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Third Circuit Finds in Favor of Insurance Company under the Pennsylvania Dragonetti Act

Case Study

Third Circuit Finds in Favor of Insurance Company under the Pennsylvania Dragonetti Act

October 21, 2020
Michael S. Saltzman

The U.S. Court of Appeals for the Third Circuit found in favor of a national insurance company in an insurance coverage dispute over its exclusion for coverage related to an underlying malicious prosecution claim under the Pennsylvania Dragonetti Act.

The coverage dispute stemmed from a November 2007 lawsuit in the U.S. District Court for the Eastern District of Pennsylvania involving an insured plaintiff who wanted to recover significant damages. The plaintiff alleged that the defendants—insured by the insurance company—had devised a scheme to cause buyers of memberships in limited liability companies to terminate contracts, only to have the defendants refuse to negotiate new ones. The defendants allegedly manufactured a frivolous lawsuit and arbitration to invoke non-existent rights of first refusal that would impede the aforementioned transactions. Notably, there were no rights of first refusal, and the defendants knew this before the first lawsuit was filed. They persisted with the claims nonetheless, ultimately causing the plaintiffs to lose in excess of $10 million. The defendants claimed coverage under their general liability policy with the insurance company, but it disclaimed coverage citing the policy’s exclusion for coverage related to the “knowing violation of rights of another.” The U.S. District Court for the Eastern District of Pennsylvania ruled in favor of the insured, and the insurance company appealed the decision.

On May 18, 2020, Goldberg Segalla’s Michael S. Saltzman, a Philadelphia-based partner with the firm’s Global Insurance Services practice, argued to the Court of Appeals that the district court improperly held that the appellant’s insurance policy’s exclusion did not bar coverage. The underlying claim for wrongful use of civil proceedings was based solely on alleged intentional conduct. The facts alleged in the underlying complaint were all grounded on intentional and knowing conduct, and therefore within the policy’s exclusion.

To determine if coverage exists for an underlying wrongful use of civil proceedings claim under Pennsylvania’s Dragonetti Act, Michael established that the policy provides coverage for personal and advertising liability arising out of malicious prosecution. The policy also excludes coverage for injuries caused by the insured with knowledge that the act would violate the rights of another and would inflict injury.

The Court of Appeals granted cross-motions for summary judgment on September 28, 2020, on the basis that malicious prosecution claims under Pennsylvania law are based on negligence and/or gross negligence. The court concluded that the insurance company had no duty to defend or indemnify the appellees in the underlying action filed in district court.




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