Contractual Liability Exclusion Defeats Garnishment Proceeding Against Insurer
The United States District Court for the Eastern District of Pennsylvania, applying Pennsylvania law, has held that an insurer was not liable as garnishee in a claimant’s proceeding to collect a default judgment against an insured law firm because the contractual liability exclusion barred coverage for the underlying action for breach of a settlement agreement. Zaftr Inc. v. Kirk, 2025 WL 3025675 (E.D. Pa. Oct. 29, 2025).
A company filed suit against an insured law firm for its failure to comply with escrow agreements regarding the return of the company’s funds in a Bitcoin purchase transaction. The company and the firm executed a settlement agreement under which the firm’s professional liability insurer would pay a third of the settlement amount, with the remainder to be paid by the firm in installments. After the firm failed to make the final two payments, the company filed suit against the firm and its insurer for breach of the settlement agreement. The firm failed to file an answer to the amended complaint, and the clerk entered a default judgment. To enforce its money judgment against the firm, the company obtained a writ of execution directed to the insurer as garnishee.
The court first concluded that the default judgment obtained by the claimant company could be executed upon via garnishment. The court held, however, that the company could not establish the insurer’s liability as garnishee because the policy’s contract exclusion barred coverage for the company’s breach of contract claim. The policy excluded coverage for “any claim … based upon, arising out of, directly or indirectly resulting from or in consequence of, or in any way involving … [the insureds’] liability under any oral or written contract or agreement.” The court explained that the exclusion’s lead-in clause was broader than most standard “arising out of” exclusions and precluded coverage for all claims that would not exist “but for” the excluded conduct. The court noted that nearly identical exclusions have been held to apply only to “simple” breach of contract claims rooted solely in the contract itself, such as a failure to pay or perform as contractually obligated. The court held that, given that the default judgment rested on the firm’s failure to comply with the settlement agreement, the company’s claim fell “squarely within the contractual-liability exclusion.” For those same reasons, the court determined that the firm failed to demonstrate that the exception for “such liability that would have attached to the Insured by law in the absence of such contract or agreement” applied.
