Duty to Defend – Third Circuit Reaffirms Four Corners Rule, Even if There is the Possibility of Facts Within Coverage
The Third Circuit recently held that an insurance carrier did not have a duty to defend a lawyer and his law firm against a former client’s lawsuit. See Westport Ins. Corp. v. Hippo Fleming & Pertile Law Offices, 2019 WL 5855792 (3d Cir. Nov. 8, 2019). In doing so, the court reaffirmed that the duty to defend analysis is strictly confined to the facts alleged in the underlying complaint – not a set of possibly imagined facts that could fall within the coverage afforded by a policy.
Gregory Morris and Morris Management Inc. (“Morris”) filed a lawsuit (“Lawsuit”) against Charles Wayne Hippo, Jr., Esquire (“Hippo”), and his law firm, Hippo Fleming and Pertile (“Firm”), predicated on Hippo’s prior legal representation of Morris with respect to certain real estate matters. In addition to his legal work, Hippo was also involved with his own real estate investments. The Complaint filed in the Lawsuit alleged that Hippo was disloyal, and prioritized his own development interests over Morris’ real estate matters. Specifically, Morris alleged that Hippo conspired with a Morris Management executive to divert opportunities from Morris for Hippo’s own benefit.
Hippo and the Firm sought defense and indemnity of the Lawsuit from their liability insurer, Westport. Westport denied coverage. Westport took the position that it had no duty to defend or indemnity the Lawsuit based on a Policy exclusion – the “outside business exclusion” – applicable to any “claim based upon, arising out of, attributable to or directly or indirectly resulting from any Insured’s activities” arising from involvement with a company “other than the Named Insured.”
The insureds conceded that most counts of the Complaint were outside the scope of the Westport Policy, but argued that counts I and II – which alleged legal malpractice and breach of the legal services contract – were covered. The U.S. District Court for the Western District of Pennsylvania granted summary judgment in favor of Westport on all counts, finding that each count of the Complaint involved Hippo’s alleged improper conduct with respect to his own business interests. Thus, the outside business exclusion applied, and ultimately excluded coverage.
On appeal, the Third Circuit affirmed. The court noted that Westport’s outside business exclusion was broad and excluded any of Hippo’s activities that “directly, or indirectly,” involved his own real estate investments. This included counts I and II, which “straightforwardly” characterized Morris’ legal malpractice claims as resulting from Hippo’s self-dealing. While it was argued that the insureds could be liable for legal malpractice and breach of contract based on “underlying facts” that would not fall within the scope of the outside business exclusion, the Third Circuit held that the “duty to defend does not arise merely because it is possible to imagine a set of facts within the insurance contract’s coverage that was not pleaded.”