A federal district court has held that an insurer breached a lawyers professional liability policy when it denied coverage in connection with a real estate investment transaction between a claimant and the insured lawyer, holding that the claimant believed the lawyer was representing him and that the lawyer rendered “professional services” when he failed to advise the claimant to obtain title insurance. Zhuang v. Hanover Ins. Co., 2015 WL 5173061 (W.D. Pa. Sept. 3, 2015).
The claimant sought the insured lawyer’s advice as a second opinion in connection with a real estate investment. Within days, the lawyer contacted the claimant, through the claimant’s primary attorney, regarding an investment opportunity related to a property the insured owned. The claimant agreed to the deal, and the insured prepared the loan documents. The claimant did not pay the insured lawyer for preparing the documents and knew the insured had an interest in the transaction. However, he believed the insured represented him in connection with the transaction. The claimant also believed that the insured lawyer was to obtain title insurance for the claimant’s benefit.
The claimant later filed an involuntary bankruptcy petition against the property, and another investor sought an order confirming that it held a first-priority lien on the property. The claimant then filed a malpractice action against the insured lawyer. The insurer was notified of the claim against the insured lawyer and denied coverage, and a default judgment was entered against the insured. The insured then settled with the claimant and assigned his claims against the insurer, and the claimant filed a coverage action.
In the coverage litigation, the court held that the insurer wrongfully denied coverage, finding that the insured’s actions in connection with the investment property constituted “professional services.” The court found that the services on which the malpractice complaint focused—the failure to obtain title insurance and failure to advise the claimant to do so—were “services ordinarily performed by a lawyer,” such that they fell within the policy’s definition of professional services. The court considered these services as a continuation of the legal relationship that began with the insured’s advice in connection with the first real estate investment opportunity. Although the insurer argued that the insured had no formalized legal relationship with the claimant, the court held that an attorney can owe ethical and legal duties to an individual absent a formalized relationship, and that no reasonable jury could find that the insured was not acting as an attorney when he presented the deal to the claimant. The court also held that three policy exclusions—regarding entities owned or operated by the insured; promoting or selling investments; and criminal, dishonest, or intentional acts—did not apply. The court reasoned that it was the failure to obtain title insurance, and not the real estate investment deal itself, that gave rise to the claim, and the exclusions did not apply to the lawyer’s failure to obtain title insurance.
Regarding the claim for breach of the duty of good faith and fair dealing, the court granted summary judgment to the insurer. According to the court, the finding that the policy afforded coverage for the matter did not necessarily imply that the insurer’s actions constituted bad faith. The denial may have been incorrect or negligent, but there was no evidence the insurer acted with improper purpose, and therefore the insurer was entitled to summary judgment on the bad faith count.