Insurer Must Defend Legal Malpractice Claim for Damages in the Amount of Fees Paid, Despite Carve Out of “Legal Fees” from Definition of “Damages”

An Illinois intermediate appellate court, applying Illinois law, has held that an insurer must defend an attorney against a malpractice claim seeking damages for alleged negligence in the amount of fees paid to the attorney, concluding that the “legal fees” exclusion in the policy did not apply because the injury suffered by the claimant was not a consequence of the lawyer’s fees.  Illinois State Bar Ass’n Mut. Ins. Co.  v. Canulli, No. 1-19-0142 (Ill. App. Ct. March 13, 2020).

The underlying malpractice action arose out of the insured attorney’s representation of the claimant in divorce proceedings.  The claimant ultimately sued the attorney for malpractice, seeking injunctive relief and unspecified damages.  The attorney tendered the malpractice action to his lawyers professional liability insurer, which agreed to provide a defense.

The claimant then filed an amended complaint seeking damages in the amount of “attorney’s fees and costs for useless and unnecessary legal proceedings initiated by” the attorney.  The insurer concluded that it had no duty to defend because the amended complaint did not seek covered “damages,” which the policy defined not to encompass “legal fees, costs or expenses paid or incurred by the claimant . . . whether claimed by way of restitution of specific funds, forfeiture, financial loss or otherwise, and injuries which are, in whole or part, a consequence of those fees.”

The insurer withdrew from the defense and filed a declaratory judgment action seeking a determination that it had no duty to defend because the amended complaint did not seek covered damages.  The trial court held that the insurer had no duty to defend and that the insurer had neither waived nor was estopped from withdrawing its duty to defend.

On appeal, the court reversed.  The appellate court concluded that the damages sought did not fall within the carve out for “legal fees” from the  definition of “damages” because, although the damages were measured by fees paid for allegedly unnecessary work, the injury the claimant allegedly suffered was not a consequence of the fees but rather the attorney’s alleged malpractice.  As such, the appellate court held that the insurer had a duty to defend the amended complaint.