The opinion of the court was delivered by: Frank C. Damrell, Jr. United States District Judge
This matter is before the court on a motion for summary judgment filed by defendant American Motorists Insurance Company ("defendant" or "AMIC") pursuant to Federal Rule of Civil Procedure 56. In an earlier decision, subsequently reversed by the Ninth Circuit, this court granted AMIC's motion for summary judgment on the ground there was no potential for coverage, and hence AMIC had no duty to defend plaintiff Joseph Harbison ("Harbison"). The Ninth Circuit reversed, finding that AMIC had a duty to defend Harbison in an action brought against Harbison by a former co-counsel because there was a potential for coverage based on various allegations in the complaint. Defendant now moves for partial summary judgment as to plaintiff's claims for breach of the implied covenant of good faith and fair dealing and for punitive damages, arguing that the court can find as a matter of law that its denial of coverage was, at most, a reasonable mistake in judgment in interpreting and applying the policy and thus does not give rise to bad faith liability.
For the reasons set forth below, defendant's motion is DENIED. Triable issues of fact remain as to the reasonableness of defendant's denial of plaintiff's professional liability claim, and thus, summary judgment cannot be entered in defendant's favor on the breach of implied covenant of good faith and fair dealing and punitive damages claims.
Joseph F. Harbison, III & Associates is the named insured under a lawyers professional liability insurance policy issued by AMIC, Policy No. QJ 001620 01 (the "Policy"), for the policy period of February 15, 2003 to February 15, 2004, with limits of liability of $1,000,000 per claim and $2,000,000 in the aggregate. (July 13 Order at 2.) Joseph F. Harbison is an insured under the Policy. Section B of the Policy, "What is Covered," provides in part:
"Subject to all terms and conditions of this policy, we will pay on your behalf those damages and defense expenses arising out of a claim or pre-claim incident that you first become aware of and report to us in writing during the policy period provided that the claim or pre-claim Incident arises out of your acts, errors or omissions that occurred on or after the prior acts date shown in the Declarations." (Id.) Section A of the Policy, "Definitions," provides in part:
"Whenever used in this policy, the term:
1. Claim means any demand received by you for money, services or any other thing of value arising out of your acts, errors or omissions in providing professional services. * * * *
10. Professional services [is defined in relevant part as] services you perform:
a. For a client in your capacity as a lawyer; * * * * (Id. at 2-3.) Section C of the Policy, "Defense and Settlement," provides in part: "We will provide for a defense of claims against you seeking damages...." (Id. at 3.) Section G of the Policy, "Exclusions," provides in part:
"This insurance does not apply to: * * * *
7. Any claim arising out of acts, errors, or omissions that occurred prior to the effective date of this policy if, on or prior to such date, you knew or had a reasonable basis to believe either that a professional duty had been breached or that a claim would be made.
8. Any claim arising out of a criminal, intentionally wrongful, fraudulent or malicious act or omission. * * * *
10. Liability to others which you assume under any contract or agreement." (Id.)
On or about September 2, 1998, Christopher J. Olsen ("Olsen") and Kathleen Klawitter ("Klawitter") entered into a written contingent fee retainer agreement whereby Klawitter retained Olsen to represent her in connection with all of her claims of bodily injuries and alleged damages arising out of an incident on July 23, 1998, which occurred at the Sebastopol Golf Course in Sebastopol, California, in exchange for a certain percentage of any recovery. (Id.) On or about January 13, 1999, Olsen filed an action on behalf of Klawitter entitled Kathleen Klawitter v. Lee Farris, et al., Case No. 220841, in California Superior Court for the County of Sonoma (the "Klawitter Action"). (Id.)
On or about April 2002, Olsen contacted Harbison to request that Harbison associate into the Klawitter Action as trial counsel. (Id. at 4.) Olsen asserts that he and Harbison entered into an agreement, which provided that Harbison would associate into the Klawitter Action as co-counsel and would act as primary trial counsel therein, in exchange for a certain portion of the attorneys' fees recovered in that action. (Id.) On or about July 31, 2002, Klawitter signed an "Authorization Pursuant to Rule 2-200 of Professional Conduct" which acknowledged and authorized an agreement between Olsen and Harbison. (Id.) On or about June 25, 2002, Harbison formally associated into the Klawitter Action and became co-counsel of record for Klawitter. (Id.)
On August 16, 2002, Harbison advised Olsen that Klawitter would be discharging his services in the Klawitter Action and that discharge would affect their fee agreement should Harbison be retained directly by Klawitter in the Klawitter Action. (Id.) By letter dated August 12, 2002, Klawitter terminated Olsen as her counsel in the Klawitter Action effective August 13, 2002. (Id.) On or about August 13, 2002, Klawitter retained Harbison to solely represent her in the Klawitter Action. (Id.)
On or about August 26, 2002, Olsen filed a "Notice of Lien" in the Klawitter Action wherein Olsen claimed a lien for attorneys' fees, costs and expenses on any settlement or judgment in that action. (Id.)
In early January 2003, the Klawitter Action was settled for the sum of $775,000. (Id.) On or about January 28, 2003, Harbison sent a letter to Olsen requesting that he immediately withdraw the Notice of Lien filed in the Klawitter Action. (Id. at 4-5.) Thereafter, Olsen and Harbison exchanged letters, with Harbison generally disputing Olsen's claim of a lien on the Klawitter Action ...