Before Judges Brochin, Wefing and Braithwaite
The opinion of the court was delivered by: Brochin, J.A.D.
 Argued February 11, 1998
Plaintiff Greenberg & Covitz was a New Jersey law partnership. Plaintiff Morton R. Covitz and defendant-cross-claimant David S. Greenberg are New Jersey attorneys who were partners in that firm. Defendant National Union Fire Insurance Company of Pittsburgh, Pa. was their insurer against liability for claims alleging legal malpractice. Covitz and the law firm of Greenberg & Covitz sued National Union for a judgment declaring that the insurance company was obligated to provide a defense for them and to reimburse them for costs of defense that they had already incurred in an action then pending in the United States District Court for the District of New Jersey which had been instituted against them by Spencer Savings Bank, SLA. The other defendants to the present action, i.e., Greenberg, Spencer Savings Bank, SLA, Commonwealth Title Insurance Company, Ticor Title Insurance Company, and Excell Mortgage Corp., were named as necessary parties. Greenberg cross-claimed against National Union for the same relief sought by plaintiffs and, in addition, asked for a declaration that the insurer was obligated to indemnify him against any claims asserted in the Federal court action.
The gravamen of Spencer Savings Bank's complaint in the Federal court action is that Covitz and Greenberg were the principals of Excell Mortgage Corp., that Spencer was holding approximately $175 million of residential mortgage loans from Excell, and that the law firm of Greenberg & Covitz, the law firm's partners, and Group One, a corporation controlled by Greenberg, "perpetrated a scheme to defraud Spencer . . . by causing and facilitating Excell's assignment to Spencer of mortgage loans [which] they knew did not meet Spencer's underwriting standards" and which "Spencer never would have purchased . . . had pertinent facts concerning the borrowers and their finances not been fraudulently concealed and falsified." Spencer alleges that, by failing to disclose the second mortgages on closing statements and by deferring the recording of the second mortgages until after the completion of Spencer's title searches, the law firm fraudulently concealed second mortgages on the properties subject to the loans sold to Spencer. Spencer also asserts that Excell, Covitz, and Greenberg knowingly submitted loan applications which contained false information about the income, employment, equity, assets, source of down payment, and the existence of secondary financing of the prospective borrowers. Spencer claims that it will suffer substantial losses because many of the borrowers whose mortgages it purchased from Excell were not qualified for their loans.
The first five counts of Spencer's complaint characterize the fraudulent activities which it charges to Covitz, Greenberg, their law firm, Excell, and Group One as violations of Federal and state "RICO" statutes. These counts accuse them of being responsible for the alleged violations as principals, aiders and abettors, or conspirators. The sixth count characterizes the same activities as common-law fraud. The seventh count alleges that Excell has breached various provisions of the contracts pursuant to which it sold mortgage loans to Spencer.
The eighth and ninth counts of Spencer's Federal court complaint are directed only against defendants Commonwealth Title Insurance Company and Ticor Title Insurance Company, respectively. Those counts allege that the title insurance companies promised to protect Spencer against losses that it might suffer as the result of fraud committed by Greenberg & Covitz, and Spencer asserts that the title companies are liable accordingly. Commonwealth and Ticor have asserted contingent cross-claims for indemnification against the alleged malefactors.
Spencer filed its original complaint against Excell, Covitz, Greenberg, and the law firm of Greenberg & Covitz on November 6, 1991. By a letter dated December 10, 1991, attorneys for Covitz and the law firm advised National Union that Spencer had filed a complaint which alleged that "the defendants defrauded it by assigning mortgage loans that did not meet the Bank's underwriting standards." National Union was asked to "assume the defense of [Covitz] and the law firm to the extent that any of the allegations are deemed to be the result of the negligent conduct of any partner, attorney, paralegal or employee of the firm of Greenberg & Covitz." A letter dated January 7, 1992, made the same request on behalf of Greenberg.
National Union responded by a letter dated January 31, 1992. This letter notes that Covitz and Greenberg were principals of Excell who participated in its management, and that the allegations of malpractice arose out of their employment by Excell. National Union's letter refers to the section of the malpractice insurance policy which describes its coverage as extending to claims arising out of the insureds' "rendering or failing to render professional services for others in [their] capacity as . . . lawyer[s]." It also refers to and quotes exclusion (g), the "owned enterprise" exclusion. The letter concludes, "In light of your role as partners of Excell Mortgage Corp., and for such other good and sufficient reasons as may appear, the National Union Fire Insurance Company expressly denies coverage with respect to this claim."
Covitz and Greenberg & Covitz filed their original complaint against National Union on March 20, 1995. In National Union's answer to that complaint, the insurer asserted for the first time that it was relying on exclusions (a) and (b) of its insurance policy, as well as on exclusion (g). Exclusion (a) states that the policy does not apply "to any claim arising out of any criminal act, error or omission of any insured." Exclusion (b) says that the policy does not apply "to any claim arising out of any dishonest, fraudulent or malicious act, error or omission of any insured, committed with actual dishonest, fraudulent, or malicious purpose or intent."
Covitz, Greenberg, and the law firm moved for summary judgment declaring that they are entitled to coverage. National Union cross-moved for summary judgment exculpating itself from liability. The Law Division ruled that each of the policy exclusions on which National Union relied defeated coverage. The court rejected the claim of Covitz, Greenberg, and the law firm that they were entitled to have National Union provide them with a defense. The court also denied their motion for reconsideration.
Covitz, Greenberg, and their law firm have appealed. They argue in their main brief that the claims against them are covered by their professional liability insurance policy because those claims arose from their performance of legal services; that National Union waived exclusions (a) and (b) to the coverage of that policy because its letter denying coverage referred only to exclusion (g); that none of the cited exclusions is applicable; and that they are entitled to coverage under the "innocent insured" clause of the policy because none of them personally participated in the real estate closings. Their reply brief adds the arguments that facts outside of Spencer's pleadings may trigger coverage and that, in any event, they are entitled to coverage for the contingent claims asserted against them by Commonwealth Land Title Insurance Company and Ticor Title Insurance Company.
National Union conceded during oral argument that exclusion (a) was inapplicable, and we agree.
To determine whether a policy of liability insurance obligates its issuer to defend the insured, [t]he complaint should be laid alongside the policy and a determination made as to whether, if the allegations are sustained, the insurer will be required to pay the resulting judgment, and in ...