No Coverage under Lawyer’s Professional Liability Policy for Client’s Lost Settlement Funds
The United States District Court for the Northern District of West Virginia, applying West Virginia law, has held that an insurer had no duty to defend or indemnify its insured because two exclusions and the definitions of “damages” and “claim” each separately precluded coverage of a claim for a client’s lost settlement funds under the lawyer’s professional liability policy. ALPS Prop. & Cas. Ins. Co. v. Murphy, 2020 WL 4141987 (N.D. W. Va. July 20, 2020).
The insured attorney represented a client that owed a settlement payment to United Bank following mediation of a collection action. The insured facilitated the wire transfer of his client’s settlement funds by receiving what appeared to be email instructions from United Bank’s counsel and sending the wire instructions by email to the client’s bank. However, the wire instruction email was fraudulent and not sent by counsel for United Bank. United Bank never received the settlement payment, and the payment made by the client’s bank was not recovered. The insured tendered the potential claim for lost settlement funds to his insurer. The insurer denied coverage and filed a declaratory judgment action. The court rejected the insured’s argument that summary judgment was premature because litigation over the settlement payment was pending on appeal. The court determined that the ultimate validity of the settlement agreement was immaterial to the coverage determination, which turned on the allegations as reported to the insurer.
The insurer relied on four separate policy provisions to deny coverage. The first provision excluded claims “arising from” or “in connection with” the misappropriation or wrongful disbursement “by any person” of client funds. The court rejected the insured’s argument that he did not have actual control over the settlement funds because relevant precedent holds that one exercises control over funds by directing that they be wired. Further, the court found that a sufficient causal connection existed between the incorrect wire information transmitted by the insured and the loss of settlement funds. The court concluded that the broad exclusionary language “arising out of” contemplated that the causal connection between the claim and the theft or misappropriation may be indirect, and the phrase “by any person” did not dictate that the wrongful disbursement necessarily be the result of the insured’s actions. The second provision excluded claims “arising from” or “in connection with” any claim that seeks the reimbursement of funds held or controlled at any time by an insured. The court concluded that the second exclusion applied for the same reasons as the first and rejected the insured’s characterization of it as an “intentional acts” exclusion.
The definition of damages carved out restitution and loss of use of any funds or property. While restitution was not defined in the policy, the court applied its common meaning and held that the lost settlement payment was “plainly and unambiguously” not considered damages under both the restitution and loss of use of funds prongs of the definition. Lastly, the definition of claim did not include any demand arising from or in connection with the actual or alleged “unauthorized use or misuse of any . . . personally identifiable information.” The court held that the claim for lost settlement funds, based on the insured’s receipt of a fraudulent wire transfer email from an imposter posing as counsel for United Bank, fit this limitation because the insured alleged an unauthorized use of United Bank’s counsel’s personally identifiable information.