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A Liberty Mutual Insurance Co. unit has prevailed in litigation over an attorney’s professional liability policy because of a policy exclusion.
The litigation stems from a malpractice dispute between attorney Ernesto Martinez Jr., of Law offices of Ernest Martinez Jr. PLLC in San Antonio, and a number of his clients, according to Monday’s ruling by the 9th U.S. Circuit Court of Appeals in San Francisco in Ben Li et al. v. Ironshore Indemnity Inc.
Eighteen clients had retained Mr. Martinez to provide legal services in connection with failed real estate developments and to prosecute claims against the Federal Deposit Insurance Corp., according to court papers in the case.
They subsequently filed an arbitration agreement against Mr. Martinez alleging that his invoices were inaccurate and contained overcharges. The arbitrator required Mr. Martinez and his law office to forfeit fees paid in the FDIC litigation, which totaled $650,620.77, plus pay attorneys fees and costs.
When Mr. Martinez and the clients settled the malpractice claim, Mr. Martinez assigned to the clients all rights to any claims against him to his professional liability insurer, Liberty Mutual unit Ironshore Indemnity, according to the ruling.
When Ironshore refused to defend or indemnify Mr. Martinez, he and the clients filed suit in U.S. District Court in Pasadena, California, which ruled in the insurer’s favor.
That ruling was unanimously affirmed by a three-judge appeals court panel. Ironshore’s policy included an exclusion that coverage does not extend to payments in connection with any claim “alleging, arising out of, based upon or attributable to the conversion, misappropriation, improper commingling of client funds, the return of or restitution, or disgorgement of fees, costs and expense or other amounts,” said the appellate panel’s ruling.
Because of this exclusion, “Ironshore did not have a duty to defend or indemnify Martinez in the underlying arbitration actions,” said the ruling.
The ruling said the award for fees and costs from a defamation suit filed by Mr. Martinez against one of his former clients is also excluded because the suit was based on statements concerning his misappropriation of client funds.
“Finally, even if the policy exclusion does not apply Martinez’s claim —seeking restitution for the overbilling of his clients — is uninsurable as matter of Texas law,” said the ruling.
Ironshore’s attorney had no comment, while the plaintiffs’ attorney could not be reached for comment.
Lawyers professional liability claim frequency stabilized in 2017, but claims severity continued to increase, says a broker survey.