Malpractice Insurance and the Importance of Sound Business Practices

The typical malpractice insurance policy covers lawyers when claims are brought against them based on provision of “professional services.” But the reality of these claims is that a dispute may boil down to money. If a client claims, not that the lawyer committed malpractice, but that he charged too much for his services, will the typical malpractice insurer provide a defense? In a recent published decision, the U.S. Court of Appeals for the Tenth Circuit explains Colorado law on this question. Evanston Insurance Company v. Law Office of Michael P. Medved, P.C., holds that a claim of overbilling fell outside the law firm’s coverage for professional services.¹

The AG Investigates and a Class Takes Action

The case involved a dispute over the billing practices of a foreclosure firm in Colorado. Essentially, the firm would bill its clients (who were lenders and investors) when it foreclosed on properties, but ultimately, those costs were passed onto homeowners. According to the Colorado Attorney General’s Office, this resulted in homeowners having to pay attorney fees of the lenders before they stop could stop foreclosure proceedings through cure or reinstatement. While this by itself wouldn’t necessarily be a problem, the AG alleged that the firm charged significantly more than the allowable costs and fees for firms conducting foreclosures, which are governed by contract, investor guidelines, and state law.²

Eventually, these billing practices raised red flags with the AG, which started an investigation. After the investigation went public, a group of property owners filed a class action lawsuit regarding the excessive billing practices.  

The Firm’s Malpractice Insurer Gets Involved (With Reservations)

The law firm maintained professional liability insurance, which covered professional services. Once the class action suit was filed, the firm informed its insurer, which then took up the defense under a reservation of rights. This meant that the insurer would provide defense but reserve the right to contest coverage at a later date, which is a typical position for an insurer. The insurer defended the firm, and eventually settled the case. 

In the meantime, the AG’s investigation was still ongoing, and the firm kept the insurer up to date on the progress. Eventually, the AG filed a complaint, and again, the insurer agreed to defend the firm under a reservation of rights. But shortly thereafter, the firm settled with the AG, ending the need for representation.

The Insurer Claims No Coverage and Litigation Ensues 

With the claims resolved, the insurer turned to the firm and exercised its right not to provide coverage. The insurer sued the law firm and the main attorney for declaratory relief that the policy did not cover the class action or the AG’s lawsuit and asked for reimbursement for the costs and fees expended in defending the class action lawsuit. The district court granted summary judgment in favor of the insurer, concluding that: 

•  The insurer “had no duty to defend the class action because the allegations had pertained only to billing practices, which were not ‘professional services,’”

•  The insurer “was not estopped from asserting coverage defenses for the class action because estoppel cannot create insurance coverage,”

•  The insurer “had no duty to defend the Colorado Attorney General’s investigation because (1) no ‘claim’ could arise until [the lawyer] or his firm had received a written demand for monetary damages and (2) the allegations had pertained only to billing practices,” 

•  The lawyer’s “and his firm’s counterclaims for bad faith failed because there was no coverage under the policy,” and 

•  The insurer “was entitled to reimbursement of defense fees and costs.”³

The lawyer and his firm appealed.

The Tenth Circuit Holds the Professional Services Policy Did Not Cover Claims for Overbilling 

On appeal, the Tenth Circuit affirmed, largely agreeing with the result and conclusions reached by the district court. The court explained that the insurer had no duty to defend the lawyer or his firm on these claims, because the allegations had arisen from billing practices, not professional services. The issue was not whether the lawyer committed wrongful acts in the services he performed (which would have been covered under the policy); the allegations were only that the lawyer billed too much. In other words, the claims were not connected to the professional services covered. Because they arose only from billing practices, which are not professional services, the insurer was not obligated to defend them. 

The appellate court also rejected the lawyer’s arguments that the insurer should be estopped from now asserting its right not to defend him, after it had already done so. But the court was unconvinced by this argument as well. The insurer had only undertaken the defense under a reservation of its right to later contest coverage. But even if it hadn’t, the lawyer could not demonstrate that he suffered any prejudice from the insurer agreeing to represent him and now contesting coverage. So, the court rejected an estoppel argument.

The Importance of Sound Business Practices

This case reminds lawyers of the importance of sound billing practices and business ethics. While individual policies will vary, if claims are lodged against a lawyer or firm for what are essentially its business management of the firm, malpractice coverage may not cover it. And, while the case did not explain the ethical issues inherent in overbilling allegations, they are lurking. Attorneys should follow the rules of professional conduct governing proper billing practices, as well as any industry-specific laws or contract rules on what can be charged to the client. 

_________________________________________

¹    Evanston Ins. Co. v. Law Office of Michael P. Medved, P.C., No. 16-1464 (10th Cir. May 22, 2018). 

²   See Colorado v. Law Office of Michael P. Medved, P.C., et al., No. 2014CV34167 (Complaint), available at https://stopfraudcolorado.gov/sites/default/files/cases/110614_medved_complaint.pdf. 

¹    Id. (slip op. at 4).