Misappropriation Exclusion Bars Coverage for Claim Involving Improper Transfer of Escrow Funds, but Insurer Must Defend Against Intentional Torts Asserted by Insured’s Client

The United States District Court for the Southern District of Florida, applying Florida law, has held that a professional liability insurer did not have a duty to defend or indemnify its insured in a lawsuit involving the improper transfer of escrow funds, based on the policy’s exclusion for claims arising out of the misappropriation of funds. Hanover Ins. Co. v. Ross, No. 23-CV-80829, 2024 WL 2976762 (S.D. Fla. June 13, 2024). The court also held, however, that the insurer had a duty to defend the insured in a separate lawsuit alleging intentional torts tangentially arising out of the same transaction.

The insured escrow agent was sued by his client in two lawsuits after he transferred the client’s escrow funds to an unauthorized party. The first lawsuit asserted counts for breach of contract, conversion, legal malpractice, injunctive relief, and negligence arising out of the insured’s improper transfer of funds. The second lawsuit asserted counts for defamation, tortious interference with a business relationship, and fraud arising out of the insured’s representations to his client’s lawyer to the effect that the client was a money launderer.

The agent sought coverage for the two suits under a lawyers professional liability policy. The insurer denied coverage and filed a declaratory judgment action. The court granted summary judgment to the insurer with respect to coverage for the first suit on the basis that the policy’s misappropriation exclusion barred coverage. That exclusion applied to claims “based upon, arising out of, or in any way relating to, directly or indirectly . . . any inability or failure to safeguard . . . any funds . . . deposited in or payable from, any Insured’s or former Insured’s account, including an attorney trust account.” The court determined that the exclusion applied to the first suit – in which all the claims arose out of the misappropriation of funds – because the exclusion “only requires that the lawyer failed to safeguard funds in his trust account.”

With respect to the second lawsuit, however, the court determined that the insurer had a duty to defend the tortious interference and defamation claims. As to the tortious interference count, while the policy’s conduct exclusion potentially barred coverage, the court concluded that the insurer had a duty to defend the claim pending an adjudication or admission. As to the defamation count, the policy’s definition of “Wrongful Act” expressly encompassed defamation, and this specific provision controlled over the more general conduct exclusion. Otherwise, the court reasoned, the policy’s definition of “Personal Injury” expressly including defamation would be rendered meaningless.