Legal Malpractice Law Review : Professional Responsibility Case Summaries & Commentary : Bennett J. Wasserman : LegalMalpractice.com : Lawyer Malpractice & Legal Ethics

Guarantee Insurance Co. v. Saltman, 217 N.J. Super. 604 (App. Div. 1987)

NJ Underlying Insurance Action  

Student Contributor: Colleen Gaedcke  

Facts: A few months after obtaining professional malpractice coverage from the plaintiff, one of the partners at the defendant law firm was served with a legal malpractice complaint. The defendant submitted the complaint to the plaintiff who provided a defense under a reservation of rights to disclaim, pending an investigation of any misrepresentation by the law firm on its application for coverage. This investigation ultimately revealed that the defendant law firm did not have knowledge of the malpractice claim at the time it submitted its application.

Despite the results of its own investigation, however, plaintiff moved to disclaim its duty to defend and indemnify the firm for alleged fraudulent misrepresentations and intentionally withholding information concerning the malpractice action. Additionally, plaintiff sought reimbursement for all defense costs.

The law firm, in turn, filed a counterclaim against the plaintiff arguing that it owed a defense and indemnity for the pending malpractice claim, and furthermore, sought indemnification for all legal fees incurred in defending the plaintiff’s declaratory judgment action. The court found that the plaintiff’s policy with the defendant was valid and required plaintiff to provide a defense and indemnity in the malpractice action. Moreover, under Court Rule 4:42-9(a)(6), the law firm was awarded a significant portion of the legal fees it incurred in defending the declaratory judgment action.  

Issue: Can an insured recover counsel fees from an insurer for costs and expenditures incurred in defending an insurer’s disclaimer of coverage?  

Ruling: Under the American Rule, a prevailing party cannot collect attorney’s fees from the losing party. The New Jersey Supreme Court has, however, carved out an exception to this Rule in R. 4:42-9(a)(6) for an insured who is forced to litigate for its policy benefits against an insurer who erroneously disclaims coverage under a liability or indemnity policy of insurance.  

Lesson: New Jersey Courts recognize that counsel fees must be awarded to insureds in order to make certain that they are receiving the full value of the coverage afforded by liability and indemnity policies in instances where an insurer’s disclaimer is not supported by the policy’s exclusions, conditions, or limitations on coverage.

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Gelsomino v.Gorov, 502 N.E.2d 264, 149 Ill.App.3d 809, (App. Ct. Ill., 1986)

IL Underlying Representation: Insurance coverage lawsuit

Student Contributor: John Anzalone

Facts: Plaintiffs sue Attorney and his law firm for legal malpractice for negligently investigating, preparing and presenting Plaintiffs in a lawsuit against the insurer that failed to cover the loss of their restaurant to a fire. Plaintiffs obtained Attorney as their counsel shortly before trial after their previous attorney had to withdraw because he was involved in an ongoing trial. The jury found for Insurer on the grounds that the plaintiffs' had committed arson and fraud.

Issue: Did the lower court err in holding that since the plaintiff did not present a question of fact regarding proximate cause or the attorney's breach of duty, the alleged errors were not actionable because they were errors of judgment, and that Plaintiffs were barred from claiming Defendant was negligent?

The Ruling: In reversing the lower court, the Appellate Court held that summary judgment was improperly given, based on the following considerations:
1) Plaintiffs are estopped from relitigating facts in one action that were specifically litigated and decided in a prior action. The Plaintiff's post-trial motion in the underlying case claiming that the court erred in not granting continuance and that this resulted in their counsel being unprepared did not bar Plaintiffs from asserting that Defendants were negligent.
2) To prove legal malpractice, Plaintiffs must establish that there was an attorney-client relationship, "a duty arising out of that relationship" that was breached, and that the breach proximately caused Plaintiffs' actual damages.
3) Plaintiffs were Attorney's client and were damaged by the jury verdict.
4) There was a question of fact regarding the attorney's breach of duty because Plaintiffs.rovided expert testimony alleging specific breaches of the attorney duty of care to Plaintiffs.
5) There was a question of fact about proximate cause because Plaintiffs supplied affidavits of people Defendants' knew about but failed to investigate whose testimony would have rebutted the circumstantial proof of arson and fraud alleged by Insurer.
6) An error of judgment is not immune for prosecution. If the attorney's judgment was one that a reasonably competent attorney would not come to, the attorney can be held liable for failing to exercise a "reasonable degree of care or skill in representing his client."

The Lesson: Errors of judgment is not an absolute defense to lawyer malpractice.  It is no defense that the allegedly negligent attorney's judgment was a non-actionable tactical choice if a reasonable attorney would not come to that conclusion. 

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Utica Mutual. Ins. Co. v. Maran & Maran, 142 N.J. 609 (1995)

NJ Underlying workers comp proceeding

Student Contributor:  Lisa Larato

Facts: Defendant Ingala sustained work related injuries and had been receiving workers compensation benefits from the Plaintiff, Utica Mutual Insurance Co. (Utica). Ingala retained a separate attorney to handle a products liability claim against the third party liable for his injuries. That attorney failed to file suit within the statute of limitations. Plaintiff then retained  Maran & Maran, to sue that attorney for malpractice. The malpractice suit settled for $585,000.

Utica contended that it had a workers compensation lien on the legal malpractice settlement proceeds, but Maran & Maran disagreed. Utica filed the instant lawsuit and the parties cross-filed for summary judgment. Maran & Maran argued that even if such a lien could attach to a legal malpractice recovery, it should not attach if the malpractice and workers compensation recoveries do not fully compensate the injured worker. They also argued that the workers compensation carrier had no claim because it failed to institute its own action against the tortfeasor.

The Superior Court, Law Division, granted Ingala and Maran & Maran’s motion and held that the lien did not attach to a malpractice recovery. Utica appealed, and the Supreme Court, Appellate Division, affirmed. Utica then moved for reconsideration and the Supreme Court granted that motion.

Issue: Whether, pursuant to N.J.S.A. 34:15-40, a workers compensation lien attaches to the proceeds of a malpractice suit brought to recover damages from an attorney who failed to institute an action against the third-party tortfeasor?

Ruling: The Supreme Court held that the statute establishing workers compensation liens prevents Maran & Maran from retaining any workers compensation benefits that have been supplemented by recovery against a liable third party, even if recovery and benefits when combined would leave Ingala less than fully compensated. Under N.J.S.A. 34:15-40, Utica is entitled to reimbursement, irrespective of whether or not Ingala is fully compensated.

Lesson: The Purpose of N.J.S.A. 34:15-40 is to prevent recovery from different sources for the same injury; no justification exists for allowing an injured employee who receives a legal malpractice recovery to be in a better position than an injured employee who recovers directly from the tortfeasor. The court reasoned that the “no double recovery” rule should not be different when the third-party recovery is against a party other than the tortfeasor.

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Insight and Commentary from Ben Wasserman and Krishna Shah

In order to drive a car in New Jersey, you need a license and insurance. If your negligent driving injures someone, you have insurance not only to protect yourself, but to protect the person you injure.

In order to practice law in New Jersey, you also need a license, but not insurance. If your negligence dmages a client and you have no insurance, then it's too bad for the client.

Is there something wrong with this picture? We think so. We lawyers are fiduciaries to our clients. That means that first and foremost we have to put our clients' interests ahead of our own. Even at our own cost.

Is New Jersey destined for universal mandatory legal malpractice insurance?

Read more from this week's New Jersey Law Journal's Professional Malpractice Supplement.

The article linked to this post may express the opinions of its authors. It is not intended as a statement or position of the editorial board of The Legal Malpractice Law Review.

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Jolley v. Marquess, 393 N.J.Super. 255 (App. Div. 2007)

NJ Underlying automobile negligence action; insurance coverage for malpractice.

Student Contributor: Colleen A. Gaedecke

Facts: A New Jersey auto insurance company retained a New Jersey law firm to defend its insured in an auto negligence case.. The malpractice defendant, a partner at the firm, was assigned the  case.  During his representation, disputes arose between the defendant and the other partners at the firm which  led to the firm’s dissolution. The defendant signed a dissolution agreement with the firm relinquishing his status as partner but continuing as  trial attorney until his final termination date. As such, the defendant agreed to continue  to represent the insurance company. Ultimately, a legal malpractice claim was filed against the defendant as a result of his representation. The defendant filed a third party claim against the firm’s malpractice carrier, asserting that they were obligated to provide him with a defense and indemnification concerning the malpractice claims brought against him. The defendant argued that he was entitled to coverage because he tried the negligence action on behalf of the firm and the file remained the firm’s file at all times. The firm’s malpractice carrier denied him coverage and argued that he was not entitled to coverage because he was not a member of the firm and because the firm surrendered all responsibility for the file when they asked him to handle the case.

Issue: Whether a malpractice insurance carrier is required to defend and provide indemnification to a former partner of the law firm for alleged acts of malpractice committed after the partner’s dissolution from that firm?

The Ruling: Affirming the trial court’s grant of summary judgment in favor of the defendant, the Appellate Court held that the firm’s insurance policy required their carrier to defend the defendant.

1) When the language of the malpractice insurance policy is clear, the courts should not rewrite the insurance policy. But when a policy is ambiguous, the court should interpret the ambiguous phrase in favor of coverage.

2) Also, the court should consider whether adding more precise language would have avoided the matter.

The Lesson: The use of precise language in a malpractice insurance policy may relieve a malpractice insurance carrier from their duty to defend and to indemnify former partners for malpractice. Without such precision, any ambiguity in the policy is usually decided in favor of coverage.

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Darby & Darby, P.C. v. VSI International, Inc. 95 N.Y.2d 308 (2000)

NY Underlying insurance coverage

Student Contributor: Maninder (Meena) Saini

Facts: Defendant (VSI International Inc.), a Florida corporation retained plaintiff (Darby & Darby) a New York law firm to represent it in two Florida lawsuits. Even though defendant paid a portion of a substantial legal bill, the defendant still owed nearly $200,000 in outstanding legal fees. Plaintiff moved to withdraw as counsel because the defendants did not pay them. The plaintiff was relieved as counsel in October 1993. In August 1996, plaintiff commenced an action to recover the outstanding amount in legal fees, plus interest and incidental costs. The defendant then asserted a counterclaim, alleging the plaintiff committed legal malpractice and breached a fiduciary duty by failing to advise defendant that its then-existing general liability insurance policy could have covered defendant’s litigation expenses.

Issue: Does a NY law firm specializing in patent litigation,  retained to defend a corporate client in a Florida patent infringment action have a duty to advise the client about possible insurance coverage to cover the cost of litigation?

Ruling:

 ...attorneys should familiarize themselves with current legal developments so that they can make informed judgments and effectivey counsel their clients... However, [the law firm] should not be held liable for failing to advise [the client] about a novel and questionable theory pertaining to their insurance coverage.

In a legal  malpractice action, a party must demonstrate that an attorney failed to employ “the ordinary reasonable skill and knowledge commonly possessed by a member of the legal profession”. What is reasonable skill and knowledge is to be determined at the time of representation.

Lesson: The standard of reasonable care applicable even to specialist-attorneys does not require attorneys to comply with   novel and questionable theories of law. An attorney only has a duty to represent a client in a manner that is reasonable and consistent with the law, as it existed at the time of representation.

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Frazier v. New Jersey Manufacturers Insurance Company, 142 N.J. 590, 667 A.2d 670 (1995) (pdf)

NJ: Underlying litigation; workers compensation lien

Student Contributor: Michael Park

Facts: Plaintiff was injured on the job while working for a third-party general contractor, and his attorney filed a worker's compensation claim against his employer's insurance carrier. However, his attorney failed to file a complaint against the third-party general contractor before the statute of limitations had run out. Plaintiff then retained a new lawyer to file a malpractice claim against his former attorney, and obtained a settlement. After learning of the settlement, the insurance carrier said it would file a lien against the recovery for legal malpractice. The matter went to court and the trial court ruled that the workers' compensation lien could not attach to his legal malpractice settlement. However, the Appellate Division reversed and held for the insurance carrier, and the plaintiff appealed.

Issue: Can a workers' compensation lien attach to the proceeds of a malpractice suit brought to recover damages from an attorney who failed to institute an action against the third-party tortfeasor responsible for the worker's injury?

Ruling: In affirming the Superior Court, Appellate Division, the Supreme Court held that a worker's compensation lien can attach to a legal malpractice settlement.

“It was the tortious act of the third party (the general contractor) that was the predicate for Frazier's malpractice action against his former attorney. But for the third-party tortfeasor's tortious conduct, Frazier would not have recovered against his attorney...No apparent justification exists for allowing an injured employee who receives a legal malpractice recovery to be in a better position than an injured employee who recovers directly from the tortfeasor. Malpractice claims that are derivative of third-party claims are therefore subject to the workers' compensation lien under N.J.S.A. 34:15-40."

Lesson: The Court did not want to allow the plaintiff to receive double recovery, pocketing the money from the legal malpractice settlement that arose from the attorney not filing a complaint against the original tortfeasor, and the money he received for workers' compensation for being injured. If the lien did not attach, he would be receiving compensation twice for the same injury. 

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Liberty Surplus Insurance Corporation, Inc. v. Nowell Amoroso, P.A.
189 N.J. 436, 916 A.2d 440 (N.J. 2007)

NJ Underlying matter: Malpractice Insurance coverage

Student Contributor: Evan Michael Hess

Facts: Plaintiff is the malpractice insurance carrier of the Defendant law firm in a Declaratory Judgment action. During the law firm’s  representation of one of its clients, it did not timely file the client’s Complaint. The Client got a judgment for $400,000 which was reversed due to the untimely filing. Shortly after the dismissal, the Defendant applied for malpractice insurance with the Plaintiff. On the application for insurance, Defendant answered “no” to a question whether it had “a reasonable basis to believe that it had breached a professional duty or to foresee that a claim would be made against" it. The policy was issued. Afterwards, a malpractice action was started by the client against the law firm. It tendered the defense of the malpractice action to the carrier. The carrier disclaimed coverage alleging that the law firm reasonably knew of the possibility that it might be sued for malprctice when it submitted the application for insurance. The carrier filed a declaratory judgment action against the law firm seeking to deny coverage. The law firm cross-moved for coverage. Both parties filed motions for summary judgment.

Issue: Can a malpractice insurance carrier deny coverage to an insured law firm when on its application for insurance the firm answers “no” to a question asking whether the firm had subjective knowledge of any circumstance, act, error or omission that could result in a legal malpractice claim ? Here, the application was submitted before the law firm was sued by the former client.

Ruling: The Supreme Court upheld the Appellate Division’s ruling that denied coverage to the law firm:

1) The law firm could not have subjectively believed that it had not breached any professional duty. It was reasonable to foresee that the client that had lost their $400,000 judgment would bring a malpractice claim against the law firm.

coverage, under the policy, was conditioned not only on foreseeing a possible malpractice claim, but also on the insured having no reasonable basis to believe that any deviation from a pertinent standard of care had occurred.

Lesson: You can never report a claim to your carrier early enough--As soon as you know it might turn into a malpractice claim.  Some lawyers choose to wait until there is objective proof of a claim--when they are served with a malpractice complaint. But if you have a subjective basis to know that you may have made a mistake and that it can reasonably turn into a later malpractice claim, it makes sense to report it sooner rather than later-- during your policy period and on any application for renewal. Otherwise, you run the risk of no coverage for that claim. You may want to forego reporting a claim if your policy deductible is big enough to cover the claim.

Editor's Note:  In  NJ, a recent trial court ruling required a lawyer who practices as a professional corporation, LLC or LLP,  and who must carry malpractice coverage under Court Rule 1:21:-1A,B and C, to report all claims and to cooperate in the defense of the claim so as not to deprive the client of the benefit of mandatory insurance coverage.

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