INSURANCE-RELATED COURT CASES
Digested from case reports published online
COURT DECISIONS
Law firm’s actions were professional services
The law firm of Marcus & Cinelli, LLP (M&C) held a professional liability insurance policy issued by Aspen American Insurance Company (Aspen) when it faced a loss. The loss involved a lawsuit filed by a creditor of one of the firm’s clients, Barbara Stewart (Stewart).
Stewart was under a restraining notice from another law firm, Patterson Belknap Webb & Tyler LLP (Patterson). The notice was in place due to unpaid fees Stewart owed to Patterson. The notice was in effect at the time that M&C arranged sale of a portion of Stewart’s property, taking part of the proceeds to pay off debts owed to the firm by Stewart as well as to prepay a retainer.
Patterson sued M&C, alleging wrongful interference with the efforts to collect the judgment Stewart owed to Patterson. Patterson also accused M&C of contempt of court and obtaining a fraudulent conveyance. When M&C requested protection under their policy, Aspen responded that no obligation existed to either indemnify or provide a defense against the claim.
The insurer’s denial was based on two reasons. First, Aspen advised that the loss did not involve professional services and, second, it held that a policy exclusion regarding misappropriation was applicable.
M&C then sought a judgment, requesting that Aspen be found to have both a duty to defend as well as to indemnify. Aspen countered with a motion to dismiss the complaint. After a district court upheld Aspen’s argument that the policy’s misappropriation exclusion applied, M&C appealed.
Upon appeal, a higher court reviewed the adversaries’ positions anew. After winning a $2 million judgment against Stewart, Patterson had a restraining notice placed to prevent her from doing anything with assets that might be available to pay the judgment.
Stewart was deposed during Patterson’s efforts to discover all available property related to Stewart’s divorce, which resulted in an $8.5 million award. In particular, she was questioned about jewelry she purportedly received. She testified that the only jewelry she held was a large diamond ring she wore at the deposition. Allegedly, all other jewelry was in the possession of her former daughter-in-law.
Months after the deposition, Stewart had arranged for an auction sale for the nearly-25-carat diamond ring. The task was handled by one of M&C’s attorneys who, while aware of Patterson’s restraining notice, stated he had been confident that the ring’s title was owned clear of any restraint. However, he made no mention of any restraints to the auction house he contacted to handle the sale.
Later, the M&C attorney signed off on the sale and sent instructions about the account that the auction house should deposit the ring sale proceeds of $2.375 million. They transferred nearly $406,000 to M&C to clear Stewart’s debt to the firm and to set up a retainer account. Another $225,000 was sent to another law firm (not Patterson) to clear debts owed to it. Finally, the remaining $1.74 million was deposited in three separate escrow accounts under the control of Stewart.
Several years later, after M&C and Stewart had ended their firm/client relationship, Patterson became aware of M&C’s handling the ring’s sale, the disbursements and setting up of additional accounts. This resulted in their lawsuit that M&C presented to Aspen for coverage.
The higher court reviewed the district court’s rationale for ruling in favor of Aspen. After spending effort on reviewing relevant cases, statutes and policy language, it came to a different conclusion. The court found ambiguity in the policy exclusion.
The exclusion resolved the meaning of misappropriation which was not specifically defined. That being the case, it was evident that Aspen and M&C held two different opinions on its meaning. Aspen alleged that M&C’s actions were in violation of their restraining order and, therefore, qualified as a form of misappropriation. M&C maintained that their actions should be viewed within the parameters of the term’s legal meaning.
Did the firm’s actions constitute wrongful application of another’s property for one’s own purpose?
The court held that M&C’s actions did not demonstrate acting in a self-dealing manner. Rather, they consisted of following their client’s instructions for the ring’s sales, the sales format and how proceeds were to be deposited and used. The existing ambiguity should, per contract law, be construed in favor of M&C.
Aspen’s other allegation was that friction between M&C and Patterson constituted a form of fee dispute, a non-professional issue. The court held differently. In its view, M&C’s involvement did meet the policy’s definition of professional services. Per the policy, such services are actions in service of a client within the capacity of a lawyer in good standing or acting within the scope of a fiduciary. M&C’s actions involved both parts of the definition.
In light of its findings, the court vacated the lower court ruling to dismiss M&C’s request for indemnification and a legal defense, reversed that court’s denial of the obligation to defend, and remanded for rehearing.
Marcus & Cinelli, LLP v. Aspen American Insurance Co.—United States Court of Appeals for the 2nd Circuit—No. 24-2792—October 23, 2025.
