Sanctions Against Lawyer Suing Insurance Broker Affirmed

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Dimitri Enterprises, Inc. (“Dimitri”) and its attorney, Richard J. Flanagan, appealed from the district court’s June 24, 2021 order imposing $24,675.00 in sanctions pursuant to Federal Rule of Civil Procedure 11. Dimitri, a roofing contractor, filed this lawsuit in connection with a dispute regarding insurance coverage for an employee’s injuries on a construction project.

In Dimitri Enterprises, Inc. v. Spar Insurance Agency LLC, NIF Services of New Jersey, Inc., and Scottsdale Insurance Company, No. 21-1722-cv, United States Court of Appeals, Second Circuit (October 6, 2022) the complaint asserted claims against defendant Scottsdale Insurance Company (“Scottsdale”), which was Dimitri’s commercial general liability insurance carrier, and defendant NIF Services of New Jersey, Inc. (“NIF”), which was originally alleged to be Dimitri’s broker.

ORIGINAL CLAIM DISMISSED AS TIME BARRED

The district court granted NIF’s motion to dismiss both claims against it, reasoning that the negligence claim was time-barred, and the breach of contract claim was inadequately pled because Dimitri did not allege any contractual terms that NIF breached. Dimitri then filed a second amended complaint (the “SAC”) against an additional defendant, Spar Insurance Agency, LLC (“Spar”), which was the retail insurance broker for Dimitri’s policy.

In its SAC, Dimitri brought claims against Spar for negligence and breach of contract that were identical to the negligence and breach of contract claims that the district court already dismissed against NIF. The district court granted Spar’s Motion to dismiss.

In addition, the district court granted Spar’s subsequent motion for sanctions, explaining that “plaintiff’s counsel knew or should have known that the claims against Spar were likewise subject to dismissal” because “identical claims against NIF were previously dismissed as either time-barred or inadequately pled.”

DISCUSSION

The Second Circuit reviewed the district court’s imposition of sanctions pursuant to Rule 11 of the Federal Rules of Civil Procedure for an abuse of discretion. This deferential standard is applicable to the review of Rule 11 sanctions because the district court is familiar with the issues and litigants and is thus better situated than the court of appeals to marshal the pertinent facts and apply a fact-dependent legal standard. An abuse of discretion only occurs if the district court based its ruling on an erroneous view of the law or on a clearly erroneous assessment of the evidence or rendered a decision that cannot be located within the range of permissible decisions.

RULE 11 SANCTIONS

Rule 11 explicitly and unambiguously imposes an affirmative duty on each attorney to conduct a reasonable inquiry into the viability of a pleading before it is signed. The standard for triggering the award of fees under Rule 11 is objective unreasonableness and is not based on the subjective beliefs of the person making the statement.

In particular, with respect to the statute of limitations on the negligence claim, Dimitri asserts that “the suggestion of a later date for the accrual of a negligence claim was not frivolous, rather it was responsible and zealous.” Regardless, the Second Circuit, concluded it could discern no abuse of discretion in the district court’s decision to impose sanctions.

Under Rule 11, a litigant’s obligations with respect to the contents of filings are not measured solely as of the time they are filed with or submitted to the court but include reaffirming to the court and advocating positions contained in those pleadings and motions after learning that they cease to have any merit. The Second Circuit has upheld sanctions where an attorney or litigant may have initially filed a non-frivolous claim but, after the district court’s dismissal of that claim, re-filed a similar or identical claim in an amended pleading without any good-faith basis for overcoming the district court’s prior ruling.

Finding that the district court did not abuse its discretion by the Second Circuit concluded that imposing sanctions against Dimitri’s counsel because Dimitri brought the exact same negligence and breach of contract claims against Spar that had already been dismissed against NIF. Although the claims were brought against a different party, the particular grounds for dismissal of the claims against NIF (the wholesale broker) applied with equal force to the assertion of the same claims against Spar (the retail broker).

With respect to the negligence claim, the district court had ruled that the claim against NIF was time-barred because the claim accrued, at the latest, when Dimitri received notice that the coverage was denied. In the wake of that ruling, Dimitri made no argument as to how a different accrual date could possibly apply as to its identical claim subsequently brought against Spar, which related to the exact same denial of coverage. Moreover, at a hearing on the sanctions motion, Dimitri’s counsel conceded to the district court that the negligence claim against Spar was time-barred.

Plaintiff’s counsel filed the same defective claims against a new defendant. Therefore, the Second Circuit concluded that such claims were not made in good faith.

It was “patently clear” from that reasoning that amending the pleading to assert the same claims against Spar had absolutely no chance of success.

Some people and their lawyers believe that suing an insurance company or an insurance agent/broker is always a slam-dunk suit that cannot lose. In this case the client and his lawyer were surprised by an obvious dismissal because the suit was time barred and just filed the same suit against another defendant that they knew was also time barred. The case was dismissed and counsel was properly sanctioned under Rule 11 for submitting a frivolous suit.

(c) 2022 Barry Zalma & ClaimSchool, Inc.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.Subscribe and receive videos limited to subscribers of Excellence in Claims Handling at locals.com https://zalmaoninsurance.locals.com/subscribe.Subscribe to Excellence in Claims Handling at https://barryzalma.substack.com/welcome.

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