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The court was faced with cross summary judgment motions stemming from the carrier’s denial of professional liability coverage. The insured brought declaratory judgment, breach of contract, and bad faith claims against its carrier after being denied coverage for its alleged professional misconduct.

In 1995, the insured drafted and executed a power of attorney on behalf of its client. Years later, the power of attorney assignee inquired whether it was authorized to create a charitable trust in the decedent’s name. The insured drafted a memorandum which informed the assignee that it was able to create a trust, but that the trust might be challenged in the future. The assignee was made executrix of the estate and created a trust, through which she expended more than $1.8 million.

In 2007, a state trial judge issued a decision which surcharged the executrix for the expenditures she made while she controlled the estate. In response, the insured sent a letter to the former executrix, explaining that she now had a potential claim against him and he was forced to apprise his liability insurance carrier. Consequently, the insured ended its representation of the former executrix.

In January 2008, the insured applied for liability insurance with the carrier in this action. In response to a question on the insurance application, the insured wrote that he did not know of “any circumstance…that could result in a professional liability claim” against him. Yet, the insured later acknowledged that at the time of application, he thought the former executrix might make a claim for return of the fees paid to him, but that it did not amount to professional liability. The carrier subsequently issued a professional liability insurance policy to the insured.

The former executrix’s attorney contacted the insured in June 2008 and told him that he should reimburse the former executrix for the amounts surcharged by the state trial judge. As such, the insured put his carrier on notice that he might be subject to a malpractice claim. The carrier responded that it had no duty to defend the insured and that he was not covered because “he had a reasonable basis to believe that his acts, errors or omissions created a potential claim against him prior to the inception of his insurance policy,” in violation of the policy’s conditions.

The former executrix filed suit against the insured in early 2009. The insured contacted his carrier, demanded that they provide him with representation for his defense. When the carrier refused, citing the language of the policy, the insured filed a claim against the carrier. Both parties filed for summary judgment.

The court looked to Third Circuit precedent for the resolution of these claims, which hinged upon whether the “insured party had a reasonable basis to believe in the existence of facts which would act to exclude policy coverage.” This test has both a subjective and objective component, which attempt to examine the insured’s knowledge that he would be subject to malpractice action by his former client. Thus, a court will look to the insured’s subjective knowledge of facts, and then weigh whether there is an objective basis for a reasonable belief that a claim could arise.

The court found that an issue of credibility remained as to the scope of the insured’s subjective knowledge of relevant facts. It therefore refused to grant summary judgment on the carrier’s duty to defend or indemnify because no determination could be made on the subjective knowledge prong at the summary judgment stage. Thus it never reached the objective component of the test.

However, the court did grant summary judgment to the carrier on the bad faith count because the insured failed to provide clear and convincing evidence that the carrier failed to conduct a proper investigation of his claim.

Date of Decision: September 20, 2011

Foster v. Westchester Fire Ins. Co., No. 09-1459, U.S. District Court for the Western District of Pennsylvania, 2011 U.S. Dist. LEXIS 106726 (W.D. Pa Sept. 20, 2011) (Conti, J.)