Nova Casualty Company brought an action alleging legal malpractice against law firms. Nova alleged that the defendant negligently advised the insurer in the negotiation of a high/low agreement, negligently negotiated the form of the agreement, and negligently gave advice regarding settlement. This case is Nova Casualty Company v. Santa Lucia, 2010 WL 3942875 (M.D.Fla.).

The allegations in this case arose from a lawsuit filed in Florida state court. In that action, Shackelford filed a lawsuit against Bayfront Tower Condominium Association, stemming from an incident when she was injured while being shown a condo. Santa Lucia was hired by Nova, the insurer of the association, to defend the insureds. Mediation was conducted in this litigation and a high/low agreement was negotiated. The parties agreed to a low of $200,000 and a high of $750,000. Nova paid the $200,000 low under the agreement.

The insurer was of the opinion and contended the payment released Nova from liability beyond that amount. Shackelford's attorney disagreed and filed a motion to set aside the agreement; this was granted by the trial resolution judge. At that point, Nova paid its policy limits and initiated this lawsuit against the attorney who handled the negotiations. The attorney claimed the insurer had no standing to bring the lawsuit.

When the case was moved to the United States District Court, M.D. Florida, Tampa Division (due to diversity jurisdiction), that court noted that neither the Florida Supreme Court nor Florida's appellate courts had ever addressed the key issue: whether an insurance carrier has standing to bring a legal malpractice action against an attorney hired to defend its insured. However, the district court said that under Florida law, an attorney's liability is limited to those with whom the attorney is in privity of contract or intended third party beneficiaries of the attorney-client relationship. And, in this instance, the insurer fit into this category.

The court said that Nova has a direct cause of action against Santa Lucia. Nova selected and retained Santa Lucia and it was Nova that was responsible for paying Santa Lucia for his work. Therefore, Nova was in privity of contract with Santa Lucia. Moreover, Nova is a third party beneficiary of Santa Lucia's representation of the insured since Nova has a contract with the insured that gives Nova the duty to provide a defense, giving Nova the right to select and the duty to pay counsel. That relationship makes Nova an obvious third party beneficiary. Finally, by satisfying the liability claim against its insured, the insurer steps into the shoes of the insured through equitable subrogation to sue a liable tortfeasor, and in this instance, Nova paid the policy limits on behalf of its insured and so assumed a right of action against any other person responsible for the loss. This subrogation right then includes the right to bring a claim for legal malpractice where the negligence of the attorney contributed to the loss. Nova was allowed to pursue its lawsuit against Santa Lucia.

Editor's Note: The question in this case was whether an insurer could sue the attorney it chose to defend the insured for malpractice. The United States District Court ruled that the answer is “yes”. The main result of this opinion is that attorneys who are hired to defend insureds can find themselves as defendants in malpractice cases filed by both insureds and insurers. Defense attorneys, beware!

Defense within Limits and the Duty to Defend

The United States District Court, E.D. Pennsylvania, handled a lawsuit filed by the insurer seeking a ruling on its duty to defend. One of the main issues in this case was a defense within limits provision in the policy; this is a provision that causes the overall limits of coverage to be reduced by incurred defense costs. This case is NIC Insurance Company v. PJP Consulting, 2010 WL 4181767 (E.D.Pa.).

Pukuma was attacked by four visibly intoxicated patrons at a bar. The bouncers removed the attackers but they also placed Pukuma outside with them, wherein the attack resumed and Pukuma was stabbed. He suffered various severe injuries. Pukuma filed a lawsuit against the bar alleging that the bar owner's negligence allowed the four assailants to injure Pukuma. The insured bar turned the lawsuit over to its insurer, NIC, which then filed a declaratory judgment action to have the court determine its duty to defend.

NIC alleged that the liability policy contained an assault and battery limits of liability endorsement that limits coverage to $50,000 for any injuries arising out of an assault and battery. The insurer also alleged that the policy had a defense within limits provision that reduces the amount of coverage that is available to indemnify the insured by the expenses incurred in defending the insured. NIC alleged that once the legal fees and expenses exhausted the applicable limits of liability, the insurer had no further obligation to defend or indemnify the insured.

The United States District Court in Pennsylvania noted that the defense within limits (DWL) provision presented an unsettled issue under Pennsylvania law; the court questioned whether the provision was consistent with the state public policy. The court said that while Pennsylvania does not presently regulate DWL provisions, they may be inconsistent with public policy in situations where, as here, the amount of potential coverage is so low ($50,000) that the legal expenses would almost certainly exhaust the policy limits long before trial. This raised legal and ethical questions in the mind of the court.

For example, when insurance coverage is the only asset available to satisfy a judgment, it places the plaintiff in a difficult position; that is, he can settle immediately for an amount that is significantly below what his claim may be worth, or he can pursue his claim in court and risk winning an uncollectible judgment. As another example, a DWL provision could act as an incentive to insurers to pursue a strategy in which they spend heavily on legal fees in order to increase the pressure on plaintiffs to settle at the quickly dwindling policy limits. And in addition, if the insurer in this case seeks to withdraw from the defense as soon as the $50,000 limit is exhausted, this could leave the insured in the position of being without counsel.

The U.S. District Court decided that the case presented complex and unsettled issues of state law that should be settled by the Pennsylvania judiciary. The court declined jurisdiction in this matter.

Editor's Note: This case is presented not for its precedential decision, but for the information it provides about a defense within limits provision. The court discusses DWL at length and presents examples of how several state legislatures and insurance commissions have banned or limited the use of the provision (citing as examples, Minnesota, Oregon, and New York ). The court also mentioned articles written on the ethical issues related to DWL provisions. And, the court noted that the main problem with the DWL provision is that by making a single pool of money available for both defense and indemnification, it collapses the traditionally separate analyses of the duty to defend and the duty to indemnify into a single inquiry. (This is usually to the detriment of the insured.)

So, for the reader who is interested in the impact of DWL provisions, this case is very useful.

Occurrence Definition and Subcontractor's Alleged Negligence

The Supreme Court of Mississippi was called upon to determine whether the intentional hiring of a subcontractor negates coverage based on whether intentional hiring is or is not an occurrence. This case is Architex Association v. Scottsdale Insurance Company, 27 So. 3d 1148 (2010).

Architex entered into a contract with Vikram and CIS Pearl to construct a Country Inn and Suites hotel; Architex hired multiple subcontractors to build the inn. After about two years of construction work, Architex filed a statutory notice of construction lien. CIS filed a lawsuit against Architex for breach of contract and negligent construction. Architex sent the lawsuit to its insurer, Scottsdale Insurance, for defense and indemnification. The insurer declined coverage and said there was no occurrence to trigger any coverage in this situation. The insured brought a third-party complaint against Scottsdale; the circuit court in Mississippi entered summary judgment for the insurer and this appeal followed.

The insured said that claims for property damage resulted from acts that were not intended by the insured and thus, there was an occurrence. The insurer argued that the allegations against the insured did not constitute an occurrence. The Supreme Court noted that the circuit court ruled in favor of the insurer on the basis that the insured's hiring of subcontractors was not an accident; it was a course consciously devised and controlled by the insured and this undeniably set in motion the chain of events leading to the complaints against the insured. So, the Supreme Court concluded that the issue before it was this: whether the circuit court erred in concluding, as a matter of law, that the intentional hiring of subcontractors by the insured precludes the possibility of coverage.

The insured argued that the claims of insufficient rebar in the foundation caused structural damage, rusted metal, mold and mildew, and this is all unexpected from its standpoint and therefore, the claims constitute an occurrence. Scottsdale argued that there is no occurrence since failing to install rebar in a building is not an accident, and defective construction work that causes mold, rust, and mildew is not an accident. The court said that a general commercial liability policy does not extend coverage to negligent actions that are intentionally caused by the insured. However, in this case, the only intentional act or conduct considered by the lower court was the hiring of subcontractors; this was done without consideration of whether the underlying acts or conduct of the insured or the subcontractors proximately causing property damage were negligent or intentional. The Supreme Court said that while the alleged property damage may have been set in motion by the intentional hiring of the subcontractors, the chain of events may not have followed a course consciously devised and controlled by the insured without the unexpected intervention of any third person or extrinsic force.

The Supreme Court said that an interpretation of the policy that views the term “occurrence” categorically to preclude coverage for the simple negligence of a subcontractor subverts the plain language and purpose of the CGL form. A construction contractor's simple intent to engage a subcontractor is quite different from the intent necessary to deprive that contractor of its CGL insurance coverage for accidents taking place when things go awry. Any effort to equate the two would be contrary to the terms of the policy.

Therefore, by virtue of the clear and unambiguous language of the policy (as well as the subcontractor premiums paid by Architex), the court found that the policy extends coverage to Architex for unexpected or unintended property damage resulting from negligent acts or conduct of a subcontractor. The ruling of the circuit court was reversed.

Editor's Note: The Mississippi Supreme Court holds that the CGL policy's definition of occurrence does not exclude coverage for property damage caused by a subcontractor's alleged negligence. While the court asserts that there is a jurisdictional split over whether defective subcontractor construction constitutes an occurrence (and quotes the opposing views as cited in a Supreme Court of Kansas case), the fact is that the current CGL form allows coverage for property damage to the named insured's work if the damaged work or the work out of which the damage arises was performed by a subcontractor. Of course, the insurer in this case was claiming the hiring of the subcontractor was the cause of the property damage and the hiring was intentional and thus, not an occurrence. However, this argument was not accepted by the court and that makes sense. After all, the actual proximate cause of the damage was done by the work of the subcontractor, not by the subcontractor's hiring.

State Actions

The following information pertains to actions taken by certain states that will affect the insurance industry.

Colorado law now provides, in part, that in interpreting a liability insurance policy issued to a construction professional, a court shall presume that work that results in property damage is an accident unless the damage is intended and expected by the insured. However, this law does not require coverage for damage to an insured's own work unless otherwise provided in the insurance policy.

Connecticut law provides, in part, that if an insured cancels a private passenger motor vehicle liability insurance policy, the insurer shall send written notice of cancellation to any lien holder shown on the records of the insurance company as having a legal interest in the motor vehicle.

Iowa insurance division bulletin authorizes the insurance department to examine and approve the use of all policy-related forms issued by an insurer that does business in the state. This means an approval of all insurance forms is required before such forms may be used in the state.

Louisiana law now states that no person may prepare, issue, or request the issuance of a certificate of insurance for risks located in Louisiana unless the form has been filed with and approved by the commissioner of insurance. Also, a person is entitled to a legal right to notice of cancellation, nonrenewal, or any material change in a policy of insurance only if such person is named within the policy or any endorsement, and the policy or endorsement or regulation in the state requires notice to be provided.

Rhode Island law inserts new provisions that constitute unfair claims practices in the state. In particular, the statute states that failure to have an appraisal performed by a licensed appraiser when the vehicle has sustained damage estimated to exceed $2,500 constitutes an unfair claims practice. Also, failure to perform a supplemental appraisal inspection of a vehicle within four business days of a request for such an appraisal from a repair shop constitutes an unfair claims practice.

Rhode Island statutes also require that if a policy is cancelled using a short-rate table, the insurer shall provide a short-rate table within the cancellation provisions of the policy so that an insured can make an informed decision when cancelling a policy midterm.

West Virginia law allows a county or municipality to impose a statutory lien on insurance proceeds—in the amount of the greater of $5,000 or 10 percent of the available coverage—for debris removal costs in the event of total loss to real property.

Finally, a proposal to give workers compensation coverage to emergency workers for mental stress has been voted down in the North Dakota legislature. The workers comp law in the state now does not cover a work incident that causes mental trauma unless the affected person also suffers a physical injury.