Insurers can’t sidestep defense duties when some claims are covered, the Eleventh Circuit ruled in a malpractice dispute on Oct. 10.
The case, Medmarc Casualty Insurance Company v. Fellows LaBriola LLP, puts a spotlight on the obligations of professional liability insurers when policy exclusions come into play. Medmarc, a provider of lawyers professional liability insurance, sought a declaratory judgment that it had no duty to defend or indemnify the Atlanta-based law firm Fellows LaBriola LLP and attorney Steven M. Kushner. The dispute arose after former clients Zankhana Patel and PNP Amusement Games LLC sued the firm and Kushner, alleging improper disbursement of funds and failure to address conflicts of interest during legal representation in a high-stakes RICO and civil forfeiture action.
According to the malpractice complaint, the law firm and Kushner were retained to defend Patel, PNP Amusement Games, and others in a case brought by the state of Georgia. The state had obtained a seizure warrant, freezing assets and bank accounts. After the case settled, a court-appointed receiver distributed funds and auction proceeds to the firm’s trust account, with the expectation that the money would be properly distributed to the rightful parties. Patel and PNP Amusement Games alleged that, without their knowledge or consent, Fellows LaBriola and Kushner transferred funds and assets – including a BMW and jewelry – to accounts controlled by other parties, leaving them empty-handed.
Medmarc’s insurance policy covered the law firm and Kushner from February 2021 to February 2022. The policy stated that Medmarc would defend “any suit or arbitration seeking damages against the Insured to which the policy applies.” However, it also contained a misappropriation exclusion, denying coverage for “any claim[s] or other request[s] involving or relating to any conversion, improper commingling, or misappropriation…of client funds or trust account funds or funds of any other person held by any Insured in any capacity.”
Medmarc argued that all the malpractice claims fell squarely within this exclusion, so it had no duty to defend or indemnify the law firm or Kushner. The district court disagreed and dismissed Medmarc’s complaint, prompting the insurer to appeal.
The Eleventh Circuit sided with the lower court. The appellate judges found that not all of the malpractice claims were about misappropriation of funds. Some of the allegations focused on conflicts of interest – such as failing to warn clients about potential conflicts and not seeking waivers – which are not addressed by the misappropriation exclusion. Because at least some claims in the lawsuit could be covered by the policy, Medmarc was obligated to defend the law firm and its attorney.
The court also addressed Medmarc’s request for a ruling on whether it would ultimately have to pay damages if the law firm lost the malpractice suit. On that point, the judges said it was too soon to decide. The issue of indemnity would only become relevant after the underlying case was resolved.
For insurance professionals, this decision is a timely reminder that the duty to defend is broad under Georgia law. If any claim in a lawsuit could potentially be covered – even if others are excluded – insurers are required to provide a defense. The ruling also highlights the importance of precise policy language and careful analysis of exclusions, particularly in the context of professional liability coverage. As this case shows, the benefit of the doubt often goes to the insured when coverage is in question, and insurers must be prepared to defend their policyholders unless every claim is clearly excluded.
