In a win for Wiley Rein’s client, a federal district court applying Connecticut law has held that an insurer has no duty to defend or indemnify an attorney in a lawsuit that arose out of a fee dispute and did not seek any covered relief.  Continental Cas. Co. v. Parnoff, 2018 WL 4356746 (D. Conn. Sept. 12, 2018).

The insured lawyer secured an arbitration award in favor of his client and attempted to take a 40% contingency fee, as per the terms of the engagement agreement.  The client disputed the validity of the contingency fee agreement under Connecticut law, and the lawyer agreed to place the disputed portion of the fee into an escrow account.  The lawyer then sued the client to enforce the fee agreement.  Following a favorable jury verdict but during the appeal period, the lawyer transferred the escrowed funds from the trust account and used them to pay his and his wife’s personal bills.  The appellate court reversed the jury verdict and held that the attorney was not entitled to any fee because of the fee agreement’s invalidity.  The client then filed a second lawsuit against the insured attorney, seeking money damages for the “depriv[ation] of funds to which [the client] was and is fully entitled,” along with treble damages for civil theft, the imposition of a constructive trust, “disgorgement of all moneys improperly taken as a purported legal fee,” punitive damages, costs, and other equitable relief.

The lawyer sought coverage under his professional liability policy.  The insurer denied coverage and later filed a declaratory judgment action against the lawyer, his law firm, and the client, arguing, among other things, that the policy did not afford coverage for the underlying lawsuit because it did not seek covered “damages,” which specifically did not include “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.”

In granting the insurer’s motion for judgment on the pleadings, the court agreed that each form of relief sought by the client in the underlying lawsuit was expressly carved out from the policy’s definition of “damages.”  The court observed that, consistent with the many cases that have held that lawsuits based on attorney-client fee disputes do not seek “damages” within the meaning of lawyers professional liability policies, the proper approach is to focus on the underlying lawsuit’s factual allegations rather than the theory of relief pled to determine if there is any possibility of covered “damages.”  Finally, the court held that, because the policy did not afford defense or indemnity coverage, the insurer was entitled to judgment as a matter of law on the insureds’ counterclaims for breach of contract and breach of the covenant of good faith and fair dealing.