A group of insurance companies are not obilgated to pay criminal defense fees of a former partner with the law firm Shulman, Rogers, Gandal, Pordy & Ecker who is accused of conspiring to fraudulently take more than $12.5 million in Somali government assets.
In early 2017, the U.S. Department of Justice served a subpoena on the midsize firm in connection with a criminal investigation regarding various individuals’ activities and efforts to retrieve frozen assets of the Somali government, according to the opinion filed April 28 by U.S. District Judge Lydia Kay Griggsby of the District of Maryland.
Subsequently, Jeremy W. Schulman—a Bethesda, Maryland, attorney—was indicted by a federal grand jury in December 2020 on charges of wire fraud, mail fraud, bank fraud and money laundering conspiracies in connection to his alleged role in a scheme to gain control of those assets, the opinion said.
Schulman and others allegedly created false documents regarding Schulman’s authority to recover assets on behalf of the Somali government. Schulman provided these fake documents to banks and other institutions, according to a DOJ media release.
Schulman and his co-conspirators obtained control of approximately $12.5 million of frozen Somali funds, the DOJ said. Schulman also caused the firm to improperly retain more than $3.3 million of the funds while remitting the rest to the Somali government.
The criminal case is still pending before U.S. District Judge Paula Xinis of the District of Maryland, but Schulman filed a separate lawsuit in district court against insurance carriers that issued professional liability policies to the law firm after he was denied coverage for his defense fees incurred in connection with the indictment.
Schulman asserted six claims against Axis Surplus Insurance Co., Endurance American Specialty Insurance Co., and ProSight Syndicate 1110 at Lloyd’s.
Schulman argued that both the DOJ subpoena and the indictment constitute a “claim” for a “wrongful act” under the policies and that the defendants are obligated to pay all his claimed expenses in defending against both the DOJ subpoena and the indictment, Griggsby’s opinion said.
The defendants did not dispute that they are obligated to cover the plaintiff’s expenses with regard to the DOJ subpoena, but they argued that the plain language of the policies shows that the indictment is not a “claim” under the definition because a “claim” is limited to those matters involving civil proceedings, the opinion said.
Griggsby agreed, finding the undisputed material facts in the case show that the primary policy does not require the defendants to cover Schulman’s defense fees associated with the criminal indictment. The judge granted summary judgment on behalf of the defendants and dismissed the complaint last week.
“A plain reading of the policies and the undisputed material facts in this case show that the Indictment is not a ‘claim’ as the term is defined in the primary policy,” Griggsby wrote in the opinion. “In addition, the undisputed material facts make clear that plaintiff cannot show that defendants promised to cover his defense fees to prevail on his detrimental reliance claim and that Maryland does not recognize the tort of bad faith failure to pay defense expenses.”
When looking at the primary claim’s definition of “policy,” there is no reference of an indictment or criminal proceeding. Rather, examples of a “claim” in the definition “clearly describe civil proceedings or matters,” the opinion said.
Another relevant provision in the primary policy contains exclusions that bar coverage for any claim that arises “out of, directly or indirectly resulting from, in consequence of or in any way involving: … any criminal, dishonest, malicious, or deliberately fraudulent act, error or omission by an Insured … if evidence by any judgment, final adjudication, alternative dispute resolution proceeding or written admission by an Insured,” the opinion said.
Schulman’s argument relied on an exclusion in the primary policy involving claims arising from criminal acts by an insured, but the judge found that the language in the policy bars coverage for any claim “‘based upon, arising out of, directly or indirectly resulting from, in consequence of or in any way involving: … any criminal, dishonest, malicious or deliberately fraudulent act, error or omission by an Insured … if evidenced by any judgment, final adjudication, alternate dispute resolution proceeding or written admission by an Insured,” the opinion said.
“Plaintiff’s argument that this exclusion creates coverage for the Indictment under the primary policy is also unpersuasive for two reasons. First, it is well-established under Maryland law that ‘a basic legal precept concerning insurance coverage is that exclusions do not create coverage.’ … Second, the exclusion at issue here specifically refers to claims that arise out of a criminal act by an insured, ‘if evidenced by any judgment, final adjudication, alternate dispute resolution proceeding or written admission by an Insured,’” Griggsby wrote. “And so, by its terms, the primary policy requires that the evidence of a criminal act involve a civil proceeding, such as civil judgment or alternate dispute resolution proceeding. Again, this requirement is consistent with a reading of the primary policy to cover only civil matters. Given this, the exclusion relied upon by the plaintiff does not show that the parties intended to cover the Indictment under the terms of the primary policy.”
Griggsby also rejected Schulman’s argument that the indictment is a “wrongful act” under the primary policy. The policy defines a “wrongful act” as ”any actual or alleged … 1. act, error, or omission; 2. breach of contract for Professional Services; 3. breach of fiduciary duty; or 4. personal injury; committed or attempted … solely in the performance of or failure to perform Professional Services by any Insured,” the opinion said.
“By comparison, the Indictment alleges that plaintiff engaged in criminal conduct—by conspiring to recover frozen Somali Government assets—not that plaintiff made an error or mistake in providing professional legal services. … Given this, the Indictment does not fall within the primary policy’s definition of a ‘wrongful act,’” the judge wrote.
On Thursday, one of Schulman’s attorneys representing him in the criminal matter, said the team is working to appeal Griggsby’s decision.
“The insurance companies declined coverage in error and it is remarkable that a lawyer practicing law with and at the direction of their firm would have to bear the cost of any defense—for which the expense can be enormous—after the representation of a firm client has been questioned,” said Stanley E. Woodward Jr., co-founder of Brand Woodward Attorneys at Law. “Mr. Schulman continues to strongly deny the charges that have been made against him and we would also highlight the numerous procedural and legal challenged evidenced by the docket because, as we recently wrote, ‘the government failed to fully investigate the case and ignored important facts that would exonerate Mr. Schulman,’ which have only exacerbated the issue of Mr. Schulman[] having to potentially fund his own defense.”
Schulman was admitted to the Maryland Bar in November 2005 and he currently serves as a founding member of Schulman Bhattacharya.
Neither Charles C. Lemley of Wiley Rein on behalf of Axis and Endurance, nor John J. Murphy III of Walker, Murphy & Nelson on behalf of ProSight, responded to a request for comment.