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Case number 17-7063, Chicago Insurance Company versus Paulson and Nace, PLLC and Barry John Nace Appellants, Gabriel Assad and Sarah Gilbert.

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Mr. Horvath for the Appellants, Ms.

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Sark for the Appellate.

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Mr. Horvath, recording.

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Morning.

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May it please the court.

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Steve Horvath for Paulson and Nates and Barry Nates.

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I've reserved that three minutes for rebuttal.

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There are two issues I'd like to address in my argument here today on the issue of whether or not Chicago Insurance had a duty to indemnify Paulson and Nates and Barry Nates under their policy of insurance.

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The first is the application of Virginia Code Section 38.2-2226.

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And the second is the issue as to whether or not, on the summary judgment status, the court should have found that there is no reasonable basis to believe that the insured had breached a professional duty.

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The court's aware that should be the no vote.

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And in summary judgment, the evidence is looked at the light most favorable to the insured, or Paulson and Nason in this case.

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The suit was filed in this case for the malpractice within the statute of limitations on July 24, 2006.

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The suit was filed saying parent for child rather than child for parent.

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And although there are prior Virginia Supreme Court cases that have the same caption in cases in federal court and cases in state court,

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That rule has now been interpreted to say you must file child for parent by parent rather than parent for child.

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Not something that's well known in the legal community, a nuance in Virginia law.

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Can we move to what he did that is unquestionably

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Well, if it's not malpractice, but by missing the deadline, the statute of limitations.

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They did not miss the deadline, because they followed it within the statute of limitations.

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They followed it with on trial.

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No, I'm talking about the second, the one that complies with Virginia procedural practice.

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The second one was after the period of limitations.

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But then the question is, would that relate back to the first one under Virginia's relation back statute?

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Well, the first one was dismissed without prejudice.

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That's correct.

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All right.

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And then the lawyer waited until after the statute of limitations had passed to file the next one, right?

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Well, yes.

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What happened is they filed the lawsuit four days before the statute ran.

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The second one?

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The first one.

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The first one.

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All right.

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I'm talking about the second one.

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Yes.

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The second one was filed in October.

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after the statute of limitations had run.

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But it was felt at that time that there were, if you actually look at the argument before the circuit court in Richmond, they had a number of issues that they thought were winner issues, the most important of which, this was just a misnomer that could still be corrected.

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Even though the first case was

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dismissed because the fact that the first one was timely filed, everyone had been put on notice of that lawsuit that they could use that and latch onto that and use that as a benefit to go forward.

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That was the theory.

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That is not a theory that an average layperson would know about.

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that would not need expert testimony.

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In fact, as a trial court in the medical malpractice case, both sides had expert witnesses to talk about that nuance and what it meant and how that should be interpreted.

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So it's not a simple issue that, as the court below found, an average layperson should understand.

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Can I just ask a practical question, which is why wasn't the first complaint just amended?

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I don't have the answer to that.

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I don't know why that it wasn't done that way.

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It was dismissed.

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And when it's dismissed, if you look at the argument, the court said, well, that wasn't filed correctly.

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I have to dismiss it without prejudice.

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And we had this backed up lawsuit here.

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We'll just move forward on that.

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But I don't know.

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Again, that would be an issue that you would need expert testimony on to say whether a reasonable person would believe that there was a breach of a professional duty.

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And we didn't have that below.

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But we have the passage of over a year.

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I mean, is there anything in the record that they were pursuing some sort of a settlement or anything like that?

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I mean, the statute of limitations run out.

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Well, what happened, again, the timeline is this.

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The surgery occurred on July 28, 2004.

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The first lawsuit was filed July 24th, 2006.

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One of the issues that you will see discussed below as to why they were still up there plenty of time is whether or not there was continuing care because if there's continuing care by the doctor, that pushes back the statute of limitations.

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That was an issue that was open.

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The second lawsuit was filed three months later on October 25th, 2006.

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The first lawsuit was not dismissed until four months after that on February 27, 2007.

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So we have a timeline here of what they thought, everything was fine.

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and they thought they would be able to get it to be laid back.

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And if you look at the testimony, it wasn't until they were actually getting ready to finish their briefs before the Virginia Supreme Court that they said, hey, we really may have a problem here, because this is just a simple misnomer.

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Misnomer are corrected all the time.

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The idea is to go forward on the merits with the liberal amendments to pleadings that we have.

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There shouldn't be any issue with this.

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Again, the problem below was that

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The court took that issue away from a find or a fact.

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And even though Chicago Insurance did not designate an expert on that, the court substituted her own opinion saying, that's an absolute breach.

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Any reasonable attorney would know that.

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Well, with respect to the district court judge, if any reasonable attorney would know such an obvious thing about this misnomer issue, then why do we have a Supreme Court decision that has it in its caption the wrong way?

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Why would we have federal court cases that have it in the caption the wrong way?

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Why would we have state court cases that have it in the caption the wrong way?

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So what exactly is the expert going to do?

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The expert is going to say that, in fact, a mistake wasn't made?

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you know, is to say whether there was a reasonable basis to believe.

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The policy says that as a condition precedent to coverage, they have to say that the insured had, quote, no reasonable basis to believe that the insured had breached a professional duty.

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The expert would say there would be no reasonable basis to believe that a breach had not occurred.

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That's the question here.

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There's two parts to the policy.

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That's the first part.

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The second part says, or had a reasonably foresee that a claim would occur.

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Reasonable foresee is actual knowledge.

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And they don't have that in here.

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But our position is that all of that doesn't apply

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because this case, the malpractice case, was pending in Virginia, and Virginia has the power to regulate its policies of insurance and enforcement of policies of insurance, just like the United States Supreme Court case of Watson and Leeside.

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that if the local jurisdiction has a rule concerning insurance policies, they have strong interest in enforcing that.

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Virginia has a strong interest in saying, we're not going to let insurance companies come back and say that you have a

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policy defense.

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But do you have standing to even raise that?

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Absolutely.

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The reason is a couple fold.

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First of all, 38.2226 says it's waived.

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It doesn't say it's waived as to claims by the claimant only.

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It says it's waived, it's gone.

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Second, there's no Virginia Supreme Court case that says it only applies to claimants.

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Third, at that point in time, the claimant does not have an interest into the policy of insurance.

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At that point in time, the claimant is not, under Virginia law, considered to be a third-party beneficiary.

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The claimant has only an interest in that policy once a judgment has been entered and there's a library of FIFAs or very patient centers that's returned to not file.

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Once that's happened, they then have a cause of action.

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So to say that you have to apply that only to benefit the claimant is contrary to how Virginia has their insurance policies work, and there's no Virginia Supreme Court case on that.

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If that is an issue, this court always has the power to ask a certified question on it.

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But that is not the way the Supreme Court has interpreted it.

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The statute is very clear.

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Virginia is very clear in the way they interpret statutes.

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They say, we look at the claim in the statute.

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Here it doesn't say the claimant has a right, the claimant has a beneficiary.

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It just simply says that the failure to give notice within 45 days will result in the waiver of that defense.

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That's it.

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Wasn't it argued in Virginia that DC law applies?

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I'm the issue of the interpretation of the policy.

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Yes, there's no question that DC law applies to interpretation of the policy.

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So the issue concerning no reasonable basis to believe is controlled by DC law.

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The issue concerning the right under the policy, right or obligation to give notice has to apply

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Virginia law.

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And it was never argued that that statute didn't apply there.

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All right.

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So I'm reading from JA 308.

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And this was Paulson and Nace's argument that the only issue before the court is the insurance contract, not the underlying tort claim.

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There's simply no connections to Virginia as between CIA

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C, Paulson and Nace, very Nace, an interpretation or enforcement of the insurance contract.

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That's correct.

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And if you call, what happened in that case?

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I didn't read that.

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And the two counts in this present, the only cases are so on and so forth.

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And in the Eastern District, you took the position that DC law should apply.

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I respect, I understand it.

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If I took that position then, I was not meant to say it doesn't apply to 38.22226.

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It only applied to the interpretation of the contract.

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And the interpretation of the contract of insurance is what does the term no reasonable basis to believe mean.

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The issue concerning the enforcement of the contract, of course, has to be done by Virginia's police power and 38.2226 applies.

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The court did not rely on that statement below making the decision.

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There's no estoppel by that.

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We are allowed to make

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contrary arguments from time to time, we can't do that, we can't plead on the alternative, then a lot of people would be in trouble, but it was no intent to waive that position below.

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Can I ask just one follow-up question on this, if I could, on a reasonable basis to believe so?

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Is your argument that the expert would have said that the mistake was not in fact a mistake, or is it that the mistake isn't one that would lead to a determination of

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actionable mistake because it just wasn't important enough or?

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Would a reasonable attorney think that that was a breach of professional duty is what the question is.

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So you don't dispute that and an expert couldn't dispute that in fact it was a mistake?

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They could dispute that it was a mistake.

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I think they could, yes, absolutely.

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But I guess I didn't read you to be making that argument at any point in your briefs.

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It seemed like your briefs acquiesced on the notion that this was wrong, but then you made arguments to the effect that, well, there's captions in Virginia Supreme Court cases that show that this mistake is made, which that's to say the mistake is made, but it's not to say that it's not a mistake in the first place.

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We have taken the position throughout the case that that was not a mistake.

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We've never admitted that that was a mistake that was made on the part of Paulson and Nates in varying names.

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The court below, in the other case, found it was a mistake.

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We disagree with that ruling.

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Here, the question is not whether there was a mistake or not, but whether or not a reasonable attorney would believe that there was a mistake.

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So that's a different question in my mind, because you can make a mistake.

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and have no idea that it was a mistake.

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Law can change.

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It can be an error in judgment.

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There's lots of different types of mistakes that you can have.

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I was just simply focusing on the language in this particular policy, no reasonable basis to believe, rather than going through anything else, because I thought, that's what we have to focus on here, is that language, no reasonable basis to believe.

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So would a reasonable attorney understand that there was a breach of professional duty to follow suit the way it was?

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That's the question.

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All right.

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Thank you very much.

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Ms.

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Sarp.

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Good morning.

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May it please the court.

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My name is Paulette Sarp, and I represent the Appalee Chicago Insurance Company in this matter.

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I wanted to start off with really what is the critical and controlling issue in this case.

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Paulson and Ace have asserted a number of arguments to try to circumvent the policy language, the application of a Virginia statute, a waiver, and a stop-all, and I will address that if necessary.

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But really, all this Court has to focus on is our policy language and a couple simple facts.

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This policy that we issued to Paulson and Ace is a claims made and reported policy.

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And in certain circumstances, it can cover malpractice committed before the policy accepts.

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The only way it will do that, though, is if at the time the policy is issued, none of the insurers had a reasonable basis to believe that an error had occurred or that a claim might be brought against it.

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Isn't that a standard clause with the claims made?

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Is that a standard clause?

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Absolutely.

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And so here are the facts that you need.

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And I submit that the district court did not

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did not apply her expert opinion on this issue.

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This is not something that expert evidence testimony is required.

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There are numerous cases in the district that support that notion.

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What she did was look at these facts that we're going to talk about, apply it to the language, and conclude that no reasonable juror could conclude otherwise.

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And here are the facts.

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The Paulson and Nace firm waited until the last few days before the statute expired.

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They filed a medical malpractice claim on behalf of their client.

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The defendants immediately moved to dismiss and argued that Paulson and Nacek not complied with this Virginia statute that designates how a plaintiff must be named.

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The Nace defendants concede in their depositions that the reason they filed the second lawsuit

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was to correct the error that had been made in the first lawsuit.

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So you could stop right there.

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Not only would a reasonable attorney believe that an error had been committed, the NACE defendants have conceded that.

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But we don't have to stop right there.

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Second lawsuit was filed.

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After the statute of limitations had expired, there's no dispute about that.

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Again, the defendants moved to dismiss.

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And the district or the state court in Virginia dismissed with prejudice the second lawsuit.

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This all happened, the actual dismissal of the second loss had happened just within weeks of when Paulson and Nace submitted their application to CIC.

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Mr. Horvath has argued that how could a reasonable attorney know that a mistake had been made?

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I submit that whether Mr. Nace and Paulson Nace agreed with the court's ruling is really not the issue.

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At least one trial court, two trial courts, had issued orders that there was a mistake.

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Whether that's corrected on appeal, whether the insured believe that it might be corrected on appeal, there are a multitude of cases, none of which were responded to by Paulson and Ace, holding that simply because an insured believes that, boy, we can get this corrected on appeal, or our client told us he isn't going to sue us, really isn't the issue.

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It's at the time that they filed the application, they knew that two trial courts had ruled they had committed a mistake.

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I guess from the company's perspective, if those facts don't put a reasonable person on notice, a reasonable attorney on notice of an error, then we don't know what is.

[00:18:05] Speaker 04:
Essentially that language in our policy that says we're not gonna cover mistakes that happened before this policy was issued is essentially written out of the policy.

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There may be circumstances where the error, the alleged error at issue might not be so clear.

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where, for example, maybe an attorney drafted a will and the client might have brought it to his attention that you didn't write this correctly.

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I don't know whether that would be something that would put a reasonable attorney on notice of an error.

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So there's a sliding scale, but these facts are at the very end of the sliding scale.

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I just don't know what else

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an attorney could be aware of.

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that would put them on reasonable notice of a claim.

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Because the case had been dismissed already by the time that... With prejudice.

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And whether the court, you know, whether Barry and Ace agreed with that or not is not the issue.

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And we've cited several cases, capital specialty I guess is probably the closest on point, but several cases talking about this set of circumstances where cases have been dismissed, your client's rights have been adversely affected as of that time.

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Whether ultimately it's corrected,

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Who knows?

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But at the time that you submitted your application, their rights had been adversely effective.

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Cases had been dismissed.

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And Palsonese don't really respond to those cases in their brief, and I can understand why, because there's really no way around it.

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You know, this issue about expert testimony, again,

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That's not what the district court was doing.

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She was not substituting her expert opinion.

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It was based on a reasonable person.

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No jury could find otherwise.

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This is just too clear.

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And there are cases.

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The capital specialty case did the exact same thing.

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There was no expert testimony, no argument that it was needed.

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The court ruled as a matter of law based on these facts.

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So there's precedent for this.

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But I would submit that if, for some reason, expert testimony were required for some reason,

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That's Paulson and Nace's burden.

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They have the burden of establishing that the insuring agreement has been met in this case.

[00:20:23] Speaker 04:
It's sort of like an occurrence policy where the insured to get coverage first has to show that this case involved an occurrence or an accident or property damage.

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Once they've done that, then it's the insurance company's burden to show maybe that an exclusion applied.

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Here, Paulson and Nace,

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the language that we're talking about is a threshold requirement in the insuring agreement.

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And it is absolutely undisputed, again, no dispute by policy and AIDS, at least not with legal authority, that it's the insured's burden to establish that the terms of the insuring agreement have been met.

[00:21:00] Speaker 04:
So even if

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expert testimony were somehow required.

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That was not our burden.

[00:21:05] Speaker 04:
It was Paulson and Nace's burden to bring forth expert testimony to say no reasonable attorney could have believed this was an error.

[00:21:12] Speaker 03:
Let me ask you about the waiver defense.

[00:21:17] Speaker 03:
What happened on November 21st of 2011 when CIC realized

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the date of the error was actually prior to their policy, it issued a reservation of rights.

[00:21:30] Speaker 04:
Actually, I think we- I know, but what triggered that?

[00:21:35] Speaker 04:
The realization, the finding out, I'm not sure the exact details about how CNCIC actually finally realized that this was, you know, that the error had not been committed before, or had not been committed during the policy period as Barry Nace had specifically represented to CIC in his notice of claim.

[00:21:55] Speaker 04:
I don't know if they reviewed the underlying briefs and decided, hey, all of a sudden, this is not, this was not committed.

[00:22:02] Speaker 03:
Well, the medical malpractice was filed, what, three months later?

[00:22:05] Speaker 04:
The legal malpractice action against Barry Nates was filed.

[00:22:11] Speaker 03:
That's right, yeah.

[00:22:12] Speaker 03:
That was filed.

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That's in January.

[00:22:13] Speaker 04:
We found out in November, that's undisputed, that the first time that Sarah Gilbert made a claim was when she filed her

[00:22:19] Speaker 04:
legal malpractice lawsuit, and that was in March of 2012.

[00:22:27] Speaker 04:
And so we found out in late November that this error was in fact committed before a policy within about a month, maybe six weeks.

[00:22:37] Speaker 04:
A reservation of rights letter was sent to Paulson and A's firm.

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This is even before Sarah Gilbert had filed her lawsuit.

[00:22:44] Speaker 04:
And then, of course, when she did file a lawsuit, we sent another one saying, we're going to defend you, but under reservation of rights, here's why.

[00:22:51] Speaker 04:
It was essentially the same coverage reasons as before.

[00:22:55] Speaker 04:
And again, I think the district court correctly rejected that waiver argument.

[00:23:00] Speaker 04:
There was no intent to waive the right to insist that the assuring agreement be met, particularly when we had been misled to believe that this error was committed during the policy period.

[00:23:17] Speaker 04:
So one other issue, because Paulson and Ace rely so heavily on this statute,

[00:23:24] Speaker 04:
This Virginia statute says that in specific cases, not all cases where an insurance company has coverage defenses, but only when they have a defense related to a breach of the policy by the insured, they're supposed to send a reservation rights letter to the claimant.

[00:23:39] Speaker 04:
We didn't do that.

[00:23:40] Speaker 04:
That's admitted.

[00:23:42] Speaker 04:
Of course, the claimant did have notice of our coverage defenses for more than a year before her case went to trial.

[00:23:48] Speaker 04:
So the purpose of the statute, I'm assuming, obviously,

[00:23:52] Speaker 04:
is to let the claimant know that there's coverage defenses so that if she decides, you know what, maybe I don't want to litigate this med mal case, maybe I want to stay it until I find out if there's coverage.

[00:24:02] Speaker 04:
She knew about it for a year, didn't do anything.

[00:24:05] Speaker 04:
So I submit that there's, you know, there's no prejudice and Virginia courts have held that there must be prejudice for this to result in a waiver.

[00:24:13] Speaker 04:
But I guess that

[00:24:14] Speaker 04:
Threshold requirement, obviously, is does the statute even apply here?

[00:24:17] Speaker 04:
And although Mr. Horvath argues at length that, well, we argued that DC law applied

[00:24:24] Speaker 04:
when we were in the Virginia court, we only meant it to apply to, I guess, contract issues, not the statute.

[00:24:30] Speaker 04:
They didn't make that distinction in the Virginia court.

[00:24:33] Speaker 04:
And whether there is formal judicial estoppel or not, I don't know.

[00:24:37] Speaker 04:
But I think the district court was correct in recognizing that, although she didn't base her decision on this, that you can't

[00:24:46] Speaker 04:
I can't reward conduct in alleging for one purpose in one court where you don't want to litigate in Virginia, so you argue long and hard that DC law applies.

[00:24:54] Speaker 04:
Then when you get to DC, you say, oh, by the way, there is one statute we like in Virginia we like to apply here.

[00:25:01] Speaker 04:
That statute does not apply.

[00:25:04] Speaker 04:
If it's substantive, you have to go through the choice of law analysis.

[00:25:09] Speaker 04:
And the choice of law analysis on D.C.

[00:25:11] Speaker 04:
is clear.

[00:25:11] Speaker 04:
Where's the principal place of the risk?

[00:25:13] Speaker 04:
That's D.C.

[00:25:14] Speaker 04:
That's where Paul Sinanese is located, where they reside, where the vast majority of their business is, where the policy was negotiated, issued.

[00:25:22] Speaker 04:
Understandably, Paul Sinanese doesn't really address that argument because there's really no way around that either.

[00:25:28] Speaker 04:
And so we would submit that that statute really is a red herring on multiple levels.

[00:25:34] Speaker 04:
in addition to not being a D.C.

[00:25:37] Speaker 04:
statute.

[00:25:38] Speaker 04:
And D.C.

[00:25:38] Speaker 04:
is contrary to that statute.

[00:25:40] Speaker 04:
There's no requirement in D.C.

[00:25:41] Speaker 04:
that you have to send a reservation of rights to a claimant.

[00:25:45] Speaker 04:
And so there is a conflict in those laws.

[00:25:47] Speaker 04:
The district court correctly held that under that situation, we must apply D.C.

[00:25:53] Speaker 04:
law.

[00:25:54] Speaker 04:
And again, I think it's a fair result, given that there was no prejudice to the claimant.

[00:26:04] Speaker 04:
And so I don't know that I really have anything more unless you have questions.

[00:26:08] Speaker 04:
We submit that the district court correctly applied the DC law and held that there's no coverage based on the fact that prior to the policy, Paul Sinanese had a reasonable reason to know that an error had been committed.

[00:26:20] Speaker 03:
All right.

[00:26:21] Speaker 04:
Thank you.

[00:26:22] Speaker 04:
Thank you.

[00:26:22] Speaker 03:
Do you have any questions before that?

[00:26:25] Speaker 03:
Do you have any questions?

[00:26:26] Speaker 03:
All right, Mr. Horvath, your time is up.

[00:26:28] Speaker 03:
And we have no questions.

[00:26:30] Speaker 03:
So will you call the next case, please?

[00:26:32] Speaker 02:
I just responded to a couple of points to correct the record.

[00:26:35] Speaker 02:
You said that Mr. Nates said that he admitted there was no error.

[00:26:38] Speaker 02:
I just checked that he did not admit that there was error.

[00:26:43] Speaker 02:
So I think that I actually corrected.

[00:26:47] Speaker 03:
All right.