Editor’s note: This is the last in a three-part series. Bruce Bellingham drafted the appellee’s Supreme Court brief in Ohio Casualty v. Ingerman Construction.

 

Part I of this series set forth the peculiar circumstance in which a Philadelphia law firm was sued for malpractice allegedly committed in its successful defense of its client. Part II addressed whether a prevailing client can ever prove malpractice damages in its case-within-the-case, an issue that arises with surprising frequency (the answer is: probably not). It also addressed a very common situation in which a client alleges it was forced to settle because of malpractice. Such claims are obviously viable, but can a “forced” decision to pay toward a settlement prove malpractice damages in that amount (the answer is: probably not). This last installment addresses whether a client can claim payments on its behalf by a liability insurer as its malpractice damages. It also addresses certain hypothetical issues posed by the peculiar fact pattern in which an excess carrier sued its insured’s lawyer as an assignee when the insured client was satisfied with its lawyer. That “assignee” litigation strategy failed the third-party payor, but could another have gotten the plaintiff past summary judgment?

Third-Party Payments Are Never Malpractice Damages for a Client

Insurance payments are not recoverable as the insured’s actual damages. Ohio Casualty’s claim was that it paid $5 million on behalf of Ingerman Construction. Yet, the Superior Court’s conclusion was: “In the absence of any actual loss to Ingerman Construction either before or after Ohio Casualty’s settlement, the [Ohio Casualty] company’s payment of settlement proceeds does not constitute legally cognizable damages.” The Ingerman Construction dismissal comported with the majority rule that payments by insurers are not cognizable as their insured’s damages in later legal malpractice actions. As Ronald E. Mallen and Jeffrey M. Smith write in Legal Malpractice, Volume 4, “defense counsel’s liability to the insured, however, does not include payments made by the liability insurer or by a joint tortfeasor to satisfy an adverse judgment.” They also write that, “Usually, an attorney is not liable for damages paid by a joint tortfeasor or the client’s insurer.”

The rationale is explained in an Illinois Court of Appeals case where a settlement was paid for the defendants by a third party (an entity acquiring a defendant’s assets). When the defendants/clients later sued their lawyer for malpractice, they claimed the third party’s $300,000 payment as their damages. The court rejected the argument in Sterling Radio Stations v. Weinstine, 328 Ill. App. 3d 58, 64-65, 765 N.E.2d 56, 61-62 (2002):

“Here, Seith personally paid nothing in satisfaction of the judgment rendered against him and SRS as a result of defendants’ malpractice. Therefore, his measure of damages is zero. To allow Seith to recover $300,000 in this malpractice claim would unjustly enrich Seith and permit a double recovery. Further, Seith would be in a better position by bringing the legal malpractice claim than if he had won the underlying action.”

That reasoning is echoed in the equity concerns voiced in Kituskie v. Corbman, 714 A.2d 1027, 1030 (Pa. 1998), which held that a plaintiff might obtain an impermissible “windfall” from an attorney tortfeasor unless the plaintiff could prove it could have collected a judgment in the underlying action.

Ohio Casualty relied on the “collateral source rule” under which a tortfeasor who causes a personal injury cannot reap the benefit of his or her victim’s insurance coverage. The rule applies in legal malpractice actions when a client sues for its own losses even though it was compensated by insurance payments. (See Horn v. Moberg, 68 Wash. App. 551, 553, 844 P.2d 452, 453 (1993) (proceeds from homeowner-client’s fire insurance carrier did not reduce liability of client’s former lawyer for negligent handling of product liability action); Lewis v. Uselton, 224 Ga. App. 428, 430, 480 S.E.2d 856, 859 (1997) (injury victim could exclude from evidence third-party payments of her lost wages and medical expenses).) If a recovery in the underlying action would not have been reduced because of the collateral source rule’s application, then the liability of an attorney in a subsequent malpractice action for the loss of that recovery should not be reduced either.

Ingerman Construction posed a different issue, however: Does the collateral source rule allow a client to recover payments made by its insurer to settle its alleged victim’s liability claim? A case decided by the U.S. Court of Appeals for the Second Circuit held that it did. In Ocean Ships v. Stiles, 315 F.3d 111, 116 (2d Cir. 2002), the court held that “damages recoverable for a wrong are not diminished by the fact that the party injured has been wholly or partially indemnified for his loss by insurance,” allowing a former client to claim as damages its liability carrier’s payment to satisfy a personal injury judgment to satisfy the jurisdictional minimum. Most courts, however, hold that the collateral source rule does not apply to third-party payments on behalf of alleged tortfeasors because that would leave them better off than if malpractice had not occurred. (See Ohio Central Railroad System v. Mason Law Firm, 182 Ohio App. 3d 814, 823, 915 N.E.2d 397, 404 (2009) (“In our view, the collateral-source rule has no application, and the trial court correctly eschewed consideration of any damages for which Lloyds had indemnified appellant”); TIG Insurance v. Giffin Winning Cohen & Bodewes, (N.D.Ill. 2005) (where reinsurer, not client/insurer TIG, actually paid costs incurred because of malpractice, collateral source rule did not apply); Kirtland & Packard v. Superior Court, 59 Cal. App.3d 140, 145,131 Cal. Rptr 418, 421 (1976) (collateral source rule did not apply to insurer’s payment of judgment against doctor who insisted he was found negligent only because of lawyer malpractice).) Ingerman Construction implies the majority position that the collateral source rule does not apply to payments to settle or satisfy an insured’s liability.

Hypothetical Issues

The dismissal leaves a number of interesting threads hanging loose. If Ingerman Construction had paid a deductible, would its lawyers have been entitled to summary judgment on damages? Presumably, that would have gotten Ohio Casualty over the hurdle that third-party payments are not client damages. It would still have gotten hung up on the obstacle that the client prevailed, and its damages would just be the deducted payment, whereas it wanted $5 million.

Could Ohio Casualty have sued in its own behalf as a subrogee? In many jurisdictions, legal malpractice claims are non-assignable for policy reasons, i.e., that they interfere with the attorney-client relationship. Accordingly, rules against subrogation of non-assignable claims generally preclude subrogation claims for equitable indemnification or contribution in legal malpractice actions. (See Fireman’s Fund Insurance v. McDonald, Hecht & Solberg, 30 Cal. App. 4th 1373, 1385-86, 36 Cal. Rptr. 2d 424, 431 (1994); D.J. Gilsinger, , 50 A.L.R.6th 53 (2009).) However, Pennsylvania is in the minority that permits assignment of legal malpractice claims on the theory that there is no attorney-client relationship left to preserve. (See Hedlund Manufacturing v. Weiser, Stapler & Spivak, 517 Pa. 522, 526, 539 A.2d 357, 359 (1988).) Ohio Casualty might have brought a subrogation claim in its own right under Pennsylvania law, rather than suing exclusively as an assignee.

The possible obstacle to such a subrogation claim under the facts of the case is that the assumption on which Pennsylvania adopted its minority position on assignments of legal malpractice claims – that there is no attorney-client relationship left to preserve when a client alleges malpractice – is clearly refuted where the assignment was compelled and the defendant lawyer continued to represent the insured client through to the end of the trial. On the hypothesis that the Pennsylvania Supreme Court would not permit assignment of a legal malpractice claim that clearly did inject conflict into a surviving attorney-client relationship against the wishes of the client – i.e., if the claim was deemed non-assignable because the “majority” policy grounds applied, would a bar on subrogating non-assignable claims apply – this issue was never presented in the Ingerman Construction case, as Margolis Edelstein did not contest the assignability of Ingerman Construction’s malpractice claim by seeking to carve out an exception to Pennsylvania’s minority position in cases where a compelled assignment injected conflict into a surviving attorney-client relationship. Why, defense counsel reasoned, take on a well-entrenched policy position when the same result could be achieved by contesting damages to the assignor? Ironically, the assignability issue would have become more salient had Ohio Casualty made an alternative claim based on subrogation rights. The probable outcome of such an alternative litigation strategy is unclear.

Bruce Bellingham is a litigation associate at Spector Gadon & Rosen, where he handles many appeals. He also has an arts law practice and was named Philadelphia Volunteer Lawyers for the Arts’ Volunteer Lawyer of the Year in 2009. Contact him at bbellingham@lawsgr.com or 215-241-8916.

George M. Vinci is chairman of the insurance and casualty litigation practice group at the firm, where he focuses his practice on civil litigation with an emphasis on professional malpractice (legal and accounting), lender liability, directors’ and officers’ liability, insurance coverage disputes and commercial litigation. Contact him at gvinci@lawsgr.com or 215-241-8840.