John M. O'Quinn, P.C. v. Natl Union Fire In
906 F.3d 363
5th Cir.2018Background
- O’Quinn law firms (collectively “O’Quinn”) represented plaintiffs in consolidated breast-implant litigation on 40% contingency; obtained large settlements and retained roughly $263.4M in fees.
- Certain pooled costs labeled “Breast Implant General Expenses” (BI General Expenses) were allocated across plaintiffs by deducting 1.5% from settlements; some plaintiffs (the Wood class) sued claiming the fee agreements did not permit those deductions.
- An arbitration panel found breaches of contract and fiduciary duty: ordered return of improperly deducted BI expenses (~$9.98M), attorneys’ fees and prejudgment interest, and a partial fee forfeiture of $25M as a sanction; total class award ~$41.47M; state court affirmed; O’Quinn later settled for $46.5M.
- O’Quinn recovered $5M from its primary insurer and sought $10M from excess carrier Lexington under an excess professional liability policy that “followed form” to the primary policy.
- The district court granted summary judgment for Lexington, concluding the policy excluded coverage for the arbitration remedies (reimbursements, penalties/sanctions, and unauthorized gains) and that Lexington had no duty to defend or indemnify; the Fifth Circuit affirmed.
Issues
| Issue | O’Quinn’s Argument | Lexington’s Argument | Held |
|---|---|---|---|
| Whether excess policy covers indemnity for arbitration award (breach of contract/fiduciary duty) | Policy covers "Loss" including damages, settlements and wrongful acts (breach of contract/fiduciary) so Lexington must indemnify | Policy excludes reimbursement of legal fees/costs and excludes losses arising from gain/advantage not legally entitled to (fraud/dishonesty); forfeiture/return are not covered "Loss" | Held: No indemnity. Award required reimbursement/fee forfeiture and penal/sanction elements excluded from "Loss" and Exclusion B applied (gain/advantage not legally entitled) |
| Whether fee forfeiture ($25M) is an insurable loss | Forfeiture is a damage item within "Loss" and arises from alleged wrongful acts | Forfeiture is a penalty/sanction or reimbursement of legal fees and therefore excluded from "Loss"; panel intended it as sanction | Held: Forfeiture is a penalty/sanction (or reimbursement) and not a covered Loss; not indemnifiable |
| Whether excess policy must pay post-judgment interest (as Defense Costs) | Policy definition of Defense Costs includes post-judgment interest, so Lexington must pay interest accrued before insurer pays judgment | Policy contemplates interest only on the judgment amount the insurer is obligated to cover; Lexington owes nothing because it is not liable for any part of the judgment | Held: No interest owed because Lexington is not liable for any portion of the judgment; policy covers interest only on amounts insurer must pay |
| Whether Lexington must pay defense costs (attorneys’ fees) in defending the Wood claim | Excess policy’s Defense Costs clause covers defense fees and Lexington should have defended/paid once litigation progressed | Excess insurer’s duty to defend is not triggered until underlying primary policy limits are exhausted; primary defended and limits were not exhausted when suit settled | Held: No duty to defend/pay defense costs because primary limits were not exhausted at the time the underlying action concluded |
Key Cases Cited
- Nat’l Union Fire Ins. Co. v. Hudson Energy Co., 811 S.W.2d 552 (Tex. 1991) (insurance contracts construed as written if only one reasonable construction exists; ambiguities resolved for insured)
- Trinity Universal Ins. Co. v. Cowan, 945 S.W.2d 819 (Tex. 1997) (duty to defend is broader than duty to indemnify)
- Zurich Am. Ins. Co. v. Nokia, Inc., 268 S.W.3d 487 (Tex. 2008) (pleadings and policy language determine duty to defend)
- CVN Grp., Inc. v. Delgado, 95 S.W.3d 234 (Tex. 2002) (arbitrators’ awards have effect of final court judgment)
- Burrow v. Arce, 997 S.W.2d 229 (Tex. 1999) (attorney fee forfeiture is appropriate remedy for clear and serious fiduciary breach)
- Guar. Nat’l Ins. Co. v. Vic Mfg. Co., 143 F.3d 192 (5th Cir. 1998) (insured bears initial burden to show coverage; insurer bears burden to prove exclusions)
- Haverda v. Hays County, 723 F.3d 586 (5th Cir. 2013) (appellate review of grant of summary judgment is de novo)
- Schneider Nat’l Transp. v. Ford Motor Co., 280 F.3d 532 (5th Cir. 2002) (excess insurer not obligated to defend until primary limits are exhausted)