By Lindsey Dean
Although an award of sanctions against an attorney can be very costly to the attorney, the Eleventh Circuit’s recent opinion in Jones, Foster, Johnston & Stubbs, P.A. v. ProSight-Syndicate 1110 At Lloyd’s, no. 15-12399, 2017 WL 586450 (Feb. 14, 2017) makes clear that attorneys may not find coverage for such sanctions under their professional liability insurance policies.
Jones, Foster, Johnston & Stubbs, P.A. (Jones Foster) represented an individual plaintiff in an underlying defamation action filed against TheStreet.com, a financial media company, internet website and publisher. The court in the underlying action entered a protective order that prohibited the plaintiff from using TheStreet.com’s inadvertent disclosures concerning the identity of its journalistic sources. The plaintiff subsequently claimed that he had independently identified TheStreet.com’s source and named the source as a defendant in the underlying action. The source then proceeded to move the court to enter an order requiring the plaintiff and Jones Foster to show cause why they should not be held in contempt and sanctioned for their use of the privileged information (the Contempt Motion).
Jones Foster sought coverage for the Contempt Motion under its Primary Lawyer’s Professional Liability Insurance Certificate issued by ProSight-Syndicate 1110 at Lloyd’s (ProSight). The Policy’s insuring agreement generally provided coverage for Damages for Claims arising out of Jones Foster’s acts, errors, or omissions in the rendering of or failure to render Professional Services. The definition of “Claim” encompassed a “demand for money or services” but excluded “proceedings seeking injunctive or other non-pecuniary relief.” The Policy defined “Damages” as “compensatory judgments, settlements or awards [not including] … sanctions, fines or penalties assessed directly against any insured.” ProSight denied coverage for the Contempt Motion on the grounds that the remedies sought by the Contempt Motion, sanctions and non-pecuniary damages, were excluded from coverage. Jones Foster filed suit against ProSight seeking declaratory relief, as well as damages for bad faith and breach of contract. The U.S. District Court for the Southern District of Florida agreed with ProSight’s position and granted ProSight’s motion to dismiss.
Applying Florida law, the Eleventh Circuit Court of Appeals affirmed the district court’s decision. Relying on the Policy’s definition of “Damages” and “Claim”, the Court concluded that the Contempt Motion could not satisfy those definitions because it did not constitute suit against Jones Foster for a compensatory judgment or award. Rather, it sought sanctions and non-pecuniary relief, which were specifically excluded for the definition of “Damages” and “Claim”, respectively. Accordingly, the Court held that the Contempt Motion did not trigger the Policy’s insuring agreement.
The Court rejected Jones Foster’s argument that the attorney’s fees and costs sought in the Contempt Motion were compensatory and remedial in nature. The Court recognized that under the American Rule, parties bear their own attorney’s fees unless a contract or statute provides otherwise. Thus, the Court found that assessing attorney’s fees in a contempt proceeding acts to penalize the wrongdoer, who is forced to bear an unnecessary cost as a result of his or her conduct. The Court also rejected Jones Fosters’ remaining arguments, including:
- Jones Foster’s contention that the fraudulent conduct exclusion necessitated coverage because it extended coverage to claims alleging conduct of a dishonest and fraudulent nature until there is a final determination in the underlying action.
- Jones Foster’s argument that the innocent-insured provision required ProSight to defend Jones Foster because it was an innocent party to its attorneys’ wrongful conduct.
- Jones Foster’s assertion that the definition of “Damages” was satisfied because the Contempt Motion only sought indirect, rather than direct, sanctions against Jones Foster as an entity.
Fines, penalties and other sanctions that are primarily intended to punish the insured, as opposed to compensate the injured party, are often excluded from insurance coverage. Although Jones Foster advanced some creative arguments, the Eleventh Circuit correctly held that sanctions sought in connection with the contempt proceeding were punitive in nature and accordingly did not trigger coverage under the Policy’s insuring agreement.