Bad Faith Suits Begin Targeting Coverage Counsel

A new trend has emerged in which coverage counsel are being sued by third parties for aiding and abetting insurer clients’ bad faith, according to a panel session on the subject hosted by the American Bar Association’s annual Tort Trial & Insurance Practice Section’s Insurance Coverage Litigation Committee.

The suits allege that a lawyer who assists in a bad faith breach may be held liable.

While aiding and abetting started out in a criminal context, the restatement of torts places it in civil setting, according to Micalann Pepe, an associate with Christian, Dichter & Sluga, who spoke at the mid-year meeting held in Phoenix this year.

Gena Sluga, a shareholder with Christian, Dichter & Sluga in Phoenix, Ariz., said that lawyers have no special privilege against torts. In this situation, coverage attorneys can only be held liable for acting in concert with client insurers when:

1. A client owed a duty to a third party;
2. The attorney knows a duty is owed;
3. The insured breached that duty;
4. The attorney is aware of the breach.

A seminal opinion on the subject, according to Lawrence Winthrop, a Division One Judge with the Arizona Court of Appeals, is an Arizona case, Chalpin v. Snyder, 207 P.3d 666, 220 Ariz. 413.

Winthrop provided a summary of the case:

Reliance Insurance Company insured Hi-Health, a commercial business located in Arizona, for auto insurance in the amount of $5 million. Personal auto coverage was included for the business owner’s daughter, since the business had a property interest in the vehicle. The daughter was involved in an accident in California and a claim was tendered for damage to the other car and the severe injuries to the other driver. The adjuster assigned to the claim valued the loss at the full policy limit, but was only given $2 million in authority at time of mediation. The claim was not settled at mediation. Reliance then hired a California attorney, J. Kevin Snyder, to find evidence to support a no coverage stance. While facts were found that if raised initially may have resulted in a policy declination, Snyder opined that it was too late to deny coverage. Snyder recommended that Reliance file suit against its insured raising coverage issues in order to push the claimant’s family to settle. The insured responded by filing for a declaratory judgment plus attorneys’ fees and won. In the end, Reliance settled the matter for $8.5 million. Additional litigation among the parties ensued, including a suit filed by Hi-Health’s owner against Snyder, alleging malicious prosecution as well as aiding and abetting. Initially, the aiding and abetting allegation was dismissed and Snyder was granted summary judgment on the rest of the allegations. Hi-Health’s owner appealed and the appeals court reversed the lower court’s dismissal and summary judgment. As a result of the case, Reliance eventually filed for bankruptcy protection.

Reliance breached its duty by failing to settle the claim with available limits and Snyder was aware of the breach, said Winthrop. Snyder facilitated/assisted Reliance by filing a declaratory judgment against the insureds, even though he opined that the claim was covered.

In order to avoid these type of claims from arising, Teresa Milano, a New York-based claims director with Berkley Professional Liability, said that carriers need to form claims decision and opinions on their own.

Alanna Clair, a senior managing associate at Dentons US LLP in Wash. D.C., said that insurers shouldn’t rely on counsel advice exclusively to avoid being steered toward a particular result.

Another area of issue is whether an attorney is able to produce a client carrier’s file to defend against a claim. The court may force the issue, Clair said. The crime fraud doctrine, commonly accepted by courts, may be used to pierce privilege without the burden of proof necessary to prove a tort. The court may hold a hearing on this, she said, noting that forced waiver of the privilege isn’t a broad waiver.

Oregon, Texas and New Mexico have restricted such claims against attorneys, she said; however, she suggested coverage attorneys should remain aware of their limited role.

“Appropriate boundaries by the coverage lawyers – not to play adjuster, not to take over the decision-making process,” said Sluga.

Sluga, who handles complex insurance coverage and litigation, said there is a concern that these types of claims may arise in situations where any professional assists in evaluating a loss.

While company adjusters are unlikely to be judge separately from their employer, adjusters should make their own independent decisions, Milano said.

Pepe added that all parties should take steps to maintain appropriate boundaries.

In determining whether aiding and abetting occurred, Milano suggested asking the following questions:

• Was a fiduciary duty owed by the client?
• Did the client insurer breach its fiduciary duty and was the lawyer a part of it?
• Did the lawyer substantially assist client’s breach of duty?
  By drafting documents that effectuate breach of duty;
  By misrepresentations to plaintiff;
  By counseling client with regard to breach;
  By drafting and negotiating and review documents that allow breach.

Aiding and abetting is not typically covered under a lawyer’s malpractice policy because the attorney is alleged to be acting outside of the traditional scope of the attorney client relationship. The intentional acts or wrongful acts exclusion would likely apply, said Milano.