Bohna v. Hughes, Thorsness, Gantz, Powell & Brundin

• Decision Date: 27 March 1992
• Docket Number: No. 3824,3824
• Parties: Phillip BOHNA, Appellant, v. HUGHES, THORSNESS, GANTZ, POWELL & BRUNDIN, and Allstate Insurance Company, Appellees. ALLSTATE INSURANCE COMPANY, Cross-Appellant, v. Phillip BOHNA, and Hughes Thorsness, Gantz, Powell & Brundin, Cross-Appellees. HUGHES, THORSNESS, GANTZ, POWELL & BRUNDIN, Cross-Appellant, v. Phillip BOHNA, and Allstate Insurance Company, Cross-Appellees.
• Court: Alaska Supreme Court

Page 745

828 P.2d 745

Phillip BOHNA, Appellant, v. HUGHES, THORSNESS, GANTZ, POWELL & BRUNDIN, and Allstate

Insurance Company, Appellees.

ALLSTATE INSURANCE COMPANY, Cross-Appellant, v. Phillip BOHNA, and Hughes Thorsness, Gantz, Powell &

Brundin, Cross-Appellees.

HUGHES, THORSNESS, GANTZ, POWELL & BRUNDIN, Cross-Appellant, v. Phillip BOHNA, and Allstate Insurance Company, Cross-Appellees.

No. 3824.

Supreme Court of Alaska.

March 27, 1992.

Mark A. Sandberg, Sandberg & Smith, and J. Douglas Burke, Law Offices of J. Douglas Burke, Anchorage, for appellant and cross-appellee Bohna.

Ronald L. Bliss, Jean E. Kizer, Bradbury, Bliss & Riordan, Anchorage, for appellee and cross-appellant Allstate.

Stephen S. DeLisio, Staley, DeLisio, Cook & Sherry, Inc., Anchorage, for appellee and cross-appellant Hughes Thorsness.

Before RABINOWITZ, C.J., and MATTHEWS, COMPTON and MOORE, JJ.

OPINION

MATTHEWS, Justice.

INTRODUCTION

These appeals arise from judgments in an attorney malpractice case and a related indemnity claim. The jury returned a verdict setting damages suffered by plaintiff Phillip Bohna and assigning fault among 1) Allstate Insurance Company (Allstate), 2) Hughes, Thorsness, Gantz, Powell & Brundin (HT), and 3) Bohna himself. The superior court entered two judgments on the verdict. The principal judgment was in favor of Bohna and against HT. The other judgment was on Allstate's cross-claim for indemnity and was in favor of HT and against Allstate.

The basis of the malpractice claim was HT's handling of Bohna's defense after Bohna was involved in an automobile collision which resulted in catastrophic injuries to the other driver. The crux of Bohna's complaint is that in order to save money for Allstate, HT pursued a strategy of making offers of judgment in excess of policy limits under Alaska Civil Rule 68 instead of settling the case within insurance policy limits. This strategy, approved by Allstate and agreed to by Bohna, caused Bohna to incur a large uninsured judgment.

Bohna sued both Allstate and HT. Before trial, Allstate settled with Bohna for $1 million. They also entered into a "loan receipt agreement" under which Allstate loaned Bohna $3 million, which would be repayable out of (and to the extent of) any recovery Bohna might obtain in his suit against HT. After the settlement, Allstate cross-claimed against HT for indemnity.

The jury returned a verdict of approximately $6 million for Bohna. Based on its interpretation of the law and the agreements between Bohna and Allstate, the trial court reduced the verdict by the $1 million settlement and part of the $3 million loan. The court also deducted 15% for Bohna's negligence and failure to mitigate damages, as found by the jury. Finally, in accord with a pretrial ruling that comparative indemnity principles do not apply in Alaska, the court entered judgment in HT's favor on Allstate's cross-claim because the jury also found Allstate partially at fault.

On appeal the parties dispute the validity of the loan receipt agreement and to what extent--if any--it should result in a setoff. Also disputed are the alleged assignment of Bohna's malpractice claim, the propriety of the jury's consideration of the issues of Bohna's failure to mitigate damages and contributory negligence, the sufficiency of the evidence relating to an attorney's standard of care, the court's allocation of peremptory challenges, the exclusion of certain evidence, various jury instructions, and the award of costs and attorney's fees. With regard to Allstate's failed indemnity claim, the issues are whether the trial court erred by ruling that Allstate had to be found fault-free to recover, denying Allstate's motion to amend its cross-claim, and refusing to allow the jury to decide if Allstate breached its covenant of good faith and fair dealing.

For the reasons set forth below, the Bohna judgment is reversed and remanded with direction to enter an amended judgment in Bohna's favor. The HT judgment is affirmed.

FACTS AND PROCEEDINGS

The Underlying Case

In 1981 Phillip Bohna was involved in a collision which left the driver of the other car, Anthony Stevens, brain damaged and quadriplegic. During the course of the ensuing litigation, it became clear that the liability picture did not look good for Bohna. ¹

Only seventeen at the time of the accident, Bohna had no significant assets of his own. However, he was covered by his father's automobile liability insurance policy with Allstate. That policy provided for $50,000 bodily injury liability coverage plus unlimited coverage for prevailing party's attorney's fees under Alaska Civil Rule 82.

We note, in order to set the context of this case, that under Civil Rule 82 attorney's fees are awarded to the prevailing party as a matter of course. Civil Rule 82 establishes a fee schedule based on the size of the judgment and the extent to which the suit was contested before entry of judgment. ² In cases of catastrophic injury and low bodily injury insurance limits, it is not unusual for insurance companies to be liable for more in court awarded attorney's fees than for the bodily injury limits. Thus if there is a $3 million verdict, an insurance company, with coverage such as that provided by Allstate in this case, would generally be liable to pay $50,000 for bodily injury liability coverage, plus approximately $300,000 as court awarded attorney's fee coverage. ³ E.g., Schultz v. Travelers Indem. Co., 754 P.2d 265, 266 n. 1 (Alaska 1988) (attorney's fees of approximately $359,000 awarded for the death of one passenger against an insurance company which had bodily injury limits of $100,000 per passenger); McDonough v. Lee, 420 P.2d 459, 465 n. 22 (Alaska 1966) (collectability of the entire judgment not relevant to an award of attorney's fees under Civil Rule 82); Liberty National Ins. Co. v. Eberhart, 398 P.2d 997 (Alaska 1965) (insurance company's liability for attorney's fees not limited to pro-rata share based on ratio of judgment to policy limits). The total policy limits in this example would therefore be approximately $350,000. Id.

The dispute between Bohna and Stevens ultimately came down to the question of how much was available under the policy's unlimited coverage for attorney's fees. Stevens hired attorney Ray Nesbett to represent him. Nesbett and an Allstate claims manager discussed a possible settlement, but they could not come to terms. ⁴ Stevens sued Bohna on August 16, 1983. Allstate retained James Powell, a partner at HT, to defend Bohna.

Powell offered Nesbett $50,000 for Stevens' bodily injury. However, Nesbett and Powell disagreed on the proper size of the Civil Rule 82 attorney's fee for which Allstate was liable under the policy. Nesbett valued the case at between $3 and $10 million and insisted that attorney's fees would be 10% of that amount under Civil Rule 82. Powell believed that the value of the case was lower and that Civil Rule 82 fees would be lower than 10% unless there was a trial. ⁵ Because Nesbett did not believe that Powell's offer included all money available under the Allstate policy, it was rejected.

In late 1983, Powell proposed that Bohna make offers of judgment under Civil Rule 68 that exceeded policy limits. ⁶ Bohna was told that he could consult with independent counsel at Allstate's expense, and that Allstate would pay Bohna's attorney's fees and costs relating to his bankruptcy proceeding if he agreed and an offer was accepted. After consulting with attorney Hugh Wade, Bohna agreed to a $500,000 offer of judgment. Allstate made such an offer ⁷, but Nesbett rejected it. Powell next suggested increasing the offer to $1 million to put more pressure on Nesbett to settle. Powell again advised Bohna of his right to consult with independent counsel at Allstate's expense, but Bohna indicated that, if he went into bankruptcy, it did not matter by how much. Bohna, therefore, never went back to consult with Wade on excess offers of judgment. He agreed to the $1 million offer of judgment. Nesbett refused the offer. After the $1 million offer of judgment was refused, Powell filed an answer on Bohna's behalf, thus formally contesting Stevens' claim. Under the Civil Rule 82 fee schedule, this raised the awardable attorney's fees on offers of judgment. ⁸ Thus, offers of judgment apparently became less attractive to Allstate, and Allstate made no more offers for the next two years. Instead, normal discovery took place.

In September 1986, Nesbett offered to settle for $350,000. This offer remained open for fifteen days. On September 15, a new Civil Rule 82 schedule took effect, lowering the maximum applicable percentage for fees "without trial" from 7.5% to 2%. ⁹ Powell believed that the new schedule applied, and he believed that $350,000 was in excess of policy limits. Allstate did not accept Nesbett's offer. At this point Powell considered the verdict value of the case to be between $3 and $6 million, with $3 million being most likely. Powell suggested that Bohna make a $2 million offer of judgment. Allstate agreed, and Bohna signed a form authorizing up to a $3 million offer of judgment. The $2 million offer of judgment, like the others, was rejected by Nesbett.

Finally, in October 1986, Powell proposed a $3 million offer of judgment, which was agreed to by Allstate. At this point, Nesbett felt that it was possible that Stevens might obtain a less favorable judgment if he went to trial. If this were to happen, not only would Stevens be ineligible to recover his attorney's fees incurred after the offer was made, but he also would be responsible for such fees to HT. ¹⁰ Nesbett therefore accepted this offer, and on October 30, 1986, judgment was entered against Bohna (the Stevens judgment). With prejudgment interest, it amounted to over $4.6 million. ¹¹

In October 1987, Bohna began bankruptcy proceedings. Nesbett then informed Bohna's bankruptcy attorney, William Pace, that the Stevens judgment might...