Mitchum v. Hudgens

• Decision Date: 23 September 1988
• Parties: Dr. O.D. MITCHUM v. A. Neil HUDGENS. A. Neil HUDGENS v. Dr. O.D. MITCHUM. 86-1466, 86-1467.
• Court: Alabama Supreme Court

Page 194

533 So.2d 194

57 USLW 2374

Dr. O.D. MITCHUM v. A. Neil HUDGENS.

A. Neil HUDGENS v. Dr. O.D. MITCHUM.

86-1466, 86-1467.

Supreme Court of Alabama.

Sept. 23, 1988.

George L. Beck, Jr., Montgomery, for appellant/cross-appellee.

W. Boyd Reeves and Norman E. Waldrop, Jr. of Armbrecht, Jackson, DeMouy, Crowe, Holmes & Reeves, Mobile, for appellee/cross-appellant.

TORBERT, Chief Justice.

These appeals are from interlocutory orders. We granted permission to appeal pursuant to A.R.App.P. 5(a) because the case turns solely on questions of law. They arise out of a legal malpractice action filed by Dr. O.D. Mitchum against A. Neil Hudgens, the attorney hired by Dr. Mitchum's liability insurance carrier to defend him in a medical malpractice action. The defendant attorney appeals from the denial of his motion for summary judgment. Dr. Mitchum appeals from the denial of his motion to strike and for a protective order. We will first address the trial court's denial of the defendant's motion for summary judgment.

The instant lawsuit is an outgrowth of a medical malpractice action filed in a federal court against Dr. Mitchum by Jay and Carol Scott, the parents of a baby boy that Dr. Mitchum had delivered. The baby was born with numerous birth defects, and the Scotts claimed that the defects were caused by negligent acts and omissions of Dr. Mitchum.

At the time of Dr. Mitchum's care and treatment of Mrs. Scott and the baby, Jeffrey Scott, Dr. Mitchum was covered by a Dr. Mitchum subsequently filed the present lawsuit against several defendants, including Hudgens and St. Paul. The complaint contains four counts and alleges that Hudgens committed such acts of fraud and negligence during his representation of Mitchum in the Scott case that Mitchum was caused to lose his liability insurance coverage from St. Paul and to lose his ability to obtain medical malpractice insurance for his obstetrical practice from another insurer. ¹ Mitchum further alleged that he had suffered damage to his professional reputation and had lost business as a result of not being able to provide obstetrical services. The main contention of Mitchum's complaint against Hudgens is that the settlement of the Scott case was made without his permission or consent and that the settlement of the case, instead of a possible vindication at trial, has damaged him professionally.

professional liability insurance policy issued by St. Paul Fire and Marine Insurance Company (hereinafter "St. Paul"). In accordance with the terms of the policy, St. Paul defended Dr. Mitchum and hired the defendant, attorney A. Neil Hudgens, to represent Dr. Mitchum in the Scott case. Just prior to the Scott case going to trial, a settlement agreement was reached wherein St. Paul agreed to pay the Scotts $500,000, which was well within the primary policy's limits.

I.

Hudgens moved for summary judgment, which was denied by the trial court. We allowed an interlocutory appeal from the denial, in order to address a controlling question of first impression. Hudgens argues, at he did in the trial court, that, as the attorney hired by St. Paul to represent Mitchum, he owed no duty to Mitchum regarding settlement of the Scott case, because, he argues, under the terms of the contract of insurance between Mitchum and St. Paul, Mitchum's permission or consent was not required for a settlement of any claims brought against him. Hudgens concludes therefore, that nothing he did or did not do could have proximately caused any damage to Mitchum. Dr. Mitchum argues that an attorney has no authority to settle a case on behalf of his client without that client's express consent and that the duty an attorney owes to his client with respect to settlement of a client's case is separate and distinct from any rights or obligations that arise under contract between an insured and his liability insurance carrier. Mitchum also denies that the terms of the policy gave St. Paul the express authority to settle a lawsuit without his consent.

Mitchum's liability insurance policy with St. Paul provided:

"We'll defend any suit brought against you for damages covered under this agreement. We'll do this even if the suit is groundless or fraudulent. We have the right to investigate, negotiate and settle any suit or claim if we think that's appropriate." (Emphasis added.)

We agree with Hudgens that under this policy provision, St. Paul had the exclusive right to make a settlement of any claim brought against its insured, within the limits of the policy. Most courts construing identical or similar policy provisions have reached the same conclusion. As stated in 7C J. Appleman, Insurance Law and Practice, § 4711 (3d ed.1983):

"It was early stated that an insurer has the right to make a compromise or settlement of any claims against the insured, and that it is not bound to consult the interests of the insured to its own prejudice. The law favors settlement without recourse to litigation.

"Liability insurance contracts have been held to give the insurer the absolute authority to settle claims within the policy limits, and the insured has no power either to compel the insurer to make such settlements, or to prevent it from doing so."

(Emphasis added.) Hence, Dr. Mitchum's consent was not required before his insurer, St. Paul, could settle the malpractice Contrary to Dr. Mitchum's position, we do not believe that the quoted policy provision has been taken out of context, nor do we believe that the construction we have placed on it defeats the intention of the parties. That provision is clear and unambiguous and is contained in every standard liability insurance policy. See, 1 R. Long, The Law of Liability Insurance, § 5.02 (1981). Having determined that such a policy provision grants the insurer the exclusive right to settle any claim against its insured without the insured's consent, we must next determine what effect this determination has on the attorney-client relationship within the context of the present case.

                claim brought against him by the Scotts.  See, United States Fidelity & Guaranty Co. v. Sanders Drilling & Workover Co., 396 So.2d 1353 (La.Ct.App.1981) (by terms of liability policy, consent of insured not required prior to making settlement of claim);  Travelers Ins. Co. v. Hitchner, 61 N.J.Super. 283, 160 A.2d 521 (1960) (insurer may at its option settle claims against insured for loss or injury covered by policy without any interference on the part of the insured).  See also, Casualty Ins. Co. v. Town & Country Pre-School Nursery, Inc., 147 Ill.App.3d 567, 101 Ill.Dec. 669, 498 N.E.2d 1177 (1986).  This is not to say, however, that the insurer is entitled to exercise this right arbitrarily.  "The right given by contract still requires that the insurer make an investigation, consider the desires or instructions of the insured and that the settlement not be made in bad faith."   7C J. Appleman, Insurance Law and Practice, § 4711 (3d ed.1983).  As stated in Waters v. American Cas. Co. of Reading, Pa., 261 Ala. 252, 260-61, 73 So.2d 524, 531 (1953), "[T]he contract of insurance gives the insurer the exclusive right to make a settlement of the claim against [the] insured.  That right imposes a corresponding duty raised by law to observe ordinary diligence in performing that power when in exercise of it."
                

The defendant attorney maintains that, based on this court's prior decision in Waters, supra, he owed no duty to Dr. Mitchum with regard to settlement of the Scott case. He also argues that the policy provision granting the insurer the exclusive right to settle any claim against its insured is a complete bar to Dr. Mitchum's cause of action. Dr. Mitchum's position is that, regardless of the terms of his insurance contract with St. Paul, defendant Hudgens, as his attorney, was under a duty not to settle the Scott case without his express permission to do so.

Waters v. American Cas. Co. of Reading, Pa., 261 Ala. 252, 73 So.2d 524 (1953), involved an action by an insured against his liability insurer for the insurer's alleged negligent failure or bad faith refusal to settle claims against the insured within policy limits. On rehearing, the Court stated:

"We have been urged to extend the opinion in this cause as to the application of the rules of negligence and bad faith and as to the effect of the opinion upon the liability of attorneys representing the insured upon appointment by the insurer. We first consider negligence and bad faith in cases of this nature.

"There is a field of operation for both aspects of liability: that is, negligence in one, and bad faith in the other. We cannot set aside the principle of liability for negligently performing a contract as set forth in the opinion supra. It may arise when an insurer is engaged in performing his contractual duty owing to the insured to defend the suit. The law raises a duty not contractual, but by reason of the contract, to exercise ordinary diligence in doing so. A failure to exercise ordinary diligence proximately causing damage to the insured is actionable in tort. The contract of insurance gives the insurer the exclusive right to make a settlement of the claim against [the] insured. That right imposes a corresponding duty raised by law to observe ordinary diligence in performing that power, when in the exercise of it. So that, when an opportunity is presented to the insurer to make a settlement of the claim in an amount not more than the limit of liability, the law raises a duty on his part to use ordinary care to ascertain the facts on which its performance depends if he has not already done so. If "If the insurer has already made the investigation and ascertained the facts, to which we have referred supra, and refuses to make such proffered settlement, if such refusal is due to the honest judgment of [the] insurer that the facts do not warrant such a settlement, and the insurer was not negligent in the manner of defending the...