Insurer Need not Submit to Extortion
Lawyers who are retained by insurers to defend an insured person in a third party liability suit, owe a duty to both the insured and the insurer. The lawyer needs to protect his clients but cannot force the insurer client to do what the insured wants or settle a claim that the insurer does not believe it owes.
Plaintiffs, a lawyer and his firm, brought this legal malpractice claim against the lawyer who defended him in a legal malpractice claim brought by a former client. In the original case, plaintiffs’ professional liability insurer retained defendants Ian Brenson and the Law Offices of Ian Brenson (collectively, Brenson) to represent plaintiffs John Z. Huang and his firm John Z. Huang, P.C. (collectively, Huang). The former client prevailed against Huang although that judgment was reversed on appeal. Huang’s legal malpractice case against Brenson was dismissed. In Huang v. Brenson, 1-12-3231 (Ill.App. Dist.1 03/05/2014), the Illinois Court of Appeal resolved the dispute..
Yongping Zhou, a Chinese citizen, was convicted in 1998 of domestic violence. He received a one-year suspended sentence. As a result, in early 2001, the Immigration and Naturalization Service (INS) detained Zhou and served him with a notice of intent to deport to China, giving 10 days to rebut the charges and contest the deportation. Huang represented Zhou from February 2001 until June 2001, when Zhou terminated the relationship and retained another attorney.
The new attorney represented Zhou in the INS proceedings. After hearing Zhou’s testimony, the judge denied Zhou’s request for asylum and rejected his torture and persecution claims. Zhou sued Huang for legal malpractice. Zhou’s amended complaint alleged that Huang acted negligently, and he sought damages for emotional distress, physical abuse, isolation, humiliation, pain and suffering, loss of education, and loss of income. Huang’s professional liability insurer retained Brenson to represent Huang.
Five years later, after trial, the jury awarded Zhou $4 million.
On appeal the appellate court reversed and remanded with instructions to enter judgment in favor of Huang and his firm. Huang then filed this case in the circuit court, alleging Brenson committed legal malpractice while defending the Zhou malpractice case. Huang also filed claims for breach of fiduciary duty. In count V, Huang alleged that Brenson concurrently represented Huang and the professional liability insurance company, and, as a result, failed to relay several of Zhou’s settlement offers to Huang. Similarly, in count VI, Huang alleged that Brenson breached his fiduciary duty of loyalty by failing to relay Zhou’s settlement offers. He sought damages of $154, 855 for attorney fees paid to the posttrial and appellate counsel.
The elements of a cause of action for legal malpractice are: (i) the defendant attorney owed the plaintiff client a duty of due care arising from an attorney-client relationship; (ii) the attorney breached that duty; (iii) the client suffered an injury in the form of actual damages; and (iv) the actual damages resulted as a proximate cause of the breach.
Huang was unable to attribute damages to Brenson’s failure at trial. In malpractice cases like this one, which turn on the attorney’s conduct during litigation, a plaintiff must generally prove a case-within-a-case to establish proximate cause. For the case-within-a-case, as a matter of law, in Zhou v Huang, the trial court should have granted Huang summary judgment or a directed verdict on all of Zhou’s claims for damages. Brenson in no way contributed to the trial court’s error.
The appellate court concluded the trial court was correct when it decided Brenson did not proximately cause Huang’s damages as a matter of law.
BREACH OF FIDUCIARY DUTY
Huang argues that the trial court erred in holding that he failed to plead facts showing a conflict of interest. Huang notes that Brenson’s affidavit attached to the motion to dismiss stated, “I was retained by [plaintiffs] and their liability insurance carrier to defend them in [Zhou's] lawsuit.” Huang contends this statement was a judicial or evidentiary admission that Brenson had a conflict of interest. To establish a claim for breach of fiduciary duty, the plaintiff must allege: (i) the existence of a fiduciary duty; (ii) the breach of that duty; and (iii) damages proximately caused by the breach. Attorneys have a fiduciary duty to their clients. The fiduciary duty owed by an attorney to a client encompasses the obligations of fidelity, honesty, and good faith.
When an insurance company pays for an attorney to defend its insured, that does not automatically create a conflict of interest. An attorney hired by an insurance company to defend the company’s insured owes a fiduciary duty to both the insurance company and the insured. While the court might assume that the attorney’s loyalty may follow the purse strings it recognizes that the attorney owes the insured the same professional obligations as he or she would to any client.
Conflicts of interests only arise in these situations where the attorney puts the interests of the insurance company before those of the client. For example, where the insurance company and insured disagree about whether to settle a case, a conflict arises, and the attorney cannot continue to represent both without a full and frank disclosure of the circumstances to his or her clients. However, the existence of an undisclosed conflict of interest only satisfies the breach element, but not the causation element, of a breach of fiduciary duty claim.
In his fourth amended complaint, Huang alleged that Brenson failed to communicate several settlement offers from Zhou, and failed to advise him of the risk of going to trial. Failure to properly communicate a settlement offer to a client is typically considered a breach of fiduciary duty. Plaintiffs, therefore, properly pleaded the existence of a fiduciary duty and its breach. However, Huang still fails to allege facts showing proximate cause. Huang alleges that, if Brenson had notified him of Zhou’s settlement offers, he would have accepted and demanded that their insurance company accept it because it was within their policy limits, which was $500,000. Huang also alleges that the insurance company offered to settle the case for $50,000. Huang alleges in the fourth amended complaint that the insurance company had offered to settle Zhou’s case for $100,000. Huang essentially alleges that, if Brenson had properly communicated Zhou’s settlement demands to him, the case would have settled and not proceeded to trial, or the costly posttrial, and appeal.
There are three possibilities where a settlement would have precluded the trial: (i) if plaintiffs could force their insurance company to settle, (ii) if plaintiffs could settle using their own assets, or (iii) if plaintiffs could use a combination of insurance company funds and their own assets to settle the case. Huang does not allege that he was willing or able to use his own assets to settle the case, foreclosing on the second and third possibilities. Nor does Huang allege facts showing that the professional liability insurer would have accepted Zhou’s settlement offers.
An insurance company need not always cede to the demands of its insured to settle. If an opportunity appears to settle within the policy limits, thereby protecting the insured from excess liability, the insurer must faithfully consider it, giving the insured’s interests at least as much respect as its own. The insurer need not submit to extortion; it may reject a bad deal without waiving the protection the policy limit gives it against the vagaries of lawsuits. But if the honest and prudent course is to settle, the insurer must follow that route.
Huang does not allege facts that show the insurer would have or should have, in good faith, accepted Zhou’s settlement demands. While, on several occasions, Zhou demanded that Huang settle the case for $400,000, $500,000, $2 million, or $3 million, Huang does not allege or assert facts showing that these demands were reasonable. It is not clear that, even if Brenson had properly informed Huang of Zhou’s demands, Huang could have convinced or forced the insurance company to settle and avoid going to trial. Accordingly, Huang failed to plead that defendants’ breach of fiduciary duty-failing to relay Zhou’s settlement demands-proximately caused his damages.
Many believe that no good deed goes unpunished. Here, Brenson did everything possible to protect Huang from the allegations of legal malpractice. He filed appropriate motions that were wrongfully rejected by the trial court. He was sued because he lost as a result of incorrect decisions of the trial court. Huang lost because he could not allege that there was a breach of Brenson’s duty to him that caused Huang damages.
Working in the tripartite relationship between an insurer/insured/defense lawyer is often difficult and without proper appreciation of the difficulty. No lawyer wins every case. Appellate courts exist because no court is perfect. The multiple suits that arose because Mr. Zhou was violent should never have happened.
© 2014 – Barry Zalma
Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.
He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.
Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.
Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.
Mr. Zalma recently published the e-books, “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,” “Arson for Profit” and others that are available at www.zalma.com/zalmabooks.htm.