Lawyers’ Outside Business Needs Appropriate Insurance

Legal Malpractice Policy Provides No Coverage for Non-Law Pursuits

I have chided lawyers in the past for not reading their client’s policy before litigating. In this case the lawyers failed to carefully read a policy written to protect themselves from legal malpractice actions. A lawyer who conducts business that is not practicing law should never – as did the defendants – rely on a malpractice policy to protect them from actions in the non-law business.

This maxim was made clear in Westport Insurance Corporation v. Hippo Fleming & Pertile Law Offices and Charles Wayne Hippo, Jr., Civil Action No. 3:15-cv-251, United States District Court For The Western District Of Pennsylvania (October 1, 2018) when the USDC for the Western District of Pennsylvania was faced with competing motions for summary judgment in a dispute involving a professional liability insurance policy that Westport issued to Defendants (the “Policy”).

Westport refused to defend or indemnify Hippo Fleming & Pertile Law Offices (“HFP”) and one of its attorneys, Hippo, in an action brought against them by Gregory S. Morris and Morris Development, Inc. (collectively “Morris.” The Underlying suit arose from legal services that Defendants provided Morris in real-estate development matters. Morris alleged that Defendants used information derived from their attorney-client relationship with Morris to benefit their own real-estate development projects, thereby harming Morris.

RELEVANT FACTUAL HISTORY

HFP applied for professional-liability insurance from Westport in early 2007. The application for the Policy included an “Outside Interest Supplement” that broadly required HFP to disclose all outside interests of its attorneys, including all instances where an attorney acts as director, officer, partner, trustee, manager, fiduciary, or otherwise exercises control over a for-profit business other than HFP. HFP disclosed the involvement of Hippo and Jeff Fleming (“Fleming”), another HFP attorney, in an outside entity named VIP Ventures, LLC (“VIP Ventures”), but did not disclose the pair’s involvement in two other entities—Templar Development, LLC and Templar Elmerton, LLC (collectively the “Templar Entities”). VIP Ventures held ownership shares in both of the Templar Entities.

Westport issued its Lawyers Professional Liability Insurance Policy based on the representations made in the application. The Policy covered HFP and its attorneys for certain professional liability claims from March 1, 2007, until March 1, 2008.

Section VII(C) of the Policy specifically excludes coverage for lawsuits arising from the outside business interests of the insured attorneys (the “Outside Business Exclusion”). The Outside Business Exclusion provides that the Policy does not apply to claims related to “any INSURED’S activities as an officer, director, partner, manager, or employee of any company, corporation, operation, organization, partnership, or association other than the NAMED INSURED or PRIOR firm.”

Defendants’ Representation of Morris and the Underlying Suit

Defendants had a “long-standing” attorney-client relationship with Morris and his business entities. Morris retained HFP and Hippo to assist Morris with various real-estate development projects. In early 2008, Morris threatened Defendants with litigation after a dispute arose in the development of a shopping center in Blair County, Pennsylvania. Morris alleged that Defendants used information from their representation of Morris to benefit real estate development projects that Defendants undertook through the Templar Entities, thereby harming Morris.

Hippo notified Westport of the threatened litigation. Later, Morris sent an unfiled draft complaint to an attorney for Hippo, which Hippo forwarded to Westport. Westport sent Hippo a letter on October 30, 2009, where Westport “reserved its rights” and noted that several exclusions in the Policy may bar coverage of Morris’s claim.

Morris’s Complaint against Defendants contains eleven counts all relating to a real estate development and the use by HFP and Hippo of confidential information to allow the non-legal businesses to profit.

Westport Refuses to Defend or Indemnify Defendants Against the Underlying Suit

Westport evaluated coverage for the Underlying Suit after Morris filed the Complaint against Defendants. Westport, after receipt of the suit, sent Defendants a letter stating that Westport was denying coverage for the Underlying Suit based on the Policy’s Outside Business Exclusion.

DISCUSSION

The general rules of contract interpretation apply to the interpretation of insurance policies. A contract of insurance like any other contract requires that the intention of the parties be determined from the words of the instrument.

Under Pennsylvania law, courts interpret unambiguous writings as a matter of law, while ambiguous writings are interpreted by the finder of fact. When the language of an insurance policy is clear and unambiguous, courts must give effect to the policy’s language.

Here, the language of the Policy is clear and unambiguous. While the language of the Outside Business Exclusion is broad, it is reasonably susceptible to only one interpretation. The Policy does not apply to any claim that arises from an HFP attorney’s involvement as an officer, director, partner, manager, or employee of any entity other than HFP. The broad language of the Outside Business Exclusion—that the Policy shall not apply to claims “based on, attributable to, or directly or indirectly resulting from”—clearly excludes coverage for any claim arising from an attorney’s outside business activities, regardless of the extent or degree that the claim involves an attorney’s outside business activities. Taken as a whole, the language of the Policy’s Outside Business Exclusion unambiguously indicates that the parties’ intention was to exclude coverage for any and all claims arising from the outside business activities of HFP attorneys.

There is no genuine dispute of material fact that the Templar Entities are uninsured outside business entities under the Policy. Hippo acted as an officer of the Templar Entities.

Hippo and Fleming acted as partners of the Templar Entities. Hippo and Fleming were partners of the Templar Entities because they jointly carried on business for profit through the Templar Entities. Hippo also acted as both a director and manager of the Templar Entities. There is no dispute that Hippo exercised some degree of control over the affairs of the Templar Entities. It is undisputed that Hippo performed significant work on behalf of the Templar Entities.

There is no genuine dispute of material fact that Hippo was an officer, director, and manager of the Templar Entities. Similarly, there is no dispute of material fact that both Hippo and Fleming were partners of the Templar Entities. Hippo and Fleming’s involvement with the Templar Entities triggered the Policy’s Outside Business Exclusion.

An insurer has no duty to defend where all the claims within a cause of action are clearly excluded from coverage under the policy. Westport had no duty to defend because each claim in the Underlying Suit falls unambiguously within the Policy’s Outside Business Exclusion. In order to find a duty to defend the court need only determine if any claims asserted are potentially covered. If any are, the insurer must defend until the suit is narrowed only to claims that are definitely not within that coverage.

A comparison of the unambiguous language of the Policy to the four corners of Morris’s Complaint in the Underlying Suit clearly leads to the conclusion that the Outside Business Exclusion applies to all counts in the Underlying Suit as a matter of law.

The Court found there is no genuine dispute of material fact that the Policy’s Outside Business Exclusion applies to Morris’s claims against Defendants in the Underlying Suit and Westport is entitled to judgment as a matter of law. Therefore, Westport has no duty to defend Defendants against the Underlying Suit.

ZALMA OPINION

This should not have been a difficult case needing two motions for summary judgment. It could have been avoided by Hippo and Flemming, acting for the outside businesses, purchasing liability, Errors and Omissions and Directors and Officers liability insurance policies. The claim for defense and indemnity was presented to the wrong insurer or the lawyers, representing themselves, failed to acquire proper insurance.


© 2018 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Books from Full Court Press

Insurance Law Deskbook: Learn the insurance basics that are essential to every civil practitioner. The Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, state appellate courts, and foreign courts that have molded the American insurance law, as well as vital explanatory chapters, historical context, form letters, and more.

California Insurance Law Deskbook: California has long led the way when it comes to insurance jurisprudence in the United States, and few know more about California insurance law than Barry Zalma. The California Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. Similar to Barry Zalma’s general Insurance Law Deskbook, this title focuses on the state where the author has long resided and practiced as an expert in California law. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, and California appellate courts, as well as vital explanatory chapters and historical context.

Insurance Bad Faith and Punitive Damages Deskbook: Understand the relationship between insurance, the tort of bad faith, and why punitive damages are awarded to punish insurers. Previously, a person suing an insurance company in the United States could only recover contract damages, but when the tort of bad faith was created by the courts contract law was enormously affected, allowing insureds to sue insurers for both contract and tort damages, including punitive damages. Read a thoughtful analysis of how punitive damages apply in the United States to insurance bad faith suits, and why some states allow judges and juries to award punitive damages against insurers in civil litigation.

Mr. Zalma’s books available as Kindle books or paperbacks at Amazon.com can be reached at http://zalma.com/zalma-books/

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/bzalma  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Share

About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
This entry was posted in Zalma on Insurance. Bookmark the permalink.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.