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Henry U. Crosby claims that when he faced a legal malpractice suit, his insurance company’s lawyers burned through his defense money, then dumped him, leaving him exposed to a huge judgment. In his suit against Chicago-based Coregis Insurance Co. and the Atlanta law firm Long, Weinberg, Ansley & Wheeler, Crosby claims his former insurer and the firm the company retained to defend him breached their fiduciary duty by not settling the claim early. Crosby v. Coregis Insurance Company, No. 01VS019384-G (Fulton County, Georgia, June 25, 2001). But at the heart of Crosby’s complaint is the nature of his malpractice insurance — a $100,000 “diminishing limits” policy that proved to be totally inadequate. Under a diminishing limits policy, the costs of defending a malpractice suit, including attorney fees, reduce the amount of money available to satisfy a settlement or judgment. For every dollar an insurance company-appointed lawyer spends defending a claim, the amount of money available under the policy limit is reduced a dollar. Crosby’s case illustrates the potential consequences of skimping on malpractice insurance. Industry experts say diminishing limits policies are common and are popular because the premium is less expensive. Crosby’s policy was the smallest available, according to Barbara B. Evans, marketing director for the Georgia State Bar-recommended American Lawyers Insurance Reciprocal. In Crosby’s practice area, real estate, title companies routinely require a minimum of $250,000 to $500,000 in coverage, she says. But Taylor W. Jones, who represented the plaintiffs against Crosby in 1996, blames the diminishing limit policy. Such policies are “an outrage,” he says, because they create an inevitable conflict between defendants in malpractice cases and the lawyers insurance companies hire to defend their insureds. He says he expects to be a witness in Crosby’s suit. “This case is interesting not because of the money involved, but because these types of policies need judicial scrutiny,” he says. REAL ESTATE DEALS GONE BAD Crosby, a part-time magistrate in DeKalb County, Georgia, and sole practitioner, was sued in 1996 for his role in real estate deals that allegedly bilked private investors out of millions of dollars. From 1991-94, Crosby was the escrow agent for a group of interwoven companies that raised money from investors to buy rundown houses in marginal neighborhoods, renovate them, and then sell them at a profit. The returns on the investment never materialized, however, and the investors found themselves holding worthless collateral. They sued Crosby and others involved in the investment, charging the defendants had breached their fiduciary duty. By the time the case went to trial in February 2000, Crosby was the only defendant who hadn’t settled. On Feb. 28, 2000, a DeKalb jury awarded the investors $536,891 in compensatory damages plus punitive damages of $100,000. However, Jones says his clients aren’t likely to collect much of the award unless Crosby wins his suit because Crosby’s financial statements show little or no net worth. Kendall v. General Realty Investment, Civil Action No. 96-9952-7 (DeKalb Super. judgment Feb. 28, 2000). A panel of Georgia Court of Appeals judges agreed with the jury, holding that there was enough evidence to conclude that Crosby had been “consciously indifferent” to the investors’ rights, and therefore was liable for punitive damages. Crosby v. Kendall, No. A00A2503 (Ct. App. Ga. Feb. 5, 2001). A certiorari petition is pending before the Georgia Supreme Court. SUING FOR ‘SQUANDERED’ MONEY Now Crosby is suing for the cost of the judgment against him, plus interest, plus the attorney fees he had to pay when Coregis (by then merged with Westport Insurance Corp.) and Long Weinberg dumped him. He also wants punitive damages and attorney fees to cover the cost of bringing his suit. In his complaint, which his new lawyer Louis K. Polonsky drafted, Crosby claimed that the defense his insurance premium bought was “nothing more than a systematic squandering of Crosby’s $100,000 in insurance coverage for legal fees, unaccompanied by any good faith effort to settle the Kendall lawsuit when all or most of the $100,000 remained available for that purpose.” Polonsky declines to comment on the pending suit. Defendant Kathryn S. Whitlock, the Long Weinberg lawyer who handled Crosby’s defense, also failed to return phone calls. Crosby’s son, Michael, who only had passed his bar exam six months before taking over the original case from Long Weinberg, says he and his father also decline comment on the new case. But Crosby’s complaint quotes liberally from correspondence between Whitlock and Coregis Claims technician Brent Rawlings, in an effort to show how, he says, his insurance company and his lawyers betrayed him. At Coregis’ direction, Whitlock took on Crosby’s malpractice defense in September 1996. According to the letters cited by Crosby, the lawyers and the insurance company soon were aware that even if Crosby won, defense costs would exceed his policy limits. In October, and several times afterward, Whitlock informed Rawlings that damages against Crosby could range from $1.4 million to $5 million. The total budget for defending the suit, Whitlock reported, would be $120,500, of which $50,000 was set aside “for trial preparation and trial, which we hope to avoid.” In later correspondence, Whitlock raised her estimate of defense costs. There was, she informed Rawlings, an 80 to 90 percent chance that a jury would find Crosby liable on at least some of the claims, with a most likely judgment in the range of $250,000 to $750,000. On Aug. 20, 1997, Whitlock sent a revised case budget, setting out a new estimate of $243,680 for litigation expenses. The settlement value, she said, was $250,000. An Oct. 25 letter also indicates that she knew the liability limits on Crosby’s policy. Whitlock suggests in the letter that “settlement and compromise negotiations ought to be initiated.” On Oct. 30, 1996, a letter from Whitlock to Crosby reminded her client, “[t]he prayer in this case exceeds the limits of liability on your insurance policy with Coregis. Moreover, your policy with Coregis is one with diminishing limits.” However, by May 1997, the insurance company still officially hadn’t decided how much the policy could pay for Crosby’s defense, to settle claims, or to pay a judgment. Crosby’s policy set out a policy period limit of $300,000, with a $100,000 limit per claim, and there were several plaintiffs. In May 1997, Whitlock again wrote Rawlings, asking him to determine the liability limits, and then “provide [the lawyers] whatever settlement authority you deem appropriate.” By that time, May 8, 1997, Whitlock had billed Coregis $39,328 in fees. In July, after Coregis decided the policy only covered Crosby up to $100,000, Whitlock offered to settle for $50,000-approximately all that remained of Crosby’s policy coverage according to the pleadings. The plaintiffs refused. Plaintiffs’ attorney Jones says his clients would have accepted the claim limit of $100,000 to settle the claim at any time during the litigation. However, he says, no one from the defense ever made the offer. “We weren’t about to take $50,000 after they had burned through the other [$50,000],” Jones says. Two months later, on Sept. 19, 1997, Rawlings wrote to Crosby, for the first time including a line of text that would become a sort of litany in his correspondence over the next year: “Coregis will cease providing a defense for this claim as soon as the limit of liability has been exhausted.” By December, it had become clear to Whitlock that Crosby’s policy wouldn’t cover his defense in the complicated litigation. “At this point, it appears that the policy limits will be depleted prior to the close of discovery,” she wrote in a Dec. 9 letter to Rawlings. “We will do our best to get the depositions taken, prepare and file a Motion for Summary Judgment, argue that motion and have a Pretrial Order entered with the remaining policy limits.” REACHING THE LIMIT A year later, Dec. 16, 1998, Whitlock informed Westport Insurance Corp. that her firm had billed $105,139.37 in the more than two years it had represented Crosby. She also sent a letter to Crosby notifying him that they had reached the limits of his policy. “[I]t is my understanding that your insurance policy has been depleted and Westport will no longer be paying our bills. “I would appreciate your letting me know, at your earliest convenience, whether you wish to continue our services. If so, please call me so that we can make appropriate financial arrangements. If I do not hear from you, I will assume that you do not wish us to continue defending this case and we will take the steps necessary to seek the Court’s permission to withdraw as your counsel,” she wrote. On Jan. 9, 1999, Long, Weinberg filed a motion with DeKalb Superior Court asking Judge Daniel M. Coursey for permission to withdraw from Crosby’s case. Coursey denied the request, noting that he had set the firm’s Motion for Summary Judgment for argument that April. They would have to argue it if Crosby couldn’t find another lawyer. On March 16, Crosby’s son Michael took over his father’s defense. Crosby claims, “Long, Weinberg and Whitlock embarked upon a pattern of intentionally depleting the remaining insurance coverage by doing legal work, much of which was unnecessary, with the preconceived intention of using up all of the remaining coverage in attorney’s fees and expenses, and then withdrawing from the Kendall lawsuit, thereby abandoning Crosby and leaving him with no defense attorneys and no remaining insurance coverage.” Whitlock, he says, should have demanded that Coregis settle the case, and later should have told him that the plaintiffs would have settled for $100,000 — even if it meant $50,000 of it would come from Crosby. Crosby attached to his complaint an affidavit from malpractice lawyer David N. Lefkowitz, who says the firm’s defense “fell below the applicable standard of care for attorneys.” Under a diminishing limits policy, Lefkowitz says, defense lawyers are obligated to try to settle a claim to avoid the possibility of a judgment that would leave their client exposed. “This is most especially true when … the attorney is of the opinion that (i) the likely risk and exposure to the insured/client is in excess of the original amount of his insurance coverage and (ii) the amount of attorney’s fees and expenses that it would take to defend the insured/client would be in excess of the original amount of his insurance coverage,” he says in his affidavit. Still, Crosby likely could have avoided these problems if he had purchased adequate coverage. A $1 million policy would have covered both the eventual litigation costs and the judgment. While individual circumstances vary, a typical $1 million policy for a real estate lawyer with 15 years experience who hasn’t been sued in the past five years would cost about $2,000 a year, according to ANLIR’s Evans. Unlike Crosby’s inexpensive policy, Evans’ example is for a policy with no diminishing limits. Evans says real estate lawyers and securities lawyers frequently pay more for insurance because they are sued more frequently and the judgments tend to be larger. A criminal defense lawyer with the same background, seeking the same $1 million in coverage, would pay about $1,300 for a policy that includes defense costs. Insurance for a legal malpractice plaintiffs’ lawyer falls somewhere between the two: about $1,600 for a policy that includes defense costs. Evans says she encourages her company’s clients to avoid diminishing limits policies, because “if it’s protracted litigation you can erode the coverage.” ANLIR recently did sell a diminishing limits policy to two large firms, which Evans declined to name. They bought the policy on the theory that it would be “an incentive to settle if the defense costs aren’t within the limit of the policy,” she says. Robert B. Wedge, vice chairman of the State Bar of Georgia’s Committee on Malpractice Insurance, says he doesn’t know how widespread such diminishing limits policies are. The bar doesn’t keep statistics on malpractice insurance and doesn’t even know how many lawyers carry coverage. But diminishing limits coverage, he says, might encourage plaintiffs to settle, if it seems there might be nothing left after attorney fees in a lawsuit. “In some cases you get the insurance or you get nothing,” he says. Though Jones says he would have settled for the limits, his clients ended up with nothing. His clients’ judgment, he says, now rests on the success or failure of Crosby’s claims. “We can’t collect much of anything unless he wins this lawsuit,” he says.

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