Less than three months after a federal judge ruled West Chester-based Lamb McErlane was not entitled to coverage by Allied World Insurance Co. for a $557,001 professional liability claim arising out of an estate case, the law firm and its insurer are embroiled in a new malpractice coverage dispute involving a separate underlying case.

On May 9, Allied World filed suit in the U.S. District Court for the Eastern District of Pennsylvania, seeking a declaratory judgment that it is not required to defend or indemnify Lamb McErlane in a malpractice action arising out of a York County construction defect lawsuit that was ultimately tossed out on procedural grounds.

On May 11, Judge Paul Diamond, who is overseeing the coverage case, denied an unopposed request by Lamb McErlane to seal the docket for 60 days while the firm attempts to resolve the underlying professional liability matter.

“The law firm believes that unnecessary publication of the federal complaint will have a deleterious effect on the efforts being made,” Lamb McErlane partner Guy Donatelli, who is representing the firm, wrote in a May 10 letter to Diamond's secretary/courtroom deputy.

In an order issued the following day, Diamond said he was rejecting the request because Lamb McErlane “has not shown that the complaint contains the kind of material that courts protect and that disclosure will work a specific harm that outweighs the public's right of access.”

Allied World alleged in its May 9 complaint that Lamb McErlane knew it could potentially face a professional liability claim arising out of the York County matter but failed to disclose that possibility when it applied for a policy with Allied World in June 2016.

Thus, Allied World argued, coverage for the claim is precluded under the policy's prior knowledge condition.

“Because of the knowledge possessed by one or more of its attorneys who are insureds under the policy, Lamb McErlane cannot satisfy the express condition precedent to coverage for the malpractice action set forth in the policy, Insuring Agreement Section 1, that, prior to June 20, 2016, no insured had a basis (1) to believe that any Insured had breached a professional duty, or (2) to foresee that any such wrongful act or related act or omission might reasonably be expected to be the basis of a claim against any Insured,” the insurer argued.

In the underlying case, according to the complaint, Lamb McErlane represented The Villas at Bailey Springs Homeowners Association as local counsel in a construction defect suit filed in the York County Court of Common Pleas.

In July 2015, according to the complaint, the trial court granted summary judgment in favor of the defendants and against the HOA. The HOA appealed to the state Superior Court but failed to timely file a concise statement of errors complained of on appeal pursuant to Pa.R.A.P. 1925(b), as ordered by the trial court. Lamb McErlane said the firm never received a copy of that order but the trial judge ultimately denied it nunc pro tunc relief, finding that there hadn't been a breakdown in the court's administrative process.

Ultimately, the HOA's appeal was dismissed June 1, 2016, according to the complaint. A subsequent motion for reconsideration and, later, a petition for allowance of appeal with the Supreme Court were both denied as well.

The HOA filed a two-count malpractice complaint against Lamb McErlane on March 29 of this year, alleging, among other things, that the firm “failed to pursue the litigation expeditiously” and “failed to handle the litigation in a careful and reasonable manner.”

Lamb McErlane sought coverage from Allied World, but the insurer denied the claim. The insurer argued that, at the time Lamb McErlane applied for its insurance policy in mid-June 2016, the firm was aware of the trial court's October 2015 order noting the failure to file the 1925(b) statement, as well as the January 2016 order denying nunc pro tunc relief and the June 1, 2016, dismissal of the appeal.

“Allied World relied on the misrepresentations, omissions and false statements in the application when it issued the policy,” the insurer said in its complaint.

A call to Donatelli was returned by Lamb McErlane chairman Joel Frank, who said the firm fulfilled all of its professional duties and obligations as local counsel in the underlying York County matter and “met every deadline of which it was aware.”

Frank also took issue with the trial court's denial of nunc pro tunc relief, noting that, in addition to counsel from Lamb McErlane, two other attorneys of record in the York County matter, both from separate firms, failed to receive copies of the order calling for a 1925(b) statement.

“How can there not be a breakdown?” Frank said.

Frank added that once the firm received actual notice of the malpractice claim against it, it promptly notified Allied World.

Counsel for Allied World, Robert Bodzin of Kleinbard in Philadelphia, did not return a call for comment.

As Allied World pointed out in its May 9 complaint, the allegations in the most recent coverage dispute are similar to the ones the insurer made against Lamb McErlane in federal court last June related to a malpractice claim that arose out of the Chester County Court of Common Pleas matter Estate of John R.H. Thouron.

In that coverage case, U.S. Magistrate Judge Timothy Rice of the Eastern District of Pennsylvania granted Allied World's motion for judgment on the pleadings on Feb. 23 of this year, ruling that the professional liability claim against Lamb McErlane originated in May 2015, more than a year before the law firm's policy period began. Rice said a May 2015 letter outlining allegations against the firm constituted a claim.

A Chester County judge ordered the firm last year to disgorge $4.3 million in legal fees billed in its work for Charles Norris as executor of Sir John Thouron's estate. Chester County Court of Common Pleas Judge Mark Tunnell Jr. said the firm breached its fiduciary duty to the estate. He also ordered the firm to pay back more than $135,000 to the estate of one of Thouron's beneficiaries, and surcharged Norris and Lamb McErlane $557,001 for losses to the estate resulting from a tax penalty.

According to Rice's opinion, Lamb McErlane represented the executor from 2006 to 2017. In April 2013, the estate beneficiaries objected to the costs, and in May 2015, they submitted a letter to the Chester County Orphans' Court alleging that Norris and Lamb McErlane charged excessive fees.

“This letter alleged Lamb McErlane had performed 'flawed and inadequate' work, 'grossly mismanaged' the federal tax filing process, and negligently 'fail[ed] to check a box,' leading to a tax penalty in excess of $500,000,” Rice wrote.

In March 2017, Tunnell's order held the firm liable for the $557,001 tax loss.

Lamb McErlane sought coverage from Allied World for that amount—under the same June 2016 policy at issue in the HOA case—but the insurer argued that the claim originated in May 2015, when the beneficiaries filed their letter.

Rice agreed. “The firm's argument is an attempt to rewrite the policy to permit a claim only after an insured is faced with a viable cause of action in a formal legal proceeding,” his opinion said. “Although the beneficiaries were precluded from bringing a malpractice claim directly against Lamb McErlane in the estate proceedings, they were permitted to object to excessive legal fees already paid by the estate. They not only did so, they notified Lamb McErlane of their objections to Lamb McErlane's legal work.”

In the underlying matter, Lamb McErlane filed an appeal to Tunnell's decision in June 2017. Lamb McErlane filed a praecipe for discontinuance Feb. 13 of this year. Frank said at the time that the firm had reached a confidential settlement in that matter more than a month prior. He also said the firm was not covered by any other policy for the $557,001 claim.