must consist of the unreasonable and intentional (or reckless)

denial of benefits. See UPMC Health Sys. v. Metro Life Ins.

31

Co., 391 F.3d 497, 506 (3d Cir. 2004). Because it had a

reasonable basis to deny coverage for the sanctions

proceedings, Travelers asserts that it did not act in bad faith

as a matter of law. Further, it disputes the “evidence”

purportedly supporting the putative bad faith mishandling of

Post’s coverage claim, arguing, among other things, that: (1)

Spinelli first communicated with Post’s counsel—and had a

“lengthy discussion” with him—within 10 days of receiving

Bochetto’s November 3, 2005 letter; (2) there is no evidence

that Post & Schell received more favorable treatment than did

Post, nor that Travelers favored the firm at Post’s expense; (3)

Travelers conducted a thorough investigation of Post’s

coverage claim— Spinelli reviewed the Policy, the sanctions

petition, Mercy’s answer thereto (once it had been filed), and

two large binders containing documents from the Bobbett

case, and he then took the additional step of retaining counsel

to provide a coverage opinion—and this investigation

continued well after Travelers declined to provide a defense

in December 2005; and (4) three Travelers employees

submitted affidavits attesting that no claims-handling manuals

existed for the lawyer’s professional group within Travelers

(the supposedly concealed documents about which Post

complains).

2. Travelers’ Cross-Appeal As To The

Contractual Damages Award

In support of its cross-appeal, Travelers asserts that it

did not owe a duty to defend Post in the sanctions

proceedings, explaining that its duty to defend Post is

determined solely by the allegations in the sanctions petition

and Mercy’s answer to it, neither of which triggered the duty

to defend because there was no statement of a claim for

covered “damages,” but rather a request for “sanctions,”

which are expressly excluded by the Policy.

32

In response, Post contends that a “demand for

damages” was made by Mercy in October 2005, and the

subsequently filed sanctions petition did not eliminate

Travelers’ duty to investigate and defend Mercy’s malpractice

claim. Instead,

[t]he duty to cover [Mercy’s

malpractice claim] that arose in

October 2005 was a single,

unitary obligation, which

encompassed the sanctions

proceeding initiated on November

21, 2005, but was not defined by

it. This is so because[ ] . . . the

sanctions proceeding was [ ]

merely a vehicle by which Mercy

advanced its claim.

Post also observes that the duty to defend is broader in scope

than the duty to indemnify, and that coverage provisions are

to be interpreted broadly while exclusions are to be construed

narrowly and against the insurer.

D. Analysis

Because our resolution on the merits of the breach of

contract issue (i.e., whether Travelers owed a duty to defend

Post under the Policy) affects our determination as to the

issue of bad faith (i.e., whether Travelers unreasonably and

intentionally or recklessly denied coverage), we shall analyze

Post’s breach of contract claim first.

1. Breach of Insurance Contract

a. Legal Standard

33

“Insurance policies are contracts, and the rules of

contract interpretation provide that the mutual intention of the

parties at the time they formed the contract governs its

interpretation.” Am. & Foreign Ins. Co. v. Jerry’s Sport Ctr.,

Inc., 2 A.3d 526, 540 (Pa. 2010). “Such intent is to be

inferred from the written provisions of the contract. . . . If

doubt or ambiguity exists it should be resolved in [the]

insured’s favor.” Id. (internal citation omitted). “[A]ll

provisions of an insurance contract must be read together and

construed according to the plain meaning of the words

involved, so as to avoid ambiguity while at the same time

giving effect to all of its provisions.” Masters v. Celina Mut.

Ins. Co., 224 A.2d 774, 776 (Pa. Super. Ct. 1966).

As already noted, an insurer’s duty to defend is

broader than its duty to indemnify. Am. & Foreign Ins. Co., 2

A.3d at 540. It is a distinct obligation, separate and apart

from the insurer’s duty to provide coverage. Id. at 541. “An

insurer is obligated to defend its insured if the factual

allegations of the complaint on its face encompass an injury

that is actually or potentially within the scope of the policy.”

Id. See Erie Ins. Exch. v. Transamerica Ins. Co., 533 A.2d

1363, 1368 (Pa. 1987) (describing the duty to defend as

arising “whenever the complaint filed by the injured party

may potentially come within the coverage of the policy”

(emphasis in original)). “As long as the complaint ‘might or

might not’ fall within the policy’s coverage, the insurance

company is obliged to defend.” Am. & Foreign Ins. Co., 2

A.3d at 541 (citation omitted).

Whether a pleading raises a claim against an insured

that is potentially covered is a question to be answered by the

insurer in the first instance upon receiving notice of the claim

by the insured. Id. Although that question may be difficult, it

is the insurer’s duty to make a decision. Id. at 541-42. “The

insurer’s duty to defend exists until the claim is confined to a

34

recovery that the policy does not cover.” Id. at 542. “Where

a claim potentially may become one which is within the scope

of the policy, the insurance company’s refusal to defend at the

outset of the controversy is a decision it makes at its own

peril.” Id.

The question whether a claim against an insured is

potentially covered is answered “by comparing the four

corners of the insurance contract to the four corners of the

complaint.” Id. at 541. “An insurer may not justifiably

refuse to defend a claim against its insured unless it is clear

from an examination of the allegations in the complaint and

the language of the policy that the claim does not potentially

come within the coverage of the policy.” Id. In making this

determination, the “factual allegations of the underlying

complaint against the insured are to be taken as true and

liberally construed in favor of the insured.” Frog, Switch &

Mfg. Co., 193 F.3d at 746. “[T]o determine if there is

coverage, we must look to the facts alleged in the underlying

complaint, not the cause of action pled.” QBE Ins. Corp. v. M

& S Landis Corp., 915 A.2d 1222, 1225 (Pa. Super. Ct. 2007)

(emphasis in original). The manner in which the complainant

frames its request for relief does not control. Mut. Benefit

Ins. Co. v. Haver, 725 A.2d 743, 745 (Pa. 1999) (“[T]he

particular cause of action that a complainant pleads is not

determinative of whether coverage has been triggered.

Instead it is necessary to look at the factual allegations

contained in the complaint.”).

“Under Pennsylvania law, when an insured tenders

multiple claims to an insurer for defense, the insurer is

obligated to undertake defense of the entire suit as long as at

least one claim is potentially covered by the policy.” Caplan

v. Fellheimer Eichen Braverman & Kaskey, 68 F.3d 828, 831

n.1 (3d Cir. 1995); see also Am. Contract Bridge League v.

35

Nationwide Mut. Fire Ins. Co., 752 F.2d 71, 75 (3d Cir.

1985).

b. Merits

i. Travelers’ Duty To Defend

Post Against Mercy’s

Claim Was Triggered At

Least As Of October 12,

2005

Under the Policy, Travelers had a duty to defend Post

against any “claim” or “suit” for covered loss. Because the

Policy differentiates a “claim” from a “suit,” and because it

defines a “claim” as simply “a demand that seeks damages,”

Travelers’ duty to defend could be triggered by something

short of, and prior to, the filing of a complaint. See Heffernan

& Co. v. Hartford Ins. Co. of Am., 614 A.2d 295, 298 (Pa.

Super. Ct. 1992) (holding that insurer’s duty to defend was

triggered by answers to interrogatories because they put

insurer “on notice that a claim for damage . . . will probably

be made”).

The Policy provides that a claim is considered “to be

first made or brought” on the date that Travelers or any

protected person “first receives written notice of such claim.”

We thus find no error in the District Court’s conclusion that

Mercy’s malpractice claim was first made or brought on

October 12, 2005, the date on which Mercy faxed to Post a

letter blaming him for exposing it to the threat of uninsured

punitive damages and forcing it to settle the Bobbett case for

full policy limits in order to avoid such exposure. As such,

Travelers’ duty to defend Post in connection with Mercy’s

malpractice claim was triggered at least as of October 12,

2005.

36

While damages were not explicitly demanded in the

October 12, 2005 letter, Mercy asserted its malpractice claim

in no uncertain terms. After learning of Post’s alleged

misconduct, Mercy quickly terminated him as its counsel.

Mercy told Post that it would sue him for malpractice.

Indeed, in the September 25, 2005 conversation between Jim

Saxton (of Stevens & Lee) and Barton Post (Post’s father),

wherein Saxton threatened “that he, on behalf of Mercy, was

going to bring a lawsuit for malpractice against [Post],”

Saxton also advised that Post should “make arrangements to

report the claim to [Travelers], the insurance carrier.” Mercy

quickly followed up on this conversation by letter, dated

October 6, 2005, wherein Mercy (1) advised Post that it had

retained Stevens & Lee as outside counsel to investigate and

potentially prosecute a legal malpractice claim against him,

(2) directed Post to preserve relevant documents and

electronic data in connection with the threatened malpractice

suit, and (3) requested that Post produce all such relevant

documents and electronic data to Stevens & Lee. All this laid

the groundwork for the October 12 letter, wherein Mercy

blamed Post for placing it “in a position that demanded

settlement so as to limit [its] exposure and protect [its]

charitable assets” from “the substantial potential of uninsured

punitive exposure resulting from the actions of your firm.”

Considering the cumulative effect of all that

transpired—i.e., Post’s immediate termination as Mercy’s

counsel, the September 25, 2005 conversation between

Saxton and Barton Post, and the October 6 and October 12

letters—it would be fantasy to believe as of October 12 that

Mercy would not be seeking damages from Post in the

threatened malpractice suit to compensate it for the excessive

settlement it believed Post’s misconduct forced on it. As

the threatened malpractice suit certainly would have the

potential to result in a covered loss under the Policy,

Travelers’ duty to defend Post in connection with Mercy’s

37

malpractice claim was triggered at the latest “on the date that

[Travelers] or [Post] first receive[d] a written notice” of

Mercy’s claim—October 12, 2005.

Travelers’ contention that Mercy’s letters did not

trigger a duty to defend because they indicated only a

“potential” claim underwhelms. There was nothing

“potential” about Mercy’s threat to sue Post for malpractice

or its assertion that Post’s misconduct caused it monetary

loss. The definition of “claim” under the Policy does not

require anything more than a “demand that seeks damages,”

which Mercy made via its threats and letters. Indeed,

Travelers itself viewed its duty to defend as having been

triggered by Mercy’s letters because it opened a claims file

for Post and assigned responsibility of the claim to Spinelli,

who then spent considerable time reviewing numerous

documents and analyzing the claim.

ii. The Scope Of Travelers’

Duty To Defend Against

The Sanctions Petition Is

Limited To The Defense

Costs Incurred By Post

Subsequent To Mercy’s

Filing Of Its Answer On

February 8, 2006

We part ways with the District Court with regard to the

scope of Travelers’ defense obligation, as we disagree with its

holding that Travelers’ duty to defend Post encompassed the

entirety of the sanctions proceedings (that is, from when they

were begun by the Bobbetts).

Relying on the Policy’s definition of “defense

expenses”—which includes “[t]he cost of the proceedings

involved in the suit, including court reporter’s, arbitrator’s,

38

and mediator’s fees”—the District Court explained as

follows:

When Mercy joined the sanctions

petition, the proceedings

surrounding the petition became

“involved” in Mercy’s previously

asserted malpractice claim

through the potential for collateral

estoppel effect. Mercy likely

joined the sanctions petition, in

part, to participate in developing

the facts and/or law that would

directly impact their malpractice

suit (assuming the sanctions

petition did not result in sufficient

monetary compensation to

eliminate Mercy’s need to sue for

malpractice).

We disagree for at least two reasons. First, the Court’s

holding is at odds with the very distinction it (and we)

recognized between a “claim” and a “suit.” This distinction

was critical to its (and our) conclusion that Mercy had

asserted a covered malpractice “claim” at least as of October

12, 2005. But the Court then puts aside this distinction by

relying on “[t]he cost of the proceedings involved in the suit”

Policy language to support its view that the sanctions

proceedings “became ‘involved’ in” Mercy’s malpractice

claim once Mercy began participating in those proceedings.

Under the Policy, however, “defense expenses” only include

costs “involved in the suit,” and neither Mercy’s answer to

the sanctions petition (February 8, 2006) nor its malpractice

action against Post (November 19, 2007) had been filed when

the Bobbetts filed their petition for sanctions against Post on

November 21, 2005. Thus, while the sanctions proceedings

39

related to Mercy’s claim, there was as yet no suit that those

sanctions proceedings could be “involved in.” The District

Court therefore erred by concluding, based on Mercy’s

participation in conference calls with Judge Olszewski and its

insisting on receiving copies of all discovery produced in the

sanctions proceedings, “that Mercy became sufficiently

involved in the [sanctions] [p]etition to have ‘joined’ the

proceedings from the day the [p]etition was filed, on

November 21, 2005.” No amount of participation by Mercy

in the sanctions proceedings would be sufficient prior to the

filing of a “suit”—which means under the Policy “a civil

proceeding that seeks damages”—a prerequisite to Travelers’

liability. As noted below, that prerequisite was satisfied on

February 8, 2006, the date on which Mercy filed its answer to

the sanctions petition and sought damages against Post.

Second, the District Court’s conclusion goes against

two canons of contract interpretation. Under the principle of

ejusdem generis, “[i]t is widely accepted that general

expressions such as ‘including, but not limited to’ that

precede a specific list of included items should not be

construed in their widest context, but apply only to persons or

things of the same general kind or class as those specifically

mentioned in the list of examples.” McClellan v. Health

Maint. Org. of Pa., 686 A.2d 801, 805 (Pa. 1996). Similarly,

“[t]he ancient maxim ‘noscitur a sociis’ summarizes the rule

that the meaning of words may be indicated or controlled by

those words with which they are associated. Words are

known by the company they keep.” Northway Vill. No. 3,

Inc. v. Northway Props., Inc., 244 A.2d 47, 50 (Pa. 1968).

The “cost of the proceedings involved in the suit” includes

“court reporter’s, arbitrator’s, and mediator’s fees,”

not attorneys’ fees. Attorneys’ fees traditionally are

distinguished from costs. See, e.g., Fed. R. Civ. P. 54(d)

(differentiating between “costs” and “attorney’s fees”). The

Policy recognizes this distinction, addressing attorneys’ fees

40

in a separate bullet-point in the definition of “defense

expenses.”

In this context—i.e., in the absence of a “suit” (“a civil

proceeding that [sought] damages”)—the Policy’s “involved

in” language cannot apply. Hence, Travelers did not owe a

duty to defend Post in connection with the sanctions petition

at the time the petition was filed by the Bobbetts on

November 21, 2005.

However, Mercy’s answer to the sanctions petition,

filed on February 8, 2006 and which included a prayer for

relief requesting “any other relief [that] this Court deems just

and equitable under the unique and serious circumstances

presented before it, and award costs, attorneys’ fees and

expenses,” triggered coverage under the Policy. While Mercy

did not explicitly request “damages” as an item of relief, the

prayer in its answer did generally request “any other [just and

equitable] relief” as well as “costs, attorneys’ fees and

expenses.” It is debatable whether the general prayer for

“other relief” rendered Mercy’s answer a “civil proceeding

that seeks damages.” Compare Meth v. Meth, 62 A.2d 848,

849 (Pa. 1949) (“Under the prayer for general relief, a decree

which accords with the equities of the cause may be shaped

and rendered; the court may grant any appropriate relief that

conforms to the case made by the pleadings although it is not

exactly the relief which [h]as been asked for[.]”), with Baird

v. First Pa. Bank, N.A., 1 Pa. D. & C. 3d 665, 666, 1976 WL

491, at *1 (Pa. Ct. Com. Pl. 1976) (holding that a request for

“such other equitable relief as the Court deems appropriate”

is, by itself, no claim for relief at all, and requiring the

plaintiff to amend the complaint). Mercy’s specific request

for “costs, attorneys’ fees and expenses” nonetheless was

sufficient to do so because attorneys’ fees—both amounts

paid by the client to the negligent attorney as well as expenses

incurred by the client to prosecute its malpractice claim

41

against the attorney—are an item of damages in a legal

malpractice claim. See Bailey v. Tucker, 621 A.2d 108, 115

(Pa. 1993) (holding that plaintiff in legal malpractice action

could recover amounts paid to his attorney as damages); Feld

and Sons, Inc. v. Pechner, Dorfman, Wolfee, Rounick, and

Cabot, 458 A.2d 545, 554 (Pa. Super. Ct. 1983) (stating that

clients could recover fees paid to their lawyer who violated

professional obligations owed to clients); 3 Ronald E. Mallen

& Jeffrey M. Smith, Legal Malpractice § 21.6, at 22-26

(2009) (attorneys’ fees incurred in legal malpractice action

may be recoverable as consequential damages). Because

Mercy requested its attorneys’ fees as an item of relief in its

February 8, 2006 answer to the sanctions petition, the

sanctions proceeding at that time became a “civil proceeding

that [sought] damages,” and thus a “suit,” thereby triggering

coverage under the Policy.

In addition, Mercy’s answer to the sanctions petition

(in reality, its joining with the Bobbetts against Post, Reid,

Barton Post, and Post & Post) admitted and/or alleged facts

potentially giving rise to a covered malpractice claim under

the Policy. Mercy admitted and/or alleged that Post was its

former counsel, that he failed to exercise ordinary skill or

knowledge by unethically and improperly redacting and/or

withholding discoverable information, and that his failure to

exercise ordinary skill and knowledge subjected him to

sanctions and liability for attorneys’ fees—in essence, stating

the elements of a malpractice claim. See Bailey, 621 A.2d at

112 (explaining that, to state a claim for legal malpractice

under Pennsylvania law, an aggrieved client must allege that:

(1) the parties were in an attorney-client relationship; (2) the

attorney failed to exercise ordinary skill or knowledge; and

(3) the attorney’s failure to exercise ordinary skill and

knowledge was the proximate cause of damage to the client).

42

Moreover, because (1) Mercy sought damages in

addition to sanctions, and (2) the facts admitted and alleged

by Mercy in its answer to the sanctions petition stated a

potentially covered malpractice claim, the Policy’s sanctions

exclusion does not shield Travelers from its duty to defend

Post. See Caplan, 68 F.3d at 831 n.1 (“Under Pennsylvania

law, when an insured tenders multiple claims to an insurer for

defense, the insurer is obligated to undertake defense of the

entire suit as long as at least one claim is potentially covered

by the policy.”). This exclusion would only excuse

Travelers’ duty to defend Post if the possibility of Mercy’s

recovery could be confined solely to sanctions. See Am.

Contract Bridge, 752 F.2d at 75 (“the insurer is obligated to

fully defend its insured until it can confine the possibility of

recovery to claims outside the coverage of the policy”).

Mercy’s potential recovery could not be so confined.

iii. The Policy Does Not Cover

Post v. Mercy

We believe also the District Court should not have

held that Post’s suit against Mercy—filed in Philadelphia

County in February 2008—was covered under the Policy on

the basis that it was inextricably intertwined with Mercy’s

malpractice claim against Post.

Had Post asserted counterclaims in Mercy’s suit

against him, no doubt the expenses incurred by him to

prosecute the counterclaims would have been covered by the

Policy. See TIG Ins. Co. v. Nobel Learning Cmtys., No. Civ.

A. 01-4708, 2002 WL 1340332, at *14-15 (E.D. Pa. June 18,

2002) (holding that counterclaims that were inextricably

intertwined with the defense of the initial claims were

“logically encompassed” by duty to defend); Safeguard

Scientifics, Inc. v. Liberty Mut. Ins. Co., 766 F. Supp. 324,

333-34 (E.D. Pa. 1991) (holding that the insurer’s duty to

43

defend extended to counterclaims raised in the same

proceeding because “the pursuit of the counterclaims was

inextricably intertwined with the defense . . . and was

necessary to the defense of the litigation as a strategic

matter”).

However, Post did not simply assert counterclaims in

the same proceeding; rather, he filed a separate civil action in

a different venue. While Post’s new action in Philadelphia

County surely related to the case instituted by Mercy in

Luzerne County, to hold that Post’s separate action was

covered by the Policy simply because it related to Mercy’s

suit would condone, and perhaps even encourage, the

multiplicity of litigation. Such a holding also would place

insurers in the difficult and unenviable situation of having to

determine whether related cases are related enough—i.e.,

“inextricably intertwined”—to trigger coverage for the

insured’s counterclaims. Both of these results are highly

undesirable and, therefore, we cannot adopt such a rule.

As Judge Savage persuasively stated in Amquip Corp.

v. Admiral Insurance Co.,

[i]f courts were to consider the

costs an insured incurred by

instituting its own action for the

purpose of bringing pressure on

the other party under the guise of

a litigation defense, it would

encourage and endorse

multiplicity of litigation. This is

much different than requiring the

insurer to reimburse the insured

for the cost of prosecuting

counterclaims raised in the same

action.

44

No. Civ. A. 03-4411, 2005 WL 742457, at *7 (E.D. Pa. Mar.

31, 2005)(Savage, J.).

Rather than require insurers to decide whether they

have a duty to cover an insured’s expenses in a separate

action based on a highly contextual and subjective inquiry

into whether it is “sufficiently related to the underlying

action” (the rule that the District Court applied here), Amquip

provides a bright-line and sensible rule that an insurer has a

duty to cover an insured’s expenses for prosecuting

counterclaims in the initial proceeding, but that insurer has no

duty to cover the expenses incurred by an insured in

prosecuting an entirely new and separate action (even if that

action is related to the underlying case). While there

certainly may be tactical reasons for an insured to file a

related suit in a different venue, we believe that discouraging

multiple litigation and providing clear coverage guidelines for

insurers are more important considerations. The rule in

Amquip will provide clarity to insurers and insureds, as well

as conserve their legal costs and expenses (not to mention

judicial resources), and thus will better serve insurance

coverage litigants. Because Amquip provides a better rule of

law, we hereby adopt it.

Accordingly, Travelers is not required to cover the

expenses incurred by Post in connection with the separate

action he filed against Mercy in Philadelphia County.

c. Conclusion Re Duty To Defend

Travelers owed Post a duty to defend against (1)

Mercy’s malpractice claim from October 12, 2005 onward,

and (2) the sanctions petition subsequent to the filing of

Mercy’s answer on February 8, 2006. However, Travelers is

not liable for the expenses incurred by Post in connection

with the separate action he filed in Philadelphia County.

45

2. Insurance Bad Faith

a. Legal Standard

To recover for bad faith, “a plaintiff must show by

clear and convincing evidence that the insurer (1) did not

have a reasonable basis for denying benefits under the policy

and (2) knew or recklessly disregarded its lack of a

reasonable basis in denying the claim.” Condio v. Erie Ins.

Exch., 899 A.2d 1136, 1143 (Pa. Super. Ct. 2006). “Thus, an

insurer may defeat a claim of bad faith by showing that it had

a reasonable basis for its actions.” Amica Mut. Ins. Co. v.

Fogel, 656 F.3d 167, 179 (3d Cir. 2011). “[T]he essence of a

bad faith claim” is “the unreasonable and intentional (or

reckless) denial of benefits.” UPMC Health Sys., 391 F.3d at

506.

The Superior Court of Pennsylvania has explained:

“Bad faith” on [the] part of [an]

insurer is any frivolous or

unfounded refusal to pay proceeds

of a policy; it is not necessary that

such refusal be fraudulent. For

purposes of an action against an

insurer for failure to pay a claim,

such conduct imports a dishonest

purpose and means a breach of a

known duty (i.e., good faith and

fair dealing), through some

motive of self-interest or ill will;

mere negligence or bad judgment

is not bad faith.

46

Terletsky v. Prudential Prop. & Cas. Ins. Co., 649 A.2d 680,

688 (Pa. Super. Ct. 1994) (quoting Black’s Law Dictionary

139 (6th ed. 1990)).

“A reasonable basis is all that is required to defeat a

claim of bad faith.” J.C. Penney Life Ins. Co. v. Pilosi,

393 F.3d 356, 367 (3d Cir. 2004). Moreover, “mere

negligence or bad judgment does not constitute bad faith;

knowledge or reckless disregard of a lack of a basis for denial

of coverage is necessary.” Frog, Switch & Mfg., 193 F.3d at

751 n.9.

While an insurer has a duty to accord the interests of

its insured the same consideration it gives its own interests,

“an insurer is not bound to submerge its own interest in order

that the insured’s interests may be made paramount, and an

insurer does not act in bad faith by investigating and litigating

legitimate issues of coverage.” J.C. Penney, 393 F.3d at 368

(citation and internal quotation marks omitted).

Even questionable conduct giving the appearance of

bad faith is not sufficient to establish it so long as the insurer

had a reasonable basis to deny coverage. Id. (affirming

summary judgment in insurer’s favor on bad faith claim

because there was a reasonable basis to deny coverage, even

though insurer took inconsistent coverage positions in other

situations and made false statements in its marketing

materials). See O’Donnell v. Allstate Ins. Co., 734 A.2d 901,

906-10 (Pa. Super. Ct. 1999) (explaining that, while bad faith

“may also extend to the insurer’s investigative practices,” in

the absence of evidence of a dishonest purpose or ill will, it is

not bad faith for an insurer to take a stand with a reasonable

basis or to “aggressively investigate and protect its interests”).

Bad faith “must be proven by clear and convincing

evidence and not merely insinuated.” Terletsky, 649 A.2d at

47

688. This heightened standard requires evidence “so clear,

direct, weighty and convincing as to enable a clear

conviction, without hesitation, about whether or not the

defendants acted in bad faith.” Bostick v. ITT Hartford Grp.,

56 F. Supp. 2d 580, 587 (E.D. Pa. 1999) (citations omitted).

“Thus, the plaintiff’s burden in opposing a summary

judgment motion is commensurately high in light of the

substantive evidentiary burden at trial.” J.C. Penney, 393

F.3d at 367. “In a bad faith case, summary judgment [in

favor of the insurer] is appropriate when there is no clear and

convincing evidence that [its] conduct was unreasonable and

that it knew or recklessly disregarded its lack of a reasonable

basis in denying the claim.” Bostick, 56 F. Supp. 2d at 587.

b. Merits

The District Court correctly granted summary

judgment in favor of Travelers on Post’s insurance bad faith

claim brought pursuant to 42 Pa. Cons. Stat. § 8371. The

sanctions exclusion in the Policy provided Travelers a

reasonable basis for declining to provide a defense to Post,

and there is nothing in the record—let alone clear and

convincing evidence—indicating that Travelers’ purported

mishandling of Post’s claim was motivated by a dishonest

purpose or ill will.

With his primary bad faith argument foreclosed by our

(and the District Court’s) conclusion that Travelers had a

reasonable basis for declining coverage, Post asserts that

Travelers engaged in bad faith conduct by, among other

things, ignoring communications from the insured, violating

its own policies and procedures, agreeing to pay for defense

counsel for Post & Schell but not him, and keeping crucial

information from Anesh as he made his coverage

determination. This mishandling of his claim, Post contends,

48

is a basis for finding bad faith, irrespective of the final

decision on the issue of coverage.

In support of his contention, Post principally relies on

our non-precedential case of Gallatin Fuels, Inc. v.

Westchester Fire Insurance Co., which he cites for the

proposition that “a finding that the insure[r] did not ultimately

have a duty to cover the plaintiff’s claim does not per se make

the insure[r]’s actions reasonable.” 244 F. App’x at 435.

While that statement is no doubt true, Post’s reliance on

Gallatin Fuels is misplaced.

As explained above, while under Pennsylvania law bad

faith may extend to an insurer’s investigation and other

conduct in handling the claim, that conduct must “import a

dishonest purpose.” Brown v. Progressive Ins. Co., 860 A.2d

493, 501 (Pa. Super. Ct. 2004) (citation and internal quotation

marks omitted). Invariably, this requires that the insurer lack

a reasonable basis for denying coverage, as mere negligence

or aggressive protection of an insurer’s interests is not bad

faith. See Frog, Switch & Mfg., 193 F.3d at 751 n.9

(explaining that “mere negligence or bad judgment does not

constitute bad faith”); O’Donnell, 734 A.2d at 910

(explaining that an insurer may “aggressively investigate and

protect its interests”).

Indeed, Gallatin Fuels underscores this rule. In that

case, both the insurer and the insured mistakenly believed that

the insurance policy remained in full force when, in fact, the

policy had been canceled. 244 F. App’x at 427-28. Before

realizing that the policy had been canceled, however, the

insurer denied the insured’s claim without a reasonable basis.

Id. at 428. The insurer also “misrepresented the terms of the

policy, dragged its feet in the investigation of the claim, hid

information from [the insured], and continued to shift its basis

for denying the claims.” Id. at 435. Based on these facts, we

49

held that “a jury could have found—and, indeed, did find—

that [the insurer] acted in bad faith given its working

assumption that the policy had not been canceled.” Id.

Because of the misrepresentations and dishonesty of the

insurer in denying the claim without a reasonable basis for

doing so (though there was a reason about which the insurer

did not yet know), we cautioned that Gallatin Fuels was “one

of the exceedingly rare cases in which an insurer can be liable

for bad faith” even though there was no duty to provide

coverage. See id.

That is not the case here, where Post assails largely

benign claims-handling conduct—conduct that certainly does

not “import a dishonest purpose”—simply because he

disagrees with Travelers’ decision to deny coverage on the

plausible basis that the sanctions exclusion precluded

coverage. Thus, Gallatin Fuels would not be helpful to

Post’s case even were it precedential. See generally 3d Cir.

I.O.P. 5.7 (“The court by tradition does not cite to its not

precedential opinions as authority. Such opinions are not

regarded as precedents that bind the court because they do not

circulate to the full court before filing.”).

Post also relies on Giangreco v. United States Life

Insurance Co., 168 F. Supp. 2d 417 (E.D. Pa. 2001). The

relevant issue there was whether an intoxication exclusion in

a car insurance policy provided the insurer a reasonable basis

to deny coverage. See id. at 422-23. On learning that the

insured was intoxicated, the insurer denied coverage, a

decision it stuck to despite evidence later uncovered that the

insured did not cause the accident and may not have been able

to avoid it even if unimpaired. Id. at 422-23. The District

Court denied the insurer’s motion for summary judgment as

to the bad faith claim, reasoning that a jury could reasonably

conclude “that [the insurer] denied plaintiffs’ claim without

conducting a reasonable investigation and without a

50

reasonable basis. It would not be unreasonable to conclude

. . . that [the insurer] reflexively denied the claim upon

learning that the insured was intoxicated without

meaningfully pursuing issues of causation.” Id. at 423.

Citing Giangreco, Post argues that Travelers

reflexively denied coverage by relying on the sanctions

exclusion in the Policy and “latching onto the subsequent

filing of the sanctions proceedings as an excuse for

disclaiming coverage of the broader malpractice claim.” But

the record belies this argument. Travelers did not

automatically deny coverage, as evidenced by, among other

things: (1) Spinelli’s review of, and work performed in

connection with, Post’s coverage claim; (2) Travelers’

retention of Anesh as outside counsel to provide a coverage

opinion (even though the documents provided were not

comprehensive); (3) Travelers’ reconsideration of its

declining coverage; (4) its continued investigation into the

coverage issues; (5) the extensive and ongoing dialogue

among Spinelli, Anesh, and Bochetto; and (6) Travelers’

negotiations with Bochetto resulting in its compromise offer

and letter agreement to cover a portion of Post’s defense

expenses. Further, unlike in Giangreco where the insurer’s

reasonable basis to deny coverage disappeared in light of new

evidence, Travelers’ reasonable basis remained. Giangreco is

thus distinguishable.

c. Conclusion Re Bad Faith

Travelers did not frivolously decline to provide a

defense to Post; rather, after an investigation and retention of

outside counsel, Travelers reasonably concluded that the

sanctions exclusion in the Policy applied to Post’s claim and

denied coverage. Even if Travelers’ claims-handling

processes were not ideal, there is no evidence in the record—

let alone clear and convincing evidence—to indicate that

51

Travelers’ purported mishandling of Post’s claim was

motivated by a dishonest purpose or ill will. Because it

performed what appears to be an adequate investigation, and

because the sanctions exclusion in the Policy provided it a

reasonable basis for denying coverage, Travelers did not

engage in insurance bad faith.

* * * * *

While we affirm the District Court’s March 31, 2009

Order (Dist. Ct. ECF No. 109) granting summary judgment in

Travelers’ favor on Post’s bad faith claim, we vacate its July

6, 2010 Order (Dist. Ct. ECF No. 193) entering judgment in

Post’s favor in the amount of $921,862.38 on the breach of

contract claim. Under the Policy, Travelers is responsible for

all costs incurred by Post in connection with Mercy’s

malpractice claim from October 12, 2005 forward and for all

costs incurred by Post to defend the sanctions proceedings

from February 8, 2006 forward.

With respect to those defense costs incurred by Post

related to the malpractice claim, due to the broad scope of an

insurer’s duty to defend, Travelers is liable for all of Post’s

defense costs except for those costs that relate solely to the

Bobbetts’ sanctions petition. Travelers is liable for all of

Post’s defense costs incurred from February 8, 2006 that

relate to the malpractice claim and/or the sanctions

proceedings. However, Travelers is not liable for the

expenses incurred by Post with respect to the separate action

he filed against Mercy in Philadelphia.

We remand the case to the District Court to recalculate

the amount of fees and expenses incurred by Post that are to

be reimbursed by Travelers.

52

HARDIMAN, Circuit Judge, concurring in part and

dissenting in part.

I agree with Judge Ambro’s excellent opinion for the

Court in all respects save one. Unlike my colleagues, I would

hold that Travelers owed no duty to defend any portion of the

sanctions proceeding the Bobbetts initiated against attorney

Post.

As the majority notes, the Policy excluded sanctions

from coverage, stating that Travelers would not “consider

damages to include any: civil or criminal fines, forfeitures,

penalties or sanctions.” And the Bobbetts’ petition bore all

the hallmarks of a typical motion for disciplinary sanctions.

See, e.g., Black’s Law Dictionary 1458 (9th ed. 2009)

(defining “sanction” as “[a] penalty or coercive measure that

results from failure to comply with a law, rule, or order” and

listing as an example “a sanction for discovery abuse”).

Thus, I concur that Mercy’s informal participation in the

sanctions proceedings could not impose on Travelers a duty

to defend Post in those proceedings. I part ways with the

majority with respect to whether Mercy’s answer to the

Bobbetts’ petition converted the sanctions proceeding into a

“suit” as defined by the Policy, that is, “a civil proceeding

that seeks damages.”

The majority concludes that Mercy’s boilerplate prayer

for relief—which requested that the court impose

“sanction[s]” and “any other relief[] this Court deems just and

equitable under the unique and serious circumstances

presented before it, and award costs, attorneys’ fees and

expenses”—sought “damages” because attorneys’ fees are

recoverable in a suit for legal malpractice. The majority

further reasons that Mercy “in essence” stated the elements of

1

a legal malpractice claim through its admissions in its answer.

In support of this view, the majority cites cases involving

legal malpractice lawsuits. See Bailey, 621 A.2d 108; Feld &

Sons, 458 A.2d 545. While it is undoubtedly true that

plaintiffs who bring such lawsuits may obtain compensatory

damages that include attorneys’ fees, I find no authority for

the proposition that a plaintiff may pursue such relief merely

by responding to a sanctions petition with averments that

might, in a separate lawsuit, form the basis for a legal

malpractice claim. Indeed, the District Court correctly

recognized that “[s]anctions, particularly those for violations

of discovery rules, are understood to be sought by the

opposing party on motion, while a client’s remedy for his or

her attorney’s errors is a malpractice suit.” (App. 1221–22);

cf. Rohm & Haas Co. v. Lin, 992 A.2d 132 (Pa. Super. Ct.

2010) (“[T]he purpose of discovery sanctions is to secure

compliance with our discovery rules and court orders in order

to move the case forward and protect the substantive rights of

the parties, while holding those who violate such rules and

orders accountable.”).

The Pennsylvania Superior Court has recognized the

fundamental distinction between disciplinary sanctions and

compensatory damages:

Sanctions, including monetary sanctions paid to

an adversary in the form of fees or costs,

address the interests of the court and not those

of the individual. A litigant cannot rely on a

sanction motion to seek compensation for every

injury that the sanctionable conduct produces.

Rather, an injured party must request tort

damages to protect his personal interest in being

2

free from unreasonable interference with his

person and property.

Werner v. Plater-Zyberk, 799 A.2d 776, 784 (Pa. Super. Ct.

2002) (citations omitted). Under the majority’s reasoning,

Mercy could have obtained damages caused by Post’s

negligence without ever proving to a judge or jury the

elements of legal malpractice. Such an award would be

unprecedented in my experience.

Moreover, an innocent explanation for Mercy’s

participation in the sanctions proceeding belies the majority’s

inference that Mercy’s true objective in that proceeding was

to obtain compensation for Post’s malpractice. The state

court required Mercy to file a responsive pleading as the price

of admission to participate in the sanctions proceeding, which

implicated not only Mercy’s former outside counsel, but also

its own employees and corporate documents. In fact, Mercy

indicated in its opposition to Post’s motion to strike its

answer that it intervened because it “was required to

participate in the search, review and production of

documents, and to produce witnesses for depositions.”

For these reasons, I would hold that Travelers owed

Post no duty to defend the sanctions proceeding, even after

Mercy filed its answer.

3