New York’s Highest Court Denies Law Firm Excess Coverage for Client Fraud

Executive Risk Indem. v. Pepper Hamilton LLP

(N.Y. Oct. 20, 2009)

New York’s highest court held that Philadelphia-based Pepper Hamilton LLP is not entitled to excess insurance coverage for litigation arising from its client’s securities fraud. The coverage litigation stemmed from fraud perpetrated by Pepper Hamilton’s client, a company that serviced the vocational portion of the student loan market. The client repackaged loans acquired from other lenders into certificates, which it sold to investors. Pepper Hamilton prepared memoranda used by the client in connection with the sale of certificates totaling more than $465 million. In March 2002, Pepper Hamilton learned that its client was involved in securities fraud.

In July 2002, for purposes of procuring insurance coverage, Pepper Hamilton’s general counsel circulated a memorandum inquiring whether any attorney was aware of any facts or circumstances that might be the basis of a legal malpractice claim. The Pepper Hamilton attorney handling the fraudulent client’s file informed general counsel of litigation pending against the client and stated that he was uncertain whether Pepper Hamilton would be joined in that litigation. Pepper Hamilton failed to disclose that information on its insurance applications.

Pepper Hamilton was ultimately sued for professional malpractice in connection with the securities fraud. Upon being notified of the lawsuit, Pepper Hamilton’s excess insurers denied coverage. Specifically, the excess insurers argued that the prior knowledge exclusion contained in Pepper Hamilton’s primary policy and expressly incorporated into the excess policies barred coverage. The Court of Appeals agreed, relying on proof that Pepper Hamilton was aware of its client’s securities fraud months before its excess policies incepted. The court stated that the attorney’s belief that he and Pepper Hamilton could be subject to a lawsuit, although subjective, was also reasonable. As a result, the court ruled that two of the excess insurers, Executive Risk Indemnity Inc. and Twin City Fire Insurance Co., are not obligated to indemnity Pepper Hamilton.

For a copy of the decision, click

Carrie Appler and Richard Cohen

http://www.goldbergsegalla.com/attorneys/Appler.html

http://www.goldbergsegalla.com/attorneys/Cohen.html