On Appeal from the United States District Court for the Western District of Pennsylvania (Erie), C.A. No. 85-85 E.
Weis and Stapleton, Circuit Judges, and Sarokin, District Judge*fn*
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 judgment to Niagara Fire Insurance Company ("Niagara").*fn1 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 exclusion, 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, Russell Leap and victor 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 ...