Counsel’s relevant, albeit critical, analysis of the client/insured in a memorandum to the insurer seeking settlement authority did not constitute legal malpractice.
The Appellate Division affirmed the trial court’s holding that the defendant, an insurance defense counsel, did not breach any duty owed to the plaintiff, his former client, in representing him in an underlying legal malpractice action. The client’s legal malpractice claims in this action arise from a memorandum counsel drafted and submitted to the insurance carrier providing coverage to the client. In the memo, counsel discussed a letter the client had written to his former clients (the plaintiffs in the underlying legal malpractice action) and advised the insurer that the client’s letter constituted “an admission of bankruptcy fraud” by the client, and that, “[i]f the statute of limitations on the crime had not run,” the client “would be subject to up to [five] years in prison and/or a fine of up to $5,000.” Counsel further noted that, were the letter disclosed at trial, the insured was still subject to discipline, which could include a period of suspension of his license.”
A week before the trial in the underlying legal malpractice action was scheduled to begin, the insurer advised the client that it was withdrawing coverage and would not defend him in the lawsuit. The insurer later attempted to obtain a determination from the trial court that it was not required to provide coverage to the client. The trial judge held, however, that the client was entitled to coverage. Thereafter, the client filed suit against counsel, individually, as well as his law firm, alleging, inter alia, negligent representation of the client in the underlying action.
In affirming the trial judge’s decision, the Appellate Division noted the trial judge’s finding that, while insurance defense counsel has a duty of loyalty to the client/insured, counsel also has a duty to accurately and candidly report on the case to the insurance carrier; however, the duty owed to the client/insured primary. The trial judge found the statements counsel made in the memo were clearly relevant to the underlying action and that counsel had a legitimate concern about the client’s credibility, as well as other adverse consequences he could face if the letter were produced at trial. The trial judge also determined that the memo was necessary so that counsel could obtain authority to settle the matter in the best interests of the client and the insurer. Further, the trial judge noted that it was conceivable that, if counsel had not fully disclosed the weaknesses and pitfalls of the case, the insurer may not have properly evaluated the case for settlement purposes, “thereby exposing [the client] to significant financial or other liability.” In rejecting the client’s assertion that counsel should have withheld those portions of his evaluation that reflected adversely upon the client, the trial judge observed that this would have placed counsel “in a position of being illogical, disingenuous and party to providing half-truths” to the insurer. The trial judge also found that counsel could not reasonably have anticipated that the insurer would withdraw coverage for the client based on the statements in his memo. Further, the trial judge noted that counsel had no reason to believe that coverage issues were in play because neither the insurer nor the insolvent prior insurer who issued the insurance policy had issued a reservation-of-rights letter to the client at any time.
The Appellate Division affirmed the judgment substantially for the reasons stated by the trial judge in his written opinion and acknowledged that counsel had a duty to provide the insurer with a candid assessment of the merits of the underlying action in order to obtain authority to settle the matter. Had counsel not done so, the insurer may not have provided sufficient authority to settle the case, thereby exposing the client to substantial liability and other adverse consequences.
Counsel party to the tripartite relationship, created when an insurer retains defense counsel for an insured, must be ever vigilant in their representation of their client—the insured—while also upholding their duty to accurately and candidly report to the insurer. In doing so, counsel would be wise to familiarize themselves with the Appellate Division’s opinion in Buchanan as well as the trial court’s opinion below.
Case Law Alerts, 4th Quarter, October 2015
Case Law Alerts is prepared by Marshall Dennehey Warner Coleman & Goggin to provide information on recent legal developments of interest to our readers. This publication is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. Copyright © 2015 Marshall Dennehey Warner Coleman & Goggin, all rights reserved. This article may not be reprinted without the express written permission of our firm.