Harleysville and Suing Defense Counsel

Sunday, April 24, 2005 | 0

On April 24, 2005 the United States District Court for the Southern District of New York ruled that an insurer may sue its defense counsel for malpractice or subrogation, but not both. Defense attorney Larry Rogak reviews that opinion and formulates an opinion of his own.

Harleysville Worcester Insurance Co. v. Hurwitz, NYLJ 4/20/05 (USDC - SDNY) (CARTER, j)

Plaintiff Harleysville alleged that the law firm of Silverstein & Hurwitz (S&H) committed legal malpractice in the representation of plaintiff's insured, Intedge Industries, Inc. S&H moved for summary judgment.

This legal malpractice action stemmed from S&H's representation of plaintiff's insured, Intedge Industries, in a product liability action brought by Lidia Sokal. In the underlying action, Sokal was injured when her right hand and arm were pulled into the chopping head attachment to a meat grinding machine. Sokal sued Hobart Manufacturing Company, the alleged manufacturer of the mixer, and Intedge, the alleged manufacturer of the component chopping head attachment.

Counsel for Sokal served S&H with a notice to admit in the underlying action which required defendants, among other things, to admit or deny whether Intedge manufactured the subject chopping head attachment. S&H failed to serve a response within the allotted time period. As a result, the trial court sanctioned Intedge by entering an order barring it from introducing any evidence, in the trial of the action, regarding any other specific manufacturers of the subject chopping head attachment, though Intedge could still deny its own involvement as the manufacturer. Though S&H's failure to respond was a departure from the applicable standard of care, plaintiff and defendants disagree as to what repercussions, if any, this order of preclusion had on the insured's defense.

In addition to defendants' failure to respond to the notice to admit, plaintiff alleged that S&H committed a number of other negligent acts in their representation of Intedge, all of which S&H disputed. The most contentious of these was S&H's decision to agree to the entry of a summary judgment motion in favor of Intedge's co-defendant, Hobart, the alleged manufacturer of the mixer. Plaintiff claimed that by releasing Hobart from the action, Intedge's ability to shift responsibility to a co-defendant was precluded and that, at the very least, defendants should have consulted with Intedge before agreeing to Hobart's dismissal. Furthermore, plaintiff alleged that S&H's failure to object to the entry of summary judgment resulted from counsel's failure to conduct adequate research and discovery, all of which left defendants, according to plaintiff, unprepared to contest the motion. Defendants, defend the decision as a proper exercise of their discretion as counsel in shaping a litigation strategy and note that counsel for Sokal also did not oppose the entry of summary judgment.

In addition, plaintiff offers as further evidence of defendants' negligence, counsel's failure to: designate an expert or rebuttal expert witness in support of plaintiff's insured's defenses; serve written discovery requests on co-defendant Hobart and make initial disclosures, and communicate with plaintiff and Intedge regarding allegedly crucial aspects of the litigation. S&H denied any negligence regarding these decisions and offered explanations for their actions, including that they attempted to find an expert but were unsuccessful in doing so and that the discovery requests served by co-defendant Hobart upon Sokal were sufficient.

b As a result of plaintiff's dissatisfaction with defendants' performance, S&H was dismissed as counsel in September 2001, whereupon plaintiff retained new counsel. Citing the adverse impact of defendants' errors and omissions upon Intedge's available defenses, Intedge's new counsel suggested that plaintiff settle the Sokal matter. In June 2002, plaintiff settled with Sokal, on behalf of Intedge, for a lump sum payment of $900,000.

Plaintiff claimed that as a result of S&H's negligence, Intedge's defenses in the Sokal action were severely compromised and that plaintiff, as Intedge's insurer, was forced to pay Sokal an amount substantially higher than it would have otherwise paid had defendants properly discharged their duties. In order to recoup the losses allegedly caused by defendants' negligence, plaintiff filed this legal malpractice and subrogation claim.

S&H sought dismissal of the subrogation claim, arguing that the doctrine of subrogation has no application in the case at bar and that it is duplicative of plaintiff's claim for legal malpractice.

The Court held, first, "It is well established that an insurer has a right of subrogation, or, in other words, that it can stand in the shoes of its insured to seek repayment from a third party whose wrongdoing caused the loss to the insured which the insurer was obligated to cover. Under New York law, the doctrine of subrogation is to be liberally applied for the protection of those who are its natural beneficiaries-insurers that have been compelled by contract to pay for the loss caused by the negligence of another.... Were it to be established that defendants' negligence created or contributed to these indemnity obligations, the doctrine of subrogation would permit plaintiff to recover the losses occasioned by defendants' malpractice.... The court believes that an insurer may allege a claim for subrogation based on counsel's negligent representation of its insured."

However, continued the Court, "even if a claim for subrogation is possible under New York law, plaintiff's claim for subrogation is duplicative of its legal malpractice claim and must be dismissed. Plaintiff attempts to differentiate the two claims by contrasting the duty of care owed directly to plaintiff, which gives rise to the legal malpractice claim, and the duty of care owed to Intedge, which gives rise to the subrogation claim. However, contrary to plaintiffs' assumption, it is not the theory behind a claim that determines whether the claims are duplicative. In truth, the two claims are redundant. The claims arise from the same conduct-defendants' alleged acts of negligence-and involve no distinct damages.... Thus, plaintiff's claim for subrogation must be dismissed as duplicative. The subrogation claim was dismissed, but the malpractice claim survives. In addition, S&H was given leave to serve a third party complaint against the law firm which took over the defense, on the theory that incoming counsel was negligent in telling Harleysville that S&H's handling of the case had prejudiced the defense.

Comment: I can sympathize with S&H. While I do not, of course, know all the details, I have defended so many similar claims (including products liability cases involving hands chopped off by commercial meat grinders) that I can easily surmise what happened here.

True, S&H should have served a response to the Notice to Admit. However, IF all the allegations in the Notice to Admit were true (and I don't know whether they were or not), then the failure to respond was harmless. If I were served with a Notice to Admit containing allegations which I could not honestly dispute, I might simply fail to respond. In fact, a law firm can be sanctioned for denying an allegation in a Notice to Admit when there is no good faith reason to deny. However, as a matter of strategy, I usually serve a response which states that I lack sufficient information to admit or deny the allegations. One cannot always fall back on this position, however. For example in an auto accident case, if I receive a Notice to Admit whether or not my client owns a certain vehicle, I would normally be compelled to either admit or deny it.

As to the question of whether S&H's actions, or inactions, cost Harleysville any money, Harleysville will ultimately have to prove that a perfect defense would have resulted in a much lower verdict than the $900,000 it paid to plaintiff. Unless its insured did not actually manufacture the chopping head, or it can be proven that the chopping head complied with all ASTM and OSHA standards and that the machine contained appropriate warning labels, then I think it will be very difficult for Harleysville to ultimately prevail.

Somewhere along the line, the relationship between Harleysville and its counsel broke down, and that's the real problem here. Such breakdowns are sometimes the fault of defense counsel, sometimes the fault of the claims examiner. I have seen both. I have also seen defense counsel used as a scapegoat by a claims examiner who failed to properly reserve a file and wound up paying much more than the reserve, and I have a hunch -- though I could be entirely wrong -- that this is what happened here. Why do I say that? Because the court decision reports that Harleysville made reference to another lawsuit -- in Mississippi -- involving the same injury with the same machine, and that suit ended in a verdict for $450,000 (half the amount the Sokal suit settled for). So the folks at Harleysville may have said to themselves, "Well, if an injury is worth $450,000 in Mississippi, it should be worth the same in Brooklyn!" Wrong, of course, but it wouldn't be the first time.

As a general rule of thumb, I would not advise insurance carriers to sue their defense counsel for malpractice unless there is some clear, no-question mistake that directly resulted in a loss -- a loss which would clearly not have occurred otherwise. Like failing to assert a statute of limitations defense when it could have resulted in a dismissal. Otherwise, a malpractice claim can be very difficult, time-consuming, and extremely bitter experience for everyone involved -- even the claims examiner, whose own handling of his/her file will undoubtedly come under the spotlight.

by Lawrence Rogak.

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