Letter Outlining Objections to Excessive Legal Fees Constitutes “Claim”
Applying Pennsylvania law, a federal district court has held that an insurer had no duty to defend or indemnify a judgment for excessive legal fees because a court-ordered letter predating the policy period and previewing objections to the insured law firm’s fees was a “claim” first made prior to the policy’s inception. Allied World Ins. Co. v. McErlane, P.C., 2018 WL 1035781 (E.D. Pa. Feb. 23, 2018). The district court held that the letter, issued at the request of a state court during estate proceedings in which the insured law firm represented the executor, constituted a “claim” because it was a “written notice” for monetary relief.
In the underlying estate proceedings, beneficiaries objected to certain administration costs that the executor charged to the estate, including legal fees charged by the insured law firm in connection with the insured’s representation. In light of the objections, the state court directed the beneficiaries to submit a letter outlining the issues they intended to raise because the court had authority to disallow the fees charged to the estate. In May 2015, the beneficiaries issued the letter to the court, copying the law firm, alleging that the law firm had performed “flawed and inadequate” work, “grossly mismanaged” federal tax filings, and negligently “fail[ed] to check a box” which led to a significant tax penalty. The letter requested that the court “surcharge” the executor and the law firm for “losses caused by their breach of fiduciary duty.”
Six months later, the beneficiaries pursued sanctions because the executor and the law firm purportedly were “jointly and severally responsible for reimbursing the Estate for any ultimate net loss it has suffered as a result of [the tax] penalty.” The state court held that while the beneficiaries lacked standing to bring malpractice claims against the law firm, they could object to the reasonableness of fees charged to the estate. The law firm subsequently obtained professional liability insurance covering claims made between June 2016 and June 2017. During the policy period, the state court found the executor and the insured law firm jointly and severally liable for the estate’s net loss. The insurer denied coverage on the basis that the “claim” was first made prior to the policy period.
In the resulting coverage litigation, the insurer argued that no coverage was available because the “claim” was first made when the beneficiaries issued the 2015 letter. The policy defined “claim,” in relevant part, as “any written notice or demand for monetary relief . . . made to or against any Insured seeking to hold such Insured responsible for any Wrongful Act,” and “Wrongful Act” as “any actual or alleged act, error or omission committed by any Insured, solely in the performance of or failure to perform Legal Services.” The law firm argued that the letter was “a simple offer of proof” rather than a “notice” or “demand” for monetary relief, because the beneficiaries lacked standing to assert negligence claims against the law firm, which represented the executor and the estate. The court held that, irrespective of the beneficiaries’ inability to assert an affirmative claim against the law firm, the letter provided written notice of an intent to compel the return of payments received for improperly performed legal services. Thus, the letter met “the policy’s unambiguous definition of a claim.”