Civil Contempt Proceeding Inherently Seeks Non-Covered “Sanctions”

The United States District Court for the District of Hawaii, applying Hawaii law, held that an insurer was not obligated to defend an insured law firm against a civil contempt proceeding, where the policy carved out “sanctions” from the definition of Loss.  Damon Key Leong Kupchak Hastert v. Westport Ins. Corp., 2019 WL 5088739 (D. Haw. Oct. 10, 2019).  The court held that the term “sanction” was unambiguous, even though the policy did not define it, and that civil contempt proceedings necessarily seek sanctions.

An insured law firm represented a family accused of operating a Ponzi scheme.  A Nevada federal district court ordered the family’s assets, including client trust accounts held by the firm, frozen.  The Nevada plaintiffs suspected that the law firm had transferred almost two million dollars out of the trust accounts to other offshore accounts in defiance of the asset freeze order.  They asked the Nevada court to hold the law firm in contempt for violating the order and to require the firm to place an equivalent amount of its own money in a “trust fund” to satisfy any judgment ultimately obtained against the family.  The law firm tendered the civil contempt proceeding to its professional liability insurer.  The insurer refused to provide a defense, and the law firm filed a coverage action in Hawaii federal district court.

The parties agreed there would be no coverage for a suit seeking “sanctions,” but disagreed regarding whether the contempt proceeding sought only sanctions or also something more that would trigger a duty to defend.  The Hawaii court looked to Black’s Law Dictionary, which defines “sanction” as “[a] penalty or coercive measure that results from failure to comply with a law, rule, or order.”  The civil contempt proceeding fit “squarely” within this definition, the court stated, because the proceeding was predicated on a failure to comply with the Nevada court’s asset freeze order.

The Hawaii court observed that civil contempt proceedings, in which sanctions may be imposed even if a failure to comply with a court order is unintentional, would be a type of proceeding that an insurer would not want to insure.  The Court stated that the exclusion of “sanctions” from the definition of Loss appeared calculated to accomplish that result, though the court clarified that this observation was not necessary to its holding.  The court separately held that an “accounting” that the Nevada plaintiffs sought to require the law firm to perform was a form of “non-monetary relief,” which was also excluded from the definition of Loss.



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