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filed: February 23, 1988.


On Appeal from the United States District Court for the Eastern District of Pennsylvania, D.C. Civil No. 86-7266.

Sloviter, Cowen, Circuit Judges, and Debevoise, District Judge.*fn* Sloviter, Circuit Judge, dissenting.

Author: Cowen


COWEN, Circuit Judge.

This appeal arises from an order of the district court which held that, under the terms of an insurance contract issued by Aetna, Aetna had a duty to defend and indemnify its insured. The district court determined that Aetna had not established a meritorious defense and refused to vacate a default judgment which had been entered against Aetna. Since we conclude that the lower court misinterpreted the terms of the contract of insurance, and that an exclusion contained in the policy relieved Aetna of the duty to defend or indemnify its insured, we will reverse.


The material facts of this case are not in dispute. Plaintiff, Charles Harad, is an attorney licensed to practice in the Commonwealth of Pennsylvania who maintains an office in Philadelphia, Pennsylvania. To cover potential liability arising from that practice, Harad secured two policies of insurance, one from The Aetna Casualty and Surety Company ("Aetna"), the other from The Home Insurance Company ("Home").*fn1

In July 1986, nominal defendant Catania filed a lawsuit against Harad and The Hanover Insurance Company ("Hanover"), claiming malicious prosecution, pursuant to 42 Pa. Cons. Stat. Ann. § 8351 et seq., arising out of Harad's representation of Hanover in an action filed by Catania against Hanover. Catania's lawsuit was based on Harad's signing a verification to an answer and counterclaim, in which Hanover asserted that Catania "conspired and/or contrived to defraud Hanover by concealing and/or misrepresenting the fact that the vehicles" insured by Hanover were for personal rather than business use. App. at 18.

Since Harad was insured under two policies of insurance, Home and Aetna (through its Philadelphia office) discussed their duty to defend Harad. They could not come to an agreement. Aetna, relying on the professional liability exclusion in its policy, refused to defend Harad. However, Home undertook Harad's defense. On December 12, 1986, Home and Harad filed a complaint against Aetna seeking, inter alia, a declaratory judgment that Aetna was under a duty to defend and indemnify Harad. An amended complaint was filed by Home and Harad on December 23, 1986, adding Francis J. Catania as a nominal defendant, since he may have an interest in this litigation.

The amended complaint was served by certified mail on defendant Aetna at its Hartford, Connecticut, office on December 23, 1986. Plaintiffs Home and Harad did not serve a copy on Aetna's Philadelphia office, with which they had negotiated previously. Shortly thereafter, Aetna forwarded the matter to its Philadelphia office, and an attorney representing Aetna entered his appearance in the district court on January 9, 1987. On that same date plaintiffs filed a Request to Clerk for Entry of Default and a Default Judgment. The request for default was entered on the docket on January 12, and the entry of appearance was docketed on January 14. In addition, on January 14 the district court granted plaintiffs' request for default judgment, and entered judgment against Aetna in the amount of $16,737.16. The Court also ordered Aetna to defend and indemnify Harad in the lawsuit filed by Catania.

Aetna moved to vacate the default judgment on January 16, 1987, and to that end the parties entered into a stipulation, approved by the district court on February 2, 1987. The stipulation limited the issues to be addressed on the motion to "whether or not Aetna has established a meritorious defense which would constitute a defense to plaintiff's [sic] action." App. at 195. The district court considered this motion and, by Memorandum and Order dated June 9, 1987, declined to vacate the default judgment.

Although the district court recognized that the issue was whether Aetna had "established" a meritorious defense,*fn2 the court felt that the policy exclusion at issue -- i.e., coverage for liability "arising out of the rendering or failure to render any professional service" -- did not apply under the facts of this case. The district court expressed its view that a malicious prosecution claim was not excluded under the policy because Harad had not rendered or failed to render professional services to the party suing him. The court also found the exclusion ambiguous in light of the overall policy provisions establishing coverage, and construed the ambiguity against the drafter. The district court therefore denied Aetna's motion to vacate the default, concluding that it had not set forth a valid defense on the merits pursuant to the stipulation. Aetna appeals to this Court.


Aetna argues that the district court erred in failing to set aside the default judgment, and in finding that the exclusion in Aetna's policy did not relieve Aetna of the obligation to defend and indemnify Harad. We review the lower court's refusal to set aside the default judgment under an abuse of discretion standard. Farzetta v. Turner & Newall, Ltd., 797 F.2d 151, 153 (3d Cir. 1986); 10 C. Wright,, A. Miller, & M. Kane, Federal Practice and Procedure § 2693, at 472-74 (1983). Our review of the interpretation of the insurance contract and the applicability of the policy exclusion, however, is plenary. Pacific Indem. Co. v. Linn, 766 F.2d 754, 760 (3d Cir. 1985).

Although this Court has adopted a policy disfavoring default judgments and encouraging decisions on the merits, Tozer v. Charles A. Krause Milling Co., 189 F.2d 242, 245 (3d Cir. 1951), the decision to vacate a default judgment is left to the sound discretion of the trial court. In exercising this discretion, however, the court must consider whether vacating the default judgment will visit prejudice on the plaintiff, whether the defendant has a meritorious defense, and whether the default was ...

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