No Coverage for Breach of Contract under Professional Liability Policy

The United States District Court for the District of Minnesota, applying Minnesota law, has held that a law firm’s professional liability policy does not provide coverage for the firm’s alleged breach of various litigation funding agreements. Madgett Law, LLC v. Pracati Capital, LLC, 2023 WL 9509936 (D. Minn. Dec. 14, 2023). 

The insured law firm purchased a claims-made professional liability policy that provided coverage for Damages because of Claims “as a result of Wrongful Acts committed in the performance of Insured Services.” A Wrongful Act included “[a] negligent act, error, or omission.” The Policy identified the “Insured Services” as “Attorney.” 

The law firm was named in an arbitration demand that alleged breach of several litigation funding agreements between the funder and the law firm’s co-counsel in a matter in which the insured law firm had withdrawn its appearance and which had since concluded via settlement. Even though the insured law firm was not a party to the agreements, the funder alleged that it had breached the agreements and sought damages. The arbitration demand did not include any claim for negligence or professional liability against the firm. The firm tendered the arbitration demand under its professional liability policy, and the carrier denied coverage.

In the ensuing coverage litigation, the court granted the carrier’s motion to dismiss and affirmed its coverage denial, holding that the carrier owed no duty to defend the law firm against the arbitration demand because the claim fell outside the scope of coverage provided by the professional liability policy. The court emphasized that none of the demand’s allegations suggested that the law firm committed any negligent act, error, or omission in the performance of legal services for others. According to the court, any alleged negligence would have occurred in updating business records or failing to adhere to the legal funding agreements, not the firm’s services as an attorney. The demand thus did not trigger the carrier’s duty to defend under the professional liability policy.  The court declined to address coverage under any of the other policies the carrier allegedly issued to the firm (which insured different types of risks) because the complaint reasonably referred only to the firm’s professional liability policy.