Middle District Judge Finds No Duty of Malpractice Carrier to Cover Dishonest Conduct

In the case of  Westport Insurance Corporation v. Hanft & Knight, P.C., et al., 523 F.Supp.2d 444 (M.D.Pa.,2007), Judge John E. Jones, III of the United States District Court for the Middle District of Pennsylvania wrote an important opinion regarding the duty of a legal malpractice carrier to cover a law firm’s liability for dishonest acts by one of its members. This was a declaratory judgment action brought by a malpractice carrier seeking to refuse a duty to defend or indemnify a law firm.

The facts were that the senior partner in the firm had, over the course of several years, borrowed large sums of money from a client under terms unfavorable to the client, leading them to believe he was investing it in real estate ventures. In fact he used the funds to pay gambling debts. When informed that his conduct was under investigation, the partner took his own life. Subsequently, the clients brought suit against the deceased lawyer's estate and against his law firm, and sought in the declaratory judgment action to compel the malpractice insurer to indemnify.

Judge Jones found that the insurer had no duty to defend or indemnify under policy exclusions relating to personal profit, incidents of which the lawyer had prior knowledge, and acts of dishonesty and conversion or misappropriation. The clients argued that their claims against the law firm should still be covered, as the firm was an "innocent insured" without knowledge of the partner's misconduct. However, Judge Jones found that the language of the policy applied the exclusions to the acts of "any insured" and so that the law firm was not protected.

A Notice of Appeal has been filed by the Plaintiffs.