New York Court Holds Fraudulent Act Exclusion Applicable in LPL Policy

In its recent decision in Lewis & Stanzione v. St. Paul Fire & Marine Ins. Co., 2015 U.S. Dist. LEXIS 78259 (N.D.N.Y. June 17, 2015), the United States District Court for the Northern District of New York had occasion to consider the application of a fraudulent acts exclusion in a lawyer’s malpractice liability policy.

St. Paul insured the Lewis & Stanzione firm (the “Firm”) under a lawyer’s professional liability policy insuring damages arising out of any act, error or omission committed by the Firm in the rendering or failure to render legal services. Notably, the policy contained an exclusion barring coverage for claims “arising out of any dishonest, fraudulent, criminal or malicious act, error, omission or ‘personal injury’ committed by, at the direction of, or with the knowledge of an insured.”

While the policy was in effect, one of the Firm’s named partners was named in a lawsuit alleging that he was part of a fraudulent scheme designed to cause plaintiffs to extend a loan to finance the purchase of an Inn. The lawsuit contained a single cause of action against the attorney – that being for fraud. St. Paul denied coverage for the suit on the basis of its policy’s fraudulent act exclusion. In considering the matter on motion for summary judgment, the court agreed that because the underlying lawsuit alleged only fraudulent conduct, the exclusion applied to bar any defense or indemnity obligation on the part of St. Paul.

In reaching this conclusion, the court considered and rejected the Firm’s argument that St. Paul at the very least owed a duty to defend since the lawsuit alleged that the attorney’s fraudulent conduct arose out of the legal services he provided. In other words, the Firm contended that so long as it was sued in connection with legal services rendered, a duty to defend was triggered regardless of whether any exclusion might ultimately apply. The court rejected the insured’s theory of coverage, concluding:

While there is no dispute that [the attorney] was rendering legal services when he represented the sellers of the Inn, that simply does not end the inquiry. If the court were to read the Policy to impose coverage obligations on St. Paul solely because the Underlying Complaint alleges that [the attorney] rendered legal services, it would vitiate the Fraud Exclusion. The court declines to do so.

In reaching its decision, the court noted that it was possible that the insured attorney ultimately would not be found liable for having acted in a fraudulent manner. This possibility, explained the court, was immaterial to the coverage analysis since the allegations contained in the complaint fell wholly within the exclusion, thus negating any duty to defend or indemnify.

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