Insurer Owed Law Firm Defense Despite Questions Over Claims

By Don R. Sampen, published, Chicago Daily Law Bulletin, April 15, 2025

The U.S. District Court for the Northern District of Illinois recently held that an insurer was obligated to provide defense for an attorney under a professional liability policy even though the claims brought against the lawyer, according to the insurer, did not involve “damages” as defined in the policy.

The case is Esbrook P.C. v. Wesco Insurance Co., No. 23 C 3675, 2025 U.S. Dist. Lexis 47920 (March 17). The attorney and his firm were represented by the firm itself, Esbrook P.C. of Chicago. Kennedys CMK LLP of Chicago represented the insurer, Wesco.

Esbrook represented clients in connection with intellectual property litigation in New Mexico, which eventually settled. Subsequently, the former clients brought suit against Esbrook in Colorado for what they regarded as breaches of the relationship by Esbrook. Then when Esbrook brought suit for fees in New Mexico, the former clients counterclaimed, raising similar claims.

Basically, the former clients alleged that Esbrook did not advise them properly in connection with the settlement, failed to disburse the settlement proceeds and otherwise engaged in professional negligence and common-law fraud, for which they claimed to be owed damages for breach of the engagement agreement.

Esbrook tendered the firm’s former clients’ claims to Wesco, its professional liability carrier. The Wesco policy obligated the insurer to defend Esbrook when a claim sought damages arising out of an act or omission in the rendering of legal services. The definition of “damages,” however, did not include legal fees or costs charged by the insured, and also any misappropriation of client funds or punitive damages.

Wesco denied coverage and declined to defend. It took the position that the recovery sought by the former clients was for either legal fees paid to Esbrook, amounts owed as a result of misappropriation of client funds or non-covered punitive damages — none of which were covered by the policy.

Wesco moved for judgment on the pleadings, and Esbrook countered with a motion for partial summary judgment.

Analysis

In a decision by Judge LaShonda A. Hunt, the court granted Esbrook’s motion and denied Wesco’s. She wrote that, in her view, Wesco’s interpretation of “damages” based on the exclusionary provisions of the policy would essentially “swallow” the professional liability coverage the policy granted to Esbrook.

At minimum, she found that the former clients’ request for compensatory damages for claims like professional negligence and breach of fiduciary duty adequately fit into the policy’s definition of “damages.” She also pointed out language in the policy that required Wesco to provide a defense for claims of fraud or other malicious acts that could give rise to punitive damages until the fraudulent or malicious act “has been determined by adjudication.”

Hunt observed that, while the policy may not require Wesco to indemnify for such acts, the insurer at least had an obligation to provide a defense.

She also distinguished the main case Wesco relied on — Continental Casualty Co. v. Donald T. Bertucci, Ltd., 399 Ill. App. 3d 775 (1st Dist. 2010). The Illinois Appellate Court there upheld a finding of no coverage by a professional liability insurer in a case alleging that an attorney improperly retained an excessive amount of fees from the settlement of a case.

According to Hunt, that case was limited to a non-covered fee dispute between the attorney and client. This case, by contrast, involved not only a fee dispute but also broader claims of attorney malpractice.

The court therefore found that Wesco had a duty to defend.

Key Point

Depending on policy language, a professional liability insurer may have a duty to defend an insured attorney for allegations by a former client seeking damages for professional malpractice even if a principal purpose for the former client’s claim involves a fee dispute or other non-covered allegations.