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The U.S. Court of Appeals for the Third Circuit, affirming a district court's decision, has ruled that an insurance carrier did not have to defend a lawyer and his firm against a disgruntled former client's lawsuit.

The Case

As the circuit court explained, the case arose July 24, 2015, when Gregory Morris and Morris Management Inc. (together, Morris) filed an 11-count complaint against the law firm of Hippo, Fleming & Pertile and partner Charles Wayne Hippo Jr. in a Pennsylvania state court.

The lawsuit arose from Hippo's prior legal representation of Morris, which allegedly included counseling on a variety of real estate deals that Morris wished to pursue.

In addition to his legal work in the real estate area, Hippo also allegedly was involved with his own real estate investments and owned interests in Templar Development LLC and Templar Elmerton LLC (together, Templar).

In its complaint, Morris alleged that Hippo had been disloyal and that he had prioritized Templar's interests. Specifically, Morris alleged that Hippo had conspired with a Morris executive to divert opportunities away from Morris for Templar's benefit, including by engaging in disloyal actions concerning an aborted shopping center project. Morris also alleged that Hippo and Templar had poached several employees from Morris.

In response to Morris's lawsuit, Hippo Fleming and Hippo asked their liability insurer, Westport Insurance Corp., to defend and indemnify them.

Westport ultimately refused and went to court for a declaratory judgment as to its duties and obligations.

Westport moved for summary judgment, arguing it was not obligated to defend against the Morris lawsuit based on language in the insurance contract that excluded coverage for 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 "outside business exclusion").

HFP and Hippo conceded that counts III-XI of the Morris lawsuit were, in isolation, outside the scope of the insurance policy, but argued that counts I and II, which alleged legal malpractice by Hippo and breach of the legal services contract, were covered by the policy, thus necessitating Westport to defend against all counts.

The U.S. District Court for the Western District of Pennsylvania granted summary judgment on counts I and II, finding that each count in the Morris suit alleged that Hippo had acted to benefit his own business interests to Morris' detriment and, therefore, that the outside business exclusion applied to all counts in the Morris suit as a matter of law, therefore excluding coverage.

Hippo and the firm appealed to the Third Circuit. They argued that Westport was obliged to defend against the Morris action because parts of the Morris complaint were unrelated to Hippo's alleged Templar activities.

The Third Circuit's Decision

The Third Circuit affirmed.

In its decision, the circuit court explained that the outside business exclusion was "broad," excluding coverage for "any claim based upon, arising out of, attributable to or directly or indirectly resulting from [] any Insured's activities" arising from Hippo's work with a company "other than [HFP]."

Therefore, the circuit court continued, if Morris' claims were related to Hippo's Templar activities, "directly or indirectly," Westport had no obligation to defend.

The Third Circuit then rejected Hippo Fleming and Hippo's contention that counts I and II of the Morris complaint arose "primarily, if not exclusively, as a result of the alleged breach of the standard of care" attorneys owed their clients, and that there was no "underlying inextricable link" to Hippo's Templar-related activities.

According to the circuit court, Morris' complaint was "clear" that Hippo's Templar-related activities were at the center of both counts. The circuit court noted that the first 62 paragraphs of the complaint, which recounted Hippo's alleged pursuit of Templar's best interests at Morris' expense, were incorporated by reference into counts I and II; that count 1 alleged that Mr. Hippo had committed malpractice by violating his duty of loyalty with actions intended to benefit Templar; and that count II alleged that Hippo and HFP had violated their contract to provide legal services by various means meant to benefit Hippo's Templar ventures.

The Third Circuit observed that the allegations in Morris' complaint "straightforwardly" characterized the legal malpractice claim as resulting from Hippo's self-dealing on behalf of the Templar entities.

Finding that the allegations in the Morris complaint were "inextricably intertwined" with Hippo's Templar activities—and, in particular, that counts I and II were "based upon, arising out of, attributable to or directly or indirectly resulting from" Hippo's Templar involvement—the Third Circuit concluded that Westport had no duty to defend HFP or Hippo.

The case is Westport Insurance v. Hippo, Fleming & Pertile Law Offices.

Steven A. Meyerowitz, a Harvard Law School graduate, is the founder and president of Meyerowitz Communications Inc., a law firm marketing communications consulting company. Meyerowitz is the director of the Insurance Coverage Law Center and editor-in-chief of journals on insurance law, banking law, bankruptcy law, energy law, government contracting law, and privacy and cybersecurity law, among other subjects. He can be contacted at [email protected].