A New York-based law firm cannot throw out an insurance company's lawsuit seeking to be let off the hook from covering the firm against a malpractice claim, a Philadelphia federal judge has found, determining that factual questions in the case meant early dismissal was not an option.

In an order on Monday, U.S. District Judge Kai N. Scott found it was too early for ISMIE Indemnity Co. to seek a declaration that it did not need to indemnify Harras Bloom & Archer LLP in the underlying malpractice suit, but left a claim for a declaration freeing it of a duty to defend intact. The judge found the insurer had adequately alleged that the law firm and its attorneys should have predicted a malpractice suit was brewing at the time they applied for insurance coverage.

"Those allegations are enough to survive a motion to dismiss, where the court must construe all well-pleaded allegations as true and in a light favorable to [the] plaintiff," Judge Scott stated. "Accordingly, the court does not find it proper at this juncture to dismiss [the] plaintiff's duty to defend claims."

Facts underlying the case date back to May 2020, ISMIE said in its initial complaint. That was when Harras Bloom began representing medical research and device company PeriRx Inc. in patent litigation against the Regents of the University of California, a scientist employed by UCLA, and other defendants including a lab called RNAmeTRIX Inc.

PeriRx accused the university of unlawfully making money off of patents it had licensed to RNAmeTRIX.

The defendants moved to dismiss the suit for failure to state a claim. PeriRx voluntarily dropped some of its claims and a Pennsylvania court threw out others by the end of 2020. PeriRx filed an amended complaint in January 2021, and that December, the Pennsylvania judge found in favor of the defendants on summary judgment, ending the company's suit early after determining the remaining claims were not viable.

In March 2022, PeriRx was ordered to pay costs and fees of more than $20,000 to the Regents of the University of California.

The malpractice suit followed in June 2024, with PeriRx accusing Harras Bloom and its attorneys of negligence, breach of contract and conversion in the patent licensing suit.

The next month, ISMIE filed its insurance coverage claims against Harras Bloom and firm attorneys Linda S. Agnew, Paul J. Bloom, Keith H. Archer and Tara McDevitt in Pennsylvania federal court, seeking a declaration from the court that the firm's malpractice policy does not cover PeriRx's claims. PeriRx was also named as a defendant.

The law firm and its attorneys should have already been aware of the possibility of a malpractice complaint by the time they applied for the ISMIE legal malpractice policy in May 2023, the insurer argued. It brought a claim for declaratory judgment stating that the policy does not apply to the malpractice action and a claim for a rescission of the policy

The insurer also sought an indemnification declaration, asking the court to say that ISMIE does not need to cover any "judgment or award of punitive damages, restitution of escrow funds, and/or disgorgement or return of fees or costs paid as remuneration for legal services."

Harras Bloom and the attorneys moved for dismissal in November 2024, arguing that the insurer was seeking to avoid covering the law firm "while the underlying malpractice action is in its infancy, without discovery or factual determinations being made."

"Simply, [the] plaintiff's assertions are insufficient to demonstrate that a reasonable lawyer/insured knew or should have known prior to the inception of the ISMIE policy that defendants' representation of PeriRx would give rise to a malpractice action, as is required for ISMIE to satisfy its burden of demonstrating that [a prior knowledge exclusion] applies," the firm said in its motion.

In opposition, ISMIE told the court that "at least one insured was aware" of the likelihood of a malpractice suit being filed, arguing that "case law clearly states that criticism by a court is certainly an indicator that a former client might sue for malpractice."

The sides also disagreed over which state's law governs the suit, with ISMIE arguing that there is "no substantive difference" between New York and Pennsylvania law and Harras Bloom telling the court that the two states handle the duty to defend differently, and that New York law should apply.

Judge Scott said in her Monday order that the two states do handle duty to defend differently, finding it was appropriate to apply New York law because, despite the underlying malpractice suit taking place in Pennsylvania, the lawyers, law firm and policy are all based in the Empire State.

In their briefs, the sides expressed a "factual disagreement about what defendants knew or should have known at the time the defendants submitted their insurance application," Judge Scott said. "This type of disagreement is not properly resolvable on a motion to dismiss."

ISMIE's duty to indemnify claim must fail because it came too early, the judge said.

"Because the malpractice action is still in its beginning stages where the parties in that action have only recently begun discovery — the facts necessary to determine whether [the] plaintiff has a duty to indemnify [the] defendants will remain undetermined until discovery has run its course," Judge Scott determined.

The court clerk entered a default against PeriRx in the insurance coverage suit in July after the company failed to enter a pleading. Earlier this month, counsel for the plaintiffs and for PeriRx filed a joint motion to vacate the default judgment.

The underlying malpractice suit remains pending. Last month, Judge Scott, who also presides over that case, sent a conversion claim to arbitration, dismissed the breach of contract claim and a claim for punitive damages, and removed three individual attorneys from the suit, but allowed the malpractice claim and fee bid against the firm and another attorney to survive.

Counsel for ISMIE, Harras Bloom and PeriRx did not respond to requests for comment Tuesday.

ISMIE is represented by Patrick M. McGrory of Tighe & Cottrell PA, and Rostyslaw J. Smyk of Ruberry, Stalmack & Garvey LLC.

The Harras Bloom parties are represented by Kevin T. Kerns of Cozen O'Connor PC.

PeriRx is represented by Clifford B. Cohn and Kenneth D. Albert of Cohn & Associates.

The case is ISMIE Indemnity Co. v. Harras Bloom & Archer LLP et al., case number 2:24-cv-03424, in the U.S. District Court for the Eastern District of Pennsylvania.