Uncovered For Employee Theft

The New Jersey Appellate Division has affirmed that an attorney’s insurance coverage did not extend to cover employee theft

Plaintiff Jill Cadre is a New Jersey attorney who conducts her practice as a limited liability company — The Cadre Law Firm, LLC. Rule 1:21-1B (the Rule) governs the practice of law as an LLC and, among other things, mandates that attorneys who do so must procure professional liability insurance that provides coverage to the LLC for damages “arising out of the performance of professional services by attorneys employed by the [LLC] in their capacities as attorneys.” R. 1:21-1B(a)(4).

Plaintiff purchased a LawyerCare professional liability insurance policy (the Policy) from defendant ProAssurance Casualty Company. In 2015, in preparation for a compliance audit by the Office of Attorney Ethics (OAE), plaintiff discovered that one of her employees, Miguel Mayorga, a paralegal, misappropriated approximately $800,000 of clients’ funds held in the LLC’s trust account in connection with real estate closings. Plaintiff notified defendant of a potential claim under the Policy. Defendant declined coverage, relying on the Policy’s definition of covered “damages,” which specifically did not include “misappropriated client funds.”

The attorney then filed a declaratory judgment to enforce coverage under the insurance policy.

The court rejected the suggestion that policy coverage is co-extensive with ethical obligations with respect to entrusted funds

Simply put, the [ethical] Rule regulates the conduct of attorneys, not insurers. Plaintiff cites no authority for the proposition that the Court, acting within its constitutional spheres of attorney discipline and administration of the courts, has the power to enact a rule that regulates the conduct of insurers doing business in the state, a function the Legislature delegated to DOBI. N.J.S.A. 17:1-15…

The Rule is a “disciplinary rule” firmly rooted in the Court’s exclusive constitutional powers. The Court in Mortgage Grader did not, for example, use that power to revive the malpractice insurance policy that had lapsed to provide coverage to the LLP and the innocent defendant-partner during the wind down period and offer the plaintiff a source of recovery if successful in its malpractice claim.

Plaintiff’s contention that the Policy must be reformed because it failed to comply with the requirements of the Rule is unavailing.

On the merits of the coverage claim

The motion judge rejected these arguments by noting the limitation on covered damages was not ambiguous, and plaintiff knew or should have known the Policy provided no insurance for claims involving damages resulting from misappropriated client funds. The judge also found plaintiff’s purchase of a second policy covering “employee theft” to be persuasive in demonstrating plaintiff was aware the Policy provided no coverage for misappropriated funds. Lastly, the judge noted that plaintiff could not have relied upon any misrepresentation by defendant about the Policy’s coverage and whether it complied with the Rule because plaintiff was unaware of the Rule until the OAE requested the certificate of insurance.