HAMMOND v. UNITED STATES LIABILITY INSURANCE COMPANY & GROUP
MEMORANDUM OPINION regarding 21 Defendant's Motion for Judgment on the Pleadings and 24 Plaintiff's Motion for Partial Summary Judgment. Signed by Judge Arthur J. Schwab on 01/28/2015. (lmt)
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF PENNSYLVANIA
ADAM J. HAMMOND,
UNITED STATES LIABILITY INSURANCE
Presently before the Court is Defendant’s Motion for Judgment on the Pleadings and its
Brief in Support . Doc. nos. 21, 22. Plaintiff (hereinafter “Hammond”) filed a Response to the
Motion for Judgment on the Pleadings (doc. no. 25), but within this document he argued that
Summary Judgment should be entered in his favor. See doc nos. 24-25. The Court then ordered
that Defendant respond to the “Summary Judgment” portion of Hammond’s Response.
Defendant filed its Response on January 14, 2015 (doc. no. 26), making these matters ripe for
adjudication. Counsel for both parties agreed to this procedure at the initial case management
conference held on December 18, 2014.
After careful consideration of the pleadings and the attachments to the pleadings – the
attachments being the sole evidence submitted for Motion for Summary Judgment purposes – the
Court will deny Hammond’s Motion for Summary Judgment and will grant Defendant’s Motion
for Judgment on the Pleadings for the reasons set forth herein.
I. STANDARD OF REVIEW
Defendant has filed a Motion for Judgment on the Pleadings under Federal Rule of Civil
Procedure 12(c). Under Rule 12(c), judgment will not be granted unless the movant clearly
establishes that no material issue of fact remains to be resolved and that he is entitled to
judgment as a matter of law.
Rule 12(b)(6), provides the standard of review applicable to motions for judgment on the
pleadings and motions to dismiss. The Court is permitted to consider, in addition to the
allegations of the Complaint, “documents that are attached or submitted with the complaint, . . .
and any matters incorporated by reference or integral to the claim, items subject to judicial
notice, matters of public record, orders, [and] items appearing in the record of the case.” Buck v.
Hampton Twp. Sch. Dist., 452 F.3d 256, 260 (3d Cir. 2006).
Thus, in deciding a motion filed in accordance with Rule 12(c), a Court must accept the
factual allegations as true and draw all reasonable inferences presented in the pleadings in the
light most favorable to the plaintiff. Erickson v. Pardus, 554 U .S. 89, 93–94 (2007); Lum v.
Bank of America, 361 F.3d 217, 223 (3d Cir. 2004). If the facts alleged by the plaintiff are
sufficient to “raise a right to relief above the speculative level” such that the plaintiff’s claim is
“plausible on its fact,” a complaint will survive a motion to dismiss, Bell Atlantic Corp. v.
Twombly, 550 U.S. 544, 570 (2007), or a motion for judgment on the pleadings, Turbe v. Gov't of
Virgin Islands, 938 F.2d 427, 428 (3d Cir. 1991).
Following Twombly and Ashcroft v. Iqbal, 556 U.S. 662 (2009), the United States Court
of Appeals for the Third Circuit explained that a District Court must undertake the following
three steps to determine the sufficiency of a complaint:
First, the court must take note of the elements a plaintiff must plead to state a
claim. Second, the court should identify allegations that, because they are no more
than conclusions, are not entitled to the assumption of truth. Finally, where there
are well-pleaded factual allegations, a court should assume their veracity and then
determine whether they plausibly give rise to an entitlement for relief.
Connelly v. Steel Valley Sch. Dist., 706 F.3d 209, 212 (3d Cir. 2013) (citation omitted).
The third step of the sequential evaluation requires this Court to consider the specific
nature of the claims presented and to determine whether the facts pled to substantiate the claims
are sufficient to show a “plausible claim for relief.” Covington v. Int'l Ass'n of Approved
Basketball Officials, 710 F.3d 114, 118 (3d Cir. 2013). “While legal conclusions can provide the
framework of a Complaint, they must be supported by factual allegations.” Iqbal, 556 U.S. at
This Court may not dismiss a Complaint – or in this case grant judgment on the pleadings
in favor of Defendant – merely because it appears unlikely or improbable that Hammond can
prove the facts alleged or will ultimately prevail on the merits. Twombly, 550 U.S. at 563 n.8.
Instead, this Court must ask whether the facts alleged raise a reasonable expectation that
discovery will reveal evidence of the necessary elements. Id. at 556. In short, the Motion for
Judgment on the Pleadings presently before this Court should not be granted if Hammond has
alleged facts, which could, if established at trial, entitle him to relief. Twombly, 550 U.S. at 563
There are no disputes concerning the following relevant facts in the case:
From December of 2010 through December of 2011, Hammond worked as an
independent contractor designing, programming, and developing computer software specializing
in applications related to hazardous material (“hazmat”) transportation and regulatory
compliance. Amended Complaint, doc. no. 10, ¶8. During this same period of time, Hammond
served as a consultant a company known as Transportation Compliance Associates, Inc.
(“TCA”). Id. at ¶ 9.
Hammond entered into a non-exclusive limited license agreement with TCA whereby he
agreed to design, program, and develop (as well as provide consultation in association with) a
computer system and software for TCA’s use in processing hazmat transportation data owned by
TCA’s customer – one of the world’s largest online retailers of hazmat. Id. Under this
agreement, the computer system and software were to ensure the customer’s compliance with
domestic and international laws concerning the shipment of products sold to entities via the
customer’s online retail shopping website. Id. TCA agreed to compensate Hammond for his
services on the basis of the number of online catalog items processed by the computer system
and software. Id.
Hammond – without receiving payment from TCA, but believing that he and TCA were
acting in concert as joint venture partners – began to consult with LANtek, a Pittsburgh-based
software company, and directed LANtek on the designing, programming, and development, and
then implementation of the computer system and software requested by TCA. Id. at ¶ 11-12.
Simply stated, LANtek was to assist Hammond, and act under his direction, in developing a
“new” computer system and software, which was based upon concepts and ideas that Hammond
had previously developed. Id. at ¶ 12.
At some point after LANtek and Hammond began their work, Hammond was informed
by his attorneys that TCA “reneged” on their promise to form a joint venture. Id. at ¶ 13. In
addition, Hammond learned the TCA had begun working directly with LANtek on the “new”
computer system and software that was based on Hammond’s previously developed (and
proprietary) program. Id.
On December 12, 2011, Hammond sent TCA a letter terminating his relationship with the
company and threatening a lawsuit for copyright infringement. Id. On December 16, 2011,
TCA and LANtek filed a declaratory judgment action against Hammond, and said action was
assigned to this Court. Id. at ¶ 14; see also Transportation Compliance Associates, Inc. v.
Hammond, case no. 2:11-cv-01602-AJS (2011). An Amended Complaint was filed by TCA and
LANtek, on February 3, 2012, asserting additional claims for breach of contract, conversion, and
intentional interference with existing and prospective contractual relations. Id.
Hammond notified his insurance carrier, i.e., Defendant in this case, filed a claim with his
insurance carrier notifying it of the lawsuit, and requested a defense and indemnification. Id. at
¶ 14. Defendant insurer denied his claim and thus refused to defend or indemnify Hammond. Id.
Hammond filed a Motion to Dismiss the Amended Complaint in the earlier, underlying
case, but this Court denied his Motion. Id. at ¶ 15; see also, Transportation Compliance
Associates, Inc., case no. 2:11-cv-01602-AJS . Hammond then filed Counterclaims along with
his Answer to the TCA/LANtek Amended Complaint. Id.
TCA and LANtek next filed a Motion to Dismiss Hammond’s Counterclaims, which this
Court granted in part and denied in part. Id. at ¶ 17. Thereafter, TCA and LANtek filed their
Answer to Hammond’s remaining counterclaim for breach of contract and requested attorney
fees in their prayer for relief. Id. Because of the request for attorney’s fees, Hammond again
sought defense and coverage from his insurance carrier under a “malicious prosecution” clause
of his insurance contract. But again, the insurance carrier denied his claim. Id. Hammond
renewed his request for defense and indemnification under the malicious prosecution clause of
his policy, but for a third and final time, his claim was denied. Id. at ¶ 18.
Thereafter, the parties settled their claims and counterclaim in the earlier, underlying
case, and on July 2, 2012, this Court approved a Motion for Entry of Final Judgment and
Dismissal of the TCA/LANtek lawsuit filed against Hammond. Id. at ¶ 19.
Hammond has now sued his insurance carrier (Defendant herein) for breach of contract
and bad faith in the instant lawsuit, claiming Defendant should not have denied him coverage in
the TCA/LANtek case. Defendant filed the instant Motion for Judgment on Pleadings, and
Hammond filed a Response to that Motion along with his own Motion for Summary Judgment.
Defendant filed a Response to Hammond’s Summary Judgment.
Plaintiff is a California resident. Defendant is a Pennsylvania Corporation. Federal
jurisdiction is predicated upon diversity.
A. Choice of Law
The Court must begin its analysis by determining what law applies to the issues presented
by the parties. The choice of law rules of the forum state – here, Pennsylvania – apply when a
federal court sits in diversity. See Specialty Surfaces Intern., Inc. v. Continental Cas. Co., 609
F.3d 223, 229 (3d Cir. 2010), citing Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496,
(1941). Pennsylvania applies a “flexible rule which permits analysis of the policies and interests
underlying the particular issue before the court” and directs courts to apply the law of the state
with the “most interest in the problem.” Specialty Surfaces, 609 F.3d at 229-30, quoting
Hammersmith v. TIG Ins. Co., 480 F.3d 220, 227 (3d Cir. 2007).
In applying the “flexible rule” noted above, if a court is confronted with a true conflict, it
must “first consider each state’s contacts with the contract as set forth in the Restatement
(Second) of Conflict of Laws. Specialty Surfaces, 609 F.3d at 230, citing Hammersmith, 480
F.3d at 231; Compagnie des Bauxites de Guinee v. Argonaut-Midwest Ins. Co., 880 F.2d 685,
688-89 (3d Cir. 1989); Melville v. Am. Home Assurance Co., 584 F.2d 1306, 1311 (3d Cir.
1978). A court must next “weigh the contacts on a qualitative scale according to their relation to
the policies and interests underlying the [relevant] issue.” Shields v. Consol. Rail Corp., 810
F.2d 397, 400 (3d Cir. 1987).
In this case, the “particular issue” before the Court involves the interpretation of certain
clauses of an insurance contract executed between Hammond and Defendant to ascertain whether
Defendant breached those clauses as Hammond alleges.
B. Breach of an Insurance Contract
The United States Court of Appeals for the Third Circuit in Livornese v. Medical
Protective Co., noted that when interpreting an insurance contract in a diversity case – such as
the instant matter – where a choice of law question presents itself, “[u]nder Pennsylvania choice
of law rules, an insurance contract is governed by the law of the state in which the contract was
made. An insurance contract is ‘made’ in the state in which the last act legally necessary to
bring the contract into force takes place.” Livornese, 136 Fed. Appx. 473, 477 (3d Cir. 2005),
quoting J.C. Penney Life Ins. Co. v. Pilosi, 393 F.3d 356, 360-61 (3d Cir. 2004).
C. Applicable Law to the Insurance Contract at Issue
1. Insurance Carrier’s Duty to Defend its Insureds
As noted in Speciality Surfaces, supra., there is no relevant conflict in the laws of
California and Pennsylvania with respect to when an insurer has a duty to defend an insured.
609 F.3d at 230. In both jurisdictions, an insurance policy “would be construed to impose a duty
to defend if the facts alleged in support of a claim, taken as true, hold the potential for the
imposition of a liability for which the insured would be entitled to be indemnified under the
As long as a complaint “might or might not” fall within the insurance policy’s coverage,
the insurance company is required to defend. Am. & Foreign Ins. Co. v. Jerry’s Sport Ctr., Inc.,
606 Pa. 584, 2 A.3d 526, 541 (2010). The question 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. “An insurer may not justifiably refuse to defend a claim
against its insured unless it is clear from an examination of the allegations in the complaint and
the language of the policy that the claim does not potentially come within the coverage of the
Simply put, an insurer has a duty to defend if the complaint filed by the injured party
potentially comes within the policy’s coverage.
2. Insurance Carrier’s Duty to Indemnify its Insureds
There is also no relevant conflict in the laws of California and Pennsylvania with certain
aspects of the duty to indemnify. Under both California and Pennsylvania law, the duty to
defend is a distinct obligation, different from and broader than the duty to indemnify. See Street
Surfing, LLC v. Great American E & S Ins. Co., ----F.3d ----, 2014 WL 5904922, *2 (9th Cir.
November 14, 2014) (Under California law, the duty to defend is broader than the duty to
indemnify; an insurer may owe a duty to defend its insured in an action in which no damages
ultimately are awarded.); and Sikirica v. Nationwide Ins. Co., 416 F.3d 214, 225 (3d Cir. 2005)
(The duty to defend is a distinct obligation, different from and broader than the duty to
indemnify.). Pennsylvania law also holds that because the duty to defend is broader than the
duty to indemnify, there is no duty to indemnify if there is no duty to defend. Sikirica, supra.,
citing Mut. Benefit Ins. Co. v. Haver, 555 Pa. 534, 725 A.2d 743, 746 n. 1 (1999); and Erie Ins.
Exch. v. Claypoole, 449 Pa.Super. 142, 673 A.2d 348, 356 n. 3 (1996).
3. Conclusion on Choice of Law
Here, on the one hand, Defendant argues that there is no real conflict between California
law and Pennsylvania law as to when an insurance carrier owes a duty to defend its insureds.
See doc. no. 22, p. 12. On the other hand, Hammond does not appear to be arguing that a
conflict exists; instead, he simply asserts that Pennsylvania law should control these matters. See
doc. no. 25, p. 5-7.
Because this Court finds no conflict among the two states’ laws, the Court will apply
Pennsylvania law to the issues before it.
D. Analysis of Pennsylvania Law Related to Hammond’s Breach of Contract Claims
Hammond’s Complaint asserts two causes of action – breach of contract and statutory
“bad faith.” The interpretation of the scope of coverage of an insurance contract is a question of
law properly decided by the court. Livornese, supra., 136 Fed. Appx. at 476, citing, J.C. Penney,
supra., 393 F.3d at 360.
The principles that govern this Court’s interpretation of an insurance contract under
Pennsylvania law are well settled. “The goal is to ascertain the intent of the parties as manifested
by the language of the written instrument.” Alleman v. State Farm Life Ins. Co., 508 F.Supp. 2d
452, 455 (W.D. Pa. 2007). Interpretation of an insurance policy is a question of law. Westport
Ins. Corp. v. Bayer, 284 F.3d 489, 496 (3d Cir. 2002).
In construing the policy, if the words of the policy are clear and unambiguous, the court
must give them their plain and ordinary meaning. Sikirica, 416 F.3d at 220.(citation omitted).
Pennsylvania’s parol evidence rule mandates that when a written contract is clear and
unequivocal, its meaning must be determined by its contents alone. Alleman v. State Farm Life
Ins. Co., 334 Fed.Appx. 470, 473 (3d Cir. 2009), citing East Crossroads Ctr., Inc. v. MellonStuart Co., 416 Pa. 229, 205 A.2d 865, 866 (1965). Furthermore, if possible, “a court should
interpret the policy so as to avoid ambiguities and give effect to all of its provisions.” Little v.
MGIC Indem. Corp., 836 F.2d 789, 793 (3d Cir. 1987).
“In determining whether a contract is ambiguous, the court must examine the
questionable term or language in the context of the entire policy and decide whether the contract
is reasonably susceptible of different constructions and capable of being understood in more than
one sense.” Reliance Ins. Co. v. Moessner, 121 F.3d 895, 900 (3d Cir. 1997) (internal quotation
and citation omitted). When a term is ambiguous, and the intention of the parties cannot be
discerned from the policy, the court may look to extrinsic evidence of the purpose of the
insurance, its subject matter, the situation of the parties, and the circumstances surrounding the
making of the contract. Sikirica, 416 F.3d at 220. Ambiguous terms must be strictly construed
against the insurer, but the policy language must not be tortured to create ambiguities where none
Based on this case law, this Court is charged with the responsibility of interpreting the
Plaintiff’s insurance contract at issue, and must give all clear and unambiguous terms in the
contract their plain and ordinary meaning without torturing the language of the contract to create
ambiguities where none exist.
Turning to the facts of Hammond’s breach of contract claim, Hammond alleges:
Defendant breached the insurance contract when it refused to defend and/or indemnify him after
Hammond sought coverage: (1) after the declaratory judgment action was filed by TCA and
LANtek on December 16, 2011; (2) after TCA and LANtek filed an Amended Complaint on
February 3, 2012, which asserted additional claims for breach of contract, conversion, and
intentional interference with existing and prospective contractual relations; and (3) after TCA
and LANtek filed their Answer to Hammond’s remaining counterclaim for breach of contract
and requested attorney fees in their prayer for relief. Hammond requested Defendant defend and
indemnify him under the general coverage provisions of his “technology professional” insurance
policy for his first two requests, and sought defense and indemnification under a “malicious
prosecution” clause of his insurance contract for this third request. Hammond made the third
request under the malicious prosecution clause of his contract twice, and both times Defendant
denied his request. So Hammond requested coverage four times in connection with the earlier,
underlying lawsuit, and each time Defendant denied coverage.
1. The Insurance Policy’s Relevant Provisions
As noted above, TCA and LANtek filed a declaratory judgment action with this Court on
December 16, 2011. See Transportation Compliance Associates, Inc., case no. 2:11-cv-01602AJS. TCA and LANtek also filed an Amended Complaint that asserted tort claims against
After the filing of the Complaint for declaratory relief and after the filing of the Amended
Complaint asserting tort claims against Hammond, Hammond requested for coverage under his
insurance policy with Defendant.1 In response to these requests, Defendant prepared and sent
In the instant case, the entire 104-page insurance policy was attached to Defendant’s original Answer
and Affirmative Defenses. Doc. no. 8-3. When deciding a Motion for Judgment on the Pleadings this
him denial letters – one dated February 10, 2012 and another dated March 16, 2012. See doc.
nos. 8-1 and 8-2, respectively. These two letters (combined) set forth the following relevant
excerpts from the insurance policy:
We will pay those sums that the insured becomes legally
obligated to pay as damages because of “bodily injury”,
“property damage” or “personal and advertising injury” to
which this insurance applies. We will have the right and
duty to defend the insured against any “suit” seeking those
damages . . .
This insurance applies to
(1) “bodily injury” and “properly damage” only if:
The “bodily injury” or “property damage”
is caused by an “occurrence” that takes
place in the “coverage territory”; and
The “bodily injury” or “property damage”
occurs during the policy period.
“Personal injury” caused by an offense
arising out of your business, excluding
advertising, publishing, broadcasting or
telecasting done by or for you;
“Advertising injury” caused by an offense
committed in the course of advertising your
goods, products or services;
Court may consider “. . . the pleadings and attached exhibits, undisputedly authentic documents attached
to the motion for judgment on the pleadings if plaintiffs’ claims are based on the documents, and matters
of public record.” Bennetta v. U.S. Airways Group, Inc., 2014 WL 1887293, *4 (E.D. Pa. May 12, 2014);
see also NCMIC Ins. Co. v. Walcott, --- F.Supp.2d ----, 2014 WL 4375560, *1 (E.D. Pa. September 3,
2014) (When deciding a Rule 12(c) motion, a court is allowed to consider “the pleadings and attached
exhibits, undisputedly authentic documents attached to the motion for judgment on the pleadings if
plaintiffs’ claims are based on the documents, and matters of public record” in making its decision.).
Thus, because Hammond’s (Plaintiff’s) claims are based on the terms set forth in the insurance policy and
because the policy was attached to a pleading, the Court has carefully considered it in deciding the
outcome of these matters.
“Advertising Injury” is defined as:
“Advertising injury” means injury arising out of one or
more of the following offenses:
Oral or written publication of material that slanders
or libels a person or organization or disparages a
person’s or organization’s goods, products or
Oral or written publication of material that violates
a person’s right of privacy;
Misappropriation of advertising ideas or style of
doing business; or
Infringement of copyright, title or slogan.
“Bodily Injury” is defined as:
“Bodily Injury” means bodily injury, sickness or disease
sustained by a person, including death resulting from any of
these at any time.
“Occurrence” is defined as:
“Occurrence” means an accident, including continuous or
repeated exposure to substantially the same general harmful
“Personal Injury” is defined as:
“Personal injury” means injury, other than “bodily injury”,
arising out of one or more of the following offenses:
False arrest, detention or imprisonment;
The wrongful eviction from, wrongful entry into,
or invasion of the right of private occupancy of a
room, dwelling or premises that a person
occupies, by or on behalf of its owner, landlord or
Oral or written publication of material that slanders
or libels a person or organization or disparages a
person’s or organization's goods, products or
Oral or written publication of material that violates
a person’s right of privacy;
“Property Damage,” in turn, is defined as:
“Property damage” means:
Physical injury to tangible property, including all
resulting loss of use of that property. All such loss
of use shall be deemed to occur at the time of the
physical injury that caused it; or
Loss of use of tangible property that is not
physically injured. All such loss of use shall be
deemed to occur at the time of the “occurrence” that
For the purposes of this insurance, electronic data is not
As used in this definition, electronic data means
information, facts or programs stored as, created or used
on, or transmitted to or from computer software, including
systems and applications software, hard or floppy disks,
CD-ROMs, tapes, drives, cells, data processing devices or
any other media which are used with electronically
The “INSURING AGREEMENT” under the Technology Professional Liability
Coverage portion of the policy reads:
The Company will pay on behalf of the Insured any Loss excess of
the deductible not exceeding the Limit of Liability to which this
coverage applies that the Insured shall become legally obligated to
pay because of Claims first made against the Insured during the
Policy Period or, if applicable, during any Extension Period, for
Wrongful Acts of an Insured or from an Intellectual Property
Claim arising out of a Wrongful Act of an Insured.
Under the “DEFINITIONS” section of the same portion of this policy, the
relevant policy definitions read:
Claim(s) means a demand for money as compensation for a Wrongful Act
including any judicial or administrative proceeding initiated against any
Insured seeking to hold such Insured responsible for a Wrongful Act,
including any appeal therefrom.
Computer Technology Services means information technology services
performed by any Insured for others for a fee, including but not limited to
computer consulting, systems analysis, installation, programming, data
processing, system integration, software development and design, disaster
recovery, record retrieval, management and repair or maintenance of
computer products, networks or systems and education and training
services related to the above.
Professional Services means services rendered by an Insured for others for
a fee solely in the conduct of Computer Technology Services and/or
Wrongful Act means any actual or alleged error, omission, neglect or
breach of duty, Personal Injury, unintentional introduction of a Malicious
Code or unintentional failure to prevent unauthorized access to or use of
any electronic system or program of a third party;
by the Named Insured or
by the Named Insured’s partner(s), member(s) or
individual(s) employed by the Named Insured arising
solely from their duties conducted on behalf of the Named
asserted against any Named Insured partner, member or
individual hired by the Named Insured because of an actual
or alleged error, omission, neglect or breach of duty,
Personal Injury, unintentional introduction of a malicious
code or unintentional failure to prevent unauthorized access
to or use of any electronic system or program of a third
party by the Named Insured.
Personal Injury means a Claim alleging wrongful entry, wrongful eviction,
wrongful detention, false arrest, false imprisonment, libel, slander or
defamation, advertising injury or violation of any right of privacy.
2. Hammond’s Request for Coverage following the filing of the Complaint in
the Earlier, Underlying Case
The original Complaint sought a declaration from this Court that: (1) neither TCA and
LANtek violated any legally protected right of Hammond in any intellectual property he owned;
(2) Hammond owned no legally protectable intellectual property as referenced in his attorney’s
letters sent to TCA and LANtek; (3) Hammond held no interest in the nature of a partnership or
license agreement; and (4) Hammond had to return to TCA and LANtek all information that
related in any way to work Hammond did for TCA, LANtek or any of their clients.
Based on the nature of this lawsuit and the specific declaratory relief it sought, and
construing the unambiguous terms of coverage set forth above, the Court concludes that
Defendant properly denied Hammond coverage following the filing of the declaratory judgment
complaint on December 16, 2011. The terms of the policy state that Defendant “will pay on
behalf of [Hammond] any Loss . . . to which this coverage applies that [Hammond] shall
become legally obligated to pay because of Claims first made against [him] during the Policy
Period . . . for Wrongful Acts of [Hammond] or from an Intellectual Property Claim arising out
of a Wrongful Act of [Hammond].” A “Claim” is defined as “a demand for money as
compensation for a Wrongful Act including any judicial . . . proceeding initiated against
[Hammond] seeking to hold such [Hammond] responsible for a Wrongful Act . . . .” A
“Wrongful Act” is defined as “any actual or alleged error, omission, neglect or breach of duty,
Personal Injury, unintentional introduction of a Malicious Code or unintentional failure to
prevent unauthorized access to or use of any electronic system or program of a third party[.]”
Because no claim – no demand for money as compensation for a Wrongful Act (meaning
an error, omission, neglect, etc.) – was made by TCA and LANtek against Hammond upon the
filing of the Declaratory Judgment Complaint, there was nothing set forth in that Complaint
which triggered the application of coverage under the business/technology insurance policy
issued by Defendant. At the time the Declaratory Judgment Complaint was filed in the earlier,
underlying matter, TCA and LANtek were only seeking a ruling from this Court that they had
not violated any of Hammond’s alleged intellectual property rights and that he had to return their
customers’ information to them.
This Court concludes based on the allegations of the initial Complaint filed in the earlier,
underlying lawsuit, Defendant did not owe a duty to defend Hammond because the initial
Complaint filed by the TCA and LANtek did not potentially come within the insurance policy’s
3. Hammond’s Request for Coverage following the filing of the Amended
Complaint in the Earlier, Underlying Case
The Amended Complaint altered the lawsuit previously filed by TCA and LANtek in that
it advanced additional claims for breach of contract, conversion, and intentional interference with
existing and prospective contractual relations. Under the Amended Complaint, TCA and
LANtek sued Hammond for monetary damages. Hammond again requested insurance coverage
Again, by comparing the four corners of the insurance contract to the four corners of this
Amended Complaint, this Court concludes that Defendant properly denied Hammond’s
coverage request – including the request to defend him against TCA’s and LANtek’s new claims.
First, as noted above, the terms of the policy require Defendant to “pay on behalf of
[Hammond] any Loss . . . to which this coverage applies that [Hammond] shall become legally
obligated to pay because of Claims first made against [him] during the Policy Period . . . for
Wrongful Acts of [Hammond] or from an Intellectual Property Claim arising out of a Wrongful
Act of [Hammond].” “Claim” is defined as “a demand for money as compensation for a
Wrongful Act including any judicial . . . proceeding initiated against [Hammond] seeking to hold
such [Hammond] responsible for a Wrongful Act . . .”. A “Wrongful Act” is defined as “any
actual or alleged error, omission, neglect or breach of duty, Personal Injury, unintentional
introduction of a Malicious Code or unintentional failure to prevent unauthorized access to or use
of any electronic system or program of a third party[.]”
Even though the Amended Complaint now raised tort claims which called for monetary
damages, the policy’s coverage was only triggered if the damages were incurred due to a
“Wrongful Act” by Hammond. Again, the policy defines “Wrongful Act” as “any actual or
alleged error, omission, neglect or breach of duty, Personal Injury, unintentional introduction of
a Malicious Code or unintentional failure to prevent unauthorized access to or use of any
electronic system or program of a third party[.]”
Nothing in the Amended Complaint suggests that any of the tort claims asserted by TCA
and LANtek arose because Hammond made an actual or alleged error or omission or because of
neglect on his part or a breach of duty. The Amended Complaint does not contain allegations
suggesting that TCA and/or LANtek were entitled to damages from Hammond due to “Personal
Injury” as defined by the policy, nor because of any Malicious Code Hammond unintentionally
introduced into his program. In short, the Amended Complaint advanced causes of action
against Hammond (breach of contract, conversion, and intentional interference with existing and
prospective contractual relations) based upon the actions he took when trying to either resurrect
his failed business venture with TCA, and/or exact revenge or gain leverage against TCA when
that business venture soured.
Under either scenario, the insurance policy provides no coverage for this sort of dispute.
The dispute that erupted between TCA and Hammond and ultimately led to Amended Complaint
being filed in the earlier, underlying lawsuit, can best be described as failed, unconsummated
business venture. Thus, Defendant did not err in denying coverage given the plain and
unambigous terms of its policy.
4. Hammond’s Requests for Coverage following TCA/LANtek’s Answer to
His Counterclaims Seeking Attorneys Fees
Finally, Hammond made two additional requests for coverage after TCA and LANtek
filed an Answer to his Counterclaim for breach of contract. In the “Prayer for Relief” portion of
their Answer to Hammond’s Counterclaim, TCA and LANtek requested attorney fees. See doc.
no. 95 in case no. 11-cv-1602 (“the earlier, underlying case”).
This time, when Hammond approached Defendant, he sought coverage under the
“malicious prosecution” clause of his insurance contract, claiming that the request for attorney
fees constituted “malicious prosecution.” Defendant denied his claim. Prior to settling this
earlier, underlying lawsuit, Hammond renewed his request for defense and indemnification under
the malicious prosecution clause of his policy, but again, his claim was denied.
Here, in his Response to the Motion for Judgment on the Pleadings, Hammond argues
that “. . . defense and/or indemnification was ‘triggered’ under the malicious prosecution’ clause
of [the] insurance policy . . . .” Doc. no. 25, p. 10. In support of this argument, Hammond points
to Defendant’s Prayer for Relief in Defendant’s Answer to his Counterclaim in the underlying
case which requested “. . . attorney fees . . . for Hammond’s bad faith and other wrongful
conduct . . . pursuant to inter alia 12 Pa.C.S. § 5305 and 17 U.S.C. § 505.” Id., p. 10-11. See
also doc. 95, p. 9, in the earlier, underlying case. In addition, Hammond points to Defendant’s
responses to his requests for admissions in the earlier, underlying lawsuit, wherein the insurer
stated that it sought “. . . from Hammond the recovery specified in ¶D of the Prayer for Relief .
. . based on the conduct that also supports a malicious prosecution and/or abuse of civil
proceedings claim.” Doc. no. 25, p. 11.
In order to determine whether Hammond was entitled (at a minimum) to a defense by the
insurance company due to TCA’s “malicious prosecution” reference in its Answer to
Hammond’s Counterclaim in the earlier, underlying case, the Court begins by reviewing the
insurance policy itself. The only portion of Hammond’s insurance policy which references
“malicious prosecution” can be found under the “Businessowners [sic.] Coverage” portion of the
policy and is not part of the Technology Professional Liability Coverage portion of the policy.
In order for any coverage to be triggered under the “Businessowners Coverage” portion of his
insurance policy, TCA’s allegations in its Answer to Hammond’s Counterclaim had to first meet
the “Businessowners Coverage” definition of “occurrence.”
“Section II” of the “Businessowners Coverage” of the policy describes the coverage
available for certain types of liability – notably, “business liability.” Doc. no. 8-3, p. 35. In this
section of the policy, “occurrence” is defined to mean “. . . an accident, including continuous or
repeated exposure to substantially the same general harmful conditions.” Id., p. 48. This same
section of the policy states that the “. . . insurance applies: “. . . (2) [t]o “personal and advertising
injury” caused by an offense arising out of your business . . .”. Id., p. 35.
In addition, this section of the policy indicates that the insurance company “. . . will pay
those sums that the insured become legally obligated to pay as damages because of . . . ‘personal
and advertising injury’ to which the insurance applies.” Id. The term “malicious prosecution” is
found within the definition of “personal and advertising injury” as follows:
“Personal Injury” is defined as:
“Personal injury” means injury, other than “bodily injury”, arising
out of one or more of the following offenses:
False arrest, detention or imprisonment;
Malicious prosecution; . . .
Id., p. 48. Thus, boiled down, the insurance policy indicates the insurance company would pay
those sums that Hammond became legally obligated to pay as damages because of injury arising
out of malicious prosecution.
Finally, this same section (“Section II” - “Businessowners Coverage”) excludes coverage
for any “loss, cost, or expense” arising out of any “infringement of copyright, patent, trademark,
trade secret or other intellectual property rights.”
As noted above, TCA and LANtek never sued Hammond for “malicious prosecution;”
rather, TCA and LANtek claimed that they were entitled to attorney fees for Hammond’s alleged
bad faith and other wrongful conduct pursuant to 12 Pa.C.S.A. § 5305 and 17 U.S.C.A. § 505.
The state statute allows for attorney fees to be awarded when misappropriation of trade secrets is
done in bad faith. 12 Pa.C.S.A. § 5305 (“A court may award reasonable attorney fees, expenses
and costs to the prevailing party: (1) if a claim of misappropriation [of trade secrets] is made in
bad faith; (2) a motion to terminate an injunction is made or resisted in bad faith; or (3) willful
and malicious misappropriation exists.”). The federal statute provides attorney fees in copyright
infringement cases. 17 U.S.C.A. § 505 (Remedies for copyright infringement: “. . . the court
may also award a reasonable attorney’s fee to the prevailing party as part of the costs.”).
Thus, given TCA’s/LANtek’s basis for their request for attorney fees in their prayer for
relief (not a separate claim filed against Hammond), was predicated upon Hammond’s alleged
misappropriation of trade secrets made in bad faith and/or copyright infringement, Defendant
properly disclaimed coverage for two reasons. First, the demand for attorney fees was not an
independent cause of action triggering coverage. Second, the policy itself specifically excluded
coverage as noted above. Accordingly, the Court concludes as a matter of law based on the
interpretation of the law and the specific clauses of this insurance policy that Defendant did not
breach its insurance contract with Hammond when it disclaimed Hammond’s coverage request
under the “malicious prosecution” clause of the policy.
E. Conclusion on Breach of Contract
Because this Court has concluded that Defendant did not breach any portion of its
insurance contract with Hammond, the Court concludes that there was no breach of contract, and
accordingly, finds that Hammond’s claim for breach of contract fails. The Court agrees with
Defendant that judgment on the pleadings in favor of Defendant is appropriate with respect to
F. Bad Faith
Next, Defendant requested judgment (in its favor) on the pleadings related to Hammond’s
bad faith claim.
The United States Court of Appeals for the Third Circuit, has adopted the following
definition of “bad faith” as follows:
“Bad faith” on part of insurer is any frivolous or unfounded refusal to pay
proceeds of a policy; it is not necessary that such refusal be fraudulent.
For purposes of an action against an insurer for failure to pay a claim, such
conduct imports a dishonest purpose and means a breach of a known duty
(i.e., good faith and fair dealing), through some motive of self-interest or
ill will; mere negligence or bad judgment is not bad faith.
Polselli v. Nationwide Mut. Fire Ins. Co., 23 F.3d 747, 751 (3d Cir.1994). The Court in Polselli
went on to state that mere negligence on the part of the insurer is insufficient to constitute bad
faith; recklessness, however can support a finding of bad faith. Id.
More recently, the Court of Appeals held that under Pennsylvania law, a court should
reject a bad faith claim where “any reasonable basis exist[s] for the insurer’s conduct.”
Livornese, supra, 136 Fed. Appx. at 480. “Ultimately, in order to recover on a bad faith claim,
the insured must prove: (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 in denying the claim.” Nw. Mut. Life Ins. Co. v. Babayan, 430 F.3d 121, 137
(3d Cir. 2005).
Finally, the Court of Appeals for the Third Circuit has held that under Pennsylvania law,
if a court determines that there is no coverage, the insurance carrier had “good cause to refuse to
defend.” Frog, Switch & Mfg. Co., Inc. v. Travelers Ins. Co., 193 F.3d 742, 751 (3d Cir. 1999).
Based upon the foregoing analysis of the breach of contract claim and this Court’s
conclusion that no such breach occurred, the Court concludes no bad faith claim as that term is
defined by law can survive the instant Motion for Judgment on the Pleadings. In addition, the
Court notes that Plaintiff’s bad faith claim would be barred by Pennsylvania’s two-year statute of
Based on the foregoing law and authority, the Court will grant Defendant’s Motion for
Judgment on the Pleadings. In doing so, Hammond’s Motion for Summary Judgment will be
denied as moot in light of the Court’s ruling on Defendant’s Motion for Judgment on the
Pleadings. An appropriate Order follows.
s/ Arthur J. Schwab
Arthur J. Schwab
United States District Judge
All Registered ECF Counsel and Parties
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