7th Circuit Finds Professional Liability Duty Not Required Based On Facts

April 11, 2016 / Writing and Speaking

The 7th U.S. Circuit Court of Appeals, construing Illinois law, recently held that payments a law firm was ordered to make by an arbitrator for breach of fiduciary duty in connection with a contingent fee arrangement, constituted a return of “legal fees” and therefore were excluded from coverage under the firm’s professional liability policy. Edward T. Joyce & Associates P.C. v. Professionals Direct Insurance Co., 2016 U.S. App. Lexis 5063 (7th Cir. March 21, 2016).

The law firm, Edward T. Joyce & Associates was represented by Nisen & Elliott LLC and Moirano, Gorman Kenny LLC. Lewis, Brisbois, Bisgaard & Smith LLP represented the insurer, Professionals Direct Insurance Co.

Joyce was retained by a class of plaintiffs in 2002 to prosecute a securities fraud action. Its retainer agreement with the class provided for a $200,000 flat fee and 25 percent of any award or settlement plus reimbursement of costs. The agreement allowed Joyce to retain local counsel outside of Illinois as necessary with those fees to be treated as costs under the agreement.

Joyce won a substantial award against one of the defendants in the class litigation in 2007, but by that time the defendant had become insolvent. The defendant’s insurers thus were the only source of funding for the award. Joyce arranged for two law firms to handle the collection litigation against the insurers.

In the process, Joyce charged about $405,000 in fees for consultative work with the firms. The firms themselves also charged for the litigation involved with collecting against the insurers. That litigation eventually resulted in a recovery of $8.6 million from the insurers.

Most of the class members, however, took the position that the collection work should have been handled by Joyce as part of the contingency arrangement, rather than handled as additional costs subject to full reimbursement. They filed a demand for arbitration against the Joyce firm in 2011, claiming that it breached its fiduciary duty and engaged in other wrongful conduct.

The Joyce firm denied any wrongdoing, retained counsel to defend it in the arbitration and forwarded its counsel’s invoices to Professionals Direct for payment. Professionals Direct provided professional liability coverage for Joyce, protecting it against claims for damages arising out of the rendering of professional services.

It agreed to pay for the firm’s defense under a reservation of rights, and it paid the invoices as they were submitted, except for two, which it paid after a delay.

Ultimately, the arbitrator found against Joyce on the breach of fiduciary duty claim. As a remedy, the arbitrator ordered Joyce to remit the $405,000 in fees it charged for the consultative work, ordered it to pay 25 percent of the litigation fees for the collection litigation and also ordered it to pay the costs of the arbitration.

The total award against Joyce was for $628,000. In issuing the award, the arbitrator used various terms to describe it, including “damages” and a “sanction.”

Joyce challenged the award in state court, but to no avail. During the appeal of the state court ruling rejecting the challenge, the Illinois appellate court referred to the award three times as a “sanction.”

Joyce sought recovery from Professionals Direct for the amount awarded, but the insurer declined, relying on two policy exclusions. One was exclusion (o), which excluded coverage for “fines, sanctions, penalties, punitive damages … .” The other was exclusion (p), which excluded coverage for “any claim for legal fee … paid or owed to” the firm.

Joyce then brought the instant coverage action. On cross summary judgment motions, the U.S. District Court, relying on the characterization of the arbitration award as a “sanction,” found that exclusion (o) applied, and entered summary judgment for Professionals Direct. Joyce appealed.


In an opinion by Judge Diane S. Sykes, the 7th Circuit affirmed, but on different grounds. She initially addressed Joyce’s estoppel argument. It claimed that Professionals Direct was estopped from denying coverage because, after the arbitrator issued his final award, the insurer delayed several weeks before issuing payment on two fee invoices.

Sykes rejected the argument. She noted that an insurer under Illinois law has two options when an insured requests a defense and the insurer disputes coverage. The insurer can defend under a reservation or seek a declaratory judgment that there is no coverage. If it does neither, it may be estopped from raising coverage defenses.

Here, Professionals Direct defended under a reservation. Sykes found no authority in Illinois law, moreover, for the proposition that a delay between the time of the insured’s submission of expenses and its subsequent receipt of reimbursement could give rise to an estoppel argument.

The Exclusions

As for the policy exclusions, Sykes found that exclusion (o) did not apply. That exclusion, she observed, listed “sanctions” alongside penalties and punitive damages as being excluded from coverage.

The award here, however, did not fall into any of these categories because the purpose of the award was to provide a remedy for Joyce’s breach of fiduciary duty, not a sanction. Sykes did not feel bound, moreover, by either the arbitrator’s or appellate court’s use of that term. Rather, she said, the court had to look to the substance of the award.

On the other hand, Sykes did find that exclusion (p) applied. According to her, the $405,000 amount Joyce charged for consultative work fell straightforwardly within the description of a “claim for legal fees” as provided for in the exclusion. The litigation fees of the two outside firms was not quite so clear, but Sykes nonetheless found that, in substance, that portion of the arbitration award also was within the exclusion. The arbitration costs were not here at issue.

Accordingly, the 7th Circuit agreed with the district court that Professionals Direct had no duty to indemnify Joyce for the arbitration award, albeit under exclusion (p), and it affirmed summary judgment for the insurer.

Key Points

  • In determining the applicability of an insurance policy exclusion, a court will look to the substance of the defining events, rather than their characterization by another court.
  • The language “claim for legal fees … paid or owed to” an insured law firm, as used in an exclusion in a professional liability policy, may apply both to the firm’s obligation to disgorge fees it charged and to fees the firm is obligated to pay for another’s work.
  • Chicago

    Illinois 60603

    10 South LaSalle Street

    Chicago, Illinois 60603

    T: 312.855.1010 TF: 800.826.3505 F: 312.606.7777 Office Managing Partner: Dennis D. Fitzpatrick

  • New York

    New York 10005

    28 Liberty Street 39th Floor

    New York, New York 10005

    T: 212.805.3900 TF: 800.826.3505 F: 212.805.3939 Office Managing Partner: Carl M. Perri

  • Mission Viejo

    California 92691

    27285 Las Ramblas

    Suite 200

    Mission Viejo, California 92691

    T: 949.260.3100 TF: 800.826.3505 F: 949.260.3190 Office Managing Partner: Ian R. Feldman

  • Florham Park

    New Jersey 07932

    100 Campus Drive

    Florham Park, New Jersey 07932

    T: 973.410.4130 TF: 800.826.3505 F: 973.410.4169 Office Managing Partner: Carl M. Perri

  • Michigan City

    Indiana 46360

    200 Commerce Square

    Michigan City, Indiana 46360

    T: 219.262.6106 TF: 800.826.3505 F: 312.606.7777 Office Managing Partners: Paige M. Neel, Kimbley A. Kearney

  • Milwaukee

    Wisconsin 53202

    250 E. Wisconsin Avenue

    Suite 1800

    Milwaukee, Wisconsin 53202

    T: 414.279.5525 TF: 800.826.3505 F: 312.606.7777 Office Managing Partner: James M. Weck

  • Stamford

    Connecticut 06902

    68 Southfield Avenue

    2 Stamford Landing Suite 100

    Stamford, Connecticut 06902

    T: 203.921.0303 TF: 800.826.3505 F: 212.805.3939 Office Managing Partner: Matthew J. Van Dusen

  • Tampa

    Florida 33609

    4830 West Kennedy Boulevard, One Urban Center

    Suite 600

    Tampa, Florida 33609

    T: 813.509.2578 TF: 800.826.3505 F: 312.606.7777 Office Managing Partner: Dennis D. Fitzpatrick Co-Managing Partner: Kelly M. Vogt

  • San Francisco

    California 94111

    100 Pine Street

    Suite 1250

    San Francisco, California 94111

    T: 415.287.2744 TF: 800.826.3505 F: 949.260.3190 Office Managing Partner: Ian R. Feldman

  • Houston

    Texas 77019

    2929 Allen Parkway

    American General Center, Suite 200

    Houston, Texas 77019

    T: 346.229.4612 TF: 800.826.3505 F: 312.606.7777 Office Managing Partner: Ramy P. Elmasri

  • Dallas

    Texas 75201

    325 N. Saint Paul Street

    Suite 3100

    Dallas, Texas 75201

    T: 469.942.8635 TF: 800.826.3505 F: 312.606.7777 Office Managing Partner: Ramy P. Elmasri

  • Boca Raton

    Florida 33434

    7777 Glades Road

    Suite 405

    Boca Raton, Florida 33434

    T: 561.765.5305 TF: 800.826.3505 F: 312.606.7777 Office Managing Partner: Dennis D. Fitzpatrick Co-Managing Partner: Kelly M. Vogt