Eleventh Circuit: Misappropriation Exclusion Doesn't Bar Duty To Defend Under Georgia Law

The Eleventh Circuit has held under Georgia law that a misappropriation exclusion in a lawyer's professional liability insurance policy did not eliminate the insurer's duty to defend an underlying lawsuit. See Medmarc Casualty Insurance Co. v. Fellows Labriola LLP, 2025 U.S. App. LEXIS 26389 (11th Cir. Oct. 10, 2025).

The exclusion barred coverage for "any claim or other request involving or relating to any conversion, improper commingling, or misappropriation, whether by an Insured or any other person, and whether intentionally or not, of client funds or trust account funds or funds of any other person held by any Insured in any capacity." The underlying lawsuit alleged that the insured lawyer agreed to represent multiple clients without recognizing potential conflicts among them, failed to advise the clients about the potential conflicts, and failed to seek a waiver of the conflicts or withdraw from the representation. The underlying lawsuit also alleged that the insured law firm received certain funds deposited into its IOLTA account related to the joint representation and then improperly distributed those funds among the clients.

As an initial matter, the court found that "[t]here are multiple claims" in the underlying lawsuit. The court rejected the insurer's argument that the underlying lawsuit was a single claim based on language in the policy's "When a Claim is First Made" section. The pertinent sentence stated that "[a]ll claims... involving a single act, error, or omission or a series of related acts, errors, or omissions shall be deemed to be one claim and to be first made when the first of such claims is made." The court found that the insurer did not make the "one claim" argument in the trial court, and also determined that, to the extent the argument needed to be considered on appeal, it was "unpersuasive." The court reasoned that because the "one claim" sentence appeared in the "When a Claim is First Made" section, rather than the definition of "claim," an insured "would expect that the sentence in question impacts only when a claim is first made and would not expect it to inform the meaning of 'claim' beyond that."

In a footnote, the court wrote the policy defined "claim" to mean "a demand or suit for damages received by the Insured, including any arbitration proceedings to which the Insured is required to submit or to which the Insured has submitted with the Company's consent." But the court did not explain why the underlying lawsuit included multiple "claims" based on that definition.

After determining that there were multiple claims in the underlying lawsuit, the court ruled that "at least some fall outside the misappropriation exclusion." In particular, the court found that "the conflict of interest allegations... have nothing to do with misappropriation, conversion, or improper commingling and, thus, fall outside the misappropriation exclusion." The court rejected the insurer's argument that the conflict of interest allegations "involve" or "relate" to misappropriation, conversion, or improper commingling. Quoting the Supreme Court's ruling inNew York State Conf. of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 655 (1995), the court stated that it "must not read phrases like 'relate to' so that they 'extend to the furthest stretch of [their] indeterminacy.'" The court declined to rule "where that line ultimately lies," but stated "it surely cannot be where claims simply involve the same parties and are brought in the same lawsuit."

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