The opinion of the court was delivered by: Hon. Harry D. Leinenweber
MEMORANDUM OPINION AND ORDER
This case involves the construction of a malpractice insurance policy and the duty to defend. Rinella & Rinella, Bernard R. Rinella, and Maricarol Lacy (hereinafter, the "Rinellas") are matrimonial lawyers. James River Insurance Company (hereinafter, "James River") and Kemper Casualty Insurance Company (hereinafter, "Kemper") are liability insurance carriers that sold the Rinellas malpractice insurance policies. Lisa Terranova (hereinafter, "Terranova") is a former client of the Rinellas who is suing them in the Circuit Court of Cook County, Illinois for malpractice. Kemper is defending the Rinellas in that case under a reservation of rights. James River has declined to defend the Rinellas based on its view that under the terms of its policy it has no duty to do so. It filed this suit seeking a declaration supporting its position. Kemper and the Rinellas have filed counterclaims seeking declarations that James River owes a defense and has an obligation to indemnify. All three parties have filed Motions for Summary Judgment.
The parties substantially agree on all of the facts but disagree as to the appropriate legal conclusions. The James River policy is "written on a 'claims-made and reported basis'" and provides malpractice coverage for "claims that occur subsequent to the retroactive dated stated in the declarations" and which are reported while the policy is in force. The policy was issued for the period November 8, 2004 to November 8, 2005 with a retroactive date of November 2, 2002. On April 20, 2005, Lisa Terranova filed suit against the Rinellas and the suit is presently pending on a Third Amended Complaint filed on June 9, 2008.
The Terranova suit arose out of a divorce proceeding filed on May 21, 1999, in which she was represented by the Rinellas. Her husband was represented by an attorney named Richard Doermer. On December 23, 1999, a Marital Settlement Agreement (the "MSA") was reached by the parties and the marriage was dissolved on January 5, 2000. The MSA contained a provision awarding Terranova a portion of her husband's Comdisco Employee Stock Options Plan Account ("CESOPA"). The MSA provided that the transfer of her portion of the CESOPA would be by a Qualified Domestic Relations Order ("QDRO") through the Plan Administrator of the CESOPA pursuant to the provision of ERISA. However on February 21, 2000, Comdisco sent a letter to the parties stating that a QDRO was not the proper mechanism for transfer of the stock options and advised that Terranova should set up a subaccount in her name. Apparently the Rinellas decided not to follow this advice and instead filed a petition for a rule to show cause against Terranova's husband for failing to effectuate the transfer. A hearing was held on March 26, 2001. An order denying the petition was entered on September 20, 2001. However, on July 16, 2001, Comdisco filed for bankruptcy rendering the options worthless. The denial of the petition was appealed to the Illinois Appellate Court which subsequently affirmed the trial court's denial.
The bases for Terranova's suit against the Rinellas is that the attorneys committed professional negligence in failing to use the proper mechanics in obtaining the transfer of the Comdisco stock options prior to the bankruptcy, and in pursuing the rule to show cause instead of seeking the transfer or seeking to have the MSA amended to provide for replacement assets; in not advising her of their acts of malpractice in violation of their fiduciary duty; and the Rinellas conspired with her husband's attorneys to lull her into a false sense of security so as to prevent her from filing a malpractice suit until her claim was time barred.
The relevant provisions of the James River insurance contract are as follows:
1. THIS POLICY IS WRITTEN ON A "CLAIMS-MADE AND REPORTED BASIS" AND PROVIDES PROFESSIONAL LIABILITY COVERAGE FOR THOSE CLAIMS THAT OCCUR SUBSEQUENT TO THE RETROACTIVE DATE STATED IN THE DECLARATIONS AND WHICH ARE FIRST MADE AGAINST YOU AND REPORTED TO US WHILE THIS POLICY IS IN FORCE. NO COVERAGE EXISTS FOR CLAIMS FIRST MADE AGAINST YOU AND REPORTED TO US AFTER THE END OF THE POLICY TERM UNLESS, AND TO THE EXTENT, AN EXTENDED REPORTING PERIOD APPLIES
a. We will pay on behalf of the "Insured" those sums in excess of the deductible the "Insured" becomes legally obligated to pay as "Damages" and "Claims Expenses" because of a "Claim" first made against the "Insured" and reported to us in writing during the "Policy Period" by reason of a "Wrongful Act" in the performance of or failure to perform "Professional Services" by the "Insured" or by any other person or entity for whom the "Insured" is legally liable. The "Wrongful Acts" must have been committed on or subsequent to the "Retroactive Date" specified in the Declarations and before the end of the "Policy Period".
b. Defense and Settlement
We shall have the right and duty to defend any covered "Claim" brought against the "Insured" even if the "Claim" is groundless, false or fraudulent. However, we will have no duty to defend the "Insured" against any "Claim" seeking "Damages" to which this insurance does not apply. You shall not admit or assume liability nor settle or negotiate to settle any "Claim", nor incur any "Claims Expenses" without our prior written consent. We shall have the right to appoint counsel and to make any investigation and defend any "Claim" as we deem necessary.
3. SECTION II - DEFINITIONS * * *
B. "Claim" means a written demand for monetary damages arising out of or resulting from the performing or failure to perform "Professional Services".
C. "Claims Expenses" means:
(1) attorney's fees, expert witness fees and other reasonable fees and costs paid by us or by you with our prior written consent, in the investigation and defense of covered "Claims";
(2) reasonable and necessary fees, costs and expenses resulting from the investigation, adjustment, defense and appeal of a "Claim", including the cost of appeal bonds, however, we shall not be obligated to apply for or furnish appeal bonds on your behalf. "Claims Expenses" does not include your employees wages or salaries or the costs of your directors, officers or employees.
All "Claims Expenses" are a part of the Limit of Liability and Deductible and shall not be considered sums payable in addition thereto.
G. "Named Insured" means the entity or person named in the Declarations.
* * * I. "Policy Period" means the period of time shown in the Declarations.
J. "Professional Services" means those services performed by the "Insured" for others:
(1) as a lawyer,. . . * * *
L. "Related Claims" means all "Claims" arising out of a single "Wrongful Act" or series of "Related Wrongful Acts" in the performance of or failure to perform "Professional Services".
M. "Related Wrongful Acts" means all "Wrongful Acts" that have as a common nexus any fact, circumstance, situation, event, transaction cause or series of casually connected facts, circumstances, situations, events, transactions or causes.
N. "Retroactive Date" means the date specified in the Declarations.
* * * P. "Wrongful Act" means any actual or alleged act, error, omission, "Personal Injury", neglect or breach of duty in the performing of or ...