Duty to Defend Does Not Encompass Affirmative Claims

Applying Texas law, a federal district court has held that a professional liability insurer’s duty to defend an insured attorney against a former client’s claims does not encompass fees and costs incurred by the attorney in prosecuting an affirmative fee claim against the client.  Charla G. Aldous, P.C. v. Darwin Nat’l Assurance Co., 2015 WL 1037489 (N.D. Tex. Mar. 9, 2015). 

The insured lawyer, along with two other attorneys, sued a former client to recover fees.  The client counterclaimed for breach of fiduciary duty, duress, breach of contract, fraud, and professional negligence.  The lawyer sought coverage from her professional liability insurer.  The insurer agreed to the insured’s choice of counsel, subject to a detailed reservation of rights, which explained that the insurer would be responsible for one-third of defense counsel’s fees and expenses, which the insurer allocated to the defense of the client’s counterclaims.  The insurer specifically disclaimed any obligation to cover work performed by defense counsel in connection with the insured’s affirmative claims for fees.  Pursuant to this agreement, the insurer paid approximately $500,000 over the course of the litigation.  The three attorneys ultimately won their lawsuit against the client.  The final judgment included an award of $532,381.93, representing the attorneys’ fees and costs incurred in the defense of the counterclaims.  In light of that award, the insurer requested reimbursement from the insured.  The insured refused and filed suit against the insurer, asserting claims for breach of contract, violations of Texas Insurance Code § 542, and declaratory relief.  The insurer counterclaimed for declaratory relief, unjust enrichment, money had and received, and breach of contract.

In ruling on the parties’ cross motions for summary judgment, the court held that the insurer was entitled to judgment on the insured’s breach of contract claim for three reasons.  First, the court agreed with the insurer that it had no obligation to pay any fees or expenses related to the prosecution of the attorney’s affirmative fee claim, in part because it was not necessary for the insured to prevail on her claim in order to successfully defend the client’s counterclaims.  Second, the court held that the insured’s representation to the court in the underlying litigation that the fees and costs incurred in the defense of the client’s counterclaims totaled $668,068.38  judicially estopped her from seeking a different sum from the insurer.  Third, the court held that the insurer’s deduction of certain of fees and expenses in accordance with its billing guidelines did not constitute a breach of the duty to defend.  The court noted that the policy established that the insurer’s determination of the reasonableness of claim expenses would be “conclusive” and observed that the insurer’s deductions did not appear to be arbitrary.

Next, the court granted summary judgment in favor of the insured on the insurer’s breach of contract claim, which alleged that the insured’s refusal to reimburse the insurer after receiving the judgment against her client constituted an impairment of the insurer’s subrogation rights under the policy.  The court held that Texas’s anti-subrogation rule—which precludes an insurer from suing its insured on the contract—applied to bar the breach of contract claim.

By contrast, the court held that the anti-subrogation rule did not preclude the insurer’s claim for money had and received, which likewise sought recovery from the insured for the portions of the judgment representing the fees it had paid.  The court held that the insurer is entitled to such recovery, but concluded that summary judgment was not warranted because the insurer had not conclusively established the amount of its recovery.

Finally, the court held that genuine issues of fact remained as to the insurer’s claim for negligent misrepresentation based on certain statements by the insured, including her statement that “any fees and expenses recovered will be reimbursed to the carrier.”