What normally goes straight into an email “delete” folder is taken seriously and acted upon by a surprising number of lawyers. A Chinese company, in less than perfect English, expresses the immediate need for legal representation to exert pressure on their delinquent customers. The email is flattering – “after a careful review of your profile as well as your qualifications and experience, we are of the opinion that you are capable and qualified to provide the legal services as requested.”
The opportunity to earn a few thousand dollars with no effort is too enticing. The lawyer agrees to represent the client and may even obtain a signed retainer agreement. The client then tells the lawyer that the delinquent customer has agreed to pay, and the lawyer soon receives a cashiers’ check from the delinquent customer. The lawyer deposits the check into a client trust account and wire transfers the funds, less the lawyer’s 10% fee, to a foreign bank account. A few days, a week, or even a month later, the lawyer’s bank learns the cashiers’ check is phony, freezes the lawyer’s client trust account, and demands that the lawyer immediately repay the deficit. The lawyer has no recourse, as the wire transfer cannot be reversed and the “client” has disappeared.
Not surprisingly, the scammed lawyer seeks coverage for the bank’s claim from his legal malpractice insurer. But where are the “Professional Services”?
“Although a professional may commit the conduct, the critical issue for insurance coverage is whether the act or omission in dispute was ‘professional.’” Ronald E. Mallen and Jeffrey M. Smith, Legal Malpractice (2009 Ed.), § 36:9. In the seminal case of Bank of California, N.A. v. Opie, 663 F.2d 977,988 (9th Cir. 1981), the Ninth Circuit held the status of a person as a “professional” within a particular field does not mean that any activity by that person constitutes the performance of “professional services” subject to coverage under a malpractice policy: “To be covered, the liability must arise out of the special risks inherent in the practice of the profession.” In PMI Mortgage Ins. Co. v. American Int’l Specialty Lines Ins. Co., 394 F.3d 761, 766 (9th Cir. 2005), the Ninth Circuit similarly held that “insurance policies covering ‘professional services’ reach only those acts committed by the insured in his or her capacity as a professional – they do not cover general administrative activities that occur in all types of businesses.”
The “act” giving rise to the scammed lawyer’s potential liability to the bank is the deposit of a phony check into the client trust account. There is no specialized knowledge or skill required in depositing a check or making a wire transfer; rather, any person with a bank account could do the same. Thus, the bank’s claim against the scammed lawyer is not predicated on any “Professional Services” rendered by the lawyer, so the typical malpractice policy would not defend or indemnify the scammed lawyer for the bank’s claim. Indeed, we have obtained arbitration decisions in favor of our professional liability insurer clients on this fact situation.
While there is no California case on point, trial courts in other jurisdictions have ruled that professional liability insurers do not owe coverage in this situation. A Georgia court ruled: “No application of legal knowledge unique to the practice of law is implicated by [Insured’s] actions in this case. While he may have initially been contacted on the pretense of providing some legal services . . . , it is ‘the nature of the act the insured performed, rather than the title or status of the insured,’ that determines what actions taken by an insured amount to the provision of ‘professional services.’" Fidelity Bank v. Stapleton, Civil Action No. 07A-11482-2 (Georgia 2009). A Massachusetts Court came to the same conclusion, holding that “the receipt, endorsement, and deposit of a check, and the distribution of funds did not require a lawyer’s specialized knowledge, labor, or skill . . . [the lawyer] was merely an essential pawn in an elaborate fraudulent check scam, a role which did not call upon his professional skills but rather required [his] blind trust to act as a facilitator to convert a check to cash.” Fleet Nat’l Bank v. Wolsky, Civil Docket CV2004-05075 (Mass. Superior Ct. 2006).
In some cases, other coverage issues may arise. If the bank alleges that the scammed lawyer breached a written depository agreement with the bank, the breach of contract exclusion in the professional liability policy may be triggered. A different analysis may be required with respect to claims brought against the lawyer by clients whose funds were in the trust account when it was frozen by the bank, giving rise to an argument that the scammed lawyer negligently failed to safeguard the clients’ funds. Even in this situation, however, coverage may not arise, as the act causing the clients’ loss – the lawyer allowing his client trust account to become overdrawn by depositing a phony check and wiring funds out of the account – arguably would not involve the performance of legal services.
When a lawyer falls for one of these internet scams, the consequences to the lawyer and his or her practice can be devastating. The situation is truly unfortunate, but it is generally not one which triggers coverage under a professional liability policy.