Liability Insurer May Press Malpractice Suit When Its Interests Are Aligned With Insured

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By Samson Habte  

 

A liability insurer has standing under Ohio law to bring a malpractice action against a law firm that it retained to defend an insured where the interests of the insurance company and the insured are aligned, the U.S. District Court for the Northern District of Ohio ruled April 16 (Carolina Casualty Insurance Co. v. Gallagher Sharp, N.D. Ohio, No. 1:10cv2492, 4/16/13).

The court rejected the assertion that under Ohio law insurers cannot establish privity with their insureds and thus lack standing to assert a malpractice claim against attorneys hired to defend an insured.

That argument was made by a law firm that was hired by an insurer to defend a lawsuit and subsequently sued by that carrier for allegedly botching the case.

The law firm filed a motion for summary judgment that sought to dismiss the case for lack of standing.

“[T]here are inherent conflicts of interests in the insurer-insured relationship,” the motion said, and “no Ohio case has ever held that an insurer … has the requisite privity and thus standing to bring a malpractice claim against its insured's attorneys.”

Judge Benita Y. Pearson disagreed. An insurer can establish privity--and thus standing to assert a malpractice action--so long as its interests and those of its insured “were aligned and did not diverge before” the alleged negligence occurred, the court said.

Such a showing was made here, Pearson said in ruling that the case can go forward.

'Inartfully Written.'

The plaintiff, Carolina Casualty Insurance Co., was the liability carrier for Goodman Weiss Miller, a law firm that was sued for malpractice by former clients. The law firm was covered for up to $3 million, the court said, but that coverage was subject to “a 'declining limits' policy, whereby the liability limit was reduced with the expenditure of defense fees and costs.”

Carolina retained the defendant, Gallagher Sharp, to handle the insured law firm's malpractice defense.

During the trial, Gallagher drafted a “high-low” settlement agreement which was agreed to by Goodman Weiss, Carolina Casualty, and the plaintiffs. The agreement, the court said, was  

designed to cap the amount that [the plaintiffs] would recover in the event that they prevailed on their claims while at the same time guaranteeing them a minimum recovery if they lost. The “high” component was to be the amount of the remaining policy limits, and the “low” component was to be $100,000. If a jury awarded an amount in excess of the policy limit, Goodman would be required to pay the excess.  

 

 

A jury returned a verdict in favor of the plaintiffs for about $2.4 million. Some $700,000 had been expended on defense fees at that point, the court said, leaving Goodman liable for about $100,000 of the judgment.

However, the plaintiffs subsequently repudiated the “high-low” agreement, the court said.

Goodman and Carolina then filed a declaratory action seeking to have the agreement declared valid and binding. That effort failed. The agreement was deemed unenforceable in a 2006 decision which, according to court documents, characterized the document as “very inartfully written.”

Second Agreement Backfires

Goodman and Carolina also challenged the judgment in the underlying malpractice suit. An appeals court affirmed the verdict in 2007, but the law firm and insurer pressed on and appealed the case to the Ohio Supreme Court.

The supreme court granted review on Aug. 29, 2007. However, just five days earlier, Goodman and Carolina decided to enter a second high-low agreement with the plaintiffs. The “low component” under this new agreement was set at $1.75 million. “At that time,” Pearson noted, “Goodman's potential exposure in excess of the policy limits was $700,000.”


“Privity does not equate to identical interests; rather, privity exists when the interests of one adequately represents the interests of another.”
Judge Benita Y. Pearson

One year later, the supreme court reversed the $2.4 million verdict against Goodman. Envtl. Network Corp. v. Goodman Weiss Miller LLP, No. 2008-Ohio-3833, 24 Law. Man. Prof. Conduct 426 (Ohio Aug. 6, 2008). That victory proved pyrrhic for Carolina, however. Because of the second high-low agreement, the insurer still had to pay the plaintiffs $1.75 million.

In 2010, Carolina sued Gallagher Sharp, accusing the firm of negligently drafting the first high-low agreement.

That negligence, the complaint alleges, obligated Carolina to pay the low amount specified under the terms of the second agreement, $1.75 million, rather than the $100,000 it would have paid if the first one had been competently drafted and ruled enforceable.

No Inherent Conflict

The defendants argued that Carolina lacked privity with Goodman Weiss and thus did not have standing to bring a malpractice action against Gallagher based on its services in the underlying case.

In seeking summary judgment, Gallagher relied heavily on public policy underlying the privity requirement--which, the firm stated, aims to “protect the attorney's duty of loyalty and the attorney's effective advocacy for the client.”

“[T]he Ohio Rules of Professional Conduct underscore this important public policy concern and recognize the inherent conflict between the insurer and the insured,” the firm argued. “The danger of the potential conflicts between insurer and insured, as recognized by the Rules of Professional Conduct, destroys any privity between the insured and insurer,” it added.

The defendants also cited Swiss Reins. Am. Corp. v. Roetzel & Andress, 837 N.E.2d 1215, 21 Law. Man. Prof. Conduct 493 (Ohio Ct. App. 2005), as supporting their position. In that case, they argued, the court found that divergent interests that preclude nonclients from establishing standing are “inherent in every insurer-insured relationship where, as here, there is the possibility of a judgment in excess of the insurance policy limits.”

Pearson disagreed. “The Roetzel court did not make such a finding,” she stated.

“Instead,” she noted, “Roetzel considered the facts of the case and concluded that, because the insured urged settlement and the insurer repeatedly refused to engage in settlement, the parties interests, 'while in harmony at the inception of the case, … diverged quickly.'”

Accordingly, it “cannot be said that the mere identity of the parties and the existence of a partial settlement, the 2005 high-low agreement, inherently precludes a finding of privity,” Pearson declared.

No Specific Conflicts

“Privity does not equate to identical interests,” Pearson explained. “[R]ather, privity exists when the interests of one adequately represents the interests of another.”

That was demonstrated in this case, the court concluded.

“Carolina submitted evidence that both Carolina and Goodman sought to protect Goodman from any exposure in excess of the policy limit--Goodman had an interest in eliminating potential exposure beyond the amount covered by insurance and Carolina had an interest in upholding its obligation under the insurance contract as well as the obligation imposed on insurers under Ohio law,” the court said.

“Defendants trot out other conflicts that allegedly arose between Carolina and Goodman in the hopes of destroying privity, none of them availing,” Pearson wrote, adding:  

That Carolina and Goodman initially disagreed as to whether Defendants should be hired to represent Goodman does not evince a divergence of interest. Nor does the fact that a side-agreement was entered into by Goodman and [the plaintiffs in the underlying case] prior to the 2005 high-low agreement, as the side agreement did not change the aforementioned interests of Carolina and Goodman.  

Additionally, Defendants point to further alleged disagreements between Carolina and Goodman that occurred after the 2005 high-low agreement. However, any disagreements that may have occurred after the 2005 high-low agreement does not destroy the mutuality of interests Carolina and Goodman had at the time the alleged malpractice occurred.  

 

 

 

Carolina Casualty was represented by Anthony Proscia, Beth Ann Berger Zerman, Craig M. Giometti, Robert A. Chaney, and George J. Manos of Lewis Brisbois Bisgaard & Smith, Chicago, and by Adam D. Marshall of Marshall Grant, Boca Raton, Fla.

Gallagher Sharp was represented by David J. Tocco and Rajeev K. Adlakha of Vorys, Sater, Seymour & Pease, Cleveland, and by Kimberly M. Moses, Ronald M. McMillan and Thomas I. Michals of Calfee, Halter & Griswold, Cleveland.


 

Full text at http://www.bloomberglaw.com/public/document/Carolina_Casualty_Ins_Co_v_Sharp_CASE_NO_110cv2492_2013_BL_100983.  

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