FIFTH CIRCUIT COURT OF APPEALS DENIES LAW FIRM RECOVERY FROM EXCESS PROFESSIONAL LIABILITY CARRIER FROM LITIGATION EXPENSE DISPUTE

This week, the United States Court of Appeals, Fifth Circuit denied the John M. O’Quinn P.C. law firm’s claim against its excess professional liability carrier stemming from a fee dispute between the firm and its clients. John M. O’Quinn, P.C. et. al. v. Lexington Insurance Company, No. 16-20224, 2018 WL 5075485 (5th Cir. Oct. 18, 2018) originated from a dispute regarding fees deducted by the firm in a number of cases representing plaintiffs in suits against breast implant manufacturers. The firm obtained extraordinary results for the plaintiffs, however the clients alleged that certain expenses incurred by O’Quinn should not have been deducted from the settlement proceeds.

The client dispute proceeded to arbitration where the clients prevailed on breach of contract and breach of fiduciary duty claims. The arbitration award was affirmed by the state trial court and O’Quinn ultimately settled with the clients. During the dispute, O’Quinn’s primary professional liability carrier brought suit in federal court seeking a declaratory judgment that it had no duty to defend or indemnify the firm in the litigation. O’Quinn counterclaimed seeking defense and indemnity from both the primary carrier and Lexington Insurance Company, the excess carrier. The court held that the primary carrier owed a defense and stayed the indemnity issues pending the state-court case resolution. After settlement with the clients, the insurance dispute continued and the firm ultimately settled with the primary carrier. The federal court granted Lexington’s motion for summary judgment finding it had no duty to indemnify O’Quinn but the court did not address the duty to defend. O’Quinn filed a motion to alter or amend the judgment alleging that Lexington also breached its duty to defend. The Court denied the motion and O’Quinn appealed both the denial and Lexington’s summary judgment.

Analyzing the insurance policy’s definitions of “loss” and “wrongful act” against the arbitration panel findings, the Court noted that the underlying client fee agreements did not allow for the deduction of the disputed expenses and the deduction of the expenses from the settlements was inappropriate. Although the arbitration panel found O’Quinn breached its contract with the clients, and “breach of contract” was included under the policy’s definition of “wrongful act,” the district court found the policy did not cover this type of breach of contract and the Fifth Circuit agreed. The policy provision for loss coverage did not include the reimbursement of legal fees—which is what the arbitration panel concluded was the appropriate remedy for the expense deduction. Accordingly, O’Quinn could not seek reimbursement from its insurance carrier for costs that its clients were not required to bear. Further, the district court and Fifth Circuit agreed that the definition of “loss” did not cover the arbitration panel’s finding of breach of fiduciary duty as “loss” did not include “fines, penalties, [and] sanctions.” Finally, the Court found that Lexington was not obligated to pay costs of defense since the underlying defense costs did not exceed the primary coverage, thereby failing to trigger the excess policy. Accordingly, the Fifth Circuit affirmed the district court judgment.