Professional liability and other errors and omissions policies are purchased to protect the insured from claims brought against the insured by third-parties alleging breaches of professional duties and other failures to perform professional or other services appropriately.  Stated another way a professional liability policy issued to a law firm protects the law firm and its lawyers from claims of legal malpractice.  It does not, however, protect a lawyer from claims of wrongdoing based on activities not associated with the provision of legal services.  A recent Third Circuit Court of Appeals case addresses whether a law firm’s professional liability policy had to defend the lawyer and firm against claims of disloyalty and other wrongdoing arising out of the lawyer’s activities with a real estate business.

In Westport Insurance Corp. v. Hippo Fleming & Pertile Law Offices, No. 18-3551 (3d Cir. Nov. 8, 2019) (Not Precedential), a real estate lawyer represented a client in counseling on a variety of real estate deals.  In addition to the lawyer’s legal practice, however, the lawyer was involved with his own real estate investments through his own companies.  The client sued the lawyer and the firm for disloyalty alleging that the lawyer prioritized his own real estate interests over that of his client, including competing on and winning deals that the client wanted to do.  The lawyer and firm asked their professional liability insurer to defend and indemnify.  The insurer disclaimed based on an outside business exclusion.  The exclusion excluded coverage for any “claim based upon, arising out of, attributable to or directly or indirectly resulting from [] any Insured’s activities” involving a company other than the law firm.

The insurer sought a declaratory judgment and the district court granted summary judgment in favor of the insurer.  The law firm and lawyer conceded that counts III-XI of the complaint were outside the scope of coverage, but argued that counts I and II were covered and that required a full defense.

In affirming, the circuit court noted that the outside business exclusion was broad and that under Pennsylvania law, the court had to interpret the insurance policy according to its plain meaning and must honor a clear and unambiguous policy exclusion.  While the insured tried to separate the claims in counts I and II, which sounded in legal malpractice, the circuit court agreed with the district court that the factual allegations concerning the lawyer’s own real estate companies were at the center of both counts.  The first 62 paragraphs of the complaint, said the court, recount the lawyer’s pursuit of this company’s best interests at the client’s expense and were incorporated by reference into counts I and II.

While the court agreed that the lawyer and law firm could be liable for malpractice for reasons unrelated to the lawyer’s real estate business, it found that the facts alleged in the complaint were inextricably intertwined with the lawyer’s real estate business activities.  The court held that it was confined to the facts alleged in the complaint. As the court said,  “[a] 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.”