Insurance Carrier Allowed to Sue Attorney For Failing to Disclose Settlement Demand

February 19th, 2018 By Tara Mireur

In a ruling likely to give insurance attorneys heartburn, the United States District Court for the Eastern District of Texas, Marshall Division denied an attorney’s motion to dismiss a lawsuit against it by an excess insurance carrier complaining it was misled about settlement. Ironshore Europe DAC v. Schiff Hardin, LLP, 2018 WL 338604 (E.D. Tex. Jan. 9, 2018).

The Schiff Hardin firm was representing Ironshore’s insured Dorel Juvenile Group, Inc. in a lawsuit filed by the Hinsons, who were parents of a minor child who was injured in a car accident involving a product manufactured by Dorel. While the opinion does not specify, it appears that Ironshore was excess over a $6 million self-insured retention.  Ironshore did not assume the defense of Dorel but regularly communicated with Schiff. Ironshore was particularly concerned that the Hinson case could result in an award or settlement in excess of $6 million and would thus implicate its insurance policy with Dorel. Ironshore alleged that during the pendency of the Hinson case, Schiff made numerous misrepresentations and withheld critical information about developments of the lawsuit, including the latest settlement offers.  Ironshore argued that it was not given an accurate picture of the Hinson case, thus it did not associate in the defense of the lawsuit. After the Hinson jury awarded $34 million, Ironshore brought suit against Schiff alleging negligent misrepresentation.

The court granted in part and denied in part Schiff’s motion to dismiss the claim. The court rejected Schiff’s claim that since the alleged misrepresentations were made while Schiff was representing Dorel, the claim was barred by the doctrine of attorney immunity. The court acknowledged the general rule that “attorneys are immune from civil liability to nonclients for actions taken in connection with representing a client in litigation.” Id. at *2 (citing Cantey Hanger, LLP v. Byrd, 467 S.W.3d 477, 481 (Tex. 2015)). However, the court observed that Texas law also recognizes that an attorney may be liable for negligent misrepresentation under Section 552 of the Restatement of Torts when a third party, even a nonclient, justifiably relies on the attorney’s misrepresentation. Id. at *3 (citing McCamish, Martin Brown & Loeffler v. F.E. Appling Interests, 991 S.W.2d 787, 792-794 (Tex. 1999)). This potential liability is based on an independent duty to the nonclient which arises based on the attorney’s “manifest awareness of the nonclient’s reliance on the misrepresentation and the professional’s intention that the nonclient so rely.”   Id. at *4.   The court recognized that there was a tension between the holdings in Cantey Hanger and McCamish, but declined to make an Erie-guess that McCamish was no longer good law. I

The Court then considered whether Schiff’s statements or omissions constituted actionable misrepresentation. Many of the claimed misrepresentations were about settlement value and the way the trial went:

  • “Schiff’s reporting negligently and falsely misrepresented the facts of the Lawsuit, its settlement value, and the exposure it presented to Ironshore’s Policy.”
  • “Schiff falsely represented that the early trial date did not prejudice their preparations.”
  • Schiff reported that the first day of trial “went pretty well,” the second day “was fine,” and the third day “went well.”

Noting the inherent unreliability of predicting jury verdicts, the court held that communications regarding predictions about the future do not fall within the scope of a negligent misrepresentation claim. Id. at *5.  Similarly, Schiff’s subjective, general opinions as to how the trial was proceeding on a particular day were puffery and not affirmative misrepresentations. Id.

However, the court held that Schiff’s failure to report certain settlement offers did present potential liability. The court distinguished cases holding that negligent misrepresentation claims cannot be based on omissions because in this case Ironshore alleged that the statements made by Schiff were “either misleading when made or became misleading based on a failure to disclose subsequent developments.” Id. at *8. For example, Ironshore claimed that “Schiff falsely represented that the last offer of settlement from Plaintiffs was $6.5 million. Schiff failed to disclose . . . that Plaintiffs actually offered to settle for $3.25 million.” Id.  Having made the initial representation regarding the settlement demand, Schiff had an affirmative duty to disclose “new information that made the earlier representation misleading or untrue.” Id.

Take-aways:  The court’s partial denial of Defendant Schiff’s motion to dismiss serves as a reminder of the importance of accurate and complete reporting to litigation stakeholders, including excess carriers.