Utah Federal Court Holds That Malpractice Claim “Resulting From” Sanctions on Insured Law Firm Seeks “Damages”

A Utah federal district court, applying Utah law, has held that a malpractice action “resulting from” or “incident to” a court’s decision to assess sanctions on an insured law firm for its violation of a discovery rule constitutes a claim for “damages” under the terms of the law firm’s professional liability policy. ALPS Prop. & Cas. Ins. Co. v. Fillmore Spencer LLC, 2023 WL 3996808 (D. Utah Jun. 14, 2023). Although the policy carved out sanctions from the definition of “damages,” the court concluded that the claimant sought recovery of compensatory damages stemming from the sanctioned violation—not recovery of the sanctions themselves.    

The insured, a law firm, was sanctioned in connection with its failure to timely disclose a computation of damages in violation of discovery rules. The court granted partial summary judgment to the defendant company on this basis and dismissed the damages claims of the insured’s client. The client sued the insured, seeking compensatory damages stemming from the alleged malpractice. The insured tendered the lawsuit to its professional liability insurer, which agreed to defend under a reservation of rights. 

The insurer filed a declaratory judgment action, asserting that the client’s suit was not covered because the policy’s definition of “damages” excludes coverage for sanctions. The policy provides coverage for sums “the Insured becomes legally obligated to pay as Damages.” “Damages” are defined in the policy as “any monetary award . . . .; provided, however, that Damages does not mean nor include:. . . . sanctions, . . . .” The insurer asserted that the policy did not cover any of the client’s damages because they arose from the evidentiary sanction imposed in the underlying suit.

The court disagreed, stating that the insurer’s interpretation required the court to read phrases such as “resulting from” or “incident thereto” into the policy. The court also pointed to an exclusion for injunctive or declaratory relief that expressly provided that damages “does not mean nor include . . . . injunctive, declaratory, or other equitable relief, or costs or fees incident thereto.” The court reasoned that such exclusion demonstrated that the insurer could have drafted its policy to exclude damages incident to sanctions, but it did not. Lastly, the court held that, as a practical matter, the client was not seeking recovery of a monetary sanction because there is nothing to recover from a sanction that excludes evidence. The court, therefore, concluded that it must read the “sanctions” language to exclude coverage for a claim that seeks the payment of the actual sanctions, but not precluding coverage for a claim seeking compensatory damages that were caused by or incident to an evidentiary sanction.