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Legal Malpractice Insurer Must Defend New Jersey Lawyer and Law Firm In Alleged Fraudulent Scheme

In prior blogs, I have discussed the duty of liability insurance companies to defend their insureds under the terms of their policies. Today’s case is a classic example of an insurance company’s obligation to defend their insured under these circumstances.

In this case, Allstate sued the lawyer and his law firm, along with multiple other named defendants. Allstate was not a client of the lawyer or the law firm but brought a fraud lawsuit alleging that the lawyer and his law firm, among others, engaged in a continuing fraudulent kickback scheme designed to defraud Allstate in paying personal injury protection (no fault) benefits.

The lawyer’s malpractice insurance company refused to cover the claim, stating that Allstate was alleging that the lawyer and his law firm engaged in fraudulent conduct. The malpractice insurer also argued that Allstate’s claim was not made against them in their insured capacity. The lawyer and his law firm sued, and both the law firm and its malpractice insurance company made motions for summary judgment.

Look to the policy 

The court looked to the terms of the policy and found that the claims made by Allstate in their lawsuit potentially were covered. Consequently, the court ruled that the malpractice insurance company was obligated to provide a defense to the lawyer and his law firm.

Addressing the malpractice insurance company’s claim that fraud was not covered by the policy, the court stated that the policy required the insurance company to defend against claims alleging a “wrongful act arising out of Professional Legal Services,_” defining a wrongful act as “any act by the insured in rendering Professional Legal Services for others.”_ The court further noted that the term “Professional Legal Services” was defined under the policy as “services rendered by an insured as a lawyer, provided that such services are connected with and incidental to the insured’s profession as a lawyer…”

Interpreting this language, the court ruled that the advice given to the clients of the lawyer and his law firm which formed the basis of Allstate’s fraud claim clearly fell within the definition of Professional Legal Services. The court also held that coverage was not limited to negligent acts only, but covered any act connected to the insured’s profession as a lawyer, which was the case here.

Finally, the court evaluated an exclusion in the policy for “intentional, willful, dishonest and fraudulent acts,” ruling that the malpractice insurer could only rely upon that exclusion if there was a finding at the end of the case that the lawyer and his law firm had engaged in such acts.

Bottom line: the malpractice insurer has to defend the case until the end and will most likely pay indemnity dollars to settle the case long before it is over.

Three morals

  1. Lawyers have problems with their insurance companies, too, and need to fight them, just like everyone else.
  2. The duty to defend in liability insurance policies, as I have previously discussed, is always broader than the duty to indemnify. Your rights under these policies to get your defense costs covered is extraordinarily broad. Don’t give up.
  3. Just because it looks like or seems like something might not be covered, always look at the policy language and compare it to the allegations contained in the lawsuit. Coverage may exist, even if the insurance company says “no.” A “yes” may always be out there.

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