Niagara Fire Ins. Co. v. Pepicelli, Pepicelli, Watts and Youngs, P.C.
| Decision Date | 25 June 1987 |
| Docket Number | No. 86-3642,86-3642 |
| Citation | 821 F.2d 216 |
| Parties | NIAGARA FIRE INSURANCE COMPANY v. PEPICELLI, PEPICELLI, WATTS AND YOUNGS, P.C. and Perma Tread Corporation, Russell Klasen, and Victor Leap, Theodore H. Watts, Alan L. Pepicelli, Lisa Pepicelli and Christopher J. Youngs. Appeal of PEPICELLI, PEPICELLI, WATTS AND YOUNGS, PC, Defendant, and Theodore H. Watts, Alan L. Pepicelli, Lisa Pepicelli Youngs and Christopher J. Youngs, Intervening Defendants. |
| Court | U.S. Court of Appeals — Third Circuit |
Martin W. Sheerer (argued), Thomas J. Schuchert, Thomas J. Schuchert & Associates, Pittsburgh, Pa., for appellants.
Robert C. Ward (argued), Dunn & Conner, Erie, Pa., for appellee.
Before WEIS and STAPLETON, Circuit Judges, and SAROKIN, District Judge. *
In this dispute concerning malpractice insurance coverage, Pepicelli, Pepicelli, Watts & Youngs, P.C., ("the Law Firm") appeals from a grant of summary judgment to Niagara Fire Insurance Company ("Niagara"). 1 The district court found no coverage under the Law Firm's malpractice policy for claims alleging negligence and breach of contract in the Law Firm's representation of Perma Tread Corporation ("Perma Tread"). Because we find that the claims made by Perma Tread do not constitute claims omitted from coverage under the malpractice policy's exclusions, we will reverse and remand with a direction that judgment be entered for the Law Firm.
John Pepicelli ("Pepicelli") owns all the shares of World of Tires, Inc. ("World of Tires"). In addition, Pepicelli practices law and is the major shareholder in the Law Firm, a professional corporation. Victor Leap and Russell Klasen are the sole shareholders of Perma Tread.
From June to October, 1980, Perma Tread owned a tire recapping plant. On October 16, 1980, World of Tires entered into a purchase agreement with Perma Tread. World of Tires agreed to buy the tire recapping plant for $350,000, consisting of a $10,000 cash down payment, $140,000 to be paid from the immediate sale of various plant assets, and a $200,000 World of Tires' note secured by the plant's remaining equipment. The final closing date of the deal was April 1, 1981.
Pursuant to the terms of the purchase agreement, World of Tires obtained fire and hazard insurance from the American Insurance Corporation ("American"). World of Tires was a named insured under the policy. Although both parties here refer to Perma Tread as a loss payee under the policy, the record is unclear as to whether Perma Tread was a loss payee or simply an additional named insured. See, e.g., III App. at 369, 378, 388. The policy limit was $250,000.
On December 26, 1980, a fire destroyed almost all the assets being purchased by World of Tires, leaving only salvage of a nominal value. At the time of the fire, World of Tires still owed Perma Tread approximately $260,000 according to the purchase agreement.
After the fire, Victor Leap and Russell Klasen of Perma Tread hired the Law Firm to collect compensation for the loss from American. A hand-written note, dated March 28, 1981, from Pepicelli to Leap and Klasen states that the agreed-upon fee for the Law Firm's services to Perma Tread was $5000. While this note implies World of Tires might play some role in collecting the fire insurance claim, it points out that Perma Tread would receive all the insurance proceeds. On February 18 and again on April 14, 1981, Pepicelli submitted documents to American that indicated a loss of $312,601. American thereafter offered to settle the fire claim for $112,136. Pepicelli termed the offer "ridiculous." III App. at 224.
Stephen Toole, another attorney in the Law Firm, then filed suit against American, naming World of Tires as the plaintiff. In its answer, American raised the defense of fraud, alleging that World of Tires had prepared a fraudulent proof of loss. Perma Tread, by this time represented by counsel from outside the Law Firm, intervened as a plaintiff in the fire insurance action prior to trial. The trial court, however, issued a directed verdict against Perma Tread because by the time it intervened, its claim was barred under the one-year contractual limitation on actions under the fire insurance policy. Trial before a jury resulted in a verdict against World of Tires and for the insurance company. As the trial judge stated, "This verdict could only have been based upon the belief that the defendant had established its affirmative defense of fraud or false swearing." III App. at 370.
Perma Tread and its shareholders, Leap and Klasen then initiated a malpractice action against the Law Firm. The malpractice litigation is being held in abeyance until this declaratory judgment suit determines whether Niagara must defend and indemnify the Law Firm under its malpractice policy. Perma Tread alleges in its complaint that Pepicelli and the Law Firm committed malpractice by inter alia failing to name Perma Tread as a plaintiff in the fire insurance suit, submitting erroneous proof of the fire loss, and failing to advise Perma Tread in a timely fashion that fraud had been raised as a defense by the fire insurance carrier.
The lawyers' liability insurance policy at issue here provides:
I. Coverage
To pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of any claim or claims, first made against the insured and reported to the Company during the policy period, arising out of personal injury or any act or omission of the insured in rendering or failing to render professional services for others in the insured's capacity as a lawyer or Notary Public and title insurance agents services in the insured's capacity as lawyer, and caused by the insured or any other person for whose acts or omissions the insured is legally responsible, except as excluded or limited by the terms, conditions and exclusions of this policy.
With respect to such insurance as is afforded by this policy, the Company shall defend any suit against the insured alleging such act or omission and seeking damages which are payable under the terms of this policy, even if any of the allegations of the suit are groundless, false or fraudulent; and the Company may make such investigation and, with written consent of the insured, such settlement of any claim as it deems expedient....
* * *
EXCLUSIONS
This policy does not apply:
* * *
f) to any claim arising out of any insured's activities as an officer or director of any employee trust, charitable organization, corporation, company or business other than that of the Named Insured;
g) to any claim made by or against or in connection with any business enterprise (including the ownership, maintenance or care of any property in connection therewith), not named in the Declarations, which is owned by any insured or in which any insured is a partner, or employee or which is directly or indirectly controlled, operated or managed by any insured in a non-fiduciary capacity;
....
III App. at 1-2. The policy's claim limit is $1,000,000.
Niagara retained Underwriters Adjusting Company and its claims counsel, Barie Snider, to supervise the Law Firm's defense in the malpractice litigation. Snider retained James Marnan of Knox, Graham, McLaughlin, Gornall & Sennett to act as defense counsel. Snider directed Marnan to forward to him all documents that Marnan received from the Law Firm's file on the fire insurance case and Marnan complied with the directive.
On November 1, 1984, Snider wrote Pepicelli to inform him of certain policy exclusions' possible applicability. Snider stated:
To the extent that the above captioned claim arises out of your activities as an officer or director of a "corporation, company or business other than that of the named insured", or to the extent that this claim is made "by or against or in connection with any business enterprise not named in the declarations, which is owned by any insured ...", Niagara Fire Insurance disclaims any liability to indemnify Pepicelli, Pepicelli, Watts and Youngs or the above named claimant in this matter. In that regard, we have retained [Robert Ward of Dunn & Conner] to represent Niagara Fire Insurance Company in regards to this coverage issue. We urgently recommend that you obtain counsel of your own choosing and at your own expense to represent you regarding this coverage issue.... In view of the fact that the issue of coverage has not as yet been resolved, we are instructing Knox, Graham, McLaughlin, Gornall and Sennett, Inc. to continue their defense of Pepicelli, Pepicelli, Watts and Youngs, P.C. under a reservation of rights.
IL App. at 150-51. During February of 1985, Snider and Marnan agreed to reject a settlement offer of $250,000 made by Perma Tread.
On March 8, 1985, Niagara filed its complaint in this declaratory judgment action. Niagara and the Law Firm each subsequently moved for summary judgment below. Niagara argued that the policy's exclusions here relieve the insurer of its obligation to defend and indemnify the insured, whereas the Law Firm argued that the exclusions are at least ambiguous with respect to the claims made by Perma Tread and therefore should be interpreted in favor of the insured. In addition, the Law Firm argued that Niagara should be estopped from relying on the exclusions because the insurer improperly obtained documents from the Law Firm's files, on the basis of those documents identified a coverage dispute, and, despite the coverage dispute, supervised both the malpractice action and the coverage suit through the same office of Underwriters Adjusting Company. The district court granted Niagara's summary judgment motion and denied the Law Firm's, reasoning that one or more policy exclusion(s) apply to each of Perma Tread's malpractice claims. The district court rejected the Law Firm's estoppel argument because the firm had not...
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