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When a Law Firm Gets Scammed: Must Insurer Defend, Indemnify?

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By Cynthia Hsu, Esq. on June 09, 2011 6:45 AM

What does your law firm insurance cover? Does it cover e-mail scams?

That's right - those strange e-mail scams that you always see popping up in your personal inbox from those Nigerian nationals asking you to help them with their inheritance that was left to them by their great great uncle that they can't get to without your help... Yes, those scams.

A New York court has ruled that a law firm's insurance policy does in fact cover work done for these "clients," as one firm found out the hard way.

Lombardi, Walsh, Wakeman, Harrison, Amodeo & Davenport, P.C., received an e-mail by a "CEO" of a "Taiwanese corporation." The e-mail stated that this "CEO" needed help in collecting debts in North America. A retainer was signed, and the law firm received $384,700 from a "debtor" - at which point the law firm deposited the check into their bank account, according to the court opinion.

They were instructed to transfer the funds, minus their legal fee, to another bank in South Korea to a supplier of the phony corporation. The transfer was made, and the check was found to be counterfeit - and the law firm overdrawn on its accounts.

The law firm settled with the bank on the overdraft, but they had originally contacted their law firm insurer, American Guarantee and Liability Insurance Company. American Guarantee declined to indemnify, according to the opinion.

But, the court disagreed - and ruled that American Guarantee was required to help defend the law firm. After all, the scope of the insurance was to cover a claim "based on an act or omission in [plaintiff's] rendering or failing to render Legal Services for others," according to the court opinion. However, due to the confidential nature of the settlement, the court did not decide on whether or not American Guarantee had to indemnify the law firm as well.

So, it really didn't matter that the client was a fake client. Fake clients still fall under the purview of "others" in the clause "legal services to others," according to the court.

Of course, this decision is only in the New York courts. And, law firms should still exercise caution - Lombardi thought they had when they told the bank to wait until the check "cleared" before sending it to South Korea, but apparently there is a big difference between "cleared" and "available." Luckily, their law firm insurance now has their back.

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