More than one attorney has been very upset to find that their fees are rarely covered under an attorney malpractice insurance policy. Usually this realization comes after the claim is denied. Included under this category of damages are civil or criminal fines, sanctions, or penalties ordered by a court or other administrative body. In addition, demands for attorney’s fees to be returned to the client are not covered.
But there are always exceptions to the rule. Given the right facts there might be coverage. The Illinois Appellate Court ruled in ILLINOIS STATE BAR ASSOCIATION MUTUAL INSURANCE COMPANY v. Canulli that the ‘Fees’ in question were not attorney fees but actually a legal malpractice claim. This was because the attorney’s actions caused his former client (Freda) to spend more money to defend Freda. So the attorney fees in question were the result of a covered legal malpractice act. According to the Appellate Court:
“….This was a legal malpractice claim, not a fee dispute. Contra Tana, 55 Cal. Rptr. 2d at 163. Freda’s complaint stems from the allegedly negligent way Canulli represented her in the divorce, and it is that negligent representation that caused her to expend more money than necessary. This is clearly a dispute about representation. Therefore, we conclude that the damages Freda sought in her amended complaint were not excluded by the policy and so ISBA Mutual had a duty to defend Canulli against her complaint.
¶ 31 We note that ISBA Mutual’s decision to cut off Canulli’s defense upon receipt of Freda’s amended complaint was a drastic measure. Given the broadness of an insurer’s duty to defend, discussed above (supra ¶ 21), we struggle to understand why ISBA Mutual did not take a more circumspect approach. It could, for example, have continued to defend Canulli under a reservation of rights while ascertaining its obligation. Its failure to do so is incomprehensible.”
But 99 times out of 100, a fee suit exclusion applies. Depending on the insurer’s attorney malpractice policy the language for this exclusion normally is found in 1 of 3 places: the insuring agreement, the definition section where damages or claims are defined, or in the exclusion section of the policy. Typically, this exclusion is found in the definition of damages which is where it is found in the ISBA policy.
A typical example is in the Berkley Insurance Company policy definition of damages:
D. Damages means judgments, awards and settlements (including pre-judgment interest), provided all settlements are negotiated with the assistance and approval of the Insurer. Damages also includes punitive and exemplary damages, and the multiple portions thereof, to the extent that such damages are insurable under the law of the most favorable applicable jurisdiction. Damages do not include:
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. civil or criminal fines, sanctions, penalties or forfeitures, whether pursuant to law, statute, regulation or court rule, including but not limited to awards under 18 U.S.C. §1961, et. seq., Federal Rules of Civil Procedure 11 or 28 U.S.C. §1927 and state statutes, regulations, rules or law so providing, and injuries that are a consequence of any of the foregoing;
3. injunctive or declaratory relief; or
4. any amount for which an Insured is absolved from payment by reason of any covenant, agreement or court order.
Fees can be a significant exposure to an attorney as court awarded attorney’s fees can amount to millions of dollars. Attorney fees and associated sanctions (which were excluded in the above case) tend not to be covered because when awarded they are meant to punish for deliberate, excessive or egregious acts by an attorney so there should be no coverage.
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Lee Norcross, MBA, CPCU
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