Client’s Fee Dispute Claim Triggers Duty to Defend because it “Arises Out of” Firm’s Performance of Professional Services

Applying Texas law, a federal district court in Texas has held that, although a client’s claim against an insured law firm regarding a fee dispute did not implicate “professional legal services,” it arose out of the performance of such services, and thus it triggers the insurer’s duty to defend. Shamoun & Norman, LLP v. Ironshore Indem., Inc., 2014 WL 5460475 (N.D. Tex. Oct. 28, 2014). 

An insured law firm filed an action against a former client for breach of a performance incentive bonus agreement.  The client counterclaimed for breach of fiduciary duty, alleging that the agreement was merely an effort by the firm to increase its fees when it realized the client’s matter would be favorably resolved.  The law firm’s insurer denied a defense on the grounds that the action was a fee dispute and thus did not involve “Professional Legal Services” as defined under the law firm’s policy.

The court agreed that non-specialized tasks like billing and fee-setting do not constitute professional services under Texas law.  Nevertheless, the court noted that the policy required the insurer to provide a defense for any claim “arising out of” the performance of professional legal services, and “arising out of” was interpreted broadly under Texas law to mean “but for” causation.  Because the client’s claim would not exist but for the attorney-client relationship, the court found, the claim arose out of the law firm’s performance of professional legal services.  As such, the court held that the insurer had a duty to defend the claim against the law firm.