Investigation Seeking Sanctions and Return of Fees Sought No Covered “Damages”

In a win for Wiley Rein’s client, a Louisiana federal district court has held that an insurer has no duty to defend an attorney in an investigation that sought only sanctions, the return of legal fees, and other non-covered relief.  Andry Law Group, LLC v. CNA Fin. Corp., 2018 WL 3642003 (E.D. La. Aug. 1, 2018).

The insured attorney represented clients seeking settlement payments in the Deepwater Horizon oil spill settlement program.  In 2013, the court overseeing the settlement program appointed former FBI director Louis Freeh as a special master to investigate potential misconduct in the settlement process.  The special master’s investigation revealed that the insured attorney had colluded with a member of the settlement claims administrator’s staff and submitted fraudulent claims on behalf of his clients.  The special master recommended that the court disallow the attorney from representing future settlement claimants and report the attorney to the proper disciplinary and criminal authorities.  Additionally, the special master initiated proceedings to clawback the legal fees the attorney had earned to date for fraudulent claims.

The insured sought coverage under his lawyers professional liability policy for the special master’s investigation, including the clawback actions.  The insurer denied coverage because the investigation presented no possibility of covered “damages,” which was defined in the policy expressly to not include “legal fees, costs and expenses paid or incurred or charged by any Insured,” “civil or criminal fines, sanctions, penalties or forfeitures,” and “injunctive or declaratory relief.”

In the  coverage litigation, the court agreed with the insurer that the investigation sought no covered damages.  The court held that all the relief contemplated by the special master – the attorney’s disqualification from future representations, the clawback of fees the attorney earned for fraudulent claims, and the referral of the matter for future disciplinary or criminal investigation – constitutes sanctions, penalties, injunctive relief, or the return of legal fees, and thus is not included in the policy’s definition of “damages.” Accordingly, the court held that the insurer has no duty to defend or indemnify the attorney in connection with the special master’s investigation or the clawback actions.