FIFTH CIRCUIT SAYS NO DUTY TO DEFEND LAWSUIT UNDER A MALPRACTICE POLICY IN SUIT SEEKING RESTITUTION OF LEGAL FEES PAID BY A THIRD PARTY

In a ruling that should be welcomed by professional liability insurers involved in suits filed by third parties where the professional’s representation of a client is not at issue, the Fifth U.S. Circuit Court of Appeals recently reversed the trial court in Edwards v. Continental Casualty Company, No. 15-30827, 2016 U.S. App. LEXIS 19753 (5th Cir. Nov. 2, 2016), and held that the malpractice insurer had no duty to defend a lawyer under a professional liability policy because the underlying lawsuit by a defendant in a previous lawsuit sought restitution of legal fees paid to an opposing lawyer as part of a settlement and, therefore, did not allege any “acts or omissions” as defined by the policy.

Edwards represented Andrew Schmidt, a commercial diver, in a personal injury suit, against Schmidt’s employer, Cal Dive, for a brain injury he allegedly sustained during a work-related dive and the parties entered into a multi-million-dollar settlement agreement before trial under which Cal Dive and its insurer paid a lump sum to Schmidt and funded an additional payment through annuity contracts. As a part of the settlement, Cal Dive paid attorney’s fees to Edwards through an annuity contract.

A year after the settlement, Cal Dive and its insurer filed suit against Schmidt and Edwards alleging that Schmidt had exaggerated or fabricated the extent of his injuries, although they did not allege that Edwards played any part in the “scheme.” As to Edwards, Cal Dive sought its cost of funding the annuity contract to him based in its claim that it was fraudulently induced to settle and claimed that it was entitled to restitution from Edwards of all funds that he “unjustly received” under the “invalid” settlement agreement, based on claims for unjust enrichment and restitution. That case was eventually dismissed for failure to state a claim and that dismissal was affirmed by the Fifth Circuit.

Edwards’s law firm maintained a professional liability policy with Continental Casualty Company that named Edwards as an insured and Edwards timely notified Continental of the claims brought against him in Cal Dive’s lawsuit and sought defense and coverage, but Continental declined to provide either. Edwards filed a declaratory judgment action against Continental, seeking a declaration that his firm’s professional liability policy required Continental to defend him and Edwards filed a motion for partial summary judgment and Continental filed a motion for summary judgment. The district court granted partial summary judgment in favor of Edwards, holding that Continental had a duty to defend him and Continental appealed.

Continental argued on appeal that it had no duty to defend Edwards in the underlying action because Cal Dive’s claims against Edwards were not the kind covered by the insurance policy. The policy provided that Continental “shall have the right and duty to defend in the Insured’s name and on the Insured’s behalf a claim covered by this Policy even if any of the allegations of the claim are groundless, false or fraudulent.” The pertinent policy language specified that a “claim” is one “arising out of an act or omission, including personal injury, in the rendering of or failure to render legal services, which were defined as “services . . . performed by an Insured for others as a lawyer.”

The appeals court first noted that it was undisputed that Louisiana law applied to the case and that under Louisiana law, “[t]he duty to defend is determined by examining the allegations of the injured plaintiff’s petition . . . and the insurer is obligated to tender a defense unless the petition unambiguously excludes coverage.” The court opined that Continental’s duty to defend was only activated by a claim covered by the policy but that the claims filed against Edwards in Cal Dive’s underlying action were not the type of claims that were covered by the Continental policy. It concluded that Cal Dive’s claims against Edwards did not “arise out of an act or omission . . . in [Edwards’s] rendering of or failure to render legal services” because Cal Dive did not allege “a single professional act or omission by Edwards that gives rise to such claims.” In fact, Cal Dive specifically alleged that it does “not believe that Edwards . . . [was] aware of Schmidt’s fraud.” In other words, the competency of Edwards’s representation of Schmidt, or lack thereof, was not at issue in the underlying suit and Edwards was only named in the suit because he received settlement funds from Cal Dive for his representation of Schmidt. While Edwards argued that the “arising out of” language of the policy should be applied broadly to provide coverage for Cal Dive’s claims and that this reading of the insurance policy “would result in professional liability policies only covering claims for malpractice and other attorney misdeeds,” the appeals court held that such an interpretation would effectively read the words “act or omission” out of the policy’s definition of a claim.

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