Mr. Arzadi and the law firm subsequently filed an action seeking a declaratory judgment that Evanston had a duty to defend and indemnify them in the Allstate suit. Thereafter, Evanston's counsel issued a letter to Mr. Arzadi and the law firm disclaiming coverage in the Allstate suit on the ground that they were alleged to have engaged in fraudulent conduct, which did "not fall under the [p]olicy's definition of Professional Legal Services," and because "the [c]laim [was] not made against them in their insured capacity."

The parties filed cross-motions for partial summary judgment on the duty to defend.

Evanston argued that the plaintiffs were named as defendants in eight of the 16 counts in the Allstate suit, which alleged that they had violated Section 4(e) of the New Jersey Insurance Fraud Prevention Action, N.J. Stat. Ann. § 17:33A-1, et seq. ("IFPA"), by participating in a "kickback scheme" while representing clients in personal injury matters. The alleged kickback scheme was in the form of referral exchanges that involved the plaintiffs referring personal injury clients to certain chiropractic clinics for treatment in exchange for a reciprocal referral for representation in bringing a personal injury claim.

According to Evanston, the Allstate allegations served "merely as contextual background for the actual claims at issue," i.e. an insurance fraud conspiracy, which did not qualify as a professional legal service.

Evanston also contended that the plaintiffs should be barred from coverage because the underlying claims in the Allstate suit did not allege that the plaintiffs had been negligent in providing legal services.

The Evanston Policy

The Evanston policy provided that it had to defend the plaintiffs against claims alleging a:

Wrongful Act arising out of Professional Legal Services. 

It defined:

Wrongful Act 

as:

any act . . . by the Insured in rendering . . . Professional Legal Services for others. 

The policy defined:

Professional Legal Services 

as:

services rendered by an Insured (1) as a lawyer . . . provided that such services are connected with and incidental to the Insured's profession as a lawyer and are performed by or on behalf of the Named Insured or any Predecessor Firm. . . . 

The district court granted the plaintiffs' motion.

In its decision, the district court observed that the Allstate suit contained allegations that Mr. Arzadi had advised clients how to proceed with their personal injury claims, and if ruled that those allegations fell "squarely" within the Evanston policy's definition of "Professional Legal Services."

The district court reasoned that the acts complained of by Allstate – advising clients that "they had valid bodily injury claims," "encouraging them to continue to undergo [unnecessary] treatment," or making referrals for treatment – were acts that allegedly occurred in the context of Mr. Arzadi's representation of his clients. The district court said that there was "clearly a substantial nexus between the representation and the professional services his clients sought."

Indeed, the district court added, if Mr. Arzadi had not been acting as an attorney, he would not have been able to commit the allegedly fraudulent acts.

The district court also pointed out that the Evanston policy did not limit coverage to negligent acts only. It determined that the language was "clear" that the policy provided that it would cover "any act as long as it is connected to the Insured's profession as a lawyer." Providing legal advice, as Mr. Arzadi was alleged to have done, certainly was connected to his practice as a lawyer, the district court said.

Therefore, the district court concluded, the allegations contained in the Allstate suit generally fell within the scope of a covered claim under the Evanston policy, and Evanston had a duty to defend Mr. Arzadi and the law firm.

The case is Karim Arzadi, Joworisak & Associates, LLC v. Evanston Ins. Co., No. 2:17-CV-5470-SDW-CLW (D.N.J. Feb. 7, 2018).