Award for Claim Based on Improper Attorney Billing Is Not “Loss,” Does Not Involve “Professional Legal Services,” and Is Barred by a Personal Profit/ Advantage Exclusion

A Texas federal district court has granted summary judgment in favor of an insurer and held that there was no coverage for claims made against an insured law firm arising out of the firm’s alleged improper deductions from its client’s settlement distributions.  O’Quinn P.C. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 2014 WL 3543709 (S.D. Tex. July 17, 2014).  The court held that: (1) an arbitration award did not constitute covered “Loss” under the policy since the relief sought was essentially restitutionary in nature; (2) coverage was not triggered because the suits alleged wrongdoing in connection with improper billing practices, and not “professional legal services”; and (3) the policy’s personal profit/ advantage exclusion barred coverage.

During the early 1990s, a law firm began representing women in lawsuits against breast implant manufacturers.  Due to the large number of similar suits, the breast implant cases were consolidated for pretrial proceedings.  In mid-1993, the firm began deducting 1.5% out of the gross recovery of each client’s award for their pro rata share of expenses common to all cases, which it referred to as “BI General Expenses.”  This deduction was not set forth in the terms of the firm’s contingency fee contracts.  In addition, the “BI General Expense” account reported a surplus, but money was never returned to any of the firm’s clients until 2007.

In 1999, a group of former clients sued the firm and alleged that the deduction of the “BI General Expenses” was improper.  Another similar suit was filed in 2001, but that case was later non-suited and the plaintiffs joined the 1999 suit as class members.  An arbitration panel issued a final award against the law firm and ordered it to repay the amounts deducted for “BI General Expenses” and to forfeit some of the fees it collected as a remedy for its breach of fiduciary duty.  The award was confirmed by a state trial court, after which the law firm settled with the claimants.  The law firm then sought coverage under two legal malpractice policies issued by a single insurer: one that was in effect at the time of the 1999 suit, and another that was in place at the time of the 2001 suit.

The court granted summary judgment in the insurer’s favor.  First, the court ruled that the two lawsuits constituted a single “Claim” deemed first made in the earlier policy period pursuant to the “Interrelated Wrongful Acts” provision in the policies, reasoning that they involved the same factual allegations and arose from a common nexus of fact.  It then held that coverage was unavailable for any of three reasons: First, the underlying award was not “Loss” under the policy since the underlying claims were essentially restitutionary in nature.  The court rejected the law firm’s argument that neither the plaintiffs, the arbitration award, nor the settlement used the term “restitution,” opining that the gravamen of the claims was for reimbursement of amounts the firm had improperly deducted from its client’s settlements.  Second, the claims did not arise out of “professional legal services” but instead out of improper billing practices, which did not require specialized knowledge and skill inherent to lawyers.  Finally, the claim arose out of the firm’s “gaining profit or advantage to which it was not legally entitled” and was therefore barred under a policy exclusion.