“Attorney Fee Exclusion” Inapplicable Even Though Attorney’s Fees the Measure of Alleged Damages

In an opinion written by Justice Cunningham, with Justices Connors and Harris concurring, the First District Appellate Court of Illinois, applying Illinois law, found that ISBA Mutual Insurance Company (“ISBA Mutual”) had a duty to defend its insured, a lawyer accused of malpractice, reversing a lower court’s summary judgement.  The appellate court found that the malpractice policy’s exclusion related to the defense for claims for legal fees did not apply because, while damages were measured by the attorney’s fees, the dispute was about representation.

Michael D. Canulli represented a client in a divorce action.  In the course of the representation, Canulli brought suit against a group of companies identified as Prairie State.  Prairie State moved for sanctions against Canulli and his client alleging the suit against it was not well grounded in fact or law.  Canulli’s client sued him for malpractice alleging that his action against Prairie State was unnecessary and negligent and caused her to incur more legal fees than necessary.  Canulli tendered the malpractice suit to his insurer, ISBA Mutual.  ISBA Mutual originally accepted tender of the defense, but later withdrew its appointed defense counsel and filed a declaratory judgment action after the underlying complaint was amended to clarify that she was seeking damages in an amount in excess of $100,000 “in that she has incurred attorney’s fees and costs for useless and unnecessary legal proceedings initiated by [Canulli].”  ISBA Mutal asserted that it did not have a duty to defend claims for attorney’s fees.  Ultimately, Canulli and his client settled the underlying malpractice claim with the client dismissing her amended complaint and paying $67,500 for Canulli’s fees.  The lower court then granted summary judgement in ISBA Mutual’s favor in the coverage dispute, and Canulli appealed.

The appellate court analyzed the claim in light of two earlier cases: Continental Casualty Co. v. Law Offices of Melvin James Kaplan, 345 Ill. App. 3d 34 (2003) and Continental Casualty Co. v. Donald T. Bertucci, Ltd., 399 Ill. App. 3d 775 (2010).  Kaplan arose from a dispute over coverage for a legal malpractice claim.  There, the court held that damages in a suit against an attorney for negligence in the attorney’s representation of his client was measured by the fees paid, but that “does not mean that the injury suffered is a consequence of the fees charged.”  While the policy at issue in Kaplan excluded defense coverage for disputes over attorney’s fees, the court found that the claim at issue did not arise from the fees charged, and thus did not fall under the exclusion.

On the other hand, Bertucci involved defense coverage for a fee dispute between an attorney and his client in which the client accused the attorney of retaining excessive fees from a settlement payment.  The policy at issue in Bertucci was substantially similar to the policy at issue before the appellate court and in Kaplan.  In contrast to Kaplan, the Bertucci court determined that the underlying action was a dispute over fees, which brought the action under the attorney fees exclusion of the policy.

The appellate court compared the facts of the instant case to Kaplan and Bertucci, and determined that Canulli’s case tracked more closely to Kaplan because the client’s suit against Canulli arose out of alleged negligent actions Canulli took in the course of the representation, and while fees were the measure of the damages, they were not the cause of the damages.  “This was a legal malpractice claim, not a fee dispute.”  Thus, ISBA Mutal had a duty to defend Canulli in the underlying action.

In examining ISBA Mutual’s actions, the appellate court found its actions “incomprehensible,” as ISBA Mutual had initially provided a defense, but withdrew when the complaint was amended.  The court pointed out that ISBA Mutual had alternatives to the drastic action of withdrawing defense, such as defending under a reservation of rights while determining its coverage obligation.  Illinois State Bar Ass’n Mutual Ins. Co. v. Canulli, 2020 IL App (1st) 190142 (Mar. 13, 2020).