Fee Exclusion Applies to Malpractice Litigation Where “Essential Character of the Dispute” Concerned Fees

A Delaware state court, applying Delaware law, has held that a fee exclusion barred coverage for a lawsuit where the “essential character of the dispute” was about fees and costs.  Attorneys Liability Protection Society v. Jay W. Eisenhofer, Grant & Eisenhofer, P.A., 2014 WL 2884506 (Del. Super. Ct. June 9, 2014). 

The insured, a law firm, was co-lead counsel for plaintiffs in a class action.  In 2004, prior to an early mediation, the insured agreed that if the mediation resulted in a large settlement, the insured would seek only between 5% and 15% of the amount recovered and would assist plaintiffs in opposing any firm that sought a higher reward.  The 2004 mediation was unsuccessful.  In 2007, the litigation settled and 14.5% of the settlement was awarded in attorney’s fees.  Shortly after the settlement, a plaintiff sued the insured alleging that the 2004 fee agreement was still valid even though the early mediation was unsuccessful.  The lawsuit included breach of fiduciary duty, breach of contract, and professional malpractice counts.  The insured sought coverage for the suit under its professional liability policy.  The insurer denied coverage based on the definitions of professional services and damages and an exclusion related to fee disputes, which applied to “any dispute for fees or costs, or any claim that seeks, whether directly or indirectly, the return, reimbursement or disgorgement of fees, costs, or other funds or property held by an insured.”

The court granted summary judgment in favor of the insurer based on the fee exclusion.  The court held that the “essential character of the dispute, not how it is pled,” determined the exclusion’s application.  According to the court, the essential character of the dispute was about fees and costs notwithstanding the counts pled and that the plaintiff sought amounts in excess of the law firm’s fees.