Duty to Defend Where Complaint Contains Potentially Covered Allegations
The United States District Court for the Southern District of Florida, applying Florida law, has determined that two lawyers professional liability insurers had a duty to defend where the underlying complaint included at least some allegations that an attorney acted in an insured capacity and that were not excluded by various capacity, conspiracy, business enterprise, and investment advice exclusions. Medmarc Cas. Ins. Co. v. Yanowitch, 2022 WL 673546 (S.D. Fla. Mar. 7, 2022).
A law firm and attorney sought coverage under professional liability policies issued to the law firm (the “first law firm”) and a separate law firm that had employed the attorney (the “second law firm”) for a lawsuit allegedly brought by a former business associate and client in connection with a failed business venture involving an entity owned in part by the attorney. The lawsuit alleged in part that the attorney made misrepresentations to the underlying plaintiff to induce him to continue investing funds in the venture, the underlying plaintiff transferred his investment funds to the trust account at the first law firm, and the attorney owed the underlying plaintiff fiduciary duties arising out of the attorney-client relationship as well as in the attorney’s role as a trustee and fiduciary responsible for the underlying plaintiff’s investment. The insurers, who issued policies to the attorney’s law firms, sought a declaration that they had no duty to defend or indemnify the attorney and the first law firm.
The court granted in part and denied in part the parties’ cross-motions for judgment on the pleadings and summary judgment, concluding that, between the two policies, there was at least a duty to defend the attorney and the first law firm. As a preliminary matter, the court determined that, while the first law firm was not an “Insured” under the policy issued to the second law firm, the attorney could constitute an “Insured” under that policy. The particular policy defined “Insured” as “any lawyer who was . . . [an] employee . . . of the Named Insured . . . solely while acting in a professional capacity on behalf of the Named Insured.” The court concluded that the underlying complaint “clearly alleges that [the attorney] was employed by [the second law firm]” and alleges that “while in the course and scope of his employment at the [second law firm], [he] breached various fiduciary duties he owed to [the underlying plaintiff] as an attorney, trustee, and fiduciary.” Thus, “[w]hile the facts presented during the course of the Underlying Litigation might establish that [the attorney] was not acting ‘solely’ as an attorney for [the second law firm], the Underlying Complaint alleges enough to find that [the attorney] was an insured under [that policy] for purposes of the duty to defend.”
The court then rejected the insurers’ arguments that several exclusions in their respective policies barred coverage, including exclusions barring coverage for claims (1) “involving the rendering of or failure to render investment advice,” (2) “involving any Insured’s activities as an owner, partner, officer, director, member, principal, stockholder, employee, or independent contractor of an entity [not named in the policy],” (3) “involving or relating to any conversion, improper commingling, or misappropriation . . . of client funds or trust account funds . . . held by any Insured in any capacity,” (4) “arising out of any act or omission in the performance of, or failure to perform, “Professional Services” for any “Business Enterprise,” and (5) “arising out of conspiracy.” The court concluded that while the exclusions “might apply to some of the claims in the Underlying Complaint, they do not apply to all the allegations,” reasoning that the underlying complaint contained, for example, “references to [the attorney’s] role as [the underlying plaintiff’s] attorney—a role that is potentially independent of any excluded acts,” thereby triggering the duty to defend.