The United States District Court for the District of Massachusetts, applying Massachusetts law, has held that a claim asserted against a law firm alleging the failure to transfer client files to former attorneys of the firm constituted a failure to render “Legal Services” as defined by a professional liability policy.  Governo v. Allied World Ins. Co., 2019 WL 4034810 (D. Mass. Aug. 27, 2019).  The court previously denied a motion to dismiss the case, which is described here.

The insured law firm sued former firm attorneys who began a competing law firm.  The former attorneys filed counterclaims against the firm seeking a declaratory judgment that they were entitled to client materials they had taken from the firm and asserting claims for intentional interference with contractual and business relations and for violation of ERISA.  The insured’s professional liability carrier denied coverage for the lawsuit on the basis that the counterclaims “d[id] not concern legal malpractice, and instead amount to a business dispute between plaintiffs and their former employees.”

In resulting coverage litigation, the trial court considered whether any of the three counterclaims triggered coverage under the policy, which provided coverage for claims alleging an act, error or omission “solely in the performance of or failure to perform Legal Services.”  The policy defined “Legal Services” as “those services performed on behalf of the Named Insured for others by an Insured . . . but only where such services were performed in the ordinary course of the Insured’s activities as a lawyer.”

The court held that the declaratory judgment counterclaim was not covered by the policy because it fell outside the definition of a “claim,” which specifically excluded “any proceeding that seeks injunctive, declaratory, equitable or non-pecuniary relief or remedies of any type.”  The court also held that the ERISA claim did not trigger coverage as a “legal services wrongful act” because “a benefit determination is not a service that a lawyer performs in the ordinary course of professional practice.”

However, the court held that the second counterclaim – alleging the firm’s interference in business relations by “delaying or stymying” in transferring client files and failing to notify clients of departing attorneys – triggered coverage.  Referencing the Massachusetts Rules of Professional Conduct with respect to client files, the court held that the counterclaim was “reasonably susceptible” to triggering coverage, “as giving notice to clients of an attorney’s departure from a firm and transferring a client’s file to the attorney’s new law firm (if the client wishes) are within the orbit of professional tasks that lawyers ‘perform[ ] in the ordinary course.’”

The insured also argued that the insurer was responsible for the legal expenses incurred in connection with the insured’s affirmative claims against the former attorneys because the claims were “inextricably linked” to the allegations in the counterclaims.  The court disagreed, holding that the insurer was obligated to pay only the cost of the counterclaims.