Edward T. Joyce & Associates, PC v. Professionals Direct Insurance Company

Filing 42

OPINION and Order Signed by the Honorable Charles R. Norgle, Sr on 9/30/2014. Mailed notice (mgh, )

IN TIIE UNITED STATES DISTRICT COURT TOR
THE NORTHERN DISTRICT OF'ILLINOIS
EASTERN DIVISION
EDWARD T. JOYCE & ASSOCIATES, )

P.C.,

)

Civil ActionNo. 13 CY 2475

Plaintiff,

Hon. Charles R. Norgle

v.

PROFESSIONALS DIRECT
INSURANCE COMPANY,
Defendant.

OPINION AND ORDER
CHARLES R. NORGLE, District Judge
In this declaratory judgment action, Plaintiff Edward T. Joyce & Associates, P.C. (the
"Joyce Firm") sues Defendant Professionals Direct Insurance Company ("PDIC"), seeking a
declaration that under the terms of the Lawyers Professional Liability Policy issued to the Joyce

Firm, PDIC is required to indemnify the Joyce Firm for a$628,527.47 award (the "Final

Award") entered against it, post-judgment interest, and for attorneys' fees and costs incurred by
the Joyce Firm following entry of the Final Award. Before the Court are the parties' crossmotions for summary judgment. For the following reasons, summary judgment is granted in
favor of PDIC and against the Joyce Firm.

I. BACKGROUND

A. Factsl
PDIC issued the Illinois law firm, the Joyce Firm, the Lawyers Professional Liability
Policy, No. 1OIL10098600601-LPL, for the policy period of April 6,2010 to April 6,2011. As
I

The Court takes the undisputed facts from the parties' statement of material facts and supporting
evidentiary materials. Although the Court "need consider only the cited materials," it "may consider
other materials in the record." Fed. R. Civ. P. 56(c)(3).

relevant here, the policy, as amended by the ProDirect Select@ State Amendatory Endorsement

Illinois, states:
SECTION A. COVERAGE
1.

WHAT THIS POLICY INSURES:

Subject to the terms, conditions, exclusions and limitations of this policy, we will
pay on your behalf all sums which you become legally obligated to pay as
damages because of any claim or claims, first made against you. The claim must
first be made and reported to us during the policy period or any extended
reporting period, if applicable, and must arise from any act, error or omission to
which this policy applies. Our obligation to pay damages on your behalf is
limited to the limit of liability that remains after we deduct the deductible amount
shown in the Declarations, provided all of the following are true.
a) The claim must arise out of the rendering of or the failure to render

professional services.
b) The claim must be caused by an Insured under this policy or by any
person for whose acts, errors or omission you are legally liable.
c) the act, error or omission must have first occurred on or after the
applicable Retroaetive Date(s).

d) You had no knowledge of facts which could have reasonably been
expected to result in the claim, or any knowledge of the claim, prior to the
effective date of this policy.

PDIC's Local Rule 56.1(a)(3) Statement of Material Fact fl 4. The term "claim" is defined as
follows:
a) a demand or suit for money or services you receive, including any

arbitration proceedings to which you are required to submit or to which
you have submitted with our consent; or
b) when you first receive oral or written information or have knowledge of
specific circumstance involving a particular person or entity which could
reasonably be expected to result in a demand or suit for money or services;
or
c) when you first receive oral or written notification of any disciplinary
proceedings.
2

-

Id. fl 5. The term "damages" is defined as o'monetary judgments, awards or settlements unless
otherwise excluded." Id. fl

6. "Professional services" includes the following:

a) services you render in a lawyer-client relationship as a lawyer, mediator,

arbitrator, notary public, administrator, conservator, receiver, executor,
guardian, trustee or in any similar fiduciary capacity
b) services (including title opinions or title certifications) you perform for
others for a fee as a title insurance agent, title abstractor, title searcher,
escrow agent, or closing agent;
c) services you render as a lawyer for others as a mediator or arbitrator,
speaker or author of legal treatises.
d) your activities as a member of a formal accreditation, ethics, peer review,
licensing board, standards review, bar association or similar professional
board or committee.

Id. fl 7. The policy includes certain exclusions, including Exclusion (o), which provides that the

policy does not apply to: "o) any claim for fines, sanctions, penalties, punitive damages or any
damages resulting from the multiplication of compensatory damages." Id.
provides that the policy does not apply

to: "p) any claim for legal

,T

10. Exclusion (p)

fees, costs or disbursements

paid or owed to you." Id. fl 11.
On January 21,2011, Walter Duemer filed an action on behalf of over one hundred

individuals and entities that were part of the FFR Group (the "Duemer claimants") against the
Joyce

Firm. In the arbitration matter, the Duemer claimants

sought relief for legal fees

wrongfully collected under a2002 Contingency Fee Agreement (the"2})2Retainer
Agreement),2 alleging claims for breach of fiduciary duty, conversion, and breach of contract.

2

The Duemer claimants entered into a contingency fee retainer agreement with the Joyce Firm, wherein
they agreed to pay the Joyce Firm25o/o of any award from claims against various entiiies, and a
$200,000
non-refundable retainer which was to be applied to any contingency award. The agreement also requlred
the Duemer claimants to contribute towards litigation costs up to $150,000; ury
amount would be
"*-".r,
credited back against the contingent fee.

The Duemer claimants had retained the Joyce Firm to represent them in claims against
various entities, including Deloitte & Touche, Jeffries Company, EPS Solutions Corporation and
Enterprises Profit Solutions Corporation (collectively

"EPS"). The Duemer claimants alleged

that although they had obtained a settlement recovery from certain of the entities, EPS was

insolvent. The Duemer claimants further alleged that the Joyce Firm advised them that to
recover from EPS, they should obtain an arbitration award against EPS and then proceed to
collect the judgment against EPS's insurers. The Duemer claimants alleged that after they
obtained the award and suit was filed against EPS's insurers, the Joyce Firm hired counsel in San

Francisco (Morgan Lewis/Reed Smith) to handle the litigation. According to the Duemer
claimants, the Joyce Firm notified them that they would be responsible for additional attorneys,
fees and costs incurred

for local counsel to pursue the coverage action, additional hourly fees of

the Joyce Firm, and additional litigation

costs. The Duemer claimants

asserted that the San

Francisco action was part of the original contingency fee agreement, and they intended to receive
a reimbursement

of all excess litigation proceedings at the successful conclusion of the litigation

against EPS's insurers.

The Duemer claimants alleged that although they authorized the Joyce Firm to settle with
EPS' insurers for $9,000,000, the Joyce Firm instead settled for $8,600,000 and agreed to reduce
its hourly fees by $400,000. When the Joyce Firm obtained the settlement funds, it applied both
the 2002 Retainer Agreement and a new fee agreement by deducting the hourly fees incurred by
the Joyce Firm, deducting Morgan Lewis/Reed Smith's fees and expenses as "litigation costs,,,
and deducting a 25oh contingent fee.
The procedural history of the underlying litigation is well documented bv the Illinois

Appellate Court as follows.

tl 12 III. Arbitration Proceedings
J[ 13 In their request for relief, the plaintiffs claimed that the defendant
collected legal fees under the2002 retainer agreement to which it was not entitled.
They alleged causes ofaction for breach offiduciary duty, conversion and breach
of contract and requested attorney fees and costs incurred in pursuing their claims
against the defendant. In its answer to the request for relief, the defendant denied
the claims and alleged the affirmative defenses of performance of an oral retainer
agreement, waiver and equitable estoppel. The defendant also filed a counterclaim
asserting a claim for quantum meruit. Retired Justice Robert E. Rose (arbitrator
Rose) was chosen to arbitrate the dispute. over a three-day period in May 201I,
arbitrator Rose conducted an evidentiary hearing. The evidence included
testimony by eight witnesses and exhibits submitted by the parties. At the close of
the evidentiary hearing, the parties submitted written closing arguments.

fl

14

A. The Interim Award

fl 15 On July 8, 201I, arbitrator Rose issued his interim award. Based on
the evidence from the hearing, he made findings of fact and conclusions of law as
set forth below.

fl 16 Arbitrator Rose found that the pursuit of a bad-faith insurance
coverage claim was not contemplated by the parties under the 2002 retainer
agreement. In an August 3, 2007 memorandum, the defendant advised the
plaintiffs that once the final order was issued in the EPS arbitration case, "'we
have to begin collection efforts against EPS's insurers. Toward that end, we have
already retained insurance coverage experts on our clients' behalf to lead us
through the process of fighting every coverage challenge the insurers may
assert."'In a conference call on August 9,2007, the defendant explained that
coverage counsel had been retained for the plaintiffs to assist in recovering from
EPS's insurers. Several of the plaintiffs did not recall that the defendant explained
that it would be assisting coverage counsel and the terms of its assistance. The
parties stipulated that some but not all the plaintiffs participated in the conference
call. On September 25,2007, the law firm of Morgan Lewis filed suit on behalf of
the plaintiffs and against EPS's insurers.
tl

17 Arbitrator Rose found that the plaintiffs were unaware that the
defendant had previously retained the Morgan Lewis firm to assist it in the
arbitration proceeding against EPS. It was not until the January 30, 2009
memorandum from the defendant that the plaintiffs were informed in writing that
(1) the defendant considered it had fulfilled its obligations under the 2002 retainer
agreement, (2) Morgan Lewis was the lead counsel in the suit against the EPS
insurers and working on an hourly basis, and (3) the defendant was charging the
plaintiffs a contingent hourly fee for its work performed in connection with the
insurance case.

fl 18 1. Undue Influence
!f 19 Based on the evidence, arbitrator Rose determined that the defendant
had not overcome the presumption of undue influence that arose when an attorney
benef,rtted from the modification of an existing fee agreement. The August 3,
2007 memorandum did not mention that the defendant considered its obligations
under the 2002 retainer agreement to be completed or that it would be charging
the plaintiffs an hourly fee in addition to its 25o interest in all funds recovered.
The memorandum never made it clear to the plaintiffs that a new fee agreement

was being reached and did not advise the plaintiffs that they could seek
independent legal advice as to the proposed retainer agreement. A considerable
number of the plaintiffs did not participate in the August 9,2007 conference call,
and the defendant failed to establish by a presumption of the evidence the content
of the conference call. While the January 30, 2008 memorandum did advise the
plaintiffs that the defendant considered the 2002 retainer agreement terminated,
that it would be charging a contingent hourly fee, and that Morgan Lewis would
be the lead counsel, it did not state that the plaintiff should get independent
counsel or that the defendant would be collecting its contingent fee and hourly
billings, if the insurance suit was successful. As a result, the consideration
charged for the new agreement was more than it would have been had the
plaintiffs obtained independent counsel.

!f 20 Arbitrator Rose found that the plaintiffs were presented with the
terms of the 2007 retainer agreement on a "'take it or leave it"' basis and that
there was no meeting of the minds as to the terms of the new retainer agreement.
In addition, the new retainer agreement was not reduced to writing in violation of
Rule 1.5(c) of the Illinois Rules of Professional Conduct (I11. R. Prof. Conduct
(2010) R. 1.5(c) (eff. Jan. 1, 2010). He found that the January 30, 2008
memorandum was untimely and inadequate to serve as a written contingent fee
request. Arbitrator Rose concluded that the new retainer agreement must be set
aside.

n 21 2. The Defendant's Counterclaim

\ 22 Arbitrator Rose found no evidence to support the defendant's claim
that the plaintiffs had breached any of the agreements they entered into with the
defendant or that there was a basis for a quantum meruil recovery. He also
rejected the defendant's waiver and estoppel defenses, based on evidence that
plaintiff Duemer and the defendant had agreed to conclude the litigation prior to
addressing the costs and attorney fees issue.

nn

3. Damages

124 a. Morgan Lewis Fees

fl 25 While the 2002 retainer agreement no longer applied, and the new
retainer agreement was voided by the defendant's actions, arbitrator Rose found
that the plaintiffs needed counsel to represent them in the insurance litigation.
Since the defendant's actions were not intentional, arbitrator Rose determined that
the plaintiffs were responsible for 75o/o of the Morgan Lewis fees and, as a
sanction, the defendant was responsible for the remaining 25o/o of the Morgan
Lewis fees.
n26b. Contingent Hourly Fee

127 Arbitrator Rose noted that pursuant to case law, a retainer agreement
resulting from undue influence was voidable, and the return of the fees paid under
such an agreement was an appropriate sanction. He determined that such a
sanction was appropriate in this case and ordered the defendant to pay
5405,674.87 to the plaintiffs.
1T

28 B. Post-Interim-Order Proceedings

I29

The defendant filed a motion to adjust and reduce the damages
amount. Under the interim award, the plaintiffs received a total of $555,802.02,
consisting of a refund equal to 25o/o of the Morgan Lewis fees they had paid and
the refund of the fees paid under the 2007 retainer agreement. The defendant
maintained that the amount did not reflect the amount of the fees it actually
collected from the plaintiffs. According to the defendant, the amount of
contingent hourly fees actually paid to it by the plaintiffs was $210,007.94,not
the $405,674.87 set forth in the interim award. The defendant also argued that
because of a credit given to the plaintiffs, the defendant actually received only
I5o/o ruther than the 25oh called for under the 2002 retainer agreement.

fl 30 The defendant pointed out that in the interim order arbitrator Rose
stated that his intention was to award the plaintiffs only those amounts they
actually paid to the defendant and to require the defendant to pay a fair share of
the costs of prosecuting the insurance coverage suit. Therefore, the defendant
maintained that the award of $555,802.02 should be reduced to $300,084.
J[ 31 The plaintiffs filed a motion requesting the issuance of a final award.
In addition, they sought an award of costs and requested that arbitrator Rose make
findings of fact and conclusions of law on their conversion claim against the

defendant.

n32 C. Final Award
J[33 In the final award, arbitrator Rose denied the conversion claim based
on the parties' agreement to resolve the fee calculation disagreement after the
distribution of the proceeds was made and the fact that plaintiff Duemer did not
state a specific amount to be placed in trust.

fl 34 Arbitrator Rose also rejected the defendant's motion to reduce

the

the plaintiffs were entitled to the costs of arbitration. In addition to
$555,802.02, the plaintiffs were awarded $72,725.45 in costs from

the
the

amount of damages. Under the 2002 retainer agreement, as the prevailing party,

defendant. . .

.

fl 39IV. Circuit Court Proceedings

u 40 The plaintiffs filed a verified petition to confirm the arbitration
award. The defendant filed a verified answer and a verified counterclaim to vacate
or modifu the final award. In the counterclaim, the defendant alleged that
arbitrator Rose exceeded his powers, refused to consider relevant evidence and
refused to correct miscalculations in the amount of the damages awarded. The
defendant sought a correction of the damage amounts.

fl 4l The circuit court entered an order denying the defendant's
counterclaim and confirming the arbitration award. The court assessed additional
costs of $19,846.04 and entered judgment for the plaintiffs in the amount of
$648,373.51.
Duemer v. Edward T. Jo),ce & Assocs., 995 N.E.2 d321,325-29 (Ill. App. Ct.2013). On August

9,2013, the Illinois Appellate Court affirmed the Circuit Court's order, confirming the
arbitrator's Final Award. Id. at334. On November 27,20!3,the Supreme Court of Illinois
denied the Joyce Firm's petition for leave to appeal. Duemer v. Edward T. Joyce

& Assocs..

P.C.,2N.E.3d 1045 (Ill. 20t3).
PDIC agreed to reimburse the Joyce Firm for its defense costs incurred in defending the
Duermer claim, subject to a reservation of rights. However, upon entry of the Final Award,

PDIC denied that it had any further obligation to defend or indemnify the Joyce Firm because the
matter is not covered under the Lawyers Professional Liability Policy.

B. Procedural History
On March 5,2013, the Joyce Firm filed its Complaint for Declaratory Judgment and
Other Relief in the Illinois state court. PDIC removed the litigation to federal court based on
diversity jurisdiction. The Joyce Firm seeks coverage from PDIC for the $628,527.47 arbitration

judgment entered against it and in favor of the Duemer claimants on August 8,2011, the postjudgment interest that has accrued on the Final Award, and all attorneys' fees and costs incurred
since PDIC denied coverage. Both parties now move for summary judgment. The cross-motions
are

fully briefed and before the Court.

II. DISCUSSION

A" Standard of Decision
Summary judgment is appropriate
as

if "the movant

shows that there is no genuine dispute

to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. p.

56(a); see also Garofalo v.

Vill. of Hazel

Crest

,754 F .3d 428, 430 (7th Cir. 2Ol4). The Court

reviews cross-motions for summary judgment, the same as any summary judgment motion, by
construing all facts and drawing all reasonable inferences form those facts in the light most
favorable to the nonmoving party. Garofalo, 754 F.3d at 430. However, because there is no
genuine dispute as to the material facts in this insurance coverage case, the Court "need decide

only whether either party is entitled to a judgment as a matter of law." Wis. Cent.. Ltd. v.
Shannon, 539 F.3d 751,756 (7th Cir. 2008) (internal quotation marks and citation omitted); see
also Crum

& Forster Managers Com. v. Resolution Trust Corp., 620 N.E.2 d,1073,1079 (Ill.

1998) ("The construction of an insurance policy and a determination of the rights and obligations
9

thereunder are questions of law for the court which are appropriate subjects for disposition by

way of summary judgment." (citations omitted)).

B.

Estoppel
As an initial matter, the Joyce Firm argues that PDIC should be estopped from raising

any policy defenses to coverage.
breached its duty to

"Illinois's estoppel doctrine 'applies only where an insurer has

defend."' St. Paul Fire & Marine Ins. Co. v. Vill. of Franklin park, 523 F.3d

754,756 (7thCir.2008) (quoting Emp'rs Ins. of Wausau v. Ehlco Liquidatins Trust, 708 N.E.2d
1122,1135 (Ill. 1999). An insurer "has two options: (1) defend the suit under a reservation of
rights or (2) seek a declaratory judgment that there is no coverage. If the insurer fails to take
either of these steps and is later found to have wrongfully denied coverage, the insurer is
estopped from raising policy defenses to coverage." Emp'rs Ins. of Wausau, 708 N.E.2d at

ll34-35 (citations omiued). Here, PDIC

issued a reservation of rights letter, and paid all defense

costs incurred by the Joyce Firm to defend against the Duemer claim through the date of entry

the Final Award on August 26,2011. According to the Joyce Firm, however, PDIC failed to
reasonably defend the Joyce Firm during the underlying arbitration proceedings because PDIC

failed to timely pay its attomeys' fees, and did so only after the Joyce Firm filed suit against
PDIC to collect the amounts owed on the outstanding invoices. This argument, however, is
waived because it is undeveloped and unsupported by pertinent authority. See. e.s., Hess v.

Kanoski & Assocs., 668 F.3d 446,455 (7th Cir. 2012) ("[P]erfunctory and undeveloped
arguments, and arguments that are unsupported by pertinent authority, are waived." (internal

quotation marks and citation omitted)).

10

of

C. Policy Construction
Next, the Joyce Firm argues that the final arbitration award is covered under the terms of
the Lawyers Professional Liability Policy and is not subject to any policy exclusions; and,
therefore, PDIC has a duty to indemnify

it. The parties agree that the Lawyers Professional

Liability Policy at issue in this diversity action is governed by Illinois law. Under Illinois law,
"[o]nce the insured has incurred liability as a result of the underlying claim, an insurer's duty to
indemnify arises only

if 'the insured's activity and the resulting loss or damage actually fall

within the . . . policy's coverage."' Travelers Ins. Co. v. Eljer Mfg.. Inc. ,757 N.E.2d 4Bl, 492

(Ill. 2001) (quoting Outboard Marine Corp. v. Liberty Mut. Ins. Co., 607 N.E.2d 1204,1221 (Ill.
1992)). "The duty to defend (and hence to reimburse for defense costs when the insurance
company doesn't provide the lawyer for the insured) is broader than the duty to

indemniff. . . . The duty is broader because it is triggered by arguable, as opposed to actual,
coverage." Lockwoodlnt'lB.V.v.VolmBagCo.,273F.3d74l,744(7thCir.2001)(internal
quotation marks and citation omitted); see also Outboard Marine Corp., 607 N.E.2 d at 1221.

"The construction of an insurance policy is a question of law." Netherlands Ins. Co. v.
Phusion Projects. Inc. ,737 F.3d 1174,

lI77 (7th Cir. 2013) (citing Am.

States Ins. Co. v.

Koloms, 687 N.E.2d 72,75 (Ill. 1997). "Because an insurance policy is a contract, the rules
applicable to contract interpretation govern the interpretation of an insurance policy." Founders
Ins. Co. v. Munoz, 930 N.E.2d999,1003 (Ill. 2010) (citations omitted). In construing an
insurance contract, the Court's primary role is to "ascertain and give effect to the intention of the

parties, as expressed in the policy language." Id. (citations omitted). It is well-established that

"[i]f

the language is unambiguous, the provision

will

be applied as written, unless

it contravenes

public policy." Id. (citations omitted). In addition, policy provisions which limit an insurer's

ll

liability will be construed liberally in favor of coverage only where the provision is ambiguous.
Id. (citations omitted). The parties' mere disagreement as to the meaning of a policy provision
does not render

it ambiguous; rather, the Court will find an ambiguity "where the policy

language is susceptible to more than one reasonable interpretation." Id. (citations omitted).

With these principles in mind, the Court determines whether the Joyce Firm's activity and
resulting damage actually fall within the Lawyers Professional Liability Policy. See Eljer, 757

N.E.2d at 492"
The Lawyers Professional Liability Policy expressly limits the scope of coverage for
ooarise
out of the rendering
"damages because of any claim or claims" made against it which

or the failure to render professional services." PDIC's Local Rule 56.1(a)(3) Statement

Material Fact fl

4.

of

of

Professional services are defined as services rendered in a "lawyer-client

relationship as a lawyer." Id. fl 7 (emphasis added).
First, the parties disagree as to the type of conduct which constitutes a "lawyer-client
relationship as a lawyer" within the meaning of the legal malpractice policy. PDIC argues that
fee disputes between insureds and their clients, including claims that insureds have wrongfully

withheld attorneys' fees and expenses from settlement proceeds, are not within the scope of this
coverage. In support of this argument, PDIC relies on Continental Casualty Co. v. Donald T.
Berhrcci. Ltd.,926N.E.2d 833 (Ill. App. Ct. 2010). In Bertucci, the Illinois Appellate Court
construed a similar insurance policy that provided coverage to underlying legal proceedings

which alleged "both covered damages and an act or omission in the performance of legal
services," i.e., "those services performed by an Insured for others as a lawyer."

I4

at 839

(internal quotation marks omitted) (emphasis added). The Bertucci court held that the

underlying lawsuit alleged neither requirement for coverage; and, therefore the insurer owed no
t2

duty to defend the insured.

Id.

In the underlying lawsuit, the insured's former client brought

claims against him based upon the retention of settlement funds and his subsequent
representation about his right to retain them, alleging breach of contract, unjust enrichment,
conversion, breach of fiduciary duty, fraud and violation of the Illinois statute which limits
contingent legal fees in medical malpractice actions. Id. at837. The former client sought:
(1) restitution for unauthorized legal fees which Bertucci improperly retained from the proceeds

of a medical malpractice settlement; and (2) consequential expenses arising therefrom, including
statutory interest on the settlement proceeds, attorneys' fees, and punitive damages. Id.
The Bertucci court focused on the true nature of the underlying

claim-the improper

retention of legal fees-rather than examine the legal theories advanced by the aggrieved client
o'such

as the attorney's breach

duty."

of a legal duty, violation of a statute, or disregard for an equitable

Id. The Bertucci court held that the alleged improper

o'business

retention of legal fees constituted a

practice independent of the lawyer-client relationship." Id. at842. Put differently, the

insured's retention of excessive attorney fees from a client's settlement proceeds did not draw
upon his specialized knowledge and skill as a lawyer. ld.

at844.

The Bertucci court

emphasized that the trnderlying claim arose only after the lawyer had effectively and correctly

performed the legal services for which he was retained. Id. at 845. For this reason, the Bertucci
court concluded that the underlying litigation and related proceedings conducted by the Attorney
Registration and Disciplinary Commission did not come within the terms of the policy. Id. at

844-45,847"
The Court agrees with the Joyce Firm that Bertucci is distinguishable. The underlying

arbitration goes well beyond the improper retention of legal fees; rather, the Joyce Firm's breach
of fiduciary duty is inextricably tied to the lawyer-client relationship in the role of a lawyer. The
13

arbitrator found that prior to the settlement achieved in this case, the Joyce Firm had failed to
provide a full disclosure about the change in legal representation made in pursuing the San
Francisco coverage litigation on behalf of the Duemer clients; that the Joyce Firm failed to
advise its clients to seek independent counsel; that there was undue influence in the purported

negotiation of a new fee agreement; and that the Joyce Firm failed to comply with its
professional obligations by entering into a verbal agreement for a contingent fee. Indeed, the
arbitrator found that in moving forward with the San Francisco litigation, the Joyce Firm was

working to collect the 25%o contingent fee interest it had as a creditor.
Under Illinois law, the fiduciary duty to disclose any actual or potential conflicts
interest constitutes a professional service that requires the use of legal knowledge or
Cas. Co. v. Cuda, 715 N.E.2d 663,668-69

(Ill. App. Ct. 1999);

see also Owens

Will & Emery,736N.E.2d 145, 155 (m. App. Ct. 2000) ("Generally,

a

of

skill. Cont'l

v. McDermott.

claim against an attomey

for breach of fiduciary duty falls under the rubric of professional malpractice." (citing
Hanumadass v. Coffield. Ungaretti

& Harris,724N.E.2d 14, 18 (1999))). What is more, in the

underlying arbitration, the Deumer claimants alleged that the Joyce Firm was only authorized,to
settle the San Francisco lawsuit for $9,000,000. Yet, according to the Deumer claimants, the
Joyce Firm entered into a settlement with EPS's insurers on behalf of its clients for $8,600,000,
and notified them that the Joyce Firm would reduce its hourly fees by $400,000 to offset the

lower settlement amount. Ultimately, the Joyce Firm failed to establish its authority to make the
$8,600,000 settlement agreement on behalf of its clients. Duemer, 995 N.E.2d at332.

Accordingly, the Court finds that the Duemer claim made against the Joyce Firm arises from
services rendered in a "lawyer-client relationship as a lawyer.',

t4

Next, the parties disagree on whether the Final Award constitutes "damage" within the
scope of the Lawyers Professional

Liability Policy. The term "damages" is defined

as "monetary

judgments, awards or settlements unless otherwise excluded." PDIC's Local Rule 56.1(a)(3)
Statement of Material Fact fl 6 (emphasis added). The Lawyers Professional

Liability Policy

excludes, among other things, "any claim for legal fees, costs or disbursements paid or owed to

you," id. fl 11, and "any claim for fines, sanctions, penalties, punitive damages or any damages
resulting from the multiplication of compensatory damages," id. fl 10.

PDIC argues that both exclusions preclude coverage. Pursuant to Exclusion (p), the
Lawyers Professional Liability Policy does not apply to claims for legal fees or costs. For the
same reasons discussed above,

PDIC's argument under Exclusion (p) fails as a matter of law.

The Duemer claim is not a run of the mill dispute over legal fees and costs. The Joyce Firm's

activity-failure to make proper disclosures and provide necessary legal advice, including the
impropriety in making a settlement agreement on behalf of its clients below the authorized

amount-goes beyond

a mere fee

dispute. Exclusion (p) therefore does not apply.

With respect to Exclusion (o), which excludes claims for sanctions, PDIC argues that
because the judgment against the Joyce Firm was expressly awarded as a sanction, the Duemer

claim is not covered. In the underlying arbitration, the Duemer claimants sought damages for
breach of contract and equitable disgorgement based upon the Joyce Firm's alleged failure to

finish its performance under the 2002 Retainer Agreement, the hourly fees billed to them by the
Joyce Firm, as well as the additional legal fees

it incurred with Morgan Lewis/Reed Smith. The

arbitrator found that the 2002Retainer Agreement had ended when the San Francisco litigation
began; and, therefore there was no breach of contract. However, the arbitrator found that there
was not a new retainer agreement in place because of the Joyce Firm's improper conduct. As a
15

sanction, the arbitrator awarded $405,674.87 for the contingent hourly fees charged and paid to

the Joyce Firm and an additional$150,I27.15, which represents the Joyce Firm's 25o/o share of
the fees paid to Morgan Lewis/Reed Smith. Duemer, 995 N.E.2d at326.
The Joyce Firm argues that, although the arbitrator used the term "sanction" in the Final

Award, he really intended to award only damages in the form of disgorgement based upon its
finding that the Joyce Firm did not act "with intent to violate the law or the professional rules

of

conduct." Decl. of Arthur Aufmann in Supp. of Mot. for Summ. J. Ex. C, at 17. However, the
Circuit Court of Cook County confirmed the Final Award, which included the arbitrators' stated
imposition of sanctions. Moreover, the Illinois Appellate Court affirmed the order, and expressly
and repeatedly referred to the damages award as a sanction. Ultimately, the Supreme Court

of

Illinois denied the Joyce Firm's petition for leave to appeal. The Joyce Firm's argument that the
sanction imposed by the arbitrator was not actually a sanction is fundamentally flawed in light

of

Illinois state court proceedings; and, is therefore rejected. Because the damages awarded to the
Duemer claimants are sanctions, and the policy specifically excludes such damages, PDIC has no
duty to indemnify the Joyce Firm. Where, as here, "the covered claims fall out of the case
through settlement or otherwise, the insurer's duty to defend his insured ceases." Lockwood

Int'l B.V., 273 F.3d at744 (citations omitted). The Court
arguments regarding coverage.

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need not address the parties remaining

III. CONCLUSION
For the foregoing reasons, PDIC's motion is granted, and the Joyce Firm's motion is

denied. Summary judgment is entered in favor of PDIC. PDIC has no duty to indemnifr the
Joyce Firm on the Duemer

claim. Additionally, PDIC's duty to defend

ceased when the

arbitrator awarded sanctions as relief for the Joyce Firm's breach of fiduciary duty.

IT IS SO ORDERED.

CHARLES RONALD NORG
United States District Court

DATE:

September 30, 2014

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