Just Because It's Fraud, Doesn't Mean It's Not Covered!

Case:  Arzadi v. Evanston Insurance Company, 2018 WL 747379 (D. N.J., Feb. 7, 2018). 

Suit was brought against Karim Arzadi, a practicing attorney in New Jersey and his law firm, Arzadi, Joworisak & Associates, LLC for allegedly engaging in fraudulent behavior so as to defraud "the Allstate Plaintiffs" by inducing the payment of PIP benefits in an unlawful manner.  Mr. Arzadi and his firm submitted the claim to Evanston Insurance Company, the firm's professional liability carrier, seeking a defense and indemnity to the Allstate suit.  The policy was a duty to defend policy on a claims made basis. 

Evanston Insurance Company disclaimed coverage, taking the position that the fraudulent conduct alleged against Mr. Azardi and his firm (Arzadi), did not fall under the Policy's definition of Professional Legal Services.

Arzadi subsequently initiated an action seeking a declaratory judgment that Evanston Insurance Company had a duty to defend or indemnify them in the underlying Allstate suit.  The parties filed cross Motions for Partial Summary Judgment on the duty to defend issue.  The Court granted Arzadi’s Motion for Summary Judgment. 

The Court analyzed whether the alleged fraudulent conduct of Azardi fell within the scope of a covered claim under the Policy.  Pursuant to the policy language, Evanston must defend against claims alleging a "Wrongful Act arising out of Professional Legal Services." 

The Policy defined a "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 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 Court, in determining whether particular acts constitute professional services, considered whether a substantial nexus existed between the context in which the acts complained of occurred and the professional services that were sought.  The Court held that the acts of advising clients that "they had valid bodily injury claims," and "encouraging them to continue to undergo [unnecessary] treatment" were acts that were alleged to have occurred in the context of representation and therefore, a substantial nexus between the representation and professional services sought by the clients existed. The Court reasoned that had Mr. Arzadi not been acting as an attorney, he would not have been able to commit the alleged fraud. 

Further, the Court interpreted the plain and ordinary meaning of the language of the policy which provided it would cover any act as long as it was connected to the Insured's profession as a lawyer. As such, the Court found that providing legal services, as Arzadi was alleged to have done, was connected to his practice as a lawyer. 

The Court also considered the "prior knowledge" condition in the Policy which precludes coverage if prior to the effective date of the policy, Arzadi had knowledge of the Wrongful Act which would lead Arzadi to believe that a Claim was likely.  Evanston argued that Arzadi had prior knowledge based on two prior lawsuits; however, Arzadi was not a party to one of the litigated matters and the other was connected to employment related claims.  Thus, the Court held that Arzadi was not barred from coverage pursuant to the "prior knowledge" condition.

The Court also examined the Policy Exclusions.  Exclusion A of the Policy excluded “any Claim based upon or arising out of a contract or agreement for, or any other right relating to, payment of your division of any fees or fee apportionment between the Insured and any lawyer…” Evanston argued that Arzadi was barred from coverage because the underlying Allstate suit included allegations related to a division of fees or an apportionment of fees.  The Court held that because Evanston had only pled allegations and had not met its burden of proving the applicability of the exclusion, the exclusion did not bar coverage.

Exclusion F of the Policy excluded “any Claim based upon, arising out of, or in any way involving any deliberately criminal, dishonest or fraudulent act, error or omission if a judgment or other final adjudication adverse to the Insured establishes that the Insured committed a criminal, dishonest or fraudulent act, error or omission pertaining to any Insured under this policy shall not be imputed to any other Insured under this policy for the purpose of determining the applicability of this exclusion.”   The Court held that in light of the language if a judgment or other adjudication is entered against Plaintiffs, because the underlying Allstate suit was in the preliminary stages of litigation and the allegations not substantiated by any court, Exclusion F was not a bar to coverage. 

Last, with regard to the duty to indemnify, because the Allstate suit was pending, the Court found it premature to make a determination on the issue of indemnification. 

Interesting set of facts and outcome.  More of these to come.

Categories: Insurance Coverage

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