A decision by the United States Court of Appeals for the Tenth Circuit reaffirms the principle that a professional – in that case an attorney – who engages in alleged overbilling of fees cannot expect his professional liability insurer to pick up the tab if the overbilling leads to litigation.
In Evanston Insurance Co. v. Law Office of Michael P. Medved, Case No. 16-1464 (10th Cir. May 22, 2018), the court had before it the case of a Colorado foreclosure attorney who, along with other Colorado lawyers, had been the subject of an investigation by the Colorado Attorney General into alleged overbilling in foreclosure cases. The attorney’s fees, though billed to his lender clients in the first instance, ultimately were passed on to the property owners or to buyers if the subject property was resold. The Attorney General’s investigation, in turn, had led to a class action against the attorney by aggrieved property owners.
At the time the investigation and class action commenced, the attorney was covered by a professional liability policy issued by Evanston Insurance Company. The policy covered damages only if the claim pertained to “Professional Services,” defined as “those services performed by the ‘Insured’ for others . . . as a lawyer . . . .” Evanston initially defended under a reservation of rights, but later declined coverage on the basis that the claims against the attorney involved only billing practices, which were not “professional services.” The Tenth Circuit, affirming the District Court’s judgment in favor of Evanston, agreed with the insurer, saying that “the alleged ‘wrongful act’ consisted only of billing too much.”
The Court also rejected the insured attorney’s argument that the policy’s use of the phrase “by reason of” – in a provision promising coverage for damages incurred “as a result of a Claim . . . by reason of a ‘Wrongful Act’ in the performance of or failure to perform ‘Professional Services’ by the ‘Insured’” – served to broaden coverage to include any activities, include overbilling, that arose from the professional service of documenting the fees and costs involved in each foreclosure. Relying upon a Colorado state court appellate decision in Cohen v. Empire Casualty Co., 771 P.2d 29 (Colo. Ct. App. 1989), the Tenth Circuit determined that a Colorado court would reject this broadening argument, noting the Cohen court’s reasoning that an attorney’s expenses relate to his “business” and not to “legal advice or assistance to others in his professional capacity as a lawyer.”
The Tenth Circuit’s decision in Evanston illustrates a common, but not necessarily universal, judicial approach to resolving coverage issues arising from disputes over professional fees. Coverage disputes involving a professional’s alleged overbilling have received varying treatment from the courts, depending on case facts, policy language, whether defense costs or indemnity amounts are at issue, and applicable law. Certain decisions have turned, for example, not on the meaning of “professional services” but rather on the meaning of “damages” or whether a return of erroneously charged fees gives rise to an insurable “Loss.” Other cases have focused on the impact of policy exclusions relating to fraud and dishonesty. Any case involving, at its core, a dispute over professional fees requires careful analysis at the outset in order to ensure that all appropriate coverage issues are identified and properly preserved.