Does Malpractice Insurance Cover Fee Disputes?

You may be surprised to learn that some professional malpractice policies do not cover fee disputes. Professional liability insurance is an essential component of every professional’s practice, helping to mitigate risk in malpractice actions.  But many professional liability policies may leave professionals to fend for themselves in one of the most fundamental aspects of the practice: collecting fees for services rendered.  This limitation was recently highlighted by Louisiana’s Western District Court in Pias v. Cont’l Cas. Co., No. 2:13-cv-00182 (W.D. La. Aug. 6, 2013).

In Pias, the underlying workers’ compensation matter settled for $95,000.  However, the plaintiff only received a fraction of the settlement sum after the attorney claimed over $86,000 of the agreed upon settlement as legal fees.  Not content with this allocation of assets, the plaintiff retained new counsel and filed a motion for return of funds held as attorney’s fees.  In the motion, the plaintiff argued that her prior counsel failed to advise her regarding his billing practices. 

The workers’ comp attorney referred the matter to his liability carrier. But, the attorney was denied coverage on the basis that: a) the client’s motion did not seek relief based upon any conduct committed in the performance of “legal services” within the meaning of the policy; and b) the motion did not constitute a claim for “covered damages” within the meaning of the policy.  The attorney subsequently filed a coverage action against his insurer in federal court to secure a defense, but his arguments were unavailing.  The District Court granted the insurer’s motion for judgment on the pleadings, finding that a “straightforward fee dispute” is not within the scope of a legal malpractice policy and that the policy specifically carved out legal fees from covered damages.

The District Court’s opinion reiterates several themes of Professional Liability Matters.  For one, professionals should craft engagement letters that set clear terms informing the client of the nature of fee agreements and payment.  Further, when selecting professional liability insurance, professionals should be sure to understand the limitations of their coverage, in order to ensure proper protection and avoid costly litigation.

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3 Comments

  1. Good article. I’ve handled professional liability claims, specifically for physicians, for a long time. I am always surprised when a professional does not know what is contained within their insurance policy and for what they are being covered. Let’s encourage professionals to break out those policies and read. Begin with the Insuring Agreement….read the definitions of “occurrence,” “wrongful act,” “professional services”…read the Exclusions. If you don’t understand, ask your insurance broker.

  2. Although Lawyers Professional Liability (“LPL”) Insurance policies do not cover fee disputes, in such disputes where the law firm sues a client for fees, the client usually counter-claims the law firm alleging malpractice. The counter-claim would, most likely, trigger coverage under the Firm’s LPL insurance policy (subject to the policies terms, conditions and exclusions, etc.). This is why LPL insurance underwriters don’t like to see fee disputes listed on an LPL insurance application and also why it’s important for law firms to have in place formal written procedures which require an analysis of the potential liability risk before suing a client for fees.
    Please be advised that nothing stated herein should be construed as legal advice or insurance advice or creating the existence of an attorney-client / broker-client relationship. Coverage questions should be directed to an attorney that practices in the applicable jurisdiction. The opinions stated herein are my own and do not necessarily represent the opinions of my employer, Herbert L. Jamison & Co., L.L.C.

  3. Even though carriers are not supposed to cover fee dispute suits, I have seen them. In fact, one of my insureds has one currently that the carrier is covering.

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