In Shamoun & Norman, LLP v. Ironshore Indemnity, Inc., Cause No. 3:14-1340, In the U.S. District Court, Northern District of Texas, the federal district court construed a professional liability policy issued by Ironshore to require a defense of the law firm policyholder in a fee dispute, despite an absence of allegations that the insured law firm negligently provided any legal service.

The Underlying Dispute

Shamoun & Norman, LLP (insured) represented an individual over a period of years in connection with a variety of litigation matters. During the attorney-client relationship, the parties executed an incentive bonus agreement that allegedly entitled the insured to additional fees in the event litigation ended successfully for the client. After the attorney-client relationship ceased, the insured attempted to enforce the incentive agreement to collect additional fees. In response, the now-former client filed a counterclaim against the insured for breach of fiduciary duty, claiming that the insured only sought the incentive agreement once it became clear that litigation would, in fact, end successfully. The former client further alleged that the insured “asserted unconscionable pressure … to extort him in violation of the fiduciary duty” owed by the insured.

The insured presented the counterclaim to its professional liability carrier, Ironshore Indemnity, Inc. (insurer). Insurer originally agreed to provide a defense subject to a reservation of rights. Insured protested, arguing that the reservation was inappropriate. Shortly thereafter, insurer withdrew the defense, arguing that a fee dispute was not a “professional service,” the rendering of which led to the counterclaim.

Ultimately, the fee dispute went to trial, at which time the jury determined that neither the insured nor the former client should recover anything. Insured then brought suit against insurer to recoup the fees paid to its defense counsel. The insured also asserted claims for extracontractual relief and bad faith.

The Professional Services Policy

The insurance policy contained two relevant provisions. First, the policy defined the duty to defend as follows:

The Insurer shall have the right and duty to defend any Claim first made against the Insured during the policy period and reported to the Insurer during the Policy Period and arising out of the rendering of or failure to render Professional Legal Services, including an appeal thereof, seeking Damages to which this insurance applies even if any of the allegations are groundless, false or fraudulent.

Emphasis added. The policy defined the phrase “Professional Legal Services” as follows:

“Professional Legal Services” shall mean legal services and activities performed for others as a lawyer, and including pro bono legal service, services as a notary public, arbitrator, mediator, title insurance agent, designated issuing lawyer to a title insurance company, fiduciary, services rendered as a member of a bar association, ethics peer review, formal accreditation board or similar professional boards or committees, or the publication or presentation of research papers or similar materials by an Insured. … Professional Legal Services shall include services as an administrator, conservator, receiver, executor, guardian, or in any similar fiduciary capacity, or trustee, if such services are usual and customary to the practice of law and are in the rendering of professional services to others in an attorney client relationship.

The Coverage Dispute

Insured and insurer filed cross-motions for summary judgment, each contending that the policy unambiguously dictated a ruling in its favor. The insurer argued that billing disputes were not “professional services” generally, nor were they services “performed for others.” The insured argued, among other issues, that the dispute “arose out of” the attorney-client relationship, which was sufficient to trigger coverage.

The district court reviewed the terms of the policy and concluded that non-specialized tasks such as billing and fee setting would not fall under the policy’s definition of “professional legal services,” a construction that the court noted was consistent with other Texas case law.

That said, the court held that the policy provided coverage for any claim “arising out of” the rendering of professional services. The court also held that, under Texas law, the phrase "arising out of" is construed broadly to mean “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 instant case, the former client counterclaimed against the insured for breach of fiduciary duty, a claim that could not exist “but for” the existence of an attorney-client relationship wherein professional services were provided. Thus, the district court reasoned, the former client’s claim for breach of fiduciary duty had a "but for" connection with the insured’s provision of professional services and insurer had a duty to defend the insured under the terms of the policy.

Implications

Insurer argued that the court’s ruling would effectively convert every fee dispute into a matter covered by a professional liability policy, as all fee disputes would bear a “but for” relationship to the provision of professional services. The court did not address this argument, nor did the court address with specificity the cases cited by insurer from other jurisdictions holding that fee disputes were not “professional services” covered by professional liability policies. Given the expansive construction of the policy under the “arising out of” language, however, insurers and policy holders should evaluate carefully the coverage afforded by professional liability policies.