Jeffrey Steinberg’s article entitled “Coverage for Fee Disputes Under Legal Malpractice Policies” has been published in the New York Law Journal. Access the full article by following the “Read More” link below.

An issue which periodically arises (although it is rarely decided) in the insurance realm is whether there is coverage for fee disputes under legal malpractice policies, particularly where there is a claim in the complaint for malpractice. The analysis of this issue must begin with an examination of the policy insuring agreements, which typically require that, to trigger a duty to defend, the complaint must allege both covered conduct and covered damages. See Certain Underwriters at Lloyd’s v. Lacher and Lovell-Taylor, transcript opinion (Sup. Ct., N.Y. Co. 2012), aff’d, 112 A.D.3d 434, 975 N.Y.S.2d 870 (1st Dept. 2013) (fee dispute).

As to the first of those requirements, the question is whether the complaint involves the rendering of professional services.

One noted treatise, addressing the issue of “professional services,” has observed that:

“[a]lthough a professional may commit the conduct, the critical issue for insurance coverage is whether the act or omission in dispute was ‘professional.’ An act is not ‘professional’ merely because it was performed by [an insured].”

9. Mallen & J. Smith, Legal Malpractice § 36:9.

The applicable law in New York is consistent therewith. The leading case in this state is Albert J. Schiff Associates, Inc. v. Flack, 51 N.Y.2d 692, 435 N.Y.S.2d 972 (1980), where the court held that “[a]n errors and omissions policy is intended to insure a member of a designated calling against liability arising out of the mistakes inherent in the practice of that particular profession,” and the mere fact that a claim may “have some connection” with the profession is not necessarily sufficient to trigger coverage under such a policy. Accord, Propis v. Fireman’s Fund Insurance Co., 112 A.D.2d 734, 492 N.Y.S.2d 228 (4th Dept.), aff’d, 66 N.Y.2d 828, 498 N.Y.S.2d 363 (1985).

Specifically, in Schiff the court held that, although the alleged theft of trade secrets at issue there may have been related to the insured’s business and “set the stage” for the rendering of professional services, such conduct did not in fact constitute professional services which would invoke coverage under the policy.

Furthermore, in order to trigger a duty to defend, the allegations must actually be predicated upon professional services. See generally, Seskin & Sassone v. Liberty International Underwriters, 306 A.D.2d 520, 761 N.Y.S.2d 679 (2d Dept. 2003); American Guarantee & Liability Insurance Co. v. Lerner, slip opinion (Sup. Ct., N.Y. Co. 2007), aff’d on other grounds, 58 A.D.3d 523, 870 N.Y.S.2d 785 (1st Dept. 2009); cf. Chmiel v. Continental Casualty Co., 177 A.D.2d 1022, 578 N.Y.S.2d 315 (4th Dept. 1991) (despite insured’s proffer of extrinsic facts concerning nature of activities, claims were not based thereon). See also R. Mallen & J. Smith, Legal Malpractice § 36:11 (“[i]nsurers consider disputes over legal fees to concern the business of the practice of law, not within the policy coverage for legal errors”).

Moreover, the conclusory labelling of a cause of action as one for legal malpractice will not suffice to transform otherwise uncovered conduct into covered conduct. See Bridge Metal Industries, L.L.C. v. Travelers Indemnity Co., 812 F. Supp. 2d 527 at fn. 8 (S.D.N.Y. 2011), citing Sidney Frank Importing Co. v. Farmington Casualty Co., 1999 WL 173263 at *3 (S.D.N.Y. 1999) (court “is not required to accept the legal characterization of the causes of action alleged in the complaint” in evaluating the duty to defend); Town of Massena v. Healthcare Underwriters Mutual Insurance Co., 40 A.D.3d 1177, 834 N.Y.S. 2d 736, 739-40 (3d Dept. 2007) (“a party’s characterization of the causes of action in a complaint are not controlling as [the court seeks] to determine the nature of the claims based upon the facts alleged and not the conclusion which the pleader draws therefrom”); Monarch Insurance Co. v. Hetherly, 148 Misc. 2d 594, 560 N.Y.S.2d 745, 748 (Sup. Ct., Monroe Co. 1990) (“[The] general rule [is] that, in determining whether an insurance policy provides coverage, the court must look past the labels placed on the causes of action to the facts alleged in the underlying complaint”). But see Mandel Resnik Kaiser Moskowitz & Greenstein, P.C. v. Executive Risk Indemnity, Inc., 2005 WL 1712024 (S.D.N.Y. 2005) (allegations in pleading genuinely not limited to fee dispute).

As to the second of those requirements, the question is whether covered damages are sought.

The principle that such damages must be sought was explicitly enunciated in Waxman & Wincott, P.C. v. American Guarantee and Liability Insurance Co., transcript opinion (Sup. Ct., N.Y. Co. 2006). Similarly, in Certain Underwriters at Lloyd’s v. Lacher and Lovell-Taylor, supra, which also involved a fee dispute, the court held that covered damages cannot be found in boilerplate language in the “Wherefore” clause which seeks recovery of “at least” a particular amount (the fees plus some unspecified additional amount to be proven at trial).

In various other contexts, the courts have made clear that, regardless of the conduct alleged, there can be no duty to defend or indemnify where the damages sought are uncovered. See, e.g., Collins Building Services, Inc. v. United Capitol Insurance Co., 1999 WL 259519 (S.D.N.Y. 1999); McCostis v. The Home Insurance Co., 1993 WL 256562 (S.D.N.Y. 1993), vacated on other grounds, 31 F.3d 110 (2d Cir. 1994).

In conclusion, although there appears to be little case law in New York on this exact issue, the applicable principles and the outcome seem clear. Specifically, there can be no doubt that the insurer’s duty to defend is broader than its duty to indemnify. See Frontier Insulation Contractors, Inc. v. Merchants Mutual Insurance Co., 91 N.Y.2d 169, 667 N.Y.S.2d 982 (1997); International Paper Co. v. Continental Casualty Co., 35 N.Y.2d 322, 361 N.Y.S.2d 873 (1974).

Therefore, an insurer is obligated to defend its insured where the complaint states facts which, if proven true, would bring the alleged injury within coverage, irrespective of the insurer’s ultimate liability to indemnify. Id. (if the complaint contains both covered and excluded allegations, the insurer still must provide a defense; a claim will be excluded from coverage only if the complaint’s allegations are not subject to any possible interpretation that would fall within coverage); accord, Town of Massena v. Healthcare Underwriters Mutual Insurance Co., 98 N.Y.2d 435, 749 N.Y.S.2d 456 (2002).

Nevertheless, a “patently ‘groundless’ and ‘shot-gun’ allegation” in a complaint is insufficient to bring an otherwise uncovered claim within the scope of coverage. Lionel Freedman, Inc. v. Glens Falls Insurance Co., 27 N.Y.2d 364, 318 N.Y.S.2d 303, 306 (1971).

Thus, where a complaint sets forth factual allegations of uncovered conduct, the mere recitation of conclusory allegations of negligence, which are inconsistent with the intrinsic nature of the misconduct factually alleged, will not suffice to give rise to a duty to defend. See Allstate Insurance Co. v. Mugavero, 79 N.Y.2d 153, 581 N.Y.S.2d 142, 147-48 (1992).

Alternatively, where all of the damages sought are uncovered, the policy cannot be triggered. See Certain Underwriters at Lloyd’s v. Lacher and Lovell-Taylor, supra; Waxman & Wincott, P.C. v. American Guarantee and Liability Insurance Co., supra. Consequently, an insurer should not be affording coverage for a bare fee dispute in the absence of meaningful allegations of covered conduct and covered damages. Id. (With respect to out-of-state cases reaching the same conclusion, see, e.g., Pias v. Continental Cas. Ins. Co., 2013 WL 4012709 (W.D. La. 2013); Tana v. Professionals Prototype I Ins. Co., 47 Cal. App. 4th 1612, 55 Cal. Rptr. 2d 160 (Cal. App. 1996); Continental Cas. Co. v. Donald T. Bertucci, Ltd., 399 Ill. App. 3d 775, 926 N.E.2d 833 (Ill. App. 2010)).

This article is also on Law.com: Coverage for Fee Disputes Under Legal Malpractice Policies