The United States District Court for the District of New Jersey has held that allegations that a lawyer and his law firm engaged in a fraudulent insurance scheme to induce payment of personal injury protection benefits while representing clients constituted “Professional Legal Services” under the firm’s professional liability policy, triggering the duty to defend.  Arzadi v. Evanston Ins. Co., 2018 WL 747379 (D.N.J. Feb. 7, 2018).  Moreover, the court determined that the policy’s prior knowledge exclusion did not apply to preclude coverage under the circumstances.

The insureds, an individual lawyer and his law firm, were sued by an insurance company for allegedly engaging in a fraudulent kickback scheme while representing clients in personal injury matters by inducing the payment of personal injury protection healthcare benefits.  The insureds tendered the lawsuit to their professional liability insurer.  The insurer determined that coverage was unavailable because the insureds engaged in fraudulent conduct which did not fall under the policy’s definition of “Professional Legal Services” and because a claim was not made against them in their insured capacity.  Under the policy, “Professional Legal Services” is defined as “services rendered by an Insured (1) as a lawyer . . . provided that such services are connected with and incidental to the Insured’s profession as a lawyer and are performed by or on behalf of the [law firm].”  The insureds filed a declaratory judgment action arguing that coverage was triggered under the policy.

The court concluded that the insurer had a duty to defend.  First, the court found that the allegations against the insureds constituted “Professional Legal Services.”  The court rejected the insurer’s argument that the underlying complaint was for an insurance fraud conspiracy, which would not qualify as professional legal services or that the complaint did not allege that the insureds were negligent in providing legal services.  The court concluded that the acts complained of—advising clients that “they had valid bodily injury claims,” “encouraging them to continue to undergo [unnecessary] treatment,” or making referrals for treatment—are acts that allegedly occurred in the context of client representation.  Therefore, according to the court, “[t]here is clearly a substantial nexus between the representation and the professional services [the] clients sought.”  In addition, the court concluded that the policy did not limit coverage to negligent acts only, and that the policy “provides that it will cover any act as long as it is connected to [an Insured’s] profession as a lawyer” and “[p]roviding legal advice . . . is certainly connected to [the Insureds’] practice as a lawyer.”

Second, the court concluded that the prior knowledge exclusion, which applied to bar coverage if an insured had knowledge of a wrongful act before May 23, 2016, did not apply to bar coverage.  With respect to the first suit in question, the insureds were not a party to that litigation, and thus, the court found that “prior knowledge cannot be imputed.”  With respect to the second lawsuit, the court concluded that the litigation was filed as a wrongful employment termination suit, and because the underlying allegations in that lawsuit were connected to employment-related claims, the insureds “conceivably may not have had prior knowledge that those allegations were likely to form a basis for the insurance fraud allegations contained in the [instant suit].”