Malpractice Actions Against Law Firms
Malpractice actions against law firms continue to proliferate. One group of actions stems from the issues caused when the insurer's appointed counsel does not meet the insured's expectations. An unhappy plaintiff may file a complaint alleging its counsel should have litigated differently so the recovery would have been greater, the settlement lower or counsel should have assisted with coverage issues. Once a law firm starts an action for payment of legal fees against the recalcitrant client, the defendant frequently asserts a counterclaim for malpractice, whether warranted or not. A newer species of malpractice action is an action brought by an insurer against a law firm it retained to represent the insurer in a coverage action. In a recent case, the insurer sued its own counsel and claimed the law firm was "unfaithful" and provided "tainted advice" because it was more concerned with another client when it withdrew a subpoena that was essential to the insurer's defense.
The role of defense counsel appointed by the insurer has always raised issues. Since the insurer is precluded from the practice of law, it must rely on independent counsel to conduct the litigation; and the insurer may not interfere with counsel's professional judgment in the conduct of the litigation on behalf of the firm's client. The insurer is not able to establish a valid claim for malpractice against the defense firm since it cannot control the litigation and counsel does not have a fiduciary duty to the insurer.
The relationship is often described as a tripartite relationship. The law firm usually has an ongoing relationship with the insurer; fees are paid by the insurer; the insurer often attempts to direct the litigation; and counsel hopes to receive more business. Defense counsel's loyalty in the lawsuit, however, must be undivided and it must act in the best interest of its client, and to the insured, and not in the best interest of the insurer when their interests diverge. At the same time, the attorney is obligated to keep the insurer informed as long as the attorney-client privilege and duty of confidentiality are not breached. The rules that apply to the insurer-counsel relationship also apply to those counsel appointed by third parties.
For the malpractice action to succeed, the attorney must have caused ascertainable economic damages through his negligence. Courts have long held the attorney is obligated to select a reasonable but not necessarily the correct plan. She is not liable for an honest mistake of judgment, where there is some reasonable doubt as to the approach—unless a statute of limitations or other deadline is missed.
Malpractice actions are really two actions. Plaintiff must prove not only that the attorney was negligent but that he would have prevailed in the underlying action "but for" the attorney's negligence; the negligence was the proximate cause of the loss; and the plaintiff suffered actual and ascertainable financial damages as a result.
The insured and primary insurer or third party who appoints defense counsel have a shared interest in getting a defense verdict and keeping it as low as possible. Several courts held since the primary insurer has no interest in the excess coverage, the defense counsel may be obligated to investigate any excess coverage since there can be no conflict concerning the coverage.
Suit Against Firm
National Union1 recently commenced an action against Edwards Wildman LLP and a partner alleging they breached their fiduciary duty to National Union, its client in the litigation, and committed legal malpractice when Edwards withdrew a subpoena to a subsidiary of Travelers Insurance Company. Travelers at the time was not a party in the litigation, which involved the 2006 I-90 Connection Tunnel in Boston (the Big Dig). But it was a client of the firm.
Edwards then failed for two years to apprise National Union that it had withdrawn the subpoena it had served on Travelers in February 2010, even though a June 2010 firm file memorandum documented that conflict existed. National Union alleges damages from the firm's actions in withdrawing the subpoena and refusing to issue a trial subpoena to Travelers, allegedly to protect Travelers' interests over its own interests.
National Union retained Edwards as coverage counsel and to represent it in the litigation against its insured in connection with the Big Dig ceiling collapse. The complaint alleges approximately two weeks before the scheduled trial, the firm notified National Union it had a conflict of interest, could no longer represent it and made an emergency motion to withdraw. By that time, the insured had assigned its rights against National Union to Travelers.
National Union alleges Edwards knew or should have known from the onset of the litigation that issues involving its other client created a conflict, particularly since Edwards was aware of the major settlement between Travelers and National Union's insured, the defendant in the underlying action. National Union charges that "Rather than provide competent, zealous representation [to National Union] as required by law and the rules of ethics, their lawyers gave incompetent advice that substantially damaged National Union."2 Moreover, National Union alleges Edwards had been "unfaithful" to National Union by protecting the interests of Travelers, its other client, rather than National Union's interests.3
The complaint was served in August 2013 so the litigation is in its earliest stages.
Defense Counsel Obligations?
In Shaya B. Pacific v. Wilson Elser Moskowitz Edelman & Dicker,4 plaintiff sued its defense counsel for counsel's alleged failure to investigate excess coverage and timely notify the excess carrier. The law firm sought to dismiss based on documentary evidence and failure to state a claim. The Appellate Division, First Department, held that on a motion to dismiss, counsel appointed by the carrier may have an obligation to inquire if the insured had excess coverage, even though the primary insurer's coverage letter suggested that inquiry to the insured. The court cited the law firm's act of tendering the defense to the excess carrier, albeit late, as belying its stance that it had no obligation to its client to investigate coverage.
The court firmly rejected the law firm's arguments that its duties were constrained by the "tripartite relationship" of insured, insurer and insurance defense counsel, and that "insurance defense counsel never has any obligation to investigate coverage" under that relationship. The court held that there was no inherent conflict in investigating coverage because both plaintiff and its insurer "had a shared interest in defeating [plaintiff's] claim and securing a defense verdict."5 This was not an instance where there was an issue concerning the "scope or nature" of the insurer's policy.6 The court's holding meant that the law firm could not assert the "tripartite relationship" here to defeat the malpractice claim.