Legal Malpractice Insurance: It’s a Crime If Your Policy Doesn’t Cover Criminal Acts

Legal Malpractice Insurance Criminal ActsWhen we meet with a law firm’s management committee to review the malpractice insurance proposals we’ve obtained for their firm, one topic of discussion is the difference in policy language among the competing insurers.

It’s usually a short discussion.

Several years ago, there were material differences in policy language from insurer to insurer, but increasing competition has pressured the insurers with narrower policy language to broaden it in order to remain viable ‘players’ in the legal malpractice insurance market.

As a result, today there are few material differences in breadth of coverage among the major legal malpractice insurers. However, one important area of difference is in coverage for intentional and criminal acts.

Many attorneys don’t pay attention to this, because they’re confident that no one in their firm will intentionally commit a wrongful act, let alone a criminal one. However, the fact they may not do so doesn’t mean that a plaintiff won’t allege that they did so, i.e., to pressure them.

If that happens, then the breadth – or narrowness – of a firm’s malpractice policy language will determine whether or not it will be covered. If a firm’s policy doesn’t cover such claims, it could be exposed to potential judgments or settlements, and perhaps defense costs.

Insurers “lump in” criminal acts with dishonest, intentionally wrongful, fraudulent, and malicious act or omissions. “Intentionally wrongful acts” are intentional torts that arise out of the rendering of professional services, such as wrongful use of civil proceedings, abuse of legal process, defamation, etc. Dishonest, fraudulent, malicious acts, etc., have their common dictionary definition.

All policies exclude these acts, but most then give back some coverage, although not to the same degree.

Let’s look at examples, from the narrowest to the broadest coverage:

Narrowest Coverage

Old Republic Insurance Co.:

“This POLICY does not apply to:

(b) any CLAIM arising out of a dishonest, criminal, malicious or deliberately fraudulent act or omission of an INSURED.”

No defense, no indemnification, no coverage, period, even for “innocent insureds”.

Slightly Less Narrow Coverage

Hartford Insurance Co.:

“This insurance does not apply to claims: 1. 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.

This exclusion does not apply to an Insured who did not personally commit or participate in committing the any of the knowingly wrongful acts, errors, omissions, or personal injury…”

The exclusion adds personal injury (as defined) to the list of excluded acts, and doesn’t offer a defense to the accused, but then deletes the exclusion for ‘innocent insureds’, and thus will both defend and indemnify them.

Less Narrow Coverage

Travelers Insurance Co.:

Criminal, Dishonest, Fraudulent Or Malicious Conduct This policy does not apply to any Claim based upon or arising out of any criminal, dishonest, fraudulent or malicious conduct, or other willful violation of laws, committed by any Insured or by anyone with the consent or knowledge of any Insured, provided that this exclusion will not apply to:

  1. any Insured Person who did not participate in or have knowledge of such conduct or violation; or
  2. the Company’s duty to defend, or to pay Defense Expenses for, any Claim for malicious prosecution or abuse of process.”

This exclusion, like Hartford’s, doesn’t offer a defense to the accused, but then deletes the exclusion for ‘innocent insureds’, i.e., will both defend and indemnify them. However, the coverage is broader than Hartford’s in that doesn’t exclude claims for personal injury, and exception #2 adds the duty to defend claims of malicious prosecution or abuse of process, i.e., exempts them from the exclusion for “malicious conduct”.

Narrow/Broad Coverage

Hanover-Pro Direct

“This policy does not apply to:

  1. a) any claim arising out of your dishonest, criminal or fraudulent act, error or omission.

However, we will provide for the defense of claims alleging personal injury arising out of your performance of professional services;

 INNOCENT INSUREDS

In the event that coverage under this policy would be excluded, suspended or lost because of a dishonest, criminal, malicious, or fraudulent act, error, or omission by one or more of you, we will cover any other of you who did not participate in, acquiesce in or fail to take appropriate action when you discovered the conduct, provided that you complied with all other policy provisions.”

This insurer will defend the accused through adjudication, but only for personal injury (as defined) arising out of the rendering of legal services.

It will also defend and indemnify ‘innocent insureds’, i.e., even if the accused insured is found responsible for the criminal act or omission.

Markel Insurance Co.:

“This insurance does not apply to Claims:

  1. Arising out of an illegal, dishonest, fraudulent, criminal, knowingly wrongful, or malicious act, error or omission, or an intentional or knowing violation of the law.., committed by, at the direction of, or with the knowledge of any Insured; however, for such Claims otherwise covered by this policy, the Company will provide a defense until such time as the act, error, or omission is found to be illegal, dishonest, fraudulent, criminal, malicious, or was an intentional or knowing violation of the law by trial, court ruling, regulatory ruling or admission;”

The insurer will defend both the accused and innocent insureds through adjudication, but it won’t indemnify ‘innocent insureds’, if the accused insured is found to have committed the act or omission.

Note that Hanover provides a narrow defense for the accused, but broad defense and indemnification of innocent insureds, while Markel does the opposite, i.e., provides a broad defense of the accused (and innocent insurdes) through adjudication, but no indemnification of innocents, if the accused insured is found responsible.

Broad Coverage

Zurich Insurance Co.:

“This policy shall not apply to any Claim based upon or arising out of, in whole or in part:
A. any intentional, criminal, fraudulent, malicious or dishonest act or omission by an Insured; except that this exclusion shall not apply in the absence of a final adjudication or admission by an Insured that the act or omission was intentional, criminal, fraudulent, malicious or dishonest;

V. CONDITIONS
D. PROTECTION FOR INNOCENT INSUREDS

Whenever coverage under this policy would be excluded, suspended or lost because of Section III — Exclusions, subsection A, the Company agrees that such insurance as would otherwise be afforded under this policy shall be applicable with respect to any Insured who did not personally acquiesce in or remain passive after having personal knowledge of such conduct…

The Company’s obligation to pay shall begin once the full extent of the assets of the responsible Insured have been exhausted and once the deductible as shown in the Declarations of the policy has been satisfied.”

The insurer will provide both the accused and innocent insureds a defense through adjudication, plus indemnification, absent a final adjudication or admission that the Insured committed the act or omission.

It then restores indemnification for ‘innocent insureds’, i.e., even if the accused insured is found responsible for the criminal act or omission, but only after that party has paid to the full extent of its assets.

Broader Coverage

Catlin Insurance Co.:

“This Policy does not apply to:

  1. any Claim arising from, in whole or in part, a dishonest, fraudulent, criminal or malicious act or omission, committed by an Insured, or at the direction of an Insured or ratified by an Insured; however, the Insurer shall defend any Insured that is alleged to have committed such act or omission, but the Insured shall reimburse the Insurer for Claim Expenses if the commission of such act or omission is admitted by the Insured or otherwise established as a matter of fact in a civil, criminal, or alternative dispute resolution proceeding.

This exclusion will not apply to:

  1. any Insured who did not participate in or have knowledge of such conduct or

violation; or

  1. the Insurer’s duty to defend, or to pay Claim Expenses for, any Claim for

malicious prosecution or abuse of process”

This exclusion offers a defense to the accused Insured, but requires that Insured to reimburse the insurer if the Insured admits committing the act or omission, or it’s “otherwise established” that the Insured did it.

It then restores both defense and indemnification to ‘innocent insureds’, even if the accused insured committed the criminal or malicious act, and adds the duty to defend claims for malicious prosecution or abuse of process, i.e., exempts them from the exclusion for “malicious acts”. Here, it’s carving out an exception for claims that might arise out of the provision of legal services.

Aspen Insurance Co.:

“The Company will not defend or pay any claim:

Based on or arising out of any dishonest, intentionally wrongful, fraudulent, criminal or malicious act or omission by the Insured. The Company will provide the Insured with a defense of such claim unless and until such dishonest, intentionally wrongful, fraudulent, criminal or malicious act or omission has been determined by any final adjudication, finding of fact or admission by the Insured. Such defense will not waive any of the Company’s rights under this policy.

Upon establishment that the dishonest, intentionally wrongful, fraudulent, criminal or malicious act or omission by the Insured was committed, the Company will have the right to seek recovery of the claim expenses incurred from the Insured found to have committed such acts or omissions.”

This exclusion shall not apply to those Insureds who did not personally participate or personally acquiesce in or remain passive after having knowledge of such conduct. Each Insured must promptly comply with all provisions of this policy upon learning of any concealment.”

This exclusion offers a defense to the accused Insured, but rather than require the Insured to reimburse the insurer if the Insured admits committing the act or omission, or it’s “established” that the Insured did it, it merely gives the insurer “the right to seek recovery.” In this regard, it’s coverage is slightly broader than Catlin’s.

Aspen then restores both defense and indemnification to ‘innocent insureds’, but unlike Catlin, it doesn’t add the duty to defend claims of malicious prosecution or abuse of process, i.e., exempt them from the exclusion for “malicious acts”.

Broadest Coverage

Westport/Swiss Re

“IV. EXCLUSIONS

This POLICY shall not apply to any CLAIM based upon, arising out of, attributable to, or directly or indirectly resulting from:

H. any intentionally criminal, dishonest, malicious, or fraudulent:

  1. act, error, omission; or
  2. PERSONAL INJURY committed by an INSURED.

This exclusion applies to any INSURED who is adjudged or admits to have committed such acts. This exclusion does not apply to any INSURED who did not commit, know or acquiesce in such WRONGFUL ACT which is the basis of the claim.”

This exclusion is broad, in that it also excludes coverage for personal injury (as defined), but it offers a defense to the accused Insured through admission or adjudication, and neither requires reimbursement of those costs nor give the insurer the right to recover them, if the Insured admits or is adjudged to have committed the act or omission.

It also restores both defense and indemnification to ‘innocent insureds’.

CNA Insurance Co:

“This Policy does not apply:

A. Intentional Acts

to any claim based on or arising out of any dishonest, fraudulent, criminal, malicious act or omission or intentional wrongdoing by an Insured except that:

  1. this exclusion shall not apply to personal injury;
  2. the Company shall provide the Insured with a defense of such claim unless or until the dishonest, fraudulent, criminal, malicious act or omission or intentional wrongdoing has been determined by any trial verdict, court ruling, regulatory ruling or legal admission, whether appealed or not. Such defense will not waive any of the Company’s rights under this Policy. Criminal proceedings are not covered under this Policy regardless of the allegations made against any Insured;
  3. this exclusion will not apply to any Insured who is not found to have personally committed the dishonest, fraudulent, criminal, malicious act or omission or intentional wrongdoing by any trial verdict, court ruling, or regulatory ruling;”

This exclusion offers a defense to the accused Insured, but neither requires reimbursement of those costs nor give the insurer the right to recover them, if the Insured admits committing the act or omission, or it’s “otherwise established” that the Insured did it.

However, it’s the only policy that exempts “criminal proceedings” from the defense obligation, thus excluding it completely.

It also exempts claims for personal injury (as defined) from the exclusion, and restores both defense and indemnification to ‘innocent insureds’.

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About Curtis Cooper

Curtis Cooper is principal of Lawyers Insurance Group – Broker For Great Law Firms, which helps attorneys optimize their malpractice coverage. Contact him by phone: (202) 802-6415, or email: ccooper “at” lawyersinsurer.com.