Opinion
Civil Action 22-1344
06-26-2023
MARKOVITZ & GERMINARO, Plaintiff, v. BERKLEY INSURANCE COMPANY, Defendant.
REPORT AND RECOMMENDATION
PATRICIA L. DODGE, United States Magistrate Judge.
I. Recommendation
It is respectfully recommended that Defendant's Motion to Dismiss (ECF No. 16) be denied.
II. Report
Plaintiff Markovitz & Germinaro (“M&G”) brings this action against Defendant Berkley Insurance Co. (“Berkley”). M&G asserts that because Berkley wrongfully refused to provide it with a defense in a lawsuit for legal malpractice, it breached its contractual duties under a professional liability policy. M&G also asserts a claim for declaratory judgment and a claim of bad faith under Pennsylvania law.
Presently pending before the Court is Berkley's Motion to Dismiss the Amended Complaint.
A. Relevant Procedural History
M&G filed this action on September 19, 2022 and later filed an Amended Complaint on October 28, 2022 (ECF No. 8). Jurisdiction is based on diversity of citizenship.
Count I of the Amended Complaint alleges a claim of breach of contract. In Count II, M&G asserts a claim of bad faith in violation of 42 Pa. C.S. § 8371. M&G also seeks a declaratory judgment in Count III that Berkley has a duty to defend and indemnify M&G in the lawsuit pending against it.
On December 5, 2022, Berkley filed a motion to dismiss (ECF No. 16), which has been fully briefed (ECF Nos. 17, 21, 26, 29).
B. Relevant Factual Background
1. The Policy at Issue
Berkley issued to M&G a Lawyers Professional Liability Insurance Policy No. PLP1072891P11 for the period August 24, 2021 to August 24, 2022 (“the Policy”) (Am. Compl. ¶ 9 & Ex. B).
The grant of coverage in the Policy provides as follows:
I. A. Lawyers Professional Liability Insurance Coverage
The Insurer agrees to pay on behalf of the Insured all sums in excess of the deductible, up to the Limit of Liability, that the Insured shall become legally obligated to pay as Damages and Claim Expenses because of a Claim that is both first made against the Insured and reported in writing to the Insurer during the Policy Period, or any Extended Reporting Period, if applicable, by reason of an act or omission in the performance of Legal Services by the Insured or by any person for whom the Insured is legally liable, while acting on behalf of the Named Insured and/or Predecessor Firm for clients of the Named Insured and/or Predecessor Firm.(Am. Compl. Ex. B at 6.) A “claim” is defined as “a demand for money or services ... received by the Insured arising out of an act or omission, including Personal Injury, in the rendering of, or failure to render Legal Services.” (Id. at 12.) “Legal Services” are “those services . performed by the Insured” in various legal capacities. (Id. at 14.)
The Policy also contains two exclusions relevant to this matter--a Specific Entity Exclusion and a Capacity Exclusion. The Specific Entity Exclusion provides:
This Policy does not apply to any Claims made against any Insured based on, or arising from, or in any way involving an act or omission in the performance of Legal Services by or for the entity or individual listed below:
Markovitz Dugan & Associates
Markovitz & Tabaka(Id. at 8.)
The Capacity Exclusion provides that:
This Policy does not apply
* * *
F. Capacity as Director, Officer, Fiduciary to any Claim based on, or arising out of, or in any way involving an Insured's capacity as:
1. a former, existing or prospective officer, director, shareholder, partner, manager or member (or any equivalent position) of any entity if such entity is not named in the Declarations;(Id. at 14-15.)
M&G is the only Named Insured in the Declarations. (Id. at 3.) Robert Markovitz is an “insured” under the Policy to the extent that he is “... a partner, officer, director, stockholderemployee, associate, manager, member or employee of the Named Insured.” (Id. at 13.)
2. The Underlying Action
On October 15, 2021, Robert Yelenovsky, Janine Yelenovsky, Sandhill Crane Partners, LLC and Sandhill Crane Properties, LLC (sometimes collectively, the “Underlying Plaintiffs”) filed a Complaint in the Court of Common Pleas of Allegheny County, Pennsylvania, captioned as Yelenovsky et al. v. Markovitz et al., at No. GD-21-012744 (the “Underlying Action”). The Complaint in the Underlying Action (the “Underlying Complaint”) names as defendants Robert S. Markovitz, Derek Smith, Markovitz Dugan & Associates (“MD&A”) and M&G and asserts claims for professional malpractice and unjust enrichment. (Am. Compl. ¶ 8 & Ex. A.) Markovitz is variously identified in the Underlying Action as an attorney, certified public accountant (CPA), certified valuation analyst and shareholder with MD&A, which is an accounting firm. Smith is identified as a CPA and shareholder with MD&A. M&G is identified as a “purported law firm headquartered in the same location as MD&A” that “does not have a website.” (Ex. A at 5-6.) Markovitz is also identified as an owner of M&G (id. at 28).
The Underlying Action alleges that the Yelenovskys originally retained MD&A, and specifically Smith, to assist with their taxes. In 2019, they advised Smith of their interest in finding a business to purchase as an investment. He told them that he would help them “from start to finish” and could be the primary point of contact. Further, he represented that MD&A has all of the professionals the Yelenovskys needed under one roof. He then introduced them to Markovitz with the intention that Markovitz would provide them with legal counsel. Markovitz was assisted by David Gordon, a shareholder with MD&A who is identified as an attorney, certified financial planner and certified employee benefits specialist. (Ex. A at 6-7.) Although there was no engagement letter between the Underlying Plaintiffs and either Markovitz, MD&A or M&G for legal, accounting or any other services, they believed that Markovitz was their attorney. (Id. at 7-8.)
In the spring of 2019, the Underlying Plaintiffs became aware of a property and longterm care facility business located on that property that was for sale in Follansbee, West Virginia. Based on the Underlying Plaintiffs' possible interest in purchasing both the property and the business, Markovitz and Smith commenced due diligence but did not provide regular or consistent updates. Although the sellers failed to provide answers to approximately one-third of the Yelenovskys' due diligence checklist, neither Markovitz nor Smith followed up, nor did they investigate the business's license or employment contracts. Further, they did not call the Underlying Plaintiffs' attention to a demand letter that asserted a medical negligence claim against the business. (Ex. A at 8-12.)
On June 5, 2019, the Underlying Plaintiffs entered into a letter of intent to purchase the property and business. On June 10, 2019, the Underlying Plaintiffs paid $3,000 in hand money to Mr. Markovitz and Mr. Germinaro in connection with this purchase. Prior to that date, they were unaware that M&G existed. (Ex. A at 10-11.)
The Yelenovskys raised concerns about the sellers' failure to fix items identified in an inspection and the fact that the business was having major staffing issues, but MD&A downplayed their concerns. Noting a clause in the proposed deed of trust required them to obtain the approval of the sellers prior to making any changes to the property, the Yelenovskys asked Markovitz, Smith and Gordon to have the clause removed. While Markovitz and Gordon informed them that they would have the clause removed, they failed to do so. (Ex. A at 14-17.)
Two days before the closing, the only registered nurse at the long-term care facility resigned, leaving it unable to operate, but neither Smith nor Markovitz advised the Underlying Plaintiffs to refrain from closing on the purchase. After a series of delays, the closing for the purchase occurred on October 19, 2019. Neither Smith nor Markovitz was present at the closing, but Smith advised the Yelenovskys to sign the papers and said that MD&A would fix any issues later. (Ex. A at 17-18.)
The Asset Purchase Agreement between the sellers and Sandhill Crane Partners, which is attached as Exhibit A to the complaint in the Underlying Action, states that Markovitz and M&G are to receive copies of all notices to the Yelenovskys. (ECF No. 8-1 at 46.) M&G is also identified as the “escrow agent.” (Id. at 38, 49.) The agreement for the sale of the real estate, attached as Exhibit B to the complaint, also provides that M&G is to receive a copy of all notices sent to the Yelenovskys. (Id. at 67.)
After the closing, the Yelenovskys discovered many problems with the business that were not previously disclosed to them. In addition, the business was being run in violation of West Virginia law and/or regulations governing the operation of assisted-living facilities. (Ex. A at 1819.) The Yelenovskys eventually had to cease operation of the facility and move the residents elsewhere. Sandhill Crane Partners and Sandhill Crane Properties declared bankruptcy and thereafter, the Underlying Plaintiffs initiated an arbitration action against the sellers. (Id. at 2526.)
The Underlying Plaintiffs alleged in the Underlying Complaint that Smith provided legal advice without a license, that Markovitz (who is not licensed to practice law in West Virginia) failed to supervise him and that Markovitz did not competently represent them. MD&A-but not M&G-also sent invoices to the Yelenovskys that lacked detail and did not distinguish between accounting and legal services. (Ex. A at 22-27.) The Underlying Action alleges claims of professional negligence against Markovitz and M&G (Count I), professional negligence against Markovitz, Smith and MD&A (Count II) and unjust enrichment against all defendants (Count III). (Id. at 28-33.)
3. Claims in the Present Action
According to the Amended Complaint filed by M&G, M&G tendered its defense of the Underlying Action to Berkley, but Berkley disclaimed coverage and refused M&G's request to reconsider its disclaimer. (Am. Compl. ¶¶ 10-13.) M&G alleges that Berkley's disclaimer ignores the plain language of the Underlying Action which clearly asserts a legal malpractice claim against M&G.
M&G contends that Berkley's refusal to provide a defense and potential indemnity in the Underlying Action represents a breach of its contractual duties as well as bad faith under Pennsylvania law. (Id. ¶¶ 14-17.)
C. Analysis
1. Standard of Review
Under Rule 12(b)(6), a motion to dismiss may be granted only if, accepting all well-pleaded allegations in the complaint as true and viewing them in the light most favorable to the plaintiff, a court finds that plaintiff's claims lack facial plausibility.” Warren Gen. Hosp. v. Amgen Inc., 643 F.3d 77, 84 (3d Cir. 2011) (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555-56 (2007)). “This requires a plaintiff to plead “sufficient factual matter to show that the claim is facially plausible,” thus enabling “the court to draw the reasonable inference that the defendant is liable for misconduct alleged.” Id. (quoting Fowler v. UPMC Shadyside, 578 F.3d 203, 210 (3d Cir. 2009)). While the complaint “does not need detailed factual allegations . . . a formulaic recitation of the elements of a cause of action will not do.” Twombly, 550 U.S. at 555. See also Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)).
As noted by the Court of Appeals for the Third Circuit in Malleus v. George, 641 F.3d 560, 563 (3d Cir. 2011), a 12(b)(6) inquiry includes identifying the elements of a claim, disregarding any allegations that are no more than conclusions and then reviewing the well-pleaded allegations of the complaint to evaluate whether the elements of the claim are sufficiently alleged.
In ruling on a Rule 12(b)(6) motion, courts generally consider only the complaint, exhibits attached thereto and matters of public record. Schmidt v. Skolas, 770 F.3d 241, 249 (3d Cir. 2014). In addition, “[d]ocuments that the defendant attaches to the motion to dismiss are considered part of the pleadings if they are referred to in the plaintiff's complaint and are central to the claim.” Santomenno ex rel. John Hancock Tr. v. John Hancock Life Ins. Co. (U.S.A), 768 F.3d 284, 291 (3d Cir. 2014). M&G attached the Underlying Complaint and the Policy to the Amended Complaint and thus they may be considered without converting the motion into a motion for summary judgment.
2. Breach of Contract and Declaratory Judgment Claims
M&G claims in Count I that Berkley breached its contractual obligations by refusing to defend and indemnify M&G in connection with the Underlying Action. In Count III, M&G seeks a declaration that Berkley is obligated to provide a defense and indemnification with respect to the claims against M&G in the Underlying Action. Berkley argues that based upon the clear and unambiguous terms of the Policy, it has no duty to defend or indemnify M&G with respect to these claims.
“A federal court sitting in diversity must apply state substantive law and federal procedural law.” Chamberlain v. Giampapa, 210 F.3d 154, 158 (3d Cir. 2000) (citation omitted). Here, the parties do not dispute that the Policy must be interpreted under Pennsylvania law. Under Pennsylvania law, the insured has the burden of proving facts that bring its claim within the policy's coverage. Koppers Co., Inc. v. Aetna Cas. & Surety Co., 98 F.3d 1440, 1447 (3d Cir. 1996). “By contrast, the insurer bears the burden of proving the applicability of any exclusions or limitations on coverage, since disclaiming coverage on the basis of an exclusion is an affirmative defense.” Id. (citations omitted).
In its brief, M&G cites the Pennsylvania Declaratory Judgments Act, 42 Pa. C.S. §§ 7531-41. The Court observes that “its authority to issue declaratory relief stems from the federal Declaratory Judgment Act, 28 U.S.C. § 2201, not from Pennsylvania's declaratory judgment statute ... because ‘[o]nly the courts of the Commonwealth [of Pennsylvania] have ‘the power to grant declarations and injunctive relief pursuant to [Pennsylvania's] Declaratory Judgments Act.'” 4431, Inc. v. Cincinnati Ins. Cos., 504 F.Supp.3d 368, 376 n.5 (E.D. Pa. 2020) (quoting Keystone ReLeaf LLC v. PA Dep't of Health, 186 A.3d 505, 517 (Pa. Commw. 2018)), aff'd sub nom. Wilson v. USI Ins. Serv. LLC, 57 F.4th 131 (3d Cir. 2023). See also Federal Kemper Ins. Co. v. Rauscher, 807 F.2d 345, 352 (3d Cir. 1986) (“It is settled law that, as a procedural remedy, the federal rules respecting declaratory judgment actions apply in diversity cases.”)
The Pennsylvania Supreme Court has held that “the interpretation of an insurance contract regarding the existence or non-existence of coverage is ‘generally performed by the court.'” Donegal Mut. Ins. Co. v. Baumhammers, 938 A.2d 286, 290 (Pa. 2007) (quoting Minnesota Fire & Cas. Co. v. Greenfield, 855 A.2d 854, 861 (Pa. 2004)). When the policy language is unambiguous, a court must give effect to its language. Id. A policy is not ambiguous simply because the parties disagree about its meaning. Meyer v. CUNA Mut. Ins. Soc., 648 F.3d 154, 164 (3d Cir. 2011). As noted by the Pennsylvania Supreme Court:
The goal in construing and applying the language of an insurance contract is to effectuate the intent of the parties as manifested by the language of the specific policy. When the language of an insurance policy is plain and unambiguous, a court is bound by that language . . . . Finally, the language of the policy must be construed in its plain and ordinary sense, and the policy must be read in its entirety.Pennsylvania Nat'lMut. Cas. Ins. Co. v. St. John, 106 A.3d 1, 14 (Pa. 2014) (citations omitted).
Here, neither party contends that the Policy is ambiguous. Because the Court agrees that the Policy is not ambiguous, it will proceed to interpret its provisions as relevant to the present controversy.
M&G argues that the legal malpractice claim in Count I of the complaint in the Underlying Action is covered under the Policy because it is a claim against M&G, the “Named Insured” as defined in the Policy, and arises out of acts or omissions regarding the rendering, or failure to render, legal services by M&G. See ECF No. 8-2 at 3, 10. Further, Markovitz is an “Insured” under the Policy to the extent that he performed legal services as a member of M&G. (Id. at 13.) As such, M&G contends that it is entitled to both a defense and indemnification under the Policy because the Underlying Plaintiffs allege in the Underlying Action that M&G, acting through Markovitz, failed to obtain and review necessary documents, including those related to legal liabilities, regarding their purchase of a business and property and failed to provide adequate legal advice. (ECF No. 8 Ex. A ¶¶ 231, 232, 234, 236.) According to M&G, as long as one count of the complaint in the Underlying Action is a potentially covered claim, Berkley must provide a defense until such time, if at all, that all claims are excluded from the Policy. See Indalex Inc. v. National Union Fire Ins. Co. of Pittsburgh, 83 A.3d 418, 426 (Pa. Super. 2013).
The Underlying Complaint also alleges that M&G never issued an invoice to the Underlying Plaintiffs (id. ¶ 237) and Markovitz and M&G made no distinction between accounting and legal services or work performed (id. ¶ 239). Further, it alleges that it is unclear what work, if any, Markovitz did because of the nature of MD&A's invoices. (Id. ¶ 238.)
“An insurer's duty to defend is a distinct obligation, different from and broader than its duty to indemnify.” Erie Ins. Exch. v. Muff, 851 A.2d 919, 925 (Pa. Super. 2004) “An insurer is obligated to defend its insured if the factual allegations of the complaint on its face encompass an injury that is actually or potentially within the scope of the policy.” American & Foreign Ins. Co. v. Jerry's Sport Ctr., Inc., 2 A.3d 526, 541 (Pa. 2010). “The question of whether a claim against an insured is potentially covered is answered by comparing the four corners of the insurance contract to the four corners of the complaint.” Id. “Under the four corners rule, a court in determining if there is coverage does not look outside the allegations of the underlying complaint or consider extrinsic evidence.” Ramara, Inc. v. Westfield Ins. Co., 814 F.3d 660, 673 (3d Cir. 2016) (citation omitted).
An insurer's “obligation to defend remains unless [an] exclusion clearly defeats every cause of action averred in the underlying complaint.” Penn-America Ins. Co. v. Peccadillos, Inc., 27 A.3d 259, 267 (Pa. Super. 2011). That is, the court “need only determine if any of the claims asserted are potentially covered. If any are, the insurer must defend until the suit is narrowed only to claims that are definitely not within that coverage.” Biborosch v. Transamerica Ins. Co., 603 A.2d 1050, 1057-58 (Pa. Super. 1992).
Berkley contends that two exclusions in the Policy defeat M&G's claims in this action. As to Counts I and III, Berkley contends that both the Specific Entity Exclusion and the Capacity Exclusion, viewed independently, preclude coverage based upon the four corners of the complaint in the Underlying Action. Each of these exclusions will be analyzed in turn.
a. Specific Entity Exclusion
Count II of the Underlying Complaint asserts a claim of professional malpractice against Markovitz, Smith, and MD&A and details a number of actions or inactions by Markovitz, among others. MD&A is an accounting firm, and Markovitz is identified in this count as a CPA. According to the Underlying Plaintiffs, Smith told them that MD&A had all of the professionals they needed under one roof, and that Markovitz was responsible for the legal issues associated with their purchase.
As an initial matter, it is undisputed that MD&A is not a Named Insured or an insured party under the Policy. Moreover, the Specific Entity Exclusion in the Policy provides that the Policy does not apply to any claim against an Insured “based on, or arising from, or in any way involving an act or omission in the performance of Legal Services by or for . . . Markovitz Dugan & Associates ....” As Markovitz is an “Insured” only with respect to legal work performed by or for M&G, Berkley asserts that it has no duty to defend or indemnify M&G because the claim is based on acts or omissions in the performance of legal services by MD&A, not by M&G. The Court agrees, therefore, that to the extent that “Legal Services” were provided to the Underlying Plaintiffs by or for MD&A, any claim based on acts or omissions in the performance of these services is excluded.
That does not end the analysis, however. It must also be determined whether the four corners of the Underlying Complaint can be read to assert a claim based upon allegations that M&G, through Markovitz, performed legal services for the Underlying Plaintiffs. Count I of the Underlying Complaint, which is styled as a Professional Negligence claim against Markovitz and M&G, alleges that Markovitz is an “owner” of M&G and served as an attorney for the Underlying Plaintiffs. It goes on to identify various acts and omissions relating to Markovitz's services as an attorney, including but not limited to failing to provide the Underlying Plaintiffs with an engagement letter, failing to undertake a due diligence review and failing to review documentation about potential legal liabilities associated with the transaction. Notably, both the Asset Purchase Agreement and Agreement for the Purchase of Real Estate that are attached as exhibits to the Underlying Complaint provide that Markovitz and M&G are to receive copies of all notices to the Yelenovskys. (ECF No. 8-1 at 46, 67). M&G is also identified as the “escrow agent” in the Asset Purchase Agreement. (Id. at 49.)
Undoubtedly, there are multiple and often conflicting allegations in the Underlying Complaint about the role of Markovitz in the matters at issue. Based on many of the same factual allegations, Count II of the Underlying Action appears to be directed toward the activities of MD&A, an accounting firm; Smith, a CPA; and Markovitz, who is identified as an attorney, CPA and certified valuation analyst, as well as a shareholder of MD&A. At the same time, there is no question that the allegations in Count I assert a legal malpractice claim and implicate Markovitz and M&G. Whether Markovitz performed legal services for the Underlying Plaintiffs by or on behalf of M&G, MD&A, or both, will ultimately be resolved in this case. However, based upon a review of the four corners of the Underlying Complaint, the Court cannot conclude at this juncture that all of Markovitz's legal services were performed by or on behalf of MD&A. Because one count of the complaint in the Underlying Action is a potentially covered claim, the motion to dismiss based upon the Specific Entity Exclusion will be denied.
b. Capacity Exclusion
As noted in the Capacity Exclusion, the Policy does not apply to any claim “based on, or arising out of, or involving an Insured's capacity as . . . [an] existing . . . shareholder . . . (or any equivalent position) of any entity if such entity is not named in the Declarations.” Markovitz is identified in the Underlying Action as a shareholder of MD&A. The claim in Count II appears to arise out of his capacity as a shareholder of MD&A.
In Niagara Fire Insurance Co. v. Pepicelli, 821 F.2d 216 (3d Cir. 1987), the defendant, an attorney, was sued for malpractice for failing to join a party in a lawsuit to recover insurance proceeds. Id. at 218. The underlying suit involved a tire company's action against an insurance company to collect proceeds from a fire and hazard insurance policy. Id. at 217. The malpractice suit was based upon the defendant's failure to join another tire company in the lawsuit. Id. Defendant was the sole shareholder of one of the tire companies involved in the underlying insurance dispute. Relying on an exclusion in the policy that applied to “any claim arising out of any insured's activities as an officer or director of any . . . business other than that of the named insured,” defendant's malpractice insurance carrier denied coverage for the malpractice action. Id. at 218. However, the Third Circuit held that this exclusion did not bar coverage for the malpractice suit because “[n]either the actions nor the interest of [the defendant] in his [outside] business venture . . . are at issue in the malpractice suit.” Id. at 220. Although the defendant was an officer and director of one of the involved tire companies, the malpractice suit was based solely on his negligent legal representation and “did not simultaneously involve business decisions by [defendant] [on behalf of his tire company].” Id.
Berkley cites to other decisions that applied and distinguished Pepicelli in concluding that an outside business exclusion did apply to the claims. See Coregis In. Co. v. LaRocca, 80 F.Supp.2d 452, 457 (E.D. Pa. 1999) (exclusion barred coverage because the attorney acted simultaneously as an attorney and as a partner in a real-estate business and the “allegations involve overlap between LaRocca's role as legal counsel and partner/trustee [of an outside business].” See also Coregis Ins. Co. v. Bartos, Broughal & DeVito, LLP, 37 F.Supp.2d 391, 392-95 (E.D. Pa. 1999) (exclusion barred coverage in a legal malpractice suit where an attorney simultaneously acted as an attorney and an officer of an investment partnership); Westport Ins. Corp. v. Hippo Fleming & Pertile Law Offs., 349 F.Supp.3d 468, 481 (W.D. Pa. 2018), (exclusion applied to actions of attorney who was an officer, director and manager of an outside business, the Templar Entities, and who was alleged to have “committed legal malpractice and breach of contract by simultaneously acting as Morris's attorney and a competing real-estate developer.”), aff'd, 791 Fed.Appx. 321 (3d Cir. 2019).
M&G argues that Berkley's reliance on these cases is misplaced because they stand only for the proposition that such an exclusion applies only when attorneys act to benefit their own business interests, which is not alleged in this case. Berkley counters that M&G's reading is too narrow, and that the exclusion applies when the attorney acts in a capacity excluded by the policy, whether the attorney personally benefits from the situation or not. However, as the court stated in Pepicelli, the purpose of business enterprise exclusions is “to prevent collusive suits whereby malpractice coverage could be used to shift [an insured's] business loss onto his or her [insurer].” 821 F.2d at 221. See also Westport, 349 F.Supp.3d at 482 (“each count in the Underlying Suit alleges that Hippo acted to benefit his own business interests to Morris's detriment, despite their attorney-client relationship.”)
All of the cases cited by the parties involved an “outside business exclusion” rather than a capacity exclusion. However, there appears to be no significant distinction between these exclusions for purposes of this analysis.
Here, the four corners of the Underlying Complaint allege claims against not only MD&A but also against M&G. It can be read to implicate the actions of Markovitz both as a shareholder of MD&A and separately, as a member of M&G. Moreover, the Underlying Action does not allege that Markovitz acted to benefit his own business interests at the expense of his clients. Thus, while Count II may be “based on, or aris[e] out of, or involve[e] [Markovitz's] capacity as . . . an existing . . . shareholder” of MD&A, the allegations of Count I state a claim for professional liability against Markovitz in his capacity as a member of M&G, not as an owner of MD&A. As previously discussed, there are conflicting allegations in the Underlying Complaint about the role of Markovitz in the matters at issue that cannot be resolved on a motion to dismiss. Thus, the Court cannot conclude at this time that the Capacity Exclusion is a complete bar to M&G's demand for a defense and/or indemnity.
Therefore, with respect to Counts I and III, Berkley's motion to dismiss should be denied.
3. Bad Faith Claim
M&G also alleges that Berkley engaged in bad faith conduct in violation of 42 Pa. C.S. § 8371. In its motion, Berkley contends that, because it reasonably refused to defend M&G based on the two exclusions discussed above, it could not have acted in bad faith.
Pennsylvania's bad faith statute provides that in an action arising under an insurance policy, an insured is entitled to damages if the court finds that the insurer has acted in bad faith toward the insured. 42 Pa. C.S. § 8371. A bad faith claim is distinct from the underlying contractual insurance claim from which the dispute arose. Nealy v. State Farm Mut. Auto. Ins. Co., 695 A.2d 790, 792 (Pa. Super. 1997), appeal denied, 717 A.2d 1028 (Pa. 1998).
The Pennsylvania Supreme Court has held that, “in order to recover in a bad faith action, the plaintiff must present clear and convincing evidence (1) that the insurer did not have a reasonable basis for denying benefits under the policy and (2) that the insurer knew of or recklessly disregarded its lack of a reasonable basis.” Rancosky v. Washington Nat'l Ins. Co., 170 A.3d 364, 365 (Pa. 2017) (adopting test first articulated in Terletsky v. Prudential Property & Cas. Ins. Co., 649 A.2d 680 (Pa. Super. 1994)). Further, “proof of an insurer's motive of selfinterest or ill-will, while potentially probative of the second prong, is not a mandatory prerequisite to bad faith recovery under Section 8371.” Id. at 377.
M&G's bad faith claim relies entirely on its allegation that Berkely has no justifiable basis for refusing to defend it with respect to the Underlying Action. Berkely argues that because it had a reasonable basis for its position, it cannot have acted in bad faith. Frog, Switch & Mfg. Co. v. Travelers Ins. Co., 193 F.3d 742, 751 n.9 (3d Cir. 1999). As explained above, however, whether Berkley has a reasonable basis for denying a defense and/or indemnity cannot be determined at this early stage of the litigation.
Therefore, with respect to Count II, Berkley's motion should be denied.
III. Conclusion
For these reasons, it is recommended that Defendant's motion to dismiss (ECF No. 16) be denied.
Litigants who seek to challenge this Report and Recommendation must seek review by the district judge by filing objections by July 10, 2023. Any party opposing the objections shall file a response by July 24, 2023. Failure to file timely objections will waive the right of appeal.