Insurance – Legal Malpractice – Settlement Authority – Insured’s Refusal

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Although the parties’ legal malpractice policy prohibits the defendant-insurer from settling a malpractice claim without the plaintiff-attorney’s consent, if the attorney withholds her consent, the policy then relieves the insurer of its duty to defend and caps proceeds at the amount the insurer planned to offer to settle the claim.

We affirm the circuit court’s grant of judgment on the pleadings for the insurer.

Background

In the underlying legal malpractice suit, attorney Adele Pope, acting as special administrator for the estate of one of the plaintiff-attorney’s former clients, alleges that plaintiff committed malpractice when she obtained a lump-sum payment from a trust. While the trust was making $55,000 annual distributions to the client, attorney Pope was collecting more than $18,000 per year in attorney’s fees. A lower court granted Pope one-third of the lump sum trust payment, and plaintiff failed to timely appeal.

The defendant-insurer sought to offer the estate $100,000 to settle its legal malpractice claim against plaintiff, but plaintiff objected, noting that a settlement would convey the impression that the claims were meritorious, reflect negatively on her reputation and standing in the legal community, and harm her firm’s future insurability with other professional liability carriers.

The “hammer clause” in the parties’ policy begins, “The Insurer shall not settle any Claim without the Named Insured’s Consent.” However, the hammer clause goes on to say that, if the insured refuses to consent to any settlement recommended by the insurer, which is acceptable to the claimant, and instead elects to contest the claim, then the insurer’s liability for the claim “shall not exceed the amount for which the Claim could have been settled, including Claims Expense incurred up to the date of such refusal. . . . In the event that the Named Insured refuses to consent to any settlement as set forth in section VI. D. [addressing the policy’s limits of liability and deductible], the insurer’s right and duty to defend such claim shall end upon the date of such refusal.”

Plaintiff brought this action seeking a declaratory judgment regarding the parties’ respective rights and obligations under the policy. The defendant-insurer counterclaimed, and the circuit court granted judgment on the pleadings for the insurer, requiring plaintiff to cooperate with the insurer in the defense and settlement of the claim.

Discussion

The clear language of the policy gives the insurer the right to control the defense of the underlying case. The policy also requires plaintiff to cooperate with the insurer in the defense and settlement of any claim.

Pursuant to the policy’s hammer clause, if the insurer recommends a settlement to plaintiff that is acceptable to the estate, plaintiff has the right to reject it and continue defending the case. However, such a rejection ends the insurer’s duty to defend and caps its liability at the proposed settlement amount.

The circuit court correctly analyzed the clear and unambiguous language of the policy in finding plaintiff could not prevent the insurer from negotiating with the estate to settle the Pope claim. The policy requires plaintiff to cooperate with the insurer in the defense and settlement of Pope’s action; plaintiff is free to choose not to consent to a settlement, but such refusal triggers the consequences of the hammer clause.

Even if it was reasonable for plaintiff to reject the insurer’s settlement-offer proposal, the hammer clause does not include a “reasonableness” modifier.

Affirmed.

Ballard v. Admiral Insurance Co. (Lawyers Weekly No. 011-040-23, 13 pp.) (Stephanie McDonald, J.) Appealed from Lexington County Circuit Court (Walton McLeod, J.) Eric Steven Bland, Scott Michael Mongillo and Ronald Richter for appellants; Adele Jeffords Pope and Wesley Brian Sawyer for respondents. South Carolina Court of Appeals