No Coverage for Claims Arising Out of Attorney’s Theft of Client Funds Before Policy Period
The United States District Court for the Middle District of Tennessee, applying Tennessee law, has held that an insurer had no duty to defend or indemnify an insured attorney for claims arising out of his theft from his clients’ estates because the attorney had knowledge of the theft and could reasonably foresee a claim before the inception of the policy, and the claims were all related. Hanover Ins. Co. v. Clemmons, 2016 WL 5724213 (M.D. Tenn. Sept. 30, 2016).
The insured attorney had pleaded guilty to stealing from the estates of several of his clients and had been sentenced to prison and disbarred. The attorney had been appointed by the probate court as conservator over the property of two individuals and later the administrator of the estate of one of the individuals. After the attorney had failed to file proper accountings of the estates, the probate court removed him from his role. The successor conservator filed suit against the attorney, alleging that the attorney breached his fiduciary duty to each estate by failing to account for assets and by misappropriating and converting estate funds for his own use. The attorney’s professional liability insurer filed a coverage action for a declaration that it had no obligation under its policy with respect to the claims against the attorney. Subsequently, the successor conservator amended his complaints against the attorney to add professional negligence claims based on the attorney’s failure to obtain a surety bond in the amount required by Tennessee statute.
The insurer’s policy provided coverage only for claims for which the insured attorney “had no knowledge of facts which could have reasonably caused [him] to foresee a claim, or any knowledge of the claim, prior to the effective date of the policy.” In responding to the insurer’s motion for summary judgment, the successor conservator did not dispute that coverage was unavailable for the misappropriation and conversion claims against the attorney because, having stolen from his clients’ estates, the attorney could have reasonably foreseen these claims. The court agreed, applying a mixed subjective-objective test and finding that the attorney had knowledge that the policy would not provide coverage for his theft. The court also held that the claims were not covered because they related directly or indirectly to: (1) admitted fraudulent, dishonest, and criminal acts; (2) personal profit from estates; and (3) conversion, misappropriation, and intentional or illegal use of estate funds, all of which were excluded from coverage.
With respect to the negligence claims, the successor conservator argued that a reasonable attorney could not foresee a claim resulting from obtaining surety bonds in an amount lower than required by statute because the probate court had approved the bonds. The court rejected this theory, concluding that the negligence claims were excluded as related to the conversion and misappropriation claims. The court held that the prior knowledge exclusion also barred coverage for the negligence claims because the attorney “knew the ‘nature of the injury’ he had inflicted on his clients and that he would likely be subjected to lawsuits as a result, even if he did not correctly anticipate the precise nature of the claims that injured parties would raise.” Likewise, the three exclusions also barred coverage for the negligence claims. In so ruling, the court rejected the successor conservator’s argument that the concurrent cause doctrine warranted coverage for the negligence claims, emphasizing that the policy’s exclusions had broad lead-in language for claims “based upon, arising out of, or related directly or indirectly” to the excluded conduct.