In a win for the insurer, the United States Court Appeals for the Third Circuit, applying Pennsylvania law, affirmed the district court’s holding that an outside business exclusion barred coverage for counts against an insured law firm indirectly based on the insured’s conduct with an outside business.  Westport Ins. Corp. v. Hippo Fleming & Pertile Law Offices, 2019 WL 5855792 (3d Cir. Nov. 8, 2019).

The action alleged that the insured law firm and a partner had conspired with an outside company to put the company’s interests before the interests of the firm’s client in a real estate transaction.  The firm sought coverage for the action from its professional liability insurer, which denied coverage for the entire claim on the basis that the policy’s outside business exclusion, which barred coverage for “any claim based upon, arising out of, attributable to or directly or indirectly resulting from [] any Insured’s activities” arising from the partner’s work with a company “other than [the Insured].”  While the firm conceded that the exclusion applied to some counts of the claim, it argued that the exclusion did not apply to two counts—legal malpractice and breach of contract—because those counts arose from the firm’s breach of duty, and not from the partner’s outside activities.

The Court of Appeals affirmed the district court’s ruling that the exclusion barred coverage for the two counts at issue.  The court first pointed out that the exclusion’s language was broad and that it therefore applied to the two counts if they were related—whether directly or indirectly—to the partner’s activities with the outside company.  Because both of the counts in question incorporated the first sixty-two paragraphs of the complaint, which outlined the insured’s activities with the outside company, the court determined that those activities were “at the center of both counts” and that the exclusion therefore applied.  The Court of Appeals next rejected the insured’s argument that the counts were based on facts unrelated to the outside company.  Relying on precedent stating that covered claims must be identified by comparing the “four corners of the complaint” with the “four corners of the policy,” the court held that the facts alleged in the complaint were “inextricably intertwined with” the facts alleging the insured’s conduct with the outside company.  The court held that the exclusion thus applied to bar coverage for the two counts.