Unigard Ins. Group v. O'Flaherty & Belgum

• Decision Date: 29 September 1995
• Docket Number: No. B074284,B074284
• Citation: 38 Cal.App.4th 1229,45 Cal.Rptr.2d 565
• Court: California Court of Appeals Court of Appeals
• Parties: , 95 Cal. Daily Op. Serv. 7744, 95 Daily Journal D.A.R. 13,200 UNIGARD INSURANCE GROUP, Plaintiff and Appellant, v. O'FLAHERTY & BELGUM, et al., Defendants and Respondents.

Page 565

45 Cal.Rptr.2d 565

38 Cal.App.4th 1229, 95 Cal. Daily Op. Serv. 7744,

95 Daily Journal D.A.R. 13,200

UNIGARD INSURANCE GROUP, Plaintiff and Appellant, v. O'FLAHERTY & BELGUM, et al., Defendants and Respondents.

No. B074284.

Court of Appeal, Second District, Division 3, California.

Sept. 29, 1995.

Rehearing Denied Oct. 26, 1995.

Review Denied Jan. 4, 1996.

Engstrom, Lipscomb & Lack, Walter J. Lack and Gary A. Praglin, Wayne S. Kreger, Los Angeles, for plaintiff and appellant

Bennett & Kistner and Charles J. Bennett, Long Beach, Greines, Martin, Stein & Richland, Irving H. Greines, Robert A. Olson and Cynthia N. Sarno, Beverly Hills, for defendants and respondents.

CROSKEY, Associate Justice.

This appeal is from a judgment in favor of defendants following the grant of their motion for nonsuit in a legal malpractice action. We conclude that in granting a nonsuit, the trial court erroneously ruled as a matter of law on an issue which, under the circumstances of this case, is one of fact: whether defendants breached the professional standard of care by adequately and timely alleging the affirmative defenses of exclusivity of workers' compensation and Witt v. Jackson. We also conclude that under the circumstances of this case, the insurer may bring a legal malpractice action against the attorneys hired by the insurer to defend its insured. We therefore reverse the judgment.

FACTUAL AND PROCEDURAL BACKGROUND ¹

1. The Underlying Lawsuit: Hunn v. The Wilkinson Company

On August 8, 1985, Gary Hunn filed a complaint for damages for personal injury against The Wilkinson Company ("Wilkinson"), Apple One Service, Ltd. ("Apple One"), and American Labor Core ("ALC"). The complaint alleged that Hunn sustained injuries during his employment while operating a rolling mill machine at Wilkinson's premises.

Unigard Insurance Group ("Unigard") had issued a liability insurance policy to Wilkinson. Pursuant to the policy, Unigard agreed to defend and indemnify Wilkinson in the Hunn lawsuit and hired O'Flaherty, Prestholt & Bennington to represent Wilkinson as attorneys. ²

On October 23, 1987, the O'Flaherty law firm filed an answer to the Hunn complaint on behalf of Wilkinson. The answer contained a general denial and seven affirmative defenses; the parties to this appeal agree that the answer did not allege an affirmative defense based on the exclusive remedy of the Workers' Compensation Act or mention the setoff provision in Witt v. Jackson (1961) 57 Cal.2d 57, 17 Cal.Rptr. 369, 366 P.2d 641.

Both ALC and Apple One filed cross-complaints. On April 7, 1988, the O'Flaherty law firm filed Wilkinson's answer to ALC's cross-complaint. Besides a general denial, that answer stated, as a separate and affirmative defense: "[I]f, at time of trial, the court or jury determines that there was some degree of responsibility on the part of The Wilkinson Company and that The Wilkinson's [sic] Company's conduct was a proximate cause of the plaintiff's or ALC's alleged damages, The Wilkinson Company alleges and contends that plaintiff's injuries and damages, if any, were proximately caused by the concurrent negligence of American Labor Core, Inc., and/or co-defendants and/or other as yet unknown persons or entities and that this answering cross-defendant's liability, if any, is limited to the extent of its proportionate responsibility."

On August 3, 1988, the O'Flaherty law firm filed Wilkinson's answer to Apple One's cross-complaint, which contained the same separate and affirmative defense quoted above. This answer also contained the defense of the worker's compensation setoff in Witt v. Jackson.

In August 1989, Unigard terminated the O'Flaherty firm and hired a new law firm to represent Wilkinson. On September 11,

1989, the law firm of Ramsey, Prestholt & Holmberg ("the Prestholt law firm") substituted for the O'Flaherty law firm. The Prestholt law firm sought leave to amend the answer to assert the omitted affirmative defenses, but the trial court denied this motion. On behalf of Wilkinson, Unigard paid the limits of policy coverage, $500,000 to Hunn on May 17, 1990, to avoid the risk of a larger jury verdict.

2. The Unigard v. O'Flaherty & Belgum Litigation

Unigard filed a complaint for damages for negligence against the defendants O'Flaherty law firm and Michael A. O'Flaherty. The complaint alleged that Unigard issued a liability insurance policy to Wilkinson, which had employed Hunn, who was injured while operating a rolling mill machine owned and maintained by Wilkinson. Hunn sued Wilkinson, which Unigard agreed to defend and indemnify pursuant to the insurance policy. Unigard hired the O'Flaherty law firm to represent Wilkinson. Unigard's complaint alleged that the O'Flaherty law firm breached its standard of reasonable care and skill as attorneys by failing to file an answer to Hunn's complaint which raised all affirmative defenses. Specifically, the O'Flaherty law firm failed to assert that Hunn's exclusive remedy against Wilkinson was under the Workers' Compensation Act and related affirmative defenses based on California Labor Code sections 3601 et seq.

As a result of the failure of the O'Flaherty law firm to assert these affirmative defenses and to represent Wilkinson properly, Unigard had to hire new counsel for Wilkinson in 1989. The court denied the new law firm's attempt to amend the answer to assert the omitted affirmative defenses, which exposed Unigard and Wilkinson to the risk of a substantial jury verdict. The complaint alleged that defendants' negligence forced Unigard to pay the $500,000 limit on policy coverage to Hunn to avoid the risk of a larger jury verdict at trial, plus attorney fees. Unigard twice moved for summary judgment, but the court denied both motions.

Before trial began on February 4, 1993, the O'Flaherty law firm moved for nonsuit. The court ruled that with regard to the pleadings, Wilkinson's answer in the underlying Hunn case was sufficient to put in issue any defenses under the Workers' Compensation Act. However, ruling that this was an issue of law for the court and not an issue of fact for the jury, the court dismissed the case. A judgment in favor of the O'Flaherty law firm was filed on February 16, 1993. Unigard filed this timely appeal.

ISSUES

Unigard contends that: (1) it had an attorney-client relationship with the O'Flaherty law firm and thus has standing to bring this malpractice action, (2) malpractice is a question of fact for the jury, and thus the court erroneously granted the motion for nonsuit and (3) proof of legal malpractice may require expert testimony; therefore, the court's grant of the motion for nonsuit was premature and erroneous.

DISCUSSION

1. Standard of Review

A defendant is entitled to a nonsuit if the trial court determines that, as a matter of law, plaintiff's evidence does not permit a jury to find in plaintiff's favor. In determining whether plaintiff's evidence is sufficient, the court may not weigh the evidence or consider witnesses' credibility. Instead, the court must accept as true the evidence most favorable to plaintiff and must disregard conflicting evidence. The court must give to the plaintiff's evidence all the value to which it is legally entitled, indulging every legitimate inference that may be drawn from the evidence in plaintiff's favor. A mere "scintilla of evidence" does not create a conflict for the jury's resolution; there must be substantial evidence to create the necessary conflict. (Nally v. Grace Community Church (1988) 47 Cal.3d 278, 291, 253 Cal.Rptr. 97, 763 P.2d 948, citing Campbell v. General Motors Corp. (1982) 32 Cal.3d 112, 118, 184 Cal.Rptr. 891, 649 P.2d 224.)

In reviewing a grant of nonsuit, this court follows the same rule requiring evaluation of the evidence in the light most favorable

to the plaintiff. This court will not sustain the judgment unless, interpreting the evidence most favorably to plaintiff's case and most strongly against the defendant and resolving all presumptions, inferences, and doubts in favor of the plaintiff, a judgment for defendant is required as a matter of law. (Nally v. Grace Community Church, supra, 47 Cal.3d at p. 291, 253 Cal.Rptr. 97, 763 P.2d 948.)

2. The O'Flaherty Law Firm Owed An Independent Duty of Care to Unigard

We must first address the threshold issue of whether an insurer can bring a legal malpractice action against counsel hired by the insurer to represent an insured. We conclude that when, pursuant to insurance policy obligations, an insurer hires and compensates counsel to defend an insured, provided that the interests of the insurer and insured are not in conflict, the retained attorney owes a duty of care to the insurer which will support its independent right to bring a legal malpractice action against the attorney for negligent acts committed in the representation of the insured.

In Fireman's Fund Insurance Co. v. McDonald, Hecht & Solberg (1994) 30 Cal.App.4th 1373, 36 Cal.Rptr.2d 424, the court rejected equitable subrogation as a basis for such an insurer's legal malpractice action. However, Unigard does not rely on that doctrine. Unigard claims an independent right to assert a malpractice claim against the O'Flaherty law firm arising out of its allegedly negligent representation of Wilkinson, Unigard's insured. ³

While no California case has directly addressed the issue, the Michigan Supreme Court has concluded that an insurer, as the employer of counsel to represent the insured, can bring a legal malpractice action against the attorney. Although the court based its holding on equitable subrogation, a theory rejected in California, the policy discussion in Atlanta Intern. Ins. Co. v. Bell (1991) 438 Mich. 512, 475 N.W.2d 294 applies equally to the result we reach in this appeal. We quote it at some length.

"A rule of law expanding the parameters of the attorney-client relationship in the defense counsel-insurer context might well detract...