Why it matters

Taking a broad interpretation of the phrase “arising out of the rendering of or failure to render Professional Legal Services,” a federal court in Texas held that a professional liability insurer was obligated to provide a defense to a law firm for a fee dispute. The insurer contended that the underlying fee dispute did not meet the policy’s definition of “Professional Legal Services.” Although the court recognized that billing and fee setting may not be “acts constituting acts arising out of professional services,” the dispute would not have come up “but for” the attorney-client relationship between the former client and the law firm. The court concluded that under Texas law, the phrase “arising out of” means that there is simply a causal connection or relation, though not necessarily direct or proximate causation. Therefore, despite being a fee dispute, because the claim had a “causal connection or relation” to the provision of professional legal services, a defense was owed.

Detailed Discussion

In the underlying action, the policyholder Shamoun & Norman law firm sued a former client for allegedly failing to pay the law firm certain performance bonuses. The former client counterclaimed, accusing the firm and its managing partner of attempting to extort $18 million from him through an unfair contingency fee.

Shamoun & Norman presented the claim to its professional liability insurer Ironshore Indemnity. The policy required Ironshore to defend and indemnify the law firm against claims “arising out of the rendering of or failure to render Professional Legal Services.”

Ironshore denied coverage, arguing that a fee dispute was not a “professional service.”

Ultimately, the underlying case went to trial, at which time the jury determined that neither the law firm nor the former client should recover anything. The law firm then brought suit against Ironshore to recoup its defense costs.

The Ironshore policy did not provide its own definition of “arising out of the rendering of or failure to render.” Therefore, the court stated, “if the claims against the plaintiffs had a ‘causal connection or relation’ to the provision of professional legal services, then Ironshore possessed a duty to defend.”

Although the court found that “[w]hile billing and fee setting may not be ‘acts constituting “professional services,”’ this does not answer whether they are acts ‘arising out of professional services,’” the court stated. In Texas, “arise out of” means “that there is simply a causal connection or relation, which is interpreted to mean that there is but for causation, though not necessarily direct or proximate causation.”

“In [the] original complaint, [the former client] alleged the plaintiffs ‘had a fiduciary duty to their client which they breached,’” the court stated. “But for the plaintiffs’ attorney-client relationship, there would be no claim for breach of fiduciary duty. Therefore, the claim has a ‘causal connection or relation’ to the plaintiffs’ provision of professional legal services.”

To read the opinion in Shamoun & Norman LLP v. Ironshore Indemnity, Inc., click here.