Catastrophic Verdicts: Malpractice Trends Arising Out of Low Limit/High Exposure Cases

When judgments or settlements exceed insurance policy limits, someone has to pay the difference. Increasingly, it’s the attorneys, panelists at the ABA Spring 2018 National Legal Malpractice Conference said.

The panel discussed a new trend of attorneys—who represent or are appointed by insurance companies—becoming implicated when a verdict or settlement is in excess of the insurance policy limits.

This panel—consisting of Brian Baney, senior vice president at Aspen Insurance Co.; William Barker, partner at Dentons; and Adam Smith, partner at Coughlin Duffy, and moderated by Heather Rosing, CFO of Klinedinst PC—analyzed three hypotheticals and commented on how attorneys can avoid being liable for judgments/settlements over policy limits.

Unexpectedly High Settlement

In the first hypothetical, attorney Smith represented an insurance company (ABC) in connection with a personal injury lawsuit against the insured (Factory Safety). The plaintiff made a policy limit demand, but Smith advised ABC that the claim was not worth nearly that much and that Factory Safety would only be apportioned 25 percent of the fault for the accident. However, Smith failed to advise ABC that, under joint and several liability, Factory Safety could be liable for the entire amount of the damages. ABC offered $400,000 based on Smith’s evaluation. The plaintiff rejected the offer, and the parties ended up settling for $1 million over the policy limit. ABC was responsible for the entire amount under joint and several liability. ABC sued Smith’s law firm, D&E, for the $1 million.

Baney noted that attorneys are most vulnerable to suits like this when the underlying case takes an unforeseen turn. The unanticipated turn here was when the case ended up settling for much more than both the insurer and the attorney expected. Smith’s major misstep was inadequate reporting to the insurer. Smith failed to inform the insurer about joint and several liability, which played a significant factor in the insured’s damages. He also grossly underestimated the value of the claim, Baney said. Based on Smith’s advice, ABC passed on a chance to settle the claim at the policy limits, and wound up paying $1,000,000 more than it could have.

Rosing noted two other ways this hypo could have ended and opened D&E up to claims. First, if a catastrophic settlement or verdict forced Factory Safety into bankruptcy, a bankruptcy trustee would have pursued claims on behalf of the bankrupt company in order to pay the creditors. This trustee could sue ABC for bad faith and D&E for legal malpractice.

Second, if ABC refused to pay in excess of the policy limit, Factory Safety would be on the hook for the excess. Factory Safety could then bring a legal malpractice action against D&E and a bad faith action against ABC. Rosing explained that plaintiff’s lawyers often enter into agreements with defendant insureds to forestall executing on a judgment while the insureds pursue claims against their insurers and attorneys. The insured defendants then pay any proceeds to the plaintiff to satisfy the judgment.

Bad Settlement Advice

In the second hypothetical, insurance company Helping Hands appointed defense counsel Webster to defend its insured, Bad Guy Co., in a patent lawsuit. Webster provided an evaluation where he concluded that liability was almost certain but damages were speculative, and gave Helping Hands a settlement value of $500,000. However, Webster failed to take into account produced documents that showed damages were fairly definite, and estimated at $10 million. Based on Webster’s inaccurate evaluation, Helping Hands offered the plaintiff $200,000 to settle. Plaintiff rejected the offer. After learning about Webster’s error and the true value of the case, Helping Hands offered $1 million, but the plaintiff rejected this second offer and proceeded to trial where he recovered over $30 million in damages.

Can an appointed attorney could be liable for a judgment in excess of the settlement offer when the decision to settle or not is generally in the exclusive purview of the insurance company? Smith explained that there are court decisions finding that insurers cannot sue appointed attorneys for legal malpractice in this situation, because insurers are sophisticated parties and have the authority to decide whether and under what conditions to settle.

However, Smith explained, there are certain states where appointed attorneys can be held liable for the difference between a settlement offer and a judgment amount, when the decision not to settle is based on an attorney’s erroneous advice. In those states, there are generally two theories regarding the attorney’s duty: (1) appointed attorneys owe a duty to the insurance company who hired them, in addition to the insured; (2) the insurance company is equitably subrogated to the rights of the insured, and can sue the attorney as if it were the insured.

Smith pointed out that these theories only establish the duty element of a legal malpractice claim and that the insurance company would still need to show causation and damages.

Barker emphasized that, while insurance companies have a duty to evaluate the claims and decide on settlement, they are still entitled to the assistance of the attorney, who is supposed to be even more expert in these matters. In other words, just because insurance companies ultimately decide whether to accept a settlement offer does not mean that attorneys are free to provide inaccurate evaluations on liability and damages.

Let Insureds Know

In the final hypothetical, Jones, insured by ABC, crashed her car while working for her employer, Emplco. Williams, the other driver, was injured. Emplco had an auto insurance policy with DEF, and a package policy and umbrella coverage with GHI. Williams sued Jones, Jones tendered to ABC, and ABC retained attorney Robinson to defend the action. Robinson determined that Jones was likely at fault and that the damages might exceed ABC’s policy limit. Robinson informed DEF of the possible excess liability.

Williams offered $250,000 to settle, but DEF determined that the damages only supported a $200,000 counter offer. Robinson informed the insurers, but not Emplco, about the settlement demand. Williams rejected the offer and obtained a $1 million judgment. Emplco sought coverage from GHI, but GHI declined coverage based on late notice. Emplco paid the judgment and sued Robinson for failing to inquire about other applicable insurance and failing to consult Emplco about the $250,000 settlement demand.

This hypo raised two main issues: (1) whether investigating the existence of other insurance is within the scope of the attorney’s duty; and (2) the importance of informing insureds of settlement offers. Regarding the former, Barker said that this may be part of an attorney’s peripheral duty and that Emplco may have a viable claim based on failure to investigate other available insurance. On the latter, Rosing emphasized that attorneys appointed by insurance companies sometimes fail to inform the insureds about settlement offers because the insureds do not have the funds to pay the settlement. However, such a failure can be a breach of duty and an easy hook for a legal malpractice claim.

Prevention Tips

How can attorneys who represent or are appointed by insurance companies avoid being stuck with the bill when judgments or settlements exceed policy limits? The panelists gave some best practice tips:

Provide a Broad, Comprehensive Report of the Value of the Claim

Baney noted that many attorneys open themselves up to claims because they fail to give a thorough, big picture evaluation of the claim and the insured’s exposure. He emphasized that attorneys should conduct in-depth legal research and an exhaustive review of the facts and underlying documents to ensure they are providing the insurance companies (and the insureds) with a complete and accurate evaluation of liability and damages. As the first two hypos demonstrated, overlooking one legal point—joint and several liability in the first hypo—and one set of documents—documents regarding the damages in the second hypo—opened up the attorneys to significant malpractice claims.

Stay Objective and See the Big Picture

Attorneys know how easy it can be to lose an objective view of their case. However, Baney explained that, particularly in this context, being overly passionate about a case and losing an objective perspective about the insured’s exposure and potential liability can open up attorneys to legal malpractice claims. It is imperative that attorneys see the full picture of a case, from an unbiased standpoint, in order to provide the insurer an accurate settlement value. As shown in these hypotheticals, insurers can grasp onto an attorney’s inaccurate evaluation as a foothold for a claim.

Always Tell Insureds About Settlement Offers

As the third hypo demonstrated, attorneys should always notify both the insurers and the insureds of any settlement offers. Insureds seldom have the funds to pay a demand, and therefore, attorneys often fail to notify the insureds of settlements offers and just tell the party who is going to pay—the insurer. However, if the case goes south and the insured is left to pay out on a catastrophic verdict or settlement, insureds will undoubtedly look for someone else to foot the bill. As Rosing noted, failing to notify the insured of a settlement offer can give insureds a basis for a legal malpractice claim.

The panel, entitled Catastrophic Verdicts: Malpractice Trends Arising out of Low Limit/High Exposure Cases, was held in Washington, D.C. April 26.