No Coverage for Lawsuit Seeking Recovery of Disputed Legal Fees

In a win for Wiley Rein’s client, the U.S. Court of Appeals for the Second Circuit, applying Connecticut law, has held that no coverage is available for a lawsuit seeking recovery of disputed legal fees because the relief sought does not constitute covered “damages” and because the insured was not performing “legal services.”  Continental Cas. Co. v. Parnoff, 2019 WL 6999867 (2d Cir. Dec. 20, 2019).

The insured, an attorney, sought a percentage of an arbitration award as a contingency fee from his client.  The client disputed the amount of the contingency fee, and the insured placed the disputed amount in a trust account.  During the appeal period following a judgment awarding part of the disputed fee to the insured, the insured transferred the entire disputed amount from the trust account to a personal account.  The appellate court reversed, finding that the insured was not entitled to recover any fee.  The client sued the insured, seeking recovery of the disputed fees and asserting counts for conversion, constructive trust, disgorgement, civil theft, breach of fiduciary duty, negligence, and punitive damages.

The insured sought coverage for the lawsuit under a professional liability insurance policy affording coverage for claims that an “Insured shall become legally obligated to pay as damages . . . because of a claim that is both first made against the Insured . . . by reason of an act or omission in the performance of legal services by the Insured . . . .”  The policy excluded from the definition of “damages,” among other items: (1) “legal fees, costs and expenses paid or incurred or charged by any Insured, no matter whether claimed as restitution of specific funds, forfeiture, financial loss, set-off or otherwise, and injuries that are a consequence of any of the foregoing;” (2) “punitive or exemplary amounts;” and (3) “the multiplied portion of multiplied awards.”  The insurer sought a declaratory judgment that there was no defense or indemnity coverage for the lawsuit.  The U.S. District Court for the District of Connecticut granted the insurer’s motion for judgment on the pleadings, holding that the lawsuit did not seek covered “damages,” and therefore the lawsuit did not fall within the coverage agreement.

The Second Circuit affirmed, concluding that the lawsuit “was not covered by the Policy because the relief [the client] sought did not fall within the covered damages and, moreover, fell within an exclusion.”  The court reasoned that the client “was not seeking damages caused by ‘an act or omission in [the] performance of legal services,’” but rather sought “recovery of monies (through the remedies of disgorgement and constructive trust) that she claimed [the attorney] had converted.”  Moreover, the client “was seeking to recover legal fees charged by [the attorney], which fell within the exclusion for legal fees charged by the insured[,]” and “requests for costs and interest were contingent on her recovery of the disputed fee amount and were thus excluded as ‘injuries that are a consequence of’ [the] legal fees.”  Finally, the court held that treble and punitive damages also were excluded from the definition of “damages.”