Monday, February 25, 2008

Settlement Term Not Binding On Insurer

A lawyer who was sued for legal malpractice arising out of his failure to observe the statute of limitations was defended by his insurer but also retained seperate counsel. He filed a third-party bad faith claim against the insurer that was stayed pending the outcome of the malpractice case. During settlement negotiations in the malpractice action, the insurer agreed to pay policy limits of $500,000. There was a further agreement that the lawyer would confess judgment of $1.5 million but that the plaintiffs would agree not to execute on the confessed judgment in exchange for 1/3 of any recovery in the bad faith claim. The insurer declined to agree to that aspect of the settlement as well as a waiver of attorney-client privilege; the insurer paid the policy limits.

The plaintiffs sought to compel the full term of the settlement agreement against the insurer, who was not allowed to participate in the hearing on the motion. The court entered an order granting the motion but recognizing the insurer's right to object to the admissibility of the confessed judgment. On appeal, the West Virginia Supreme Court of Appeals held that the insurer "was not permitted to participate in the settlement enforcement action and thus cannot be deemed to have had a full and fair opportunity to litigate the issue." The consent judgment is not binding on the insurer. Further, the waiver of privilege is not effective against the insurer. The matter was remanded on the issue of attorney fees.

There is a concurring opinion pointing out that the remand "as moulded" makes no determination  with respect to the reasonableness of the fees. (Mike Frisch)

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