In April 2013, the estate beneficiaries objected to the costs, alleging that the executor had mismanaged the estate proceedings and had paid excessive legal fees.

At the court's request, the beneficiaries submitted a letter in May 2015 outlining the issues they planned to raise. This letter alleged that Lamb McErlane had performed "flawed and inadequate" work, had "grossly mismanaged" the federal tax filing process, and had negligently "fail[ed] to check a box," leading to a tax penalty in excess of $500,000.

The beneficiaries requested that the court surcharge the executor and Lamb McErlane for the losses allegedly caused by their breach of fiduciary duty. Three Lamb McErlane partners were copied on the letter.

In November 2015, the beneficiaries sought sanctions, asking the court to find the executor and Lamb McErlane "jointly and severally responsible for reimbursing the [e]state for any ultimate net loss it ha[d] suffered as a result of [the tax] penalty."

In December 2015, the court precluded the beneficiaries "from introducing evidence at trial that would be offered for the purpose of establishing a 'claim' against Lamb McErlane . . . for alleged negligence or any other affirmative recovery against [Lamb McErlane] for damage allegedly caused to the [e]state." Although the beneficiaries lacked standing to bring a professional negligence claim against Lamb McErlane, the court explained, they were "permitted to object to the reasonableness of the fees charged to the [e]state – a challenge they have made from the outset." The court said that it had "the power, obligation and discretion to determine the reasonableness of fees charged to an [e]state – whether paid out in advance of court approval or when seeking court approval."

In March 2017, the court concluded that Lamb McErlane and the executor had breached their fiduciary duties by mishandling the tax process, and held them jointly and severally liable for the estate's $557,001 net loss.

Allied World Insurance Company, which had issued an insurance policy in June 2016 that insured Lamb McErlane against professional liability claims made between June 20, 2016 and June 20, 2017, asked the U.S. District Court for the Western District of Pennsylvania to declare that it was not required to insure Lamb McErlane for the $557,001 judgment because the claim had been made against Lamb McErlane when the beneficiaries had submitted their May 2015 letter to the court – 13 months before Allied World had agreed to insure the firm.

Lamb McErlane countered that the May 2015 letter was "a simple offer of proof," not "a 'notice' or 'demand' for monetary relief," because the beneficiaries were not parties to the underlying estate proceedings and therefore lacked standing to assert a claim against Lamb McErlane.

Allied World moved for judgment on the pleadings.

The Allied World Policy

The Allied World policy covered Lamb McErlane for claims made during the one-year period beginning June 20, 2016. It defined:

claim 

as:

(1) any written notice or demand for monetary relief . . . [or] (2) any civil proceeding in a court of law . . . made to or against any Insured seeking to hold such Insured responsible for any Wrongful Act 

, defined to include:

any actual or alleged act, error or omission committed by any Insured, solely in the performance of or failure to perform Legal Services. 

The policy also stated:

A Claim will be deemed to have been first made when an Insured receives written notice of the Claim. 

The district court granted Allied World's motion.

In its decision, the district court found Lamb McErlane's reliance on the beneficiaries' inability to assert an affirmative claim against it "misplaced." In the district court's view, the firm's argument was "an attempt to rewrite the policy" to permit a claim only after an insured was faced "with a viable cause of action in a formal legal proceeding." Although the beneficiaries were precluded from bringing a malpractice claim directly against Lamb McErlane in the estate proceedings, the district court noted, they were permitted "to object to excessive legal fees already paid by the estate."

Moreover, the district court said, "[t]hey not only did so, they notified Lamb McErlane of their objections to Lamb McErlane's legal work."

The district court decided that because the May 2015 letter provided written notice that the beneficiaries sought to make Lamb McErlane return payments received for improperly performed legal services, it met the policy's unambiguous definition of a claim. Therefore, the district court concluded, Lamb McErlane had written notice of the claim against it before it was insured by Allied World in June 2016.

The case is Allied World Ins. Co. v. Lamb McErlane, P.C., No. 17-2878 (E.D. Pa. Feb. 23, 2018).