Conversion or Misappropriation of Funds Exclusion under Professional Liability Policy
July 8, 2013
The insurer sued its insured under a professional liability policy seeking a declaration that it had no duty to provide coverage for an underlying lawsuit filed against its insured. This case is Attorneys Liability Protection Society, Inc. v. Whittington Law Associates, PLLC, 2013 WL 3289055.
Whittington is a New Hampshire attorney who practices law under the name Whittington Law Associates, PLLC. In 2011, he received an e-mail from a person claiming to be Richard Downey, an attorney in Virginia. The e-mail requested Whittington's assistance in a legal matter pertaining to a claim for payment of an outstanding debt. Whittington accepted the case and was then informed that partial payment had been made to avoid litigation, and the payment would be sent to Whittington.
In August of 2011, Whittington received a UPS package containing a check in the amount of $195,790, purportedly issued by Citibank, payable to Whittington Law. Whittington notified the client of the receipt and the client told Whittington to keep $2,000 as a retainer and transfer the rest of the money to MS CAR FACTORY COMPANY LTD in Japan. Whittington deposited the check into the client trust account at Ledyard National Bank and requested that bank to wire the funds to Japan. Ledyard completed the transfer in September and then received notification from Citibank that it would not honor the check. A subsequent investigation revealed that the check was fraudulent.
Ledyard seized the remaining funds in the Whittington client trust account to offset its losses. The bank then sued Whittington, seeking to recover the balance of its lost funds. Whittington notified its insurer, Attorneys Liability Protection Society (ALPS), of the lawsuit and requested defense against the lawsuit. ALPS denied coverage and filed this declaratory judgment action.
ALPS argued that the insurance policy provides coverage only for damages arising from an act, error, or omission in professional services that were or should have been rendered, and the events underlying the claim against the insured did not meet that definition. ALPS also argued that even if the claim falls within the general scope of the professional liability policy, that claim is specifically excluded by the policy's exclusion for the conversion, misappropriation or improper commingling of funds controlled by Whittington.
The United States District Court, New Hampshire, declared that the court need not resolve the first issue since the exclusion clearly applied to this situation.
The court stated that the exclusion was clear and unambiguous as applied to the facts of this case. The exclusion provides that there is no coverage for any claim arising from or in connection with “any conversion, misappropriation, or any improper commingling by any person of client or trust account funds or funds of any other person held or controlled by an insured in any capacity”. The claim against Whittington arose from the scammer's misappropriation of the bank's funds which Whittington controlled, and the court said this falls squarely within the exclusion.
Whittington argued that it never actually controlled the money sent to it because the money represented by the check never existed. The court said that the bank's action does not arise from the scanner's misappropriation of the nonexistent funds represented by the fraudulent check, so whether Whittington actually controlled those funds is irrelevant. What is relevant, the court continued, is whether Whittington controlled the funds that were misappropriated, that is, the funds Whittington instructed the bank to wire to the Japanese bank account. Whittington clearly controlled those funds.
The insured's directing influence or power over the funds was evident from the fact that the bank wired those funds at Whittington's direction. Further, the clause refers to funds controlled by the insured “in any capacity or under any authority”, a clause broad enough to encompass Whittington's status as account holders. Indeed, the insured's authority as account holders to direct the bank how to disperse the funds was the linchpin on which the scam itself turned; if Whittington had no such authority, the scam could not have been accomplished.
The motion for summary judgment by ALPS was granted.
Editor's Note: The insured in this instance tried to argue that it had no control over the funds in the client trust fund. The U.S. District Court found that there clearly was control since the insured set up the account and directed the bank where to send the funds. The insured simply fell for a check scam and the professional liability policy was not worded so as to cover that mistake.