The U.S. Court of Appeals for the Fifth Circuit affirmed a $30 million judgment against an insurance company after it refused to pay off a Houston law firm’s legal malpractice claim by pointing to exclusion in a liability policy that was so broad it covered “every single thing an attorney does or does not do, wrongful or not.”
The Fifth Circuit’s opinion in OneBeacon Insurance v. T. Wade Welch & Associates said that since the mid-1990s, T. Wade Welch & Associates represented Dish Network in over 400 different matters including a lawsuit brought against it by the Russian Media Group in Connecticut federal court.
The Welch Firm’s Ross Wooten served as the lead attorney for Dish on the case, the opinion said. In 2005, Wooten became involved in a discovery dispute in the case after he allegedly failed to respond to a discovery requests within a time limit.
In 2006, Welch Firm founder T. Wade Welch completed an application for legal malpractice insurance and responded “No” when asked if any lawyer in his firm had action taken against them for suspension, reprimand or any other disciplinary action.
Two months after the policy was signed, a motion to compel “death penalty” sanctions was filed against Dish after Wooten failed to comply with the Connecticut court’s discovery order—a problem that Wooten believed he could cure without punishment. Although opposing counsel stated that the severe sanctions striking a party’s pleadings were “unheard of in Connecticut” the trial court nevertheless approved of the death penalty sanctions request against Dish.
Wooten did not tell Dish or the Welch Firm about the sanctions order. Welch later learned of the order in 2008 from another associate at the firm and later informed Dish’s general counsel. Welch contacted Wooten for information about the order but Wooten resigned from the firm.
Welch later advised OneBeacon Insurance Group that Dish had a potentially high exposure potential legal malpractice claim and that “Wooten clearly committed malpractice.” In 2011, Dish offered to settle the case and release the Welch Firm from liability for an amount within the policy limits of its malpractice policy. Dish later won a $12.5 million malpractice award against the Welch Firm in arbitration.
OneBeacon declined to settle the case and filed a declaratory judgment action in a Houston federal court seeking to rescind the policy and a declaration that coverage was barred because of a “prior-knowledge” exclusion barred coverage in the case. The policy excluded coverage if an attorney had reasonable belief they had committed a wrongful act or if they could foresee a claim being made against them. The exclusion defined wrongful act as “any actual or alleged act, error, omission or breach of duty arising out of the rendering or the failure to render legal services.” The Welch Firm responded with a counterclaim alleging that OneBeacon had negligently failed to settle the case. Dish also intervened in the case.
A Houston federal jury later returned a verdict for the Welch Firm and Dish on every question—including that OneBeacon was grossly negligent for failing to settle the case, leading to a $30 million final judgment against the insurance company. Specifically, the jury found that OneBeacon had not shown that a reasonable attorney, given Wooten’s knowledge in 2006, could have known his actions would lead to a malpractice claim. OneBeacon appealed the judgment to the Fifth Circuit, again arguing that the prior knowledge exclusion in the policy barred coverage in the case.
In affirming the trial court’s judgment, Judge Catharina Haynes found that the wrongful act definition in OneBeacon’s policy exclusion was so extremely overbroad that it was “absurd.”
“On its face, this covers every single thing an attorney does or does not do, wrongful or not,” Haynes wrote in the Nov. 14 decision. “As written, the exclusion renders the coverage illusory and is facially absurd.”
Michael Jung, a partner in Dallas’ Strasburger & Price who represents OneBeacon, declined to comment on the decision.
David L. Miller, a partner in Houston’s Miller, Scamardi & Carrabba who represents the Welch Firm, could not be reached for comment.
Richard Patch, a partner in San Francisco’s Coblentz Patch Duffy & Bass who represents Dish, did not return a call for comment.
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