Harad v. Aetna Cas. and Sur. Co., 87-1373

Decision Date28 March 1988
Docket NumberNo. 87-1373,87-1373
Citation839 F.2d 979
PartiesHARAD, Charles A. and the Home Insurance Company, v. The AETNA CASUALTY AND SURETY COMPANY, Appellant. and Catania, Francis J.
CourtU.S. Court of Appeals — Third Circuit

Fredric L. Goldfein (argued), Elissa J. Kahn, Goldfein & Joseph, Philadelphia, Pa., for appellant.

H. Robert Fiebach (argued), Neil S. Witkes, Wolf, Block, Schorr and Solis-Cohen, Philadelphia, Pa., for appellees.

Before SLOVITER, COWEN, Circuit Judges, and DEBEVOISE, District Judge *.

OPINION OF THE COURT

COWEN, Circuit Judge.

This appeal arises from an order of the district court which held that, under the terms of an insurance contract issued by Aetna, Aetna had a duty to defend and indemnify its insured. The district court determined that Aetna had not established a meritorious defense and refused to vacate a default judgment which had been entered against Aetna. Since we conclude that the lower court misinterpreted the terms of the contract of insurance, and that an exclusion contained in the policy relieved Aetna of the duty to defend or indemnify its insured, we will reverse.

I.

The material facts of this case are not in dispute. Plaintiff, Charles Harad, is an attorney licensed to practice in the Commonwealth of Pennsylvania who maintains an office in Philadelphia, Pennsylvania. To cover potential liability arising from that practice, Harad secured two policies of insurance, one from The Aetna Casualty and Surety Company ("Aetna"), the other from The Home Insurance Company ("Home"). 1

In July 1986, nominal defendant Catania filed a lawsuit against Harad and The Hanover Insurance Company ("Hanover"), claiming malicious prosecution, pursuant to 42 Pa.Cons.Stat.Ann. Sec. 8351 et seq., arising out of Harad's representation of Hanover in an action filed by Catania against Hanover. Catania's lawsuit was based on Harad's signing a verification to an answer and counterclaim, in which Hanover asserted that Catania "conspired and/or contrived to defraud Hanover by concealing and/or misrepresenting the fact that the vehicles" insured by Hanover were for personal rather than business use. App. at 18.

Since Harad was insured under two policies of insurance, Home and Aetna (through its Philadelphia office) discussed their duty to defend Harad. They could not come to an agreement. Aetna, relying on the professional liability exclusion in its policy, refused to defend Harad. However, Home undertook Harad's defense. On December 12, 1986, Home and Harad filed a complaint against Aetna seeking, inter alia, a declaratory judgment that Aetna was under a duty to defend and indemnify Harad. An amended complaint was filed by Home and Harad on December 23, 1986, adding Francis J. Catania as a nominal defendant, since he may have an interest in this litigation.

The amended complaint was served by certified mail on defendant Aetna at its Hartford, Connecticut, office on December 23, 1986. Plaintiffs Home and Harad did not serve a copy on Aetna's Philadelphia office, with which they had negotiated previously. Shortly thereafter, Aetna forwarded the matter to its Philadelphia office, and an attorney representing Aetna entered his appearance in the district court on January 9, 1987. On that same date plaintiffs filed a Request to Clerk for Entry of Default and a Default Judgment. The request for default was entered on the docket on January 12, and the entry of appearance was docketed on January 14. In addition, on January 14 the district court granted plaintiffs' request for default judgment, and entered judgment against Aetna in the amount of $16,737.16. The Court also ordered Aetna to defend and indemnify Harad in the lawsuit filed by Catania.

Aetna moved to vacate the default judgment on January 16, 1987, and to that end the parties entered into a stipulation, approved by the district court on February 2, 1987. The stipulation limited the issues to be addressed on the motion to "whether or not Aetna has established a meritorious defense which would constitute a defense to plaintiff's [sic] action." App. at 195. The district court considered this motion and, by Memorandum and Order dated June 9, 1987, declined to vacate the default judgment.

Although the district court recognized that the issue was whether Aetna had "established" a meritorious defense, 2 the court felt that the policy exclusion at issue--i.e., coverage for liability "arising out of the rendering or failure to render any professional service"--did not apply under the facts of this case. The district court expressed its view that a malicious prosecution claim was not excluded under the policy because Harad had not rendered or failed to render professional services to the party suing him. The court also found the exclusion ambiguous in light of the overall policy provisions establishing coverage, and construed the ambiguity against the drafter. The district court therefore denied Aetna's motion to vacate the default, concluding that it had not set forth a valid defense on the merits pursuant to the stipulation. Aetna appeals to this Court.

II.

Aetna argues that the district court erred in failing to set aside the default judgment, and in finding that the exclusion in Aetna's policy did not relieve Aetna of the obligation to defend and indemnify Harad. We review the lower court's refusal to set aside the default judgment under an abuse of discretion standard. Farzetta v. Turner & Newall, Ltd., 797 F.2d 151, 153 (3d Cir.1986); 10 C. Wright, A. Miller & M. Kane, Federal Practice and Procedure Sec. 2693, at 472-74 (1983). Our review of the interpretation of the insurance contract and the applicability of the policy exclusion, however, is plenary. Pacific Indem. Co. v. Linn, 766 F.2d 754, 760 (3d Cir.1985).

Although this Court has adopted a policy disfavoring default judgments and encouraging decisions on the merits, Tozer v. Charles A. Krause Milling Co., 189 F.2d 242, 245 (3d Cir.1951), the decision to vacate a default judgment is left to the sound discretion of the trial court. In exercising this discretion, however, the court must consider whether vacating the default judgment will visit prejudice on the plaintiff, whether the defendant has a meritorious defense, and whether the default was the result of the defendant's culpable conduct. United States v. $55,518.05 in U.S. Currency, 728 F.2d 192, 195 (3d Cir.1984).

III.
A.

Aetna first argues that in assessing whether or not it had a meritorious defense, the district court erred by considering the substantive sufficiency of the defense rather than its facial validity. Aetna avers that both under the terms of the stipulation and the law in this Circuit, all it was required to do is raise the defense. We disagree.

In $55,518.05 in U.S. Currency we noted that a defendant does not have the right to have a default judgment set aside automatically upon alleging a defense. Rather, we imposed a more stringent standard which requires that a defendant seeking to set aside a default judgment set forth with some specificity the grounds for his defense. The court must then evaluate that defense to determine whether it is meritorious. In $55,518.05 in U.S. Currency, we looked to the nature of the action and to the facts a defendant would have to allege in an answer in order to defend his property from a forfeiture, pursuant to the Drug Abuse Prevention and Control Act, 21 U.S.C. Sec. 881 (1982). After applying this standard in a substantive examination of the defendant's allegations, we determined that the defendant had not met this burden when he asserted, in a conclusory manner, that the money in question was not used or intended for use in a drug transaction.

Similarly when Aetna alleged the applicability of the professional liability exemption, the district court assessed the merits of the defense in order to determine whether, under the facts of the case and the overall language of the policy, the exemption could be considered a meritorious defense. Unfortunately from Aetna's perspective, the court determined that the exemption did not apply under the facts before it. We cannot conclude, however, that the court erred in examining the substance of Aetna's defense. It could do no less. The district court would have applied an incorrect legal standard if it had merely facially scrutinized Aetna's defense. 3

B.

Aetna further asserts that the exclusion provides a complete defense to plaintiffs' claims. In opposition, Harad and Home argue that the policy clearly provides coverage for a malicious prosecution claim, such as the one asserted by Catania in his lawsuit against Harad and Home. As there are no material facts in dispute and the interpretation of a contract of insurance is a question of law, Standard Venetian Blind Co. v. American Empire Ins. Co., 503 Pa. 300, 305, 469 A.2d 563, 566 (1983), we may interpret the coverage of the policy. Niagara Fire Ins. Co. v. Pepicelli, 821 F.2d 216, 219 (3d Cir.1987). We therefore turn to an assessment on the merits of whether the exclusion provides a complete defense.

The policy terms which plaintiffs aver cover Harad's liability in this case state, in relevant part: 4

III. PERSONAL INJURY AND ADVERTISING OFFENSE LIABILITY COVERAGE:

The Company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of personal injury or advertising offense sustained by any person or organization and arising out of the conduct of the insured's business, if the offense is committed during the policy period within the policy territory, and the Company shall have the right and duty to defend any suit against the insured seeking damages on account of such injury, even if any of the allegations of the suit are groundless, false or fraudulent....

App. at 43 (emphasis added). The policy thereafter defines the term ...

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