An Illinois federal district court has granted a commercial general liability insurer’s motion for summary judgment that it had no duty to defend or indemnify an insured law firm or its principals in a defamation action based on the insureds’ failure to comply with the notice provisions in the policy. Sentinel Ins. Co., Ltd. v. Cogan, 2016 WL 4270213 (N.D. Ill. Aug. 15, 2016). The court, however, rejected the insurer’s argument that coverage for the insured’s reporting of alleged ethical violations of a competitor was precluded by the policy’s “professional services” exclusion.

The insured law firm was formed by two attorneys who previously worked together at another law firm. The prior firm sued the attorneys and their new firm for alleged wrongful conduct in connection with their departure from the prior firm. After the lawsuit commenced, one of the insured attorneys emailed a judge’s law clerk to report allegedly unethical conduct by an attorney of the prior firm. In response, the prior firm sent the insured firm a cease and desist letter and amended its complaint to include defamation allegations. Eight months after the defamation claims were added to the lawsuit, the insured firm tendered the amended complaint to its commercial general liability insurer. The insurer denied coverage, contending that the insured firm failed to comply with the notice provisions contained in the policy, and, in any event, coverage was precluded by the “professional services” exclusion contained in the policy. The “professional services” exclusion precluded coverage for claims “arising out of the rendering of or failure to render professional services as a lawyer.”

In the coverage litigation that followed, the court held that the defamation allegations did not trigger the “professional services” exclusion contained in the policy. According to the court, the attorney’s reporting of the alleged unethical conduct did not constitute “professional services” because the conduct was not done on behalf of a client or performed in the service of another.

The court, however, granted summary judgment to the insurer based on the insured’s failure to provide timely notice of the amended complaint to the insurer. The policy required that the insured give notice to the insurer “as soon as practicable” after any suit was brought against an insured. The insured failed to inform the insurer for more than nine months after receiving a cease and desist letter, and eight months after the complaint was amended. In arguing that coverage was not precluded by the notice provisions, the insured argued that its delay was the result of its confusion regarding the nature of coverage provided by its insurance policies and the terms and conditions of the policy. The court found that the insureds’ delay in providing notice was unreasonable in light of the “as soon as practicable” language of the policy, noting that the sophistication of the insureds, the insureds’ awareness of the cease and desist letter and amended complaint, and their lack of diligence in pursuing coverage supported that conclusion. The court held that the insurer had no duty to defend and indemnify the insured as a result of the insured’s failure to comply with its notice obligations under the policy.