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

Can a party that claims it was “forced” by its attorney’s negligence to settle a case during trial for $5 million seek to recover its loss in a malpractice action when it won a zero-damages verdict when the case went to the jury because of non-settling defendants? That was the issue in a Supreme Court appeal captioned Ingerman Affordable Housing v. Margolis Edelstein, No. 65 EAP 2011, 33 A.3d 601 (Pa. 2011) (appeal granted), No. 65 EAP 2011, 53 A.3d 1315(Pa. 2012) (appeal dismissed as improvidently granted). Additional complicating factors were that the prevailing client involved in the appeal, and the primary insurer that hired counsel, were satisfied. The action was brought by the client’s excess carrier that required its insureds to assign it all claims as a condition of acknowledging coverage. The carrier alleged that it was forced to proffer its policy limits to avoid a perceived risk of a “runaway verdict” against its insured and the fact that the lawyer later won a zero-damages verdict for his client was irrelevant “hindsight.”

Ohio Casualty Sued Margolis Edelstein for Legal Malpractice in Successful Defense

The underlying personal injury action was brought on behalf of a 3-year-old boy who suffered catastrophic brain injuries in 2001 by falling through a window screen in a newly renovated affordable housing development. The defendants in the underlying action included related entities Ingerman Construction Co., which renovated the Chatham Apartments in March 2000, a property developer, a property manager, an owner entity and an umbrella under which the related entities operated. Lawyer and businessman Brad Ingerman was principal of these five Ingerman defendants. Unrelated defendants included a window manufacturer and installer. A primary insurer appointed Walter J. Timby III of Margolis Edelstein to represent the Ingerman defendants.

The Ingerman defendants’ insurance programs included several primary carriers and a $25 million excess coverage policy with Transamerican Insurance Group. The crux of the malpractice action was that TIG did not cover Ingerman Construction. Ohio Casualty provided another excess coverage layer of $5 million for all the Ingerman defendants. It was therefore the only excess carrier for Ingerman Construction.

As trial began, all the insurers except Ohio Casualty entered into a high-low settlement agreement with the plaintiff, and later TIG settled for $5 million. Though Ohio Casualty had reserved its rights and taken a “no pay” position, it then settled for its $5 million limit, extracting an assignment of any claims the Ingerman defendants may have had. The case went to the jury because the window manufacturer and installer did not settle. The jury returned a verdict of zero liability against Ingerman Construction. The property manager alone, which had already settled, was found liable for $7 million.

Though the defense that Timby and Margolis Edelstein provided to Ingerman Construction resulted in a defense verdict, Ohio Casualty later sued Timby and Margolis Edelstein as an assignee of Ingerman Construction. Ohio Casualty alleged negligent representation, which Margolis Edelstein denied. Each party had expert support for its position. Ohio Casualty contended that Ingerman Construction was injured when the insurer was “forced” to settle.

In a split decision, the Superior Court held that a prevailing defendant cannot prove malpractice damages regardless of its insurer’s contention that it incurred a $5 million settlement cost because of alleged attorney negligence.

After discovery, Margolis Edelstein’s malpractice defense counsel, George Vinci and Heather Eichenbaum of Spector Gadon & Rosen, moved for summary judgment, arguing that a prevailing client has no damages claim. On December 4, 2008, Philadelphia Court of Common Pleas Judge Arnold New held, in an unpublished opinion, that “the mere threat of a verdict against Ingerman Construction was not enough to create a cause of action for legal malpractice, and such a threat vanished entirely when the jury returned a verdict in favor of Ingerman Construction.” Ohio Casualty appealed to the Superior Court, contending that its $5 million payment was Ingerman Construction’s damages. In effect, Ohio Casualty was putting to a difficult test the widespread view that a conflict between experts suffices to get to trial on a legal malpractice claim in Pennsylvania.

The majority of the Superior Court panel, Judges John T. Bender and Anne E. Lazarus, held that Ohio Casualty could not prove Ingerman Construction’s damages because Ohio Casualty settled “only on the basis of a perceived breach of duty at a time when no damages had been sustained.” Ohio Casualty’s decision to settle was based on “calculated speculation that its insured would face greater risk if the matter was not settled.” Such speculative damages could never be proved when Ingerman Construction prevailed at trial. The dissent, by Senior Judge Eugene B. Strassburger, opined that “the $5 million settlement paid by appellant on behalf of Ingerman to protect Ingerman from a potential runaway verdict is a tangible loss to Ingerman Construction.” The Supreme Court granted Ohio Casualty’s petition for leave to appeal. Following briefing and oral arguments on September 11, 2012, the court dismissed Ohio Casualty’s appeal as improvidently granted.

It may be unfortunate that a case with issues sufficiently vexing as to split a Superior Court panel, and to prompt a grant of allocatur, should be decided without published opinions. The issues are: (1) whether an aggrieved client can prevail in the trial-within-a-trial phase of a malpractice action against a lawyer who won its case in the underlying action; (2) whether a client can rely on its own voluntary settlement decision as proof of “actual damages” in its case-within-the-case; and (3) whether a client can claim payments by a liability insurer as its malpractice damages. These legal issues will be addressed in the second and third parts of this series.

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.