MARCH 2015 BAD FAITH CASES: ALLEGED BREACH OF DUTY TO IDENTIFY INSURER’S RISK OF EXPOSURE TO A BAD FAITH CLAIM FOR FAILURE TO SETTLE SOUNDS IN NEGLIGENCE, NOT CONTRACT (Middle District)

In New York Central Mutual Ins. Co v. Margolis Edelstein, the insurer alleged that its attorney failed to give it proper advice as a client, concerning settlement of a claim.  Among other things, the insurer’s complaint alleged: that the attorney “agreed to perform legal services for [the insurer], which included agreeing to ‘provide [the insurer] with a Legal Opinion on the validity of any Bad Faith Claim under the confines of Pennsylvania law.’” “[The attorney] outlined the initial steps to be taken ‘prior to providing our legal opinion to [the insurer],’ which included reviewing documentation and ‘perform[ing] legal research applicable to the facts of this case,’ and ‘prepar[ing] and ‘circulat[ing]’ a thorough outline ‘to all Counsel in the [local] office, with an eye toward scheduling a meeting of those Counsel in order to conference this matter.’”

The attorney “advised [the insurer] that he did not believe that a potential bad faith claim against [the insurer] resulting from its handling of settlement in the underlying … Litigation would be successful.” Later, the attorney “further advised that ‘[o]ur prior opinion has not changed,’ and recommended ‘that [the insurer] and its Counsel should not make any Offer beyond the $25,000, and should not make inquiry as to whether a sum of money above the policy limit of $25,000 would successfully resolve the third party action and also Release any bad faith claim.’” Ultimately, a permissive user of the automobile insured by the insurer “stipulated to his sole liability … and the jury returned a verdict on damages that were later remitted to $960,000.” He “then assigned his rights against [the insurer] to [the underlying plaintiff], who agreed not to execute the judgment … and instead prosecuted his claims against [the insurer] for bad faith.” That “matter was ultimately settled for $2 million.” The insurer later commenced this action “for breach of their agreement to provide legal advice to [the insurer] in connection with [the insurer’s] potential bad faith exposure predicated on its claims handling and settlement position in the [underlying] Litigation.”

The issue before the court was whether the insurer’s claim sounded in tort or contract, as the two-year tort statute of limitations would bar the claim. The insurer plaintiffs  raised “one cause of action against defendants for breach of contract basically alleging that defendants ‘breached their duty to exercise the degree of skill and knowledge that is ordinarily expected of a reasonable attorney by providing … legal advice that was so misleading that it precluded [the insurer] from making an informed judgment about whether to offer a sum in excess of its policy limits, or, to accept the opportunity to settle the [underlying] claim for $200,000’ and ‘by failing to provide [the insurer] with a complete and correct analysis of the law governing insurance bad faith claims in the Commonwealth of Pennsylvania.’” Further, the plaintiffs asserted: “’Due to the alleged deviations from the standard of care of a reasonable attorney by defendants, plaintiffs allege that they were caused substantial harm in the form of an unfavorable settlement with [the underlying plaintiff].’”

In a lengthy analysis applying the Pennsylvania’s Supreme Court’s 2014 ruling on the gist of the action doctrine in Bruno v. Erie Insurance Company and other case law on the tort vs. contract posture of professional malpractice claims, in light of the pleadings as made, the court concluded that the insurers’ claims sounded in neglience, and were thus time-barred. The court found that “’because plaintiffs do not allege a specific instruction or agreement that defendants supposedly breached, but instead allege that defendants ‘deviated from the standard of care of a reasonable attorney’ [emphasis added in original], their claims sound in tort and so are time-barred.’” In addition, the court observed that “as defendants correctly indicate, plaintiffs filed a [Certificate of Merit] in this case ‘further showing that the basis of their claim is deviation from a professional standard of care, and not breach of a contractual duty.’”

Thus, the case was dismissed with prejudice.

Date of Decision:  January 30, 2015

N.Y. Cent. Mut. Ins. Co. v. Edelstein, NO. 3:14-0829, 2015 U.S. Dist. LEXIS 10817 (M.D. Pa. January 30, 2015) (Mannion, J.)