In an insurance coverage dispute arising out of an unusual underlying criminal proceeding, the Fourth Circuit Court of Appeals, applying Maryland law, has held that a Maryland attorney indicted for his alleged actions on behalf of certain Somalian entities is not entitled to insurance for his fees incurred in defending against the indictment. The Court’s decision raises interesting issues about the applicable professional liability insurance policy’s definition of Claim and the definition’s application in the context of the attorney’s criminal proceedings. A copy of the Fourth Circuit’s January 4, 2024 opinion can be found here.
In 2017, Jeremy Schulman was an equity shareholder in the Maryland law firm of Shulman, Rogers, Gandal, Pordy & Ecker. In January 2017, the U.S. Department of Justice served the law firm with a grand jury subpoena. The subpoena sought the production of documents relating to the law firm’s representation of various individuals and entities associated with the government of Somalia.
The law firm notified the various carriers on its professional liability insurance program of the subpoena. The carriers contended that the subpoena did not constitute a claim and therefore did not trigger coverage. The law firm disputed the carriers’ position. In an April 2017 letter, in order to “assist in responding to the subpoena,” and to “resolve” the coverage dispute, the insurers stated that they would pay 70% of the defense fees incurred by the law firm’s counsel in responding to the subpoena.
In May, Schulman sent an email to the carriers saying, among other things, that he had not yet received written documentation with respect to the carriers’ agreement to reimburse 70% of counsel’s fees. In a June 22, 2017 letter, the carriers replied by letter to Schulman’s email. The letter opened by saying that they were responding to the matter “involving a subpoena from the U.S. Department of Justice,” and saying further that a compromise had been reached “with respect to this matter” pursuant to which the carriers agreed to pay 70% of defense fees and 100% of costs.
In December 2020, a grand jury returned an indictment charging Schulman with mail fraud, wire fraud, bank fraud, money laundering, and other charges. The indictment alleged that Schulman conspired with Somali entities to recover millions of dollars of frozen Somali assets. The indictment further alleged that Schulman, using forged documents, had represented to various financial institutions that he was authorized to take control of the Somali assets on behalf of the law firm’s clients. The indictment alleged that Schulman and the law firm retained a portion of the assets. The indictment warned that the government would “seek forfeiture as part of any sentence … in the event of [Schulman’s] conviction of any of the offenses.”
In response to the indictment, the insurers stopped paying the defense counsel’s invoices and subsequently sent a letter denying coverage for expenses related to the indictment, saying that the indictment was not a Claim as defined by the policy, noting that the term Claim is limited in the policy to civil rather than criminal proceedings.
Schulman initiated a coverage action against the insurers. The parties filed cross-motions for summary judgment. The district court granted the insurers summary judgment motion, holding that the indictment was not a claim within the meaning of the policy and that June 2017 letter from the carriers did not establish Schulman’s right to his expenses in defending against the indictment. Schulman appealed.
The Applicable Policy Language
The Policy defines a Claim as:
1. any of the following: a. a written demand against any Insured for monetary or non-monetary relief; b. a civil proceeding against any Insured commenced by the service of a complaint or similar pleading; c. a written demand for arbitration or mediation; d. a formal civil administrative or civil regulatory proceeding against any Insured, including, but not limited to, a Disciplinary Proceeding, commenced by the filing of a notice of charges or similar document or by the entry of a formal order of investigation or similar document;
2. a written request received by the Insured to toll or waive a statute of limitations relating to a matter described in subparagraph 1. above.
The January 4, 2024, Opinion
On January 4, 2024, in an opinion written by Judge James Andrew Wynn for a unanimous three-judge panel, the Fourth Circuit affirmed the district court, holding that Schulman is not entitled to coverage under the law firm’s professional liability insurance program.
Schulman had first argued that the indictment constituted a Claim under the policy because of the reference in the indictment to the government’s intent to seek “forfeiture” upon sentencing represented a “demand for monetary relief.” The court, applying dictionary definitions of the term “demand,” held that the indictment’s reference to forfeiture was not a “demand,” because it “did not require Schulman to turn over any money or property,” but “merely informed him” that “if he was convicted in the future, the government would seek forfeiture of various money and property.”
Schulman next argued that he was nevertheless entitled to have his defense fees incurred in connection with the indictment paid by the carriers because the June 2017 letter from the carriers, documenting the compromise that had been reached at the time, was contractual, and in any event, that he had detrimentally relied on the letter.
The appellate court rejected these arguments, holding that the June 2017 letter had only relate to “this matter” as identified in the letter – that is, in connection with the costs associate with responding to the subpoena. The letter, the court held, by its own terms did not reach beyond the subpoena and did not provide coverage for fees incurred in defending against the indictment. The court also rejected Schulman’s detrimental reliance argument, saying that “the plain language” of the June 2017 letter “does not promise to cover anything besides the fees and expenses related to the subpoena.”
Finally, the appellate court confirmed the district court’s dismissal of his bad faith claim against the carriers, holding that under applicable Maryland law, a plaintiff may prevail on a bad faith claim only where the plaintiff has established that he or she was entitled to coverage under the policy.
I can certainly understand Schulman’s struggle to try to obtain insurance coverage for the defense fees and expenses he incurred in defending against the indictment. The indictment is clearly a serious matter, threatening the prospect of serious consequences, including imprisonment and, as the indictment recited, even the possibility of forfeiture.
I bring a particular perspective to the issues in this dispute; my experience is primarily with D&O insurance coverage issues, rather than coverage issues under professional liability insurance policies. Coming to this dispute with the perspective of a D&O insurance practitioner, I look at the definition of Claim in this professional liability insurance policy, and the first thing I notice is that the definition of this Claim in this policy differs in one very distinctive way from the definition of Claim typically found in a D&O insurance policy.
That is, a D&O insurance policy typically will include within the definition of Claim an express provision that specifying that a Claim under the policy includes a criminal proceeding after the issuance of an indictment or criminal information. This type of provision is conspicuously absent from the definition of Claim at issue in the professional liability insurance policy at issue here.
The absence of any reference in the definition of the term Claim to a criminal proceeding arguably underscores the fact that Claims under the professional liability policy are limited to civil proceedings, and do not extend to criminal proceedings.
Given that distinctive aspect of the professional liability policy, it was always going to be an uphill battle for Schulman to establish coverage under the policy.
Schulman’s argument that the indictment’s reference to the possibility of forfeiture upon sentencing following any future conviction constituted a demand for monetary relief was his best argument that the indictment fell within the definition of Claim. However, as the appellate court found, the forfeiture reference in the indictment was not a present demand, merely a warning of possible future efforts in the event of an eventual conviction.
I will say, this is about as unusual or perhaps even as exotic a set of circumstances as you might want to conjure. I suspect strongly that somewhere wrapped up in the underlying circumstances there are a host of vexing questions about who or what constitutes the rightful government of Somalia and about who is authorized to act on its behalf.