The United States Court of Appeals for the Second Circuit has ordered Aspen American Insurance to defend a law firm in a professional liability dispute, spotlighting insurer obligations and policy language.
The case arose after Marcus & Cinelli, LLP, a law firm, was sued in New York state court by Patterson Belknap Webb & Tyler LLP, a judgment creditor of the law firm’s client, Barbara Stewart.
Patterson alleged that Marcus & Cinelli arranged for the sale of Stewart’s 24.79 carat diamond ring and received a portion of the proceeds to satisfy Stewart’s past legal fees and as a retainer for future services, at a time when Patterson held an unpaid judgment and had served Stewart with a restraining notice under N.Y. C.P.L.R. § 5222(b).
Patterson’s complaint claimed that Marcus & Cinelli’s actions amounted to a fraudulent conveyance, tortious interference with Patterson’s efforts to collect its judgment, and contempt of court. Marcus & Cinelli sought defense and indemnification from its professional liability insurer, Aspen American Insurance Company, under its policy.
Aspen denied coverage, arguing that the allegations did not involve the rendering of professional services and that a policy exclusion for misappropriation applied. The relevant exclusion stated that the policy would not cover claims “based on or arising out of the misappropriation of, or failure to give an account of, any asset in [M&C]’s care, custody or control, including the commingling of funds.”
The United States District Court for the Western District of New York agreed with Aspen and dismissed Marcus & Cinelli’s claims, also denying the law firm’s motion for partial summary judgment on Aspen’s duty to defend.
On appeal, the Second Circuit reversed the district court’s decision. The appellate court found that the allegations in the Patterson complaint did involve Marcus & Cinelli’s provision of professional services, as the law firm’s actions – such as facilitating the sale of the ring, providing legal opinions on ownership, and handling the proceeds – were performed in its capacity as legal counsel and fiduciary for Stewart.
A central issue on appeal was the meaning of “misappropriation” in the policy exclusion. The court noted that the term was not defined in the policy and referred to its common legal meaning: the dishonest application of another’s property to one’s own use without consent. The court found that the Patterson complaint did not allege that Marcus & Cinelli used the proceeds without Stewart’s authorization. Instead, the complaint focused on whether Marcus & Cinelli’s actions violated Patterson’s rights as a judgment creditor, not on whether the law firm acted without its client’s consent.
The court emphasized that under New York law, ambiguous policy terms must be construed in favor of the insured. Even if “misappropriation” could be interpreted more broadly, the ambiguity required a ruling in favor of Marcus & Cinelli. The court also noted that Aspen had reserved its rights to invoke other policy exclusions, such as those for dishonest or fraudulent acts, but had not relied on those in denying the duty to defend.
The Second Circuit vacated the district court’s dismissal of Marcus & Cinelli’s claims, reversed the denial of partial summary judgment for Marcus & Cinelli on Aspen’s duty to defend, and remanded the case for entry of partial summary judgment in favor of the law firm on Aspen’s duty to defend.
The decision does not determine whether Aspen must ultimately indemnify Marcus & Cinelli for any losses, but it does require the insurer to provide a defense in the ongoing litigation. The ruling highlights the importance of policy clarity and the broad nature of the duty to defend under New York law, especially for professional liability insurers and their policyholders.
