Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca7-14-03341/USCOURTS-ca7-14-03341-0/pdf.json

Parties Involved:
Edward T. Joyce & Associates
Appellant
Professionals Direct Insurance Company
Appellee

Document Text:

In the

United States Court of Appeals

For the Seventh Circuit ____________________

No. 14-3341

EDWARD T. JOYCE & ASSOCIATES, P.C.,

Plaintiff-Appellant,

v.

PROFESSIONALS DIRECT INSURANCE 

COMPANY,

Defendant-Appellee.

____________________

Appeal from the United States District Court for the

Northern District of Illinois, Eastern Division.

No. 13 CV 2475 — Charles R. Norgle, Judge.

____________________

ARGUED APRIL 16, 2015 — DECIDED MARCH 21, 2016

____________________

Before BAUER, EASTERBROOK, and SYKES, Circuit Judges.

SYKES, Circuit Judge. The Illinois law firm of Edward T. 

Joyce & Associates, P.C., purchased professional-liability 

insurance from Professionals Direct Insurance Company, a 

Michigan-based insurer. In 2007 the Joyce firm won a large

damages award for a class of securities-fraud plaintiffs and 

hired another law firm to sue to collect the money from the

Case: 14-3341 Document: 24 Filed: 03/21/2016 Pages: 13
2 No. 14-3341

defendant’s insurers. Some of the class members thought the 

Joyce firm should have handled this aspect of the litigation

itself under the terms of its contingency-fee agreement. The

class members took the firm to arbitration over the extra fees

incurred in the satellite collection litigation.

Professionals Direct paid for the Joyce firm’s defense in 

the arbitration. But when the arbitrator found for the clients 

and ordered the firm to reimburse some of the fees they had 

paid, the insurer refused the firm’s demand for indemnification. The Joyce firm initiated coverage litigation in state 

court, which the insurer promptly removed to federal court. 

Ruling on cross-motions for summary judgment, the district 

judge sided with the insurer, concluding that the arbitration 

award was a “sanction” under the insurance policy’s exclusion (o), which excludes coverage for “fines, sanctions, 

penalties, punitive damages or any damages resulting from 

the multiplication of compensatory damages.” 

We affirm, though on a different rationale. The arbitration award was not functionally a sanction, so exclusion (o) 

does not apply. But another provision in the policy excludes 

“claim[s] for legal fees, costs or disbursements paid or owed 

to you.” Because the arbitration award adjusted the attorney’s fees owed to the firm in the underlying securities-fraud 

class action, the “legal fees” exclusion applies.

I. Background

Professionals Direct issued a professional-liability insurance policy to the Joyce firm promising to pay “all sums 

which you [the firm] become legally obligated to pay as 

damages because of any claim or claims first made against 

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No. 14-3341 3

you.”1 The policy defines “claim” as “a demand or suit for 

money or services you receive, including any arbitration

proceedings.” Eligible claims are those “aris[ing] out of the 

rendering of or the failure to render professional services.” 

And “professional services” include “services you [the Joyce 

firm] 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.”

“Damages” are defined as “monetary judgments, awards 

or settlements unless otherwise excluded.” (Emphasis added.) 

To that end, the policy lists 27 exclusions, two of which are 

relevant here. Exclusion (o) excludes coverage for “any claim

for fines, sanctions, penalties, punitive damages or any 

damages resulting from the multiplication of compensatory 

damages.” Exclusion (p) excludes coverage for “any claim 

for legal fees, costs or disbursements paid or owed to you.”

A. The Securities-Fraud Class Action

In 2002 a class of plaintiffs retained the Joyce firm to 

prosecute a securities-fraud action against EPS Solutions 

Corporation and Enterprise Profit Solutions Corporation 

(collectively, “EPS”). Under the retainer agreement, the Joyce 

firm would receive a $200,000 flat fee and 25% of any award

or settlement, plus reimbursement of costs. The agreement 

permitted the Joyce firm to retain local counsel outside

Illinois if the firm deemed such assistance necessary, with 

 1 Bolded words appear as they do in the policy and are terms specially 

defined in section (D) of the policy.

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4 No. 14-3341

any resulting third-party legal fees to be treated as costs 

under the agreement. 

In 2007 the Joyce firm won a substantial arbitration 

award against EPS. By that point, however, EPS had become 

insolvent, and its insurers were the only source of funding to 

collect on the award.

This is where the dispute between the firm and its clients

arose. The Joyce firm thought it had fully satisfied its obligations under the terms of the original retainer agreement by 

securing the arbitration award. The firm recommended the 

retention of Morgan, Lewis & Bockius LLP, a California law 

firm, to handle the collection litigation against EPS’s insurers. The clients, however—or at least a large subset of the

class that later pursued a claim against the Joyce firm—

thought the firm should have continued to represent them 

under the terms of the original retainer agreement.

Regardless, the Joyce firm arranged for Morgan Lewis 

and later Reed Smith LLP to pursue the insurance litigation. 

Because of its “intimate knowledge of the facts and legal 

theories,” the Joyce firm assisted in the litigation on an 

hourly-fee basis, with payment deferred until and only if

there was an actual recovery. The case ultimately settled

when EPS’s insurers agreed to pay $8.6 million.

B. The Arbitration Demand by the Class Members

In January 2011 Walter Duemer, a plaintiff in the securities-fraud class action, filed a demand for arbitration against 

the Joyce firm on behalf of roughly 90% of his fellow plaintiffs. He alleged claims for breach of fiduciary duty, wrongful conversion of client trust funds, and breach of contract. 

The claims centered on the Joyce firm’s retention of the 

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No. 14-3341 5

Morgan Lewis and Reed Smith firms to handle the satellite 

litigation against EPS’s insurers.2 The Joyce firm denied any 

wrongdoing and retained counsel to defend it in the arbitration, forwarding counsel’s invoices to Professional Direct for 

payment. The insurer agreed to pay for the firm’s defense

under a reservation of rights and paid the invoices as they 

were submitted. (There were two exceptions, which we’ll 

discuss later.)

The arbitrator rejected the conversion and breach-ofcontract claims but found the Joyce firm liable for breach of 

fiduciary duty in the manner in which it had arranged for 

the two outside firms to handle the satellite litigation. More 

specifically, the arbitrator found that the Joyce firm did not 

make “up front full disclosure about the change in legal 

representation” and that the new fee arrangement “was 

presented [to the clients] as already accomplished,” suggesting “an element of undue influence about the purported 

negotiation of a new fee agreement.”

As a remedy, the arbitrator sought to unwind some of the 

additional attorney’s fees incurred by the Duemer claimants

in the satellite litigation. The arbitrator ordered the Joyce 

firm to remit the $405,674.87 in fees it had charged for

consultative work with Morgan Lewis and Reed Smith. And

because the original retainer agreement had called for a

75/25 client/attorney split of any recovery yet the clients had 

footed the entire bill for the satellite litigation, the arbitrator 

 2 The arbitration demand also challenged the acceptance of a settlement 

offer of $8.6 million—$400,000 below the $9 million threshold authorized 

by the plaintiffs. This claim was not part of the arbitrator’s final award 

and is immaterial to this appeal.

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6 No. 14-3341

also ordered the Joyce firm to pay 25% of the fees charged by 

Morgan Lewis and Reed Smith. This added $150,127.15 to 

the award. Finally, the arbitrator ordered the firm to pay

$72,725.45 to offset the costs incurred in the arbitration.

The Joyce firm unsuccessfully challenged the arbitration 

award in Illinois state court on grounds unrelated to this 

appeal. The firm was thus on the hook for $628,527.47. At 

this point Professionals Direct balked and refused to pay the 

award, relying on exclusions (o) and (p) in the policy

(among other policy defenses).

The Joyce firm filed suit in state court seeking a declaration that the insurer had breached its duty to indemnify. 

Professionals Direct removed the action to federal court

based on diversity jurisdiction. See 28 U.S.C. § 1332. On 

cross-motions for summary judgment, the district court

honed in on the arbitrator’s use of the word “sanction” to 

describe the final award against the Joyce firm. Since “claims 

for ... sanctions” are expressly excluded from coverage 

under exclusion (o) of the policy, the judge held that the 

insurer owed no indemnification duty and entered summary 

judgment for Professionals Direct. This appeal by the Joyce 

firm followed.

II. Discussion

The primary question in this case is how to classify the

arbitration award won by the Duemer claimants: Is it a 

sanction, the return of disputed fees, or simply damages? If 

the award qualifies as a sanction, then exclusion (o) knocks 

out coverage. If the award is an adjustment of disputed legal 

fees, then exclusion (p) applies and the result is the same. If 

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No. 14-3341 7

the arbitrator awarded ordinary compensatory damages, 

then Professionals Direct may be required to pay.

We review de novo the district court’s ruling on crossmotions for summary judgment. Dunnet Bay Constr. Co. v. 

Borggren, 799 F.3d 676, 688 (7th Cir. 2015). Because this case is 

in federal court under diversity jurisdiction, Illinois substantive law controls.

A. Estoppel

As a threshold matter, the Joyce firm asserts that Professional Direct is estopped from relying on any policy exclusions because it reneged on its duty to defend in the arbitration. Under Illinois law “an insurer’s duty to defend under a 

liability insurance policy is so fundamental an obligation 

that a breach of that duty constitutes a repudiation of the 

contract.” Emp’rs Ins. of Wausau v. Ehlco Liquidating Tr., 

708 N.E.2d 1122, 1135 (Ill. 1999). A breach of the duty to 

defend estops the insurer from raising policy defenses to 

coverage. Id. 

The district judge declined to address the estoppel argument because it was underdeveloped and therefore waived. 

The Joyce firm challenges that conclusion on appeal.

We don’t need to address waiver because the estoppel

argument is so obviously meritless. An insurance company 

has two options when an insured requests a defense and the 

insurer disputes coverage: The insurer can “(1) defend the 

suit under a reservation of rights or (2) seek a declaratory 

judgment that there is no coverage.” Id. Professionals Direct 

elected the first option. The Joyce firm had retained counsel 

of its choosing for the arbitration, and under a reservation of 

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8 No. 14-3341

rights, Professionals Direct agreed to reimburse defense 

costs. It followed through on this reimbursement promise.

The Joyce firm’s estoppel argument rests entirely on the 

timing of two of the reimbursement payments. The firm

asserts that after the arbitrator issued his final award, Professionals Direct claimed it had no further responsibility for 

defense costs and left two outstanding invoices unpaid. 

Multiple phone calls and e-mails followed, and the firm 

threatened litigation. Professionals Direct then paid the two 

outstanding invoices, belatedly, a few weeks later.

The Joyce firm contends that this brief delay in payment 

amounts to a breach of the duty to defend. There’s no support for this argument. To the contrary, in Santa's Best Craft, 

L.L.C. v. Zurich American Insurance Co., 941 N.E.2d 291 (Ill. 

App. Ct. 2010), the Illinois Appellate Court expressly declined to find a breach of an insurer’s duty to defend based

solely on “the amount of time between the insured's submission of expenses ... and its subsequent receipt of reimbursement,” id. at 300. So even if properly preserved, the 

estoppel argument plainly fails. Because there was no failure 

to defend, Professionals Direct is not estopped from raising

its policy defenses to coverage. 

B. Exclusion (o)

As we’ve explained, exclusion (o) knocks out coverage 

for “any claim for fines, sanctions, penalties, punitive damages or any damages resulting from the multiplication of 

compensatory damages.” The district judge classified the 

arbitration award as a “sanction” and thus concluded that 

exclusion (o) applies. The judge’s reasoning rests heavily on 

the language used by the Illinois courts in their rulings 

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No. 14-3341 9

rejecting the Joyce firm’s challenge to the arbitration award. 

Because the state courts occasionally used the word “sanction” to describe the award, the judge evidently thought 

himself bound by that label.

But the character of the award was not at issue in the

state-court proceedings, which focused narrowly on whether 

the dispute was subject to arbitration and whether the 

arbitrator exceeded his authority. It’s true that the Illinois 

Appellate Court’s decision uses the word “sanctions” three 

times—each time closely mirroring language found in the 

arbitrator’s award. Duemer v. Edward T. Joyce & Assocs., P.C., 

995 N.E.2d 321, 326 (Ill. App. Ct. 2013). But this perfunctory

repetition of the arbitrator’s terminology doesn’t determine 

the proper characterization of the award.

Nor does the arbitrator’s occasional use of the word 

“sanction” conclusively resolve the matter. Indeed, the 

arbitrator used a bevy of different terms to describe the 

award, including “damages,” “disgorgement,” the “equitable result,” “remedy,” and the “final award” (among other 

terms). In the end, what the arbitrator called the award is 

less important than what was actually alleged and proved, 

what was awarded, and why. See Cont'l Cas. Co. v. Donald T. 

Bertucci, Ltd., 926 N.E.2d 833, 842 (Ill. App. Ct. 2010) (explaining that Illinois courts “compare the language of the 

policy with the facts alleged in the complaint, rather than 

examine whether the client has pled any particular theory of 

relief”). 

Exclusion (o) lists “sanctions” alongside “fines,” “penalties,” “punitive damages,” and “damages resulting from the 

multiplication of compensatory damages”—all terms that 

describe penalties rather than compensatory remedies. The 

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10 No. 14-3341

arbitration award, on the other hand, is crafted as a remedy 

for the Joyce firm’s breach of fiduciary duty in connection 

with its handling of the retention of the outside firms for the 

collection litigation against EPS’s insurers. The arbitrator 

sought to make the clients whole for a portion of the extra 

fees they incurred in the satellite litigation. 

To be sure, the arbitrator rooted his holding in part on an 

ethics rule that carries the threat of sanctions. Specifically, he 

noted that “the Joyce law firm violated Rule 1.5c of the 1990 

Illinois Rules of Professional Conduct by entering into a 

verbal agreement for a contingent fee engagement, even 

though this was a contingent hourly fee and not your standard ‘percentage of recovery’ contingent fee agreement.” But 

the power to issue sanctions for violation of the Rules of 

Professional Conduct belongs exclusively to the Illinois

Supreme Court and to any inferior courts acting with its 

blessing. Lustig v. Horn, 732 N.E.2d 613, 620 (Ill. App. Ct. 

2000) (“Courts other than the supreme court may adjudicate 

matters touching on attorney discipline only when acting as 

agents of the supreme court upon direct order of that 

court. ... [A] denial of attorney[’s] ... fees, imposed solely as 

a sanction for unprofessional conduct on his part, would 

constitute an impermissible infringement on the exclusive 

power of the supreme court ... to adjudicate disciplinary 

matters.”). This narrow aspect of the arbitrator’s decision 

doesn’t determine the character of the award.

The arbitrator used a variety of different terms to describe the award to the Duemer claimants, but the label 

ultimately doesn’t matter. Because the award is functionally

and in substance a remedy for the firm’s fiduciary breach—

and not a sanction—exclusion (o) does not apply.

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No. 14-3341 11

C. Exclusion (p)

The stronger argument against coverage is that the arbitrator’s award falls within exclusion (p), which excludes 

coverage for “any claim for legal fees ... owed to” the firm.

The request for relief in the arbitration demand fits squarely 

within this exclusion. The Duemer claimants sought “relief 

for legal fees wrongfully collected under Contingency Fee 

Agreements signed by each of Claimants and Respondent in 

connection with Respondent’s agreement to provide legal 

services to investigate and prosecute any and all claims 

which Claimants might have in connection with the purchase of EPS stock.” (Emphasis added.) This straightforward 

request grows a bit murkier in the “[p]rayer” for relief, 

which more broadly asks for “[a]ctual damages as determined by the Arbitrator.” Still, the award fashioned by the 

arbitrator adjusted the legal fees recovered by the Joyce firm 

in the underlying securities-fraud action. That brings exclusion (p) into play.

Recall that the arbitration award had three components: 

(1) $405,674.87 to be remitted from the Joyce firm to the 

Duemer claimants for the hourly fees they paid to the firm

for its consultancy with Morgan Lewis and Reed Smith; 

(2) $150,127.15 from the Joyce firm to offset 25% of the legal 

fees paid by the claimants directly to Morgan Lewis and 

Reed Smith; and (3) $72,725.45 to cover arbitration costs. The 

costs are not at issue here. 

The first component of the award straightforwardly qualifies as a “claim for legal fees ... paid or owed to [the firm]” 

within the meaning of exclusion (p) because the claimants 

were seeking and received remittance of fees they had paid 

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12 No. 14-3341

directly to the Joyce firm. This part of the award is plainly 

excluded from coverage.

The second component of the award is somewhat more 

difficult to classify. It isn’t directly an order for reimbursement of legal fees paid to the Joyce firm. After all, the 

Duemer claimants had paid the $150,127.15 to the two outside 

law firms. But substance is what matters here, and in substance this part of the arbitrator’s award reduced the fees the 

Joyce firm was entitled to recover from the proceeds of the 

settlement with EPS’s insurers. In other words, the arbitrator 

adjusted the legal fees owed to the firm for its work in the 

underlying securities-fraud arbitration, lopping off an 

amount equal to its share of the fees the Duemer claimants 

paid to the two outside firms. So although it’s a closer question, we conclude that this part of the award, too, falls within 

exclusion (p) and is excluded from coverage.3

 3 Professionals Direct also argues that the arbitration award falls outside 

the basic grant of coverage in the policy because the award did not “arise 

out of the rendering of or the failure to render professional services.” 

That strikes us as a stretch. The arbitrator found the Joyce firm liable for 

breach of fiduciary duty arising directly out of the attorney-client 

relationship with the plaintiff class. Professionals Direct cites Continental 

Casualty Co. v. Donald T. Bertucci, Ltd., 926 N.E.2d 833 (Ill. App. Ct. 2010), 

but that case is distinguishable; it involved a pure billing dispute that 

arose after litigation concluded and the attorney-client relationship 

ended. 

Professionals Direct also argues that the second component of the 

arbitration award—the order that the firm reimburse the Duemer 

claimants for 25% of the fees paid to the two outside firms—is uninsurable restitution under Illinois law. See Local 705 Int’l Bhd. of Teamsters 

Health & Welfare Fund v. Five Star Managers, LLC, 735 N.E.2d 679 (Ill. App. 

Ct. 2000) (explaining that “disgorgement or restitution of fees do not 

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No. 14-3341 13

Accordingly, although we part company with the district 

court on which of the two exclusions applies, we agree that 

the arbitration award is excluded from the policy’s coverage 

and Professionals Direct owes no duty to indemnify.

AFFIRMED.

 

constitute insurable damages ... as a matter of Illinois law”). We don’t 

need to address this argument because we’ve already concluded that this 

part of the award amounts to a claim for legal fees and is therefore 

excluded from coverage by exclusion (p).

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