April 2014 Bad Faith Cases: An Insured Business Stated A Bad Faith Cause Of Action Against Its E&O Carrier Where Its Alleged Conduct, Whether Legal Or Not, Involved Professional Services; And An Exclusion Relied Upon By The Carrier To Deny Coverage, Even If Applicable, Did Not Cover All Claims In Underlying Action And Could Not Be A Basis To Deny Coverage For All Claims (Western District)

In Municipal Revenue Services v. Houston Casualty Company, plaintiffs were in the business of purchasing government tax liens.  A law firm accused plaintiffs of scheming with other attorneys to improperly move those tax liens to others.  The law firm sought equitable relief to enjoin those parties’ alleged on-going criminal, civil and fiduciary misconduct, and to protect its, and its clients’, confidential, proprietary, and trade secret information. The law firm also sought compensatory and punitive damages, attorneys’ fees and costs. The facts alleged in the underlying case were that the law firm represented public entities in the purchase of tax liens and worked throughout the year to prepare for tax lien sales closings. One of the entity’s officers and others allegedly contacted the taxing government entities and advised them of the need to pass new resolutions. This allegedly paved the way for replacing the original purchaser with a purchaser controlled by the officer, all as part of an alleged scheme to move business from the complaining law firm. The officer was also accused of having secretly stolen and transferred the files from the old law firm to a remote internet location where it could be accessed without permission.
The old law firm brought suit alleging six (6) counts, including Violations of Computer Fraud and Abuse Act, Violations of 18 Pa.C.S. 5741 (Wiretap Act), Violation of Pennsylvania Trade Secrets Act (All Defendants), Conversion, Tortious Interference with Present and Prospective Business Relationships; and Civil Conspiracy and Aiding and Abetting. That litigation concluded prior to the instant opinion being issued.  The insurer in the instant matter refused to defend and indemnify under its Professional Errors and Omissions policy with the business entity (not the law firm).  The entity and its officer brought a claim for breach of contract and bad faith.

The bases for denial were that the conduct alleged was not a “Wrongful Act” as defined in the policy, as there was allegedly no claim relating to “Professional Services”; and exclusion (exclusion “r”) where the claim was for misuse of confidential or proprietary information.  The insurer moved to dismiss both the breach of contract and bad faith claims.  The court denied the motion.

The court found the following factual assertions and reasonable legal inferences to be plausible, essentially on the basis that the business’ conduct, whether legal or illegal, involved professional services, whether or not rendered to the plaintiff in the underlying action:

That Plaintiffs possessed a valid and enforceable insurance policy, which covered “wrongful acts” committed by the insured; that the Policy covered “wrongful acts” in the course of “Professional Services”; that “Professional Services” may be construed to include those acts (or “wrongful acts”) that are committed in the course of business transactions (illegal or not) and include elements or actions that may be conducted in the course of “professional” work, thus, falling in the purview of “Professional Services”; that there were highly specific professional services rendered at the time the “wrongful acts” were committed; and that coverage of the policy is not excluded because Exclusion “r” of the Policy states the Policy will not apply when there is use or disclosure of confidential, proprietary or personally identifiable information in the wrongful act of claimant because other counts in the underlying claim did not include the acts specified in Exclusion “r”. These allegations constitute “enough facts to raise a reasonable expectation that discovery will reveal evidence of the necessary element[s].”
The Pennsylvania law covering the duty of an insurer to an insured is very clear and hinges on the language of the policy at issue. Plaintiff’s facts in this case are plausible and the legal conclusion would flow therefrom. A ruling in favor of a Motion to Dismiss is not appropriate where there is a plausible case where Plaintiffs maintain a legitimate cause of action with facts that support that cause of action and there is potential for success in the claim. We, therefore, find that Plaintiffs have adequately pleaded a claim for relief based on the allegations of Breach of Contract and Bad Faith.

Date of Decision: March 5, 2014

Mun. Revenue Serv. v. Houston Cas. Co., Civ. No. 1:13-cv-151 Erie, 2014 U.S. Dist. LEXIS 27762 (W.D. Pa. March 5, 2014) (Cohill, J.)