No Insurance for Lawyer who Cheats Client

Lawyer’s E&O Does Not Cover Investment Advice

Lawyers provide legal advice and counsel to their clients. When a lawyer buys errors and omissions (E&O) insurance the lawyer seeks protection from his or her errors in providing legal advice to the client. An E&O policy does not, however, provide coverage for the defense and indemnity of the lawyer for every possible reason that the lawyer might be sued.

In Christensen v. Darwin Nat. Assur. Co., United States Court of Appeals, Ninth Circuit — Fed.Appx. —- 2016 WL 1128033 (March 23, 2016) Christensen Law Offices and Thomas Christensen (Christensen) appeal the district court’s grant of summary judgment in favor of Darwin National Assurance (Darwin) in an insurance coverage dispute.

Christensen sought reimbursement from their insurer, Darwin for costs associated with a malpractice lawsuit brought against Christensen by the Henry Vincent Trading Company (“HVTC”), among others, in Nevada state court.

The case on whether Darwin had a duty to defend Christensen. Under Nevada law, “[d]etermining whether an insurer owes a duty to defend is achieved by comparing the allegations of the complaint with the terms of the policy.” United Nat’l Ins. v.. Frontier Ins., 99 P.3d 1153, 1158 (Nev.2004) (en banc). “If there is any doubt about whether the duty to defend arises, this doubt must be resolved in favor of the insured.”

THE POLICY

The coverage exclusions in the policy issued by Darwin to Christensen prohibits claims “based on, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving, in whole or in part” providing investment advice; the insured’s capacity or status as a part of a business enterprise; or any act of the insured in connection with a trust or estate when the insured is a beneficiary or distributee of the trust or estate.

FACTS

Christensen’s undervaluing of the Harmon property while advising HVTC was directly linked to what occurred next—the acquisition by the TFC Family Trust of half of HVTC’s assets. The Trustees of the TFC Family Trust are Thomas Christensen and his wife, and the trust obtained half ownership in the Harmon property following the undervaluing of the property.

ANALYSIS

Even if the misrepresentation of the value of the property was made before the self-dealing sale, the misrepresentation still fell within the exclusion for acts “in any way involving” the “Insured’s capacity or status as: [ ] an officer, director, partner, trustee, shareholder, manager or employee of a business enterprise, charitable organization or pension, welfare, profit sharing, mutual or investment fund or trust.”

Grasping for straws, Christensen, recognizing the weakness of its coverage claims, for the first time on appeal, argued that the district judge should have sua sponte recused himself from this case because his former law firm represented HVTC in the lawsuit underlying this insurance dispute. Failure to move for recusal at the trial level does not preclude raising on appeal the issue of recusal though it does mean that review is for plain error. Even if there were an error by the District Court judge Christensen failed to demonstrate any effect on substantial rights, as would be required to establish plain error. To be reversed on appeal an error must affect substantial rights to satisfy the plain error standard, and in most cases this means that the error must have been prejudicial: It must have affected the outcome of the district court proceedings. It did not.

In light of Ninth Circuit’s review of the claims in this case, and its conclusion that Darwin was plainly entitled to summary judgment, Christensen could not have suffered prejudice from any error on the part of the trial judge to recuse himself.

ZALMA OPINION

Insurance is available to protect people against almost any risk. Not every policy, however, covers every possible risk. Darwin limited its exposure by an exclusion that clearly eliminated coverage for providing investment advice, especially in a situation where the lawyer apparently misrepresented facts so that the lawyer could profit from the false advice. Fraudulent activities by a lawyer should never be appropriate grounds for insurance funded defense and/or indemnity.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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