Friday, April 30, 2010
Appeals Court Upholds Denial of Coverage for Legal Malpractice Claim
By SHERRI M. OKAMOTO, Staff Writer
This district’s Court of Appeal yesterday published its decision upholding a malpractice insurer’s recovery of the $175,000 it had paid to settle an action brought against the L.M. Ross Law Group LLP by Diversified Entertainment Co.
Div. Seven explained that the plain language of the policy did not obligate Carolina Casualty Insurance Co. to pay any damages since Beverly Hills attorney Leonard M. Ross, the sole equity partner of the firm, was the manager of Diversified when the malpractice claim was made, as well as settlor and trustee of the revocable trust holding a majority interest in the company.
The April 19 decision affirmed Los Angeles Superior Court Judge Ann I. Jones’ grant of summary judgment in favor of Carolina Casualty.
Carolina Casualty issued a lawyers’ professional liability policy to the L.M. Ross Law Group in 2004, agreeing to pay all damages and claims expenses the insured became legally obligated to pay “arising from any Claim first made against an Insured during the Policy Period.”
The policy specifically excluded claims by any business enterprise other than the firm “in which the Insured owns more than a 10 percent interest, or in which any Insured is an owner, partner, or employee, or which is directly or indirectly controlled, operated, or managed by any Insured.”
Four days before its coverage by Carolina Casualty expired, the firm reported a potential legal malpractice claim by Diversified. Diversified eventually filed a complaint in the Los Angeles Superior Court alleging that the firm had improperly advised it that it had the right to authorize the production, marketing and distribution of certain videotapes and DVDs featuring comedians Jeff Foxworthy and Bill Engvall.
Carolina Casualty agreed to tender a defense, subject to a reservation of rights, and the malpractice action was settled in 2008 by a total payment to Diversified of $250,000, consisting of $175,000 paid by the insurer and $75,000 contributed by the firm.
The insurer filed suit against the Ross Law Group seeking a declaration it had no duty to defend or indemnify the firm in the Diversified malpractice action because Diversified and its predecessor-in-interest were owned, managed or controlled by attorney Ross. The firm then filed a cross-complaint seeking reimbursement of the $75,000 it had contributed toward the settlement of the malpractice suit.
The parties sought summary judgment and jointly filed a stipulation of facts. Among the undisputed facts were that Ross served as the manager of Diversified at the time its malpractice claim was reported to Carolina Casualty, and that a majority interest in Diversified was held by the Leonard M. Ross Revocable Trust, of which Ross was the settler and trustee.
Following oral argument, Jones granted Carolina Casualty’s motion, finding Ross had acted simultaneously as counsel to Diversified and as its owner and manager.
On appeal, the firm argued that the policy exclusion only applied to conditions existing when Diversified’s malpractice claim was actually asserted, not when the potential claim was first reported, but Presiding Justice Dennis M. Perluss was not persuaded.
Writing for the court, he opined that the policy language was clear and unequivocal and that interpreting the exclusion as relating to an insured’s status at the time a an actual claim was made would be inconsistent with the coverage and notice provisions of the policy.
The justice further reasoned that Ross “was, in effect, the real party on both sides of the anticipated malpractice claim,” at the time the potential malpractice claim was reported to Carolina Casualty.
“At that point it was he who would assert any claim relating to the October 2004 distribution agreement on behalf of [Diversified], and it was he who would guide the Ross Law Group’s response to any such claim,” Perluss explained, positing that the potential for a collusive assertion of liability in such a situation was “readily apparent.”
Later changes in Ross’ roles with respect to Diversified did not alter the insurer’s legitimate interest in protecting itself from possible sham or collusive claims, he added.
Perluss also rejected the firm’s argument that the trust’s ownership of a majority interest in Diversified did not trigger the coverage exclusion since California law does not distinguish between property owned by a revocable trust and property owned by the settlor of such a revocable trust during the lifetime of the settlor.
“The potential for a collusive assertion of liability when the claimant is owned by the insured lawyer’s revocable trust is no less than when the lawyer owns the claimant directly,” Perluss said, concluding that the trust’s majority ownership of Diversified formed a separate basis for the preclusion of coverage.
Justice Fred Woods and Frank Y. Jackson joined Perluss in his decision.
David A. Tartaglio and Cheryl A. Orr of Musick, Peeler & Garrett represented the L.M. Ross Law Group, while Chad B. Wootton of the Wootton Law Group represented Carolina Casualty
The case is Carolina Casualty Insurance Company v. L.M. Ross Law Group, LLP, 10 S.O.S. 2316.
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