Paul Napoli went to war with a former colleague. His insurance doesn’t have to pay for it.

(Reuters) – For the past eight years, New York plaintiffs’ attorney Paul Napoli and his law firms have been engaged in a brutal battle with their former in-house general counsel to exchange claims and counterclaims in New York state court.

Along the way, Napoli encountered what his lawyer would later describe as “gaps and limitations” in his professional liability insurance for the fight. He had a brazen idea to fill those gaps: Napoli and his wife claimed their homeowners insurance provider, National Surety Corp, was on the hook.

Her theory, as I will explain, was based on the premise that former GC, Denise Rubin, had accused Paul Napoli, among others, of defaming her in a counterclaim. Napolis’ homeowners policy covered defamation claims. When Rubin filed allegations of defamation in an amended complaint alleging discrimination and retaliation, Napolis claimed those allegations triggered National Surety’s duty to defend Paul Napoli in the lawsuit — even though the Homeowners’ Policy provides a specific exclusion for Napolis’ business activities contained.

The US Second Circuit Court of Appeals heard oral arguments on the Napolis theory on Tuesday. It took judges Guido Calabresi, Michael Park and William Nardini two days to reject it.

On Thursday, the panel issued a summary order confirming that Napoli and his wife are not eligible for National Surety coverage. All of GC’s past claims, the court held, arose out of Rubin’s employment with Paul Napoli’s law firms, so the entire litigation falls within the exclusion of the Homeowners’ Conduct of Business Policy.

“To determine that such allegations arose out of plaintiffs’ personal activities rather than their business dealings, we would have to ‘suspect or imagine episodes or events not found among the allegations,'” the 2nd Circuit said.

Cozen O’Connor’s National Surety Attorney Adam Stein said in an email statement that the finding was not surprising: “This was a simple case for the application of the business exclusion.”

Paul Napoli did not respond to an email or direct message on Twitter. Marie Napoli, his wife, did not respond to a request sent through her personal website. I also emailed Napoli lawyer Meghan Finnerty from Offit Kurman but got no response.

Rubin, whose sex discrimination and retaliation lawsuit is pending against Napoli and several Napoli law firms, did not respond to a query sent through her current law firm, Subin Associates. The Napoli Shkolnik law firm, a successor in title to the law firms named as defendants in Rubin’s lawsuit, did not respond to a message sent through its website. Napoli and the law firm’s defendants have denied Rubin’s allegations and accused her of breaching confidentiality.

Napoli Shkolnik made headlines this week over a dispute with another former lawyer. After the firm sued former trial attorney Heather Palmore for “silently leaving” Napoli Shkolnik while secretly promoting her own separate law firm, Palmore fired back Monday with a lawsuit accusing Paul Napoli and the law firm of racial discrimination . The firm’s outside counsel described Palmore’s lawsuit to my Reuters colleague David Thomas as a “shakedown.”

Napoli’s dispute with the former GC Rubin began in 2015 when she sued him and predecessor companies for allegedly paying her less than male colleagues and passing her over for a partnership because she is a woman. Napoli countersued (and later a separate lawsuit) against Rubin for alleged breaches of her ethical duties, including alleged violations of her role as the Napoli family’s personal attorney. Marie Napoli was not named as a defendant in Rubin’s lawsuit, but she also sued Rubin, repeating her husband’s claim that Rubin served as the Napoli family’s attorney.

The procedural history is complex, but important for the purposes of the insured event, when Rubin amended her original complaint in 2020, she cited Napolis’ claims against her as evidence of alleged retaliation. Rubin, who said she never worked as a personal advisor to either Marie or Paul Napoli, described her claims as “frivolous, false, whimsical and defamatory”.

Crucially, as it later emerged, Rubin made no formal claim of defamation. The amended complaint alleges discrimination in the workplace, retaliation and breach of contract.

Paul and Marie Napoli nonetheless addressed Rubin’s claim that they defamed her in their 2021 declaratory lawsuit against their homeowners’ insurer. Napoli did not seek National Surety coverage for the litigation that led to Rubin’s amended 2020 complaint. But after Rubin accused them of defamation related to their alleged work as Napolis’ personal attorney, they claimed National Surety was obligated to cover Paul Napolis’ legal costs. (Remember, Marie was not a defendant in Rubin’s case.) Rubin’s amended lawsuit, they argued, could potentially result in a claim that might be covered by her homeowners’ policy.

The trial court judge, US District Judge Jed Rakoff, granted the insurer’s motion to dismiss last June, ruling that all of Rubin’s claims were based on her work for the Napoli law firms, so the disqualification from business activities applied.

At Tuesday’s hearing, the 2nd Circuit Panel appeared annoyed when Napoli attorney Finnerty argued that New York law broadly defines insurers’ duty of defense. The case could be different, the judges said, if Rubin had filed a defamation lawsuit. But her allegation of defamation was linked to an actual claim for retaliation, the panel said – and that allegation arose out of her work for the Napoli law firms. (One of the judges asked during the hearing why Napoli does not rely on professional indemnity insurance. Finnerty said, as I mentioned above, that there are “gaps and limitations” in that coverage.)

Obviously the facts of this case are unique, so I will not claim that the home insurance business was jeopardized by the Napolis claims. But Paul Napoli’s new and high-profile dispute with former attorney Palmore adds some poignancy to the 2nd Circuit’s decision: If the claims in this lawsuit remain linked to Palmore’s employment, Napoli’s homeowners’ insurance providers need not worry.

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