I have been studying, as well as writing and speaking on, the American Law Institute’s “Principles of the Law of Liability Insurance” for a while now. The ALI is best known for publishing “Restatements” on various aspects of the law. For that reason, when I’ve addressed the subject, I’ve sometimes had to answer, at the get-go, the obvious question -- How are ALI “Principles” different from a “Restatement?” The ALI has now saved me from this chore. Just days ago the ALI announced that the “Principles of the Law of Liability Insurance” will now be called “Restatement of the Law of Liability Insurance.” This news came by way of e-mail from the ALI Director to the involved parties. But its impact will be akin to one that was delivered via stone tablets.

While the new name sounds similar, the change is far from cosmetic. In doctrinal terms, as a Principles project, its objective was to set forth what the law on liability insurance should be, i.e., it was aspirational. The objective of a Restatement, however, is much different. It is to lay out rules describing what the law is. In practical terms, the change from a Principles project to a Restatement means that it will carry more weight with courts. Many courts are quite comfortable citing to the ALI’s various Restatements when it comes to deciding cases. There is surely no reason why this won’t be the case with the Restatement of the Law of Liability Insurance. Not to say that the Principles did not have the ability to influence judicial decisions, but that possibility is now magnified by this left turn.

This difference in purpose – from describing what the law “should be” to what it “is” – naturally means that there needs to be a different analysis undertaken when drafting the Restatement provisions. To the extent that Principles provisions have already been drafted (some approved by the ALI membership and some in earlier stages), the ALI has taken care of this. In announcing the change, the ALI stated that “[t]he Reporters will closely examine the existing text to determine what portions will need to be changed.” In addition, ample time will be provided at the ALI Annual Meeting (May 2015) “to review all the text that has already been approved and to vote on it again in light of the change in the project’s title.”

Therein lies the most important issue concerning the Restatement (also known as the ALI project formerly known as the Principles of the Law of Liability Insurance) – to what extent its approved and drafted provisions will be amended, as well as new ones approached.

To be sure, the insurance industry has not had a love affair with the Principles project. In general, insurers and their counsel have criticized the project for adopting the minority position on several issues that are adverse to their interests. If that’s so, then insurers’ initial reaction to the name change may be one of disdain. After all, if you don’t like a Principles project, then you really must not like a project that is going to carry more weight with courts. But, in fact, insurers should welcome this change from a Principles project to a Restatement.

The ALI defines a Restatement as follows: “Restatements are addressed to courts and others applying existing law. They aim at clear formulations of common law and its statutory elements or variations and reflect the law as it presently stands or might plausibly be stated by a court. Restatement black-letter formulations assume the stance of describing the law as it is.”

The ALI’s description of a Restatement could not be clearer that its objective is to set forth what the law is. That being so, those involved in putting together the now-Restatement should have no choice but to go back and amend several provisions – both approved and in draft – and approach new ones from a different perspective. After all, if the purpose of a Restatement is to set forth what the law is, then minority positions surely have to be revisited.

For example, the ALI Principles adopted a provision that, generally speaking, if an insurer breaches the duty to defend, it loses the ability to disclaim coverage for indemnity, even if there is an otherwise applicable exclusion. While this is the law in some states, it is the minority. The Reporter’s Notes to the provision admit as much.

And several more examples like this abound. By my count, courts in 24 states hold that when an exclusion applies to “an insured” or “any insured,” coverage is precluded even to a person who did not commit the excluded conduct (the innocent co-insured) and, it is important to note, this remains so even if the policy contains a separation of insureds clause. Eleven states go the other way. Despite a 24-11 score, the ALI drafters have sought to adopt the minority rule that, under this circumstance, coverage is owed.

The score on pre-tender defense costs is this: 21 states preclude coverage without the insurer needing to prove prejudice and 6 states preclude coverage only if the insurer can prove prejudice. But despite this lopsided score favoring no prejudice required, the ALI Principles seem to be requiring an insurer to establish “substantial prejudice” to disclaim coverage for pre-tender defense costs.

When it comes to the often contentious issue of the hourly rate to be paid to independent counsel, when an insured is being defended under a reservation of rights, the Principles concluded that the insurer must pay counsel whatever it asks for – and litigate the reasonableness of that when the case is over. No court has ever said that.

Faced with the adoption of unwelcomed minority positions via a Principles project, insurers should embrace this change to a Restatement. As a Principles project, the ALI has been able to support the adoption of minority positions by saying, well, it’s a Principles project. As a Restatement, this cover should no longer be available. Even if the ALI abandons minority positions, insurers will still confront Restatement provisions that they object to. That’s to be expected. No side in a project like this can be satisfied with everything.

It seems possible that efforts will be made by some of those involved in the Restatement process to maintain the adoption of minority positions. I’ve never seen how a Restatement comes to life, but I suspect that some would say that there is more to it than just counting states. In addition, in some situations it will not be clear what the law is. Not to mention that the Restatement may seek to visit unfertile ground. So even if the ALI, now penning a Restatement, is forced to reverse course on some minority positions, there are still ample opportunities for debate, and fierce for sure, over the final text.

When the ALI’s Principles project first got going in 2010, it went largely unnoticed. And some who noticed it, like me, dismissed it as academic mumbo jumbo – something for law professors to talk about when they ran out of things to say about Blackstone. Over time the Principles project took on a raised profile – garnering a lot of attention, and efforts by insurer contingents to influence its outcome. This coverage lawyer went from rolling his eyes to calling the Principles project the most important topic in liability coverage today. Now, as a Restatement, the importance of the project cannot be overstated. The work being undertaken by the ALI is surely going to add to the universe of what some courts consider when deciding coverage disputes.

[Note: I mentioned in the last issue of Coverage Opinions that I planned to address in this issue some instances where I believe that the ALI Principles project achieved its objectives. This was to be a change from several prior articles that criticized the project for not achieving its stated mandate. I was all set to do this when news broke that the Principles had been changed to a Restatement. This significant development trumped the planned article. I’ll get back to that – in the context of the new ALI landscape.]

Coverage Opinions is always mindful of the calendar and I try to write articles that have a tie-in to close-by holidays. Last year’s Halloween article – “From Boo To Sue,” involving liability for being scared in a haunted house – was particularly successful. It was the subject of ABA Journal and Wall Street Journal stories. Here is this year’s Halloween effort – which, admittedly, is nowhere near as good as last year’s.

In prior issues of Coverage Opinions I have taken issue with the then-American Law Institute’s “Principles of the Law of Liability Insurance” for adopting or considering adoption of certain provisions that adopt minority positions. One of these is Chapter 3’s proposed adoption of the following definition of “accident:” “an action or event that causes a result that the insured does not subjectively expect or intend.”

My beef has been that, to define “accident” based on a “result that the insured does not subjectively expect or intend” is likely to lead to coverage for undeserving situations. It is to open the door to arguments by insureds that, despite how substantially certainty a result is to occur – say, serious injury from a fist to the face – such a serious injury was, in fact, not subjectively expected or intended (a less serious one was), so, therefore, it was an “accident.” Even if a court sees this as ludicrous, it may nonetheless be compelled, if following the ALI’s definition of “accident,” to rule in the face of incredulousness. After all, with policy language being the test for determining coverage, courts may be constrained to conclude that it trumps common sense. In other words, this definition of “accident” could create coverage based on self-serving statements of intent (or lack of subjective intent) that fly in the face of reality.

OK, here is the holiday angle – a Halloween-related case that demonstrates how a subjective definition of “accident” (or, related, expected or intended exclusion) can lead to coverage for undeserving insureds based on self-serving statements of intent.

Vermont Mutual Insurance Company v. Dalzell, 218 N.W.2d 52 (Mich. Ct. App. 1974) involved coverage under these circumstances. On October 31, 1965, a 17-year-old “threw a 30—40 pound pumpkin over the side of a highway overpass in Shiawassee County, Michigan. The pumpkin struck a vehicle being driven by defendant Dalzell and shattered the windshield. As a result, Dalzell suffered serious facial and eye injuries. The youth was later apprehended and pled guilty to aggravated assault.”

Dalzell filed suit against the youth’s parents. The court found that their son’s conduct was wilful and malicious and entered a judgment against the son in the amount of 75,000. A declaratory judgment action was filed to determine rights and obligations under the parents’ homeowners policy.

The trial court in the declaratory judgment action held that no coverage was owed based on the policy provision that excluded “bodily injury * * * caused intentionally by or at the direction of the Insured” or “caused intentionally by an Insured over the age of 12 years.”

The Michigan Court of Appeals reversed: “The trial court found that the youth’s act of throwing the pumpkin was intentional and there was abundant evidence presented to support this finding. In addition, however, the trial court found that the youth intended to injure the motorist, defendant Dalzell. This was error since there was no evidence presented to support the conclusion that the youth intended to injure Dalzell. Throughout the criminal and civil proceedings, the youth maintained that the pumpkin was thrown to strike in front of or alongside of defendant Dalzell’s vehicle in order to frighten him. This testimony stood uncontradicted. . . . Inasmuch as under the terms of the homeowners policy in question, the insurer is not insulated from liability for intentional injuries unless there was both an intentional act and an intent to injure, . . . and since there was no evidence presented indicating that the insured intended to injure defendant Dalzell, we hold that the plaintiff is liable up to the limits of the policy for the damage suffered by defendant Dalzell.”

Even if the youth truly did not intend to injure Dalzell, Dalzell’s injury must be considered to have been substantially certain to occur. However, a definition of “accident” that is tied to the insured’s subjective intent to injure – and, of course, the insured will always argue that he or she had none – would preclude a court from considering that an injury was surely substantially certain to occur.

No discussion is required of the terms “sudden and accidental” and their role in several decades of pollution exclusion litigation. It is the giant tortoise of coverage litigation. The cases move slowly and the issue will live for a hundred years.

The only coverage issue as abundant as the pollution exclusion is that involving construction defect. In Assurance Company of America v. Ironshore Specialty Insurance Company, No. 13-2191 (D. Nevada Sept. 30, 2014) these behemoths of the coverage world come face to face.

The facts of the case are like so many in Nevada. Owners of residences sued developers and contractors alleging “damages stemming from, among other items, defectively built roofs, leaking windows, dirt coming through windows, drywall cracking, stucco cracking, stucco staining, water and insect intrusion through foundation slabs, and other poor workmanship.” One of the defendants, Centex Homes, filed a third-party complaint against allegedly responsible subcontractors, including Champion Masonry. Champion was insured by American Guarantee under a commercial general liability policy in effect from 2001 to 2002. Champion was also insured under a CGL policy issued by Ironshore Specialty Insurance Company from 2009 to 2010.

Ironshore maintained that “undisputed and incontrovertible proof exists that all work on the residences in the Garcia action, including work performed by Champion, was completed many years before the Ironshore Policy inception date of May 31, 2009.” Therefore, Ironshore, in response to a claim by American Guarantee -- which was defending Champion -- argued that its policy did not owe coverage based on the Continuous or Progressive Injury or Damage exclusion, which precluded coverage for property damage “which first existed, or is alleged to have first existed, prior to the inception of this policy. ‘Property damage’ from ‘your work’, or the work of any additional insured, performed prior to policy inception will be deemed to have first existed prior to the policy inception, unless such ‘property damage’ is sudden and accidental and takes place within the policy period.”

In essence, Ironshore maintained that, under the Continuous or Progressive Injury or Damage exclusion, since the work was performed prior to the policy inception, any property damage is deemed to have first existed prior to the policy inception. This may have been so. However, the court concluded that the Continuous or Progressive Injury or Damage exclusion did not apply, because the exception, for property damage that is sudden and accidental and takes place within the policy period, did apply.

The court noted that the underlying complaint alleged that “[w]ithin the last year, Plaintiffs have discovered that the subject property has and is experiencing additional defective conditions, in particular, there are damages stemming from, among other items, defectively built roofs, leaking windows, …” As a result, the court concluded that the underlying complaint was vague as to the temporal implications of the alleged damages, and therefore, “it is not clear on the face of the Garcia Complaint whether the alleged damages were or were not sudden and accidental. Accordingly, this exclusion alone did not preclude all possible or arguable coverage.”

It would be wrong to make too much of Assurance v. Ironshore because the decision is without much analysis and it was decided based on a duty to defend standard. On the other hand, it would be wrong to ignore it. Cases addressing the applicability of Continuous or Progressive Injury or Damage exclusions – or similar exclusions with different names – have become legion in the past few years. I don’t know how many involve an exclusion that contains a “sudden and accidental” exception. However, I do not believe that such exceptions are out of the ordinary. So Assurance v. Ironshore is not without potential relevance – both to other courts and policy drafters.

Damages at issue in construction defect claims generally have a gradual nature to them. In other words, some defective construction takes place and it causes damages to occur, which then plod along over time, until corrected. However, as Assurance v. Ironshore could be read, this on-going damage could qualify as being “sudden and accidental,” within a Continuous or Progressive Injury or Damage exclusion – as long as it is not specifically alleged that it is not sudden and accidental. In other words, damages that are surely gradual could qualify as being “sudden and accidental.” Where have I heard that before?

It is not often that you see the words must read and voluntary payments in the same sentence. Not to say that voluntary payments is not an important issue; but the cases are generally on the dull side, not to mention usually being fact specific. For these reasons, voluntary payments cases usually do not make the cut for Coverage Opinions. But the Western District of Pennsylvania’s decision in First Commonwealth Bank v. St. Paul Mercury Insurance Co., No. 14-19 (W.D. Pa. Oct. 6, 2014) easily found a place in this issue.

First Commonwealth starts off with interesting facts. On August 31, 2012, one of First Commonwealth’s clients was “the victim of malware (i.e. malicious software) that allowed an unknown third party to access the [client’s computer] systems.” This enabled access to the Senior Vice President’s on-line banking user name and password for the client’s bank accounts with First Commonwealth. To make a long story short, an unknown third party initiated unauthorized wire transfers to banks in Russia and Belarus to the tune of $3,508,500. The fraudulent wire transfers were determined a few days later. A couple of days after that, First Commonwealth’s client made several demands to the bank to immediately refund/credit the substantial funds that had been withdrawn due to the Russian and Belarusian wires. The bank, using its own funds, did just that.

In short order, First Commonwealth notified St. Paul Mercury Insurance of the loss and sought recovery of the funds under a certain liability policy. St. Paul Mercury, however, refused to provide coverage on the basis that, by refunding the money to its client, without the insurer’s prior consent, the insurer was relieved of its obligations under the terms of its policy. Coverage litigation ensued.

St. Paul Mercury’s argument was that the bank’s voluntary reimbursement of the unauthorized wire transfers constituted a breach of the policy’s Defense and Settlement provision: “[t]he Insureds agree not to settle or offer to settle any Claim, incur any Defense Costs or otherwise assume any contractual obligation, admit any liability, voluntarily make any payment or confess or otherwise agree to any Damages or judgments with respect to any Claim covered by this Policy without the Insurer’s written consent, which shall not be unreasonably withheld. The Insurer shall not be liable for any settlement, Defense Costs, assumed obligation, admitted liability, voluntary payment, or confessed or agreed Damages or judgment to which it has not consented.”

The court rejected St. Paul Mercury’s argument – holding that the bank’s payment was, in fact, not voluntary. The court based its decision on the existence of a Pennsylvania statute that required the bank, by law, to refund the fraudulent wires. Further, the court rejected the insurer’s argument that it was deprived of its right, under the policy, to defend the claim against the bank. “The fact that Defendant has the right to defend claims brought against Plaintiffs and that Plaintiffs may demand that Defendant provide that defense, however, is not dispositive of whether Plaintiffs’ payment to their client was voluntary.”

Lastly, in one fell swoop, the court rejected, as distinguishable, the voluntary payments cases cited by the insurer: “These cases merely stand for the proposition that voluntary payment provisions in liability policies are enforceable and that when an insured takes it upon itself to settle a claim without notifying the insurer, the insurer is no longer liable under the terms of the insurance policy. None of these cases, however, involve a bank’s legal and statutory obligation to refund a client when an unauthorized wire transfer has been made or any other situation where the insured’s act of paying a claim was compelled by law or other outside influences. As such, the cases cited by Defendant do not provide the basis for finding that the payment made by Plaintiffs in this case was voluntary.”

Procedurally, First Commonwealth Bank v. St. Paul Mercury involved a denial of a motion to dismiss. And it is an unpublished federal district court decision. Nonetheless, if followed by other courts, the decision could have significant consequences on insurers’ ability to assert a voluntary payments defense. Even if there is something special about the Pennsylvania banking statute that compelled the result here, the court’s decision spoke in more sweeping terms: any situation “where the insured’s act of paying a claim was compelled by law or other outside influences” would make it non-voluntary. It seems that it would not be difficult for policyholders to come up with reasons why their payments made, in various scenarios, prior to giving notice to their insurers, were compelled by law or some other outside influence.

Indeed, it didn’t take long for one policyholder firm to see this point. Connecticut’s Saxe Doernberger & Vita, P.C. made this argument in an October 24th Case Alert (SD&V does a great job with its e-mail Case Alerts I should add): “This holding is especially relevant for policyholders seeking coverage for payments made to notify potential claimants in a data breach or cyber-related incident. State and federal statutes requiring notice be given to affected individuals leave insureds no choice but to incur costs to inform the public when personal information has been compromised. Although policyholders should always strive to give prompt and complete notice to avoid this issue, First Commonwealth addresses an important issue facing insureds in fields that are increasingly affected by the need for immediate and costly response measures. Based on First Commonwealth, voluntary payment provisions may not be a valid basis for an insurer to deny coverage where an insured incurs notification costs prior to notifying its insurer of the payments.”

I’ve always found it curious that ISO’s standard form CGL policy includes, as an insured, any person (other than an employee or volunteer) or any organization while acting as the named insured’s real estate manager. There is nothing wrong with covering an insured’s real estate managers if insurers so desire. But does this provision need to be in a CGL policy’s standard form terms and conditions, except, say, one issued to condominium associations or commercial property owners? After all, I suspect that, looking at all insureds across the board, very, very (make that one more very) few insureds actually have a real estate manager. I’m sure there’s some historic reason for this. The fact that there is so little litigation over the “real estate manager as an insured” provision proves my point.

In any event, since the “real estate manager as an insured” provision doesn’t get out much, I thought I’d discuss Moon v. Cincinnati Insurance Co., No. 14-10264 (11th Cir. Oct. 24, 2014), where it was the sole issue in the case.

A two-year old child drowned in a swimming pool at a home occupied by Shawn and Tanya Moon. Terry Moon, Shawn’s father, owned the home. He had bought the home from Shawn and Tanya to avoid foreclosure and he was allowing them to live there to help them out.

At the time of the accident, Tanya Moon was babysitting the child. At issue was the availability of coverage, for the subsequent suit and $10 million judgment, under a Cincinnati Insurance Company policy issued to Terry Moon, the owner of the home. In addition to Terry Moon, the insurance policy extended coverage to “[a]ny person . . . while acting as [Terry Moon’s] real estate manager.”

The district court held that no coverage was owed to Shawn and Tanya Moon for the wrongful death action as they were neither the insured nor acting as real estate managers at the time of the accident. On appeal, the Moons argued that they were real estate managers.

So their argument went, since the term “real estate manager” is undefined in the policy, it is ambiguous and must be strictly construed in favor of coverage. The Moons asserted “that a ‘real estate manager’ is ‘one who simply takes care of an owners’ (sic) needs with regard to a piece of real estate.’ They argued that, because they took care of the home they leased from Shawn Moon’s father, Terry, they were real estate managers as well as lessees.”

The Eleventh Circuit rejected the argument, noting that, as the district court concluded, “the term real estate manager has an accepted meaning in the industry and is not ambiguous. The industry term ‘real estate manager’ implicates real estate transactions rather than routine maintenance.” The court also looked at the issue from a practical side: “Furthermore, to extend the definition of real estate manager to include a tenant who performs routine maintenance on the home he is leasing would render meaningless the policy’s lack of coverage for tenants of the property. Indeed, it would transform every tenant, family member or friend living in another’s home, who cuts the yard or paints a wall, into a covered real estate manager. This is not a reasonable interpretation of real estate manager.”

The rules that determine when an insurer’s duty to defend attaches are well-known and need no mention here. Less clear is when the insurer’s duty to defend may un-attach. It is often stated that the duty to defend continues until all potentially covered claims have been dismissed. To take a simple CGL example -- a complaint contains two causes of action: one potentially covered (defamation) and one not covered (say, involving financial losses). The potentially covered defamation claim triggered a defense. Now suppose that the defamation claim is dismissed on summary judgment. As the only claim left in the underlying action is the one involving non-covered financial losses, the insurer can withdraw its defense. This is the rule in the great majority of states. [Whether an insurer can look to information uncovered in discovery, as a basis to conclude that a defense is no longer owed, is a different, and more complex, issue.]

But in a few states the insurer’s defense may continue on – and perhaps for a while -- even if the only potentially covered claims were dismissed. I have not done the research that it would take to put together a complete list of these states, but several were discussed in Well’s Dairy, Inc. v. Travelers Indemnity Co., 336 F. Supp. 2d 906 (N.D. Iowa 2004).

In Well’s Dairy, the Iowa federal court addressed whether an insurer was obligated to continue to defend an insured, in an underlying action, where summary judgment on a breach of contract claim was denied -- but granted on a negligence claim. So with only a non-covered breach of contract claim at issue in the case, the insurer maintained that it no longer owed a defense. The Iowa federal court cited a litany of cases from across the country that have adopted a rule that “an insurer can withdraw from a defense after all arguably covered claims have been extinguished.”

But here’s the rub. The court noted that such decisions “often do not address the question of when the dismissed claims become final so as to permit an insurer to withdraw its defense.” With no Iowa decisions on point, the court adopted the rule from the Minnesota and Hawaii Supreme Courts: “An insurer is not relieved of its duty to defend as a result of the granting of a partial summary judgment until no further rights to appeal arguably covered claims exist.” [The Minnesota and Hawaii Supreme Court decisions relied upon were Meadowbrook, Inc. v. Tower Ins. Co., Inc., 559 N.W.2d 411 (Minn. 1997) and Commerce & Indus. Ins. Co. v. Bank of Hawaii, 832 P.2d 733 (Hawaii 1992).]

The Well’s Dairy court also concluded that such rule applied in Oregon and New York. The court cited Klamath Pac. Corp. v. Reliance Ins. Co., 950 P.2d 909 (Ore. Ap. Ct. 1997) for the proposition that, although the trial court dismissed the one covered claim, the insurer was still obligated to provide a defense because an “intermediate order from a trial court dismissing a claim is not a final resolution of that claim.” The Well’s Dairy court also cited Harrington Haley L.L.P. v. Nutmeg Ins. Co., 39 F. Supp. 2d 403 (S.D.N.Y. 1999) and described its holding as follows: “[U]nder New York law [] insurer’s duty to defend continued to exist even though covered claims had been dismissed where it was possible that the appellate court would reverse.”

Given that almost all cases settle, a rule that the duty to defend continues on, until no further rights to appeal potentially covered claims exist, is, in essence, a rule that the duty to defend goes to the end of the case, despite what happens along the way. Perhaps counsel in these five states will dispute that such a seemingly unending duty to defend is in fact the law. In any event, I have not examined the issue beyond how it was addressed by the Iowa federal court in Well’s Dairy. Well’s Dairy is not a new decision. And Coverage Opinions tends to focus on recent decisions. But this is an interesting issue and one that doesn’t get much discussion. So I thought I’d toss it out there for consideration.

It is hardly a revelation to state that the phrase “arising out of,” as used in an insurance policy, is interpreted broadly. Whether this is a good thing depends on the issue and which side of it you are on. This was demonstrated clearly by two recent decisions interpreting this workhorse three word phrase.

In Bond Safeguard Insurance Co. v. National Union, No. 13-561 (M.D. Fla. Oct. 20, 2014), the Florida federal court addressed a breach of contract exclusion, stating that the insurer “shall not be liable to make any payment for Loss in connection with a Claim made against an Insured ... alleging, arising out of, based upon or attributable to any actual or alleged contractual liability of the Company or any other Insured under any express contract or agreement.”

The court noted that “arising out of” has been defined to preclude coverage for claims originating from, having its origin in, growing out of, flowing from, incident to or having connection with, a specified excluding circumstance.

From there the court held that “[c]onsistent with Florida case law, this Court finds that the phrase ‘arising out of’ as used in [the breach of contract exclusion] is unambiguously broad and precludes coverage for purported tort claims that depend on ‘the existence of actual or alleged contractual liability’ of an insured ‘under any express contract or agreement.’”

While an insurer benefits from the broadly interpreted “arising out of,” when the phrase appears in an exclusion, the free lunch gets paid for when “arising out of” appears in an insuring agreement. In Shamoun & Norman, LLP v. Ironshore Indemnity, Inc., No. 14-1340 (N.D. Tex. Oct. 28, 2014), the court held that a professional liability insurer was obligated to provide a defense to a law firm for a fee dispute, rejecting the insurer’s argument that this was not the rendering or failure to render professional legal services.

The court noted that a legitimate argument existed that non-specialized tasks, such as billing and fee setting, do not fall under the definition of professional legal services. But, in the case before it, a different outcome was possible, on account of the language of the insuring agreement: “arising out of the rendering of or failure to render Professional Legal Services.” As the court put it: “While billing and fee setting may not be acts constituting ‘professional services,’ this does not answer whether they are acts ‘arising out of professional services.’”

The court held that, given the breadth of the phrase “arising out of,” a defense was owed: “[U]nder Texas law, the phrase ‘arising out of’ means that there is simply a causal connection or relation, which is interpreted to mean that there is but for causation, though not necessarily direct or proximate causation.” Therefore, despite being a fee dispute, if the claim had a ‘causal connection or relation’ to the provision of professional legal services, a defense was owed.