September 1, 2010
Full Disclosure --
our firm represents the insured in both the case discussed below and the malpractice action discussed within that case
On August 31, 2010, the 7th Circuit held that a liability insurer that does not control the defense of the suit against its insured is not obliged to pay for attorney's fees associated with bad advice offered by the insured's counsel, even if the insurer could have have told the insured that its law firm was making a dumb legal argument in
Hayes Lemmerz Intern'l, Inc. v. ACE Am. Ins. Co., 619 F.3d 777 (7th Cir. 2010), Case No. 10-1073.
less..
In this case, an insurance company had issued a workers' compensation and employer liability policy to Hayes Lemmerz International ("HLI") and to its subsidiaries. Workers were injured at a plant owned by HLI's subsidiary and a tort suit was brought against both the parent and subsidiary corporations. The complaint did not identify either company as the employer of the injured workers. The plaintiffs had already filed a workers' compensation claim, naming both parent and subsidiary as the employers of the accident victims, and had received workers' compensation benefits. The Court described what happened next as follows:
HLI and Huntington knew of course that Huntington was the employer of the accident victims and that HLI, the parent corporation, was not. But the lawyer handling the tort suit for the two companies seems not to have known (maybe the plaintiffs didn’t know either) that in 2001 Indiana, reacting negatively to a decision by the Indiana Supreme Court confirming the understanding of affiliate liability set forth above, McQuade v. Draw Tite, Inc., 659 N.E.2d 1016, 1020 (Ind. 1995), had amended its workers’ compensation law to provide that "a parent corporation and its subsidiaries shall each be considered [for purposes of workers' compensation law] joint employers of the corporation's, the parent's, or the subsidiaries' employees." Ind. Code § 22-3-6-1(a). Hence HLI was insulated from tort liability to the victims of the explosion: by virtue of being deemed a joint employer, its liability to them was governed exclusively by workers' compensation law even if in other states it could have been sued as a tortfeasor had it contributed to the injuries to its affiliate’s employees.
HLI notified its carrier of the lawsuit, but ACE elected not to take control of HLI's defense and only agreed to pay for half of the defense.
HLI filed a dec action against the insurer and the district court granted the insurer's motion to dismiss under Rule 12(b)(6). HLI appealed that judgment.
On appeal, HLI argued that because it was an employer, ACE was obliged by the terms of the insurance policy to defend it either directly or by reimbursing its defense costs. The Court agreed, holding that it was readily ascertainable fact to ACE that HLI was an employer by virtue of the 2001 amendment to Indiana's workers' compensation law, given ACE's knowledge of the underlying facts. Nevertheless, the Court held that ACE should not be forced to bear the costs of any mistaken legal advice offered by HLI's counsel.
HLI admits it made a dreadful mistake in denying in the tort suit that it was an employer. It blames its law firm for the mistake, and has sued the firm for malpractice. We cannot understand why any part of the costs of that mistake should be shifted to ACE. HLI did not ask ACE to handle its defense against the tort suit, but only for reimbursement of its legal expenses. The duty of reimbursement is limited to reasonable expenses, as otherwise the insured
would have no incentive to economize; and HLI's expenses were unreasonable — that indeed is the premise of its malpractice suit. ... [A] liability insurer that does not control the defense of the suit against its insured is not obliged to give advice to the insured on legal strategy. ... ACE had no duty to provide its insured's lawyers with legal advice.
Thus, in this case the Court squarely placed the risk of receiving bad legal advice on the entity controlling the defense. If that entity is the insurer, then the insurer may have to bear those costs. However, if that entity is the insured, then the insurer will not have to bear those costs. Therefore, counsel will want to take this into account when advising their clients on the wisdom of controlling their own defense, rather than encouraging the insurer to do so.
Lessons:
- Insurers will not need to pay the costs of defense associated with malpractice committed by defense counsel if the insurer does not control the defense.
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