The state’s six sitting Supreme Court justices were left Tuesday to decide whether an insurance company that settled for $5 million when it felt the insured’s lawyer was badly losing a case could then sue the lawyer for malpractice even though he ultimately secured a defense verdict.

Attorney Clifford E. Haines told the justices at oral argument Tuesday in Philadelphia that the lower courts defied logic in finding his client, Ohio Casualty Insurance Co., had no damages against defense lawyer Walter J. Timby III and his firm Margolis Edelstein to present to a jury given the defense verdict against Ohio’s insured. Haines pointed to the $5 million Ohio paid to settle personal injury claims against its insureds, Ingerman Construction and other related entities.

Haines argued the lower courts’ rulings in Ingerman Affordable Housing v. Margolis Edelstein granting and upholding summary judgment in favor of Timby and Margolis Edelstein essentially give insurance defense lawyers a free pass on malpractice liability if their clients settle based on separate counsel’s advice that the defense lawyer has put the insured at risk of liability.

He further argued in briefs that the collateral source rule prohibits anyone from considering the fact that the damages were paid by the insurance company via a settlement despite the availability of other remedies, such as relying on a jury verdict.

Timby and Margolis Edelstein, through lawyer George M. Vinci Jr. of Spector Gadon & Rosen, argued on the other hand that legal malpractice claims require a plaintiff prove the “case within the case,” and be able to show that the plaintiff would have won the underlying issue but for the lawyer’s malpractice. In this case, Vinci noted, Ingerman Construction was found not liable when a jury returned a $7 million verdict against another defendant.

He argued it was Ohio’s choice, based on advice from counsel at Post & Schell, to settle the case after several other defendants settled. That decision was made, Vinci said, after Shanin Specter of Kline & Specter told Ingerman Construction that he would target the company now that the other defendants had settled.

“They decided, after Shanin Specter walked over, to write a check for $5 million. Now they want my client to write that check for them,” Vinci said.

Even more importantly, Vinci argued, was that Ohio admittedly was acting in this lawsuit under the assigned rights of Ingerman Construction. When a party in Pennsylvania is an assignee of a claim, they are standing in the shoes of the party that assigned that claim — in this case, Ingerman Construction. The problem, Vinci said, is that Ingerman Construction suffered no damages, paid no money out of its own pocket and was found not liable by a jury. Therefore, Ingerman Construction had no claim to assign and Ohio has no damages to assert, he argued.

The “absurdity” of the entire case, Vinci said, is highlighted by the fact that Brad Ingerman, owner of the various Ingerman entities, testified at his deposition that his company did not sustain or pay any damages and that Margolis Edelstein gave competent representation.

But what Haines argued, and the dissenting judge at the Superior Court said in his opinion, was that Ohio never would have paid those damages had it not been fearful of significant liability beyond its $5 million excess insurance policy. Ohio settled, Haines said, because of the alleged missteps by Timby and the fact that the defendants in the underlying suit were up against one of the best personal injury lawyers in the county known for getting verdicts upwards of $100 million.

Haines also noted that Ingerman Construction faced significant exposure after the other defendants settled.

Some of the alleged missteps included a conflict of interest with Timby representing all of the Ingerman entities when Ingerman Construction was insured under a separate excess policy. That conflict was raised just days before the trial and no new counsel was appointed. There was also no evidence in discovery to show Ingerman Construction was liable, but a summary judgment motion on its behalf was never filed, Haines said.

Haines said his client went into trial with a legal malpractice claim that was only made worse when facts came out at trial that Timby was not aware of; the plaintiff in the underlying case — a boy who fell out of a third-story window at a low-income housing complex — underwent cognitive tests before the jury; and an Ingerman employee on cross-examination agreed window guards on the windows would have been a good idea.

Justice Max Baer asked Haines whether his argument was essentially seeking a new cause of action for legal malpractice in that a party that doesn’t like the direction of the case can settle and then sue his lawyer.

“You’re saying I can settle the case and create my damages,” Baer said, referring to the fact that the settlement would be the damages.

Haines said he didn’t think any lawyer would settle a case to create damages for a later legal malpractice case that the lawyer may or may not win. In his judgment, Haines said, that “would be suicide.”

Haines noted that the only reason Ingerman Construction was found not liable was because Specter switched course after Ohio’s settlement and didn’t mention Ingerman Construction in closing. Haines said he would call Specter to the stand on that point if Ohio’s case got before a jury. He said he would also call the lawyer from Post & Schell, Robert Britton, as to why he recommended Ohio settle.

After saying earlier in the argument that he had one more question for Haines to give Haines a chance to get his vote, Baer later said Haines raised a good point that any client could sue for malpractice if they can set out the facts. Maybe the way to handle it in a case like Ohio’s is to not allow Ohio to put an amount on its damages but let a jury decide what the damages are, Baer said.

In the midst of Vinci’s argument, Justice Thomas Saylor quoted from the Superior Court’s dissenting opinion in which Senior Judge Eugene B. Strassburger III noted that but for the alleged negligence by Timby, Ohio never would have settled. Saylor noted that just because Ingerman Construction was found not liable, does not mean the $5 million was handed over voluntarily.

Saylor asked Vinci whether it was illogical to create a standard that if the settlement and fear of damages was reasonable at the time, the party could prevail in bringing a malpractice claim.

The problem with that standard, Vinci said, is that in this case they are talking about Ohio when they should be talking about what damages Ingerman Construction suffered. The only party to have legal malpractice claims against Margolis Edelstein would be Ingerman Construction, Vinci said.

Chief Justice Ronald D. Castille asked how a case gets to be legal malpractice when Ingerman Construction won in the underlying trial. Vinci said he had the same question and again pointed to Ingerman Construction’s need to prove a case within a case.

When questioned by Baer, Vinci conceded that Ingerman Construction would be able to raise a malpractice claim against Margolis Edelstein if it paid some amount in a settlement.

“They have to make some payment to have a cause of action?” Baer asked.

Vinci said that was correct.

Six justices heard the case because Justice Joan Orie Melvin is suspended from the high court.

Gina Passarella can be contacted at 215-557-2494 or at gpassarella@alm.com. Follow her on Twitter @GPassarellaTLI. •