Professional Liability Alert - August 2005

Editor’s Note: This Alert highlights a recent Sedgwick appellate victory on behalf of attorneys accused of conspiring with their clients. The California Court of Appeal rejected the notion that the complaint alleged the performance of services that went beyond professional duty or economic advantage beyond mere payment. Further, as reported in our Autumn 2003 newsletter, the Court of Appeal absolved attorney Walter Root from a legal malpractice claim because the disgruntled client claimed to receive bad tax advice, but could not prove a better settlement was possible. In a related matter, Root has prevailed again - this time, against the insurer who denied coverage for the malpractice claim under Root’s "claims made and reported policy," because Root learned of the malpractice action from a reporter, but did not report it until he read of it in a legal journal report a couple of days later. Applying equitable principles to avoid forfeiture, the court reversed a summary judgment granted to the insurer.

On Thursday, February 25, 1999, attorney Walter Root received a call from an unidentified reporter for a legal journal to seek his reaction to a malpractice lawsuit filed against him earlier that day by a client for whom Root had obtained a $2.75 million settlement for an employment discrimination claim. Assuming the call to be a prank, Mr. Root ended the call. The following Tuesday, Root read an article in the journal describing the malpractice lawsuit and immediately contacted his insurer to report the claim, but because his "claims made and reported" policy had expired on Sunday, February 28, 1999, the insurer, American Equity, denied coverage for failure to report within the policy period. (The subsequent insurer also denied coverage because the reporter’s call gave Root a basis to believe there was a claim against him.) Left with no choice, Root defended the malpractice lawsuit on his own, but sued American Equity for breach of contract.

The trial court granted summary judgment to American Equity but the appellate court reversed, granted equitable relief to the insured, and in doing so, used considerable "ink" and took great pains to show that "by no means do we blanketly apply a blunderbuss ‘notice-prejudice’ rule to this, or any other claims made and reported malpractice policy" since to do so would convert the policy into a pure claims made policy and give the insured a windfall.

The Court of Appeal held that the reporting requirement can be equitably excused when it works a forfeiture and reversed on the basis that "California’s traditional common law of contracts bearing on forfeitures and conditions precedent offers a way out for the hapless insured." Id. at 1. The Court found the requirement to report, albeit found in the insuring clause, is not an element defining the scope of coverage but simply a condition precedent subject to the rules of equity. Id. at 34. Applying California Supreme Court precedent, the Court held that as a condition, it can be excused when it results in a forfeiture. Id. at 32. The court found that (a) given the fact that the insured learned of the possibility of the claim with only three days left in his policy period; (b) the insured reported the claim as soon as he received confirmation of the claim; and (c) the insurer had not given the insured the opportunity to buy an extended reporting endorsement which would have given him more time (typically 60 days) to report claims, excuse of the reporting condition was justified.

While the situation is narrow, and further review possible, attorneys and other professionals now faced with the dubious distinction of learning of a possible claim very late in the policy period, who report it after the policy has expired, appear to have caught a little "equitable" breathing space.
By Bijan Esfandiari, Associate

Sedgwick Prevails Before The California Court Of Appeal On Behalf Of Clients Charged With Conspiring With Their Client To Commit Bad Faith Berg and Berg Enterprises, LLC v. Sherwood Partners, Inc., et al., 2005 WL 1793536 (Cal.App. 6 Dist., July 29, 2005).

In a bygone and more genteel time, California lawyers didn’t worry themselves about getting sued by their client’s adversary. But all that changed in 1983 when the Court of Appeal in Wolfrich Corp. v. United Services Automobile Assn. (1983) 149 Cal.App.3d 1206, held that lawyers representing insurance carriers could be sued by insureds for conspiring with their client to commit bad faith. In response to the understandable uproar that followed, the Legislature enacted Civil Code Section 1714.10, which requires court approval for a complaint that contains allegations of conspiracy between an attorney and his or her client to commit wrongful acts, so that the court became a gatekeeper to guard against meritless claims. The Supreme Court in Doctors Co. v. Superior Court (1989) 49 Cal.3d 39, 41, 45-49, subsequently overruled Wolfrich, but articulated exceptions to the general rule that attorneys, or other agents, could not conspire with their clients or principals, which were later incorporated into section 1714.10(c). To wit, the agent could be sued for acting wrongfully and for personal financial advantage.

Decisional authority construing the statute was pretty sparse until a recent decision where Sedgwick represented the attorneys who challenged the trial court’s order that granted leave to amend to charge the lawyers with conspiring with their client with respect to the administration of an assignment for the benefit of creditors. Plaintiff alleged that the attorneys conspired with their client, an assignee, to "churn" the estate for unnecessary fees and increase their professional fees through performing unnecessary work. Plaintiff relied heavily on bankruptcy cases to argue that counsel for the assignee, who owed a duty to the estate’s creditors, should likewise owe a duty to the creditors, including plaintiff.

Not so, held the appellate court. First, the lawyers for the trustee are not, solely by reason of this relationship, lawyers for the trust’s beneficiaries. The exceptions to this rule apply only when the lawyer is accused of independent wrongdoing for motives that transcend the payment of professional fees. Thus, if a lawyer lies to the court about estate administration, in order to mask self-dealing, a cause of action is stated. But no claim can be stated if the attorney acts in the interest of the client, and gets paid for the trouble of doing so. Second, bankruptcy cases to the contrary don’t apply in this context under California law. Third, imposing a duty on the assignee’s counsel conflicts with a bedrock principle of California law that the attorney’s loyalty to the client must be complete and undivided. Fourth, a suit against opposing counsel invites unwelcome second-guessing of counsel’s litigation and tactical strategies. And fifth, the attorney’s interest in professional fees does not constitute a personal financial advantage, which would bring the allegations within one of the statutory exceptions. This published opinion should be a boon to Sedgwick’s professional liability clients, and to the California defense bar in general, to limit exposure to this kind of tactical but unwarranted suit.
By Hall R. Marston, Special Counsel and Certified Appellate Specialist.

The Professional Liability Alert! is prepared by attorneys in Sedgwick’s Professional Liability Practice Group. Sedgwick’s Professional Liability Group. For more information, about the Group, please contact:

Randall A. Miller
Los Angeles

Gregory H. Halliday
Orange County

Steven D. Wasserman
San Francisco

This communication is published as an information service for clients and friends of the firm and is made available with the understanding that it does not constitute the rendering of legal advice or other professional service.

© 2005 Sedgwick, Detert, Moran & Arnold LLP

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