Non-Covered Pre-Policy Claims for Return of Fees Do Not Impact Coverage for Breach of Duty Claim During Policy Period

Applying Michigan law, an intermediate court of appeals has held that a professional liability insurer was obligated to cover a claim for breach of duty notwithstanding its relationship to pre-policy period claims because those claims were for return of fees and therefore not covered under the policy and not required to be reported by the insured.  Illinois Nat’l Ins. Co. v. AlixPartners LLP, 2019 WL 939018 (Mich. Ct. App. Feb. 26, 2019).

The insured provided due diligence support to a client regarding an acquisition pursuant to a consulting agreement, and then the acquired company hired the insured to provide management services.  When the acquired company failed to improve financially as forecasted by the insured, the acquired company asserted verbal and written claims for return of or discounts on the management service fees.  Then, after the inception of the three relevant professional liability policies, the acquiring client sent a draft arbitration complaint addressing breaches of duties in the due diligence process prior to the acquisition.  The insurer paid the eventual arbitration award entered against the acquiring client, then sought a declaratory judgment that it was not covered based on its relationship to the pre-policy period claims by the acquired company.

The court denied the insurer’s motion for summary judgment, holding that the insured had no obligation to report the pre-policy period claims because they were for return of fees paid to the insured and therefore not covered under the policies.  The court also reasoned that the claimants were different, and one claim involved the pre-acquisition due diligence, while the other focused on the post-acquisition management services.  The court also rejected the insurer’s argument that the pre-policy period claims were asserted by the acquired company acting as an agent on behalf of the acquiring company.

The insurer also sought reformation of one of the policies based on unilateral mistake, arguing that the insured was aware of a possible claim while negotiating one of the three relevant policies and withheld that information to the insurer’s detriment.  The court rejected this argument, concluding that because the pre-policy period fee dispute claims were not required to be reported under the policy, the insured had no obligation to disclose them in the underwriting process.  Consequently, the insurer was not entitled to recoup the arbitration award.