No Coverage for Malpractice Suit Implicating Policy’s Outside Business Exclusion

The U.S. District Court for the Western District of Pennsylvania, applying Pennsylvania law, has held that a professional liability insurance policy’s outside business exclusion precluded coverage for an underlying lawsuit arising out of an insured attorney’s alleged use of privileged information to benefit his own business interests.  Westport Ins. Co. v. Hippo Fleming & Pertile Law Offices, 2018 WL 4705780 (W.D. Pa. Oct 1, 2018).

The insured law firm had a longstanding attorney-client relationship with an individual whom it assisted with various real estate development projects.  Starting in 2008, a dispute arose between the client and the firm over the development of a shopping center.  The client alleged that the firm and an insured attorney used privileged information gleaned from their representation of the client to benefit an attorney’s real estate side businesses.  The client ultimately sued the firm and the attorney, who tendered the suit to their malpractice insurer.  The insurer denied coverage for the suit based on the policy’s outside business exclusion.

In the ensuing coverage action, the court found that, although broad, the outside business exclusion is susceptible to only one interpretation: that the policy does not cover any claim “based upon, attributable to, or directly or indirectly resulting from” an insured’s involvement “as an officer, director, partner, manager, or employee” of any entity other than the insured law firm.  The court determined that the insured attorney acted as officer, director, partner, and manager of the outside entities at issue.  With that in mind, and because all the allegations in the underlying litigation stemmed from the outside business activities of the insured attorney, the court found that the exclusion barred coverage for the underlying litigation in its entirety.  In doing so, the court dismissed the firm’s argument that two counts alleging legal malpractice and breach of contract triggered coverage under the policy, explaining that while those counts involved an attorney-client relationship, they also explicitly involved the insured attorney’s outside business activities.

The court also found that genuine disputes of material fact remained over the insurer’s claims for rescission and voidance of the policy because of the firm’s failure to disclose the attorney’s personal business entities on the policy’s application.  The court noted the existence of a genuine dispute of fact concerning whether the firm knowingly and intentionally misled the insurer by failing to disclose those entities.