September 14th Newsletter

In Lazy Acres Market, Inc. v. Tseng 2007 Daily Journal D.A.R 10175, the Second Appellate District of the California Court of Appeal stated:

An insurance company agrees to defend its insured in a negligence action without a reservation of rights. The insured hires its own attorney to represent it because it believes the insurance company’s attorney has a conflict of interest. The insurance company settles the suit which is dismissed against the insured. The insured now wishes to recover its attorney fees. Does the insured have a cause of action for malpractice against the insurance company’s attorney? No. The insurance company gave the insured a safety net. The insurance company’s attorney does not have to pay for a second one. There is no causal relation between the attorney’s alleged breach of duty and damages.

This appeal followed the sustaining of demurrers to causes of action for legal malpractice and breach of fiduciary duty brought by Lazy Acres Market, Inc. Lazy Acres Market, Inc. had hired Premier Protective Services (“Premier”) to apprehend shoplifters in its market. The contract required Premier to defend and indemnify Lazy Acres Market Inc., its shareholders and employees (collectively “Lazy Acres”) for any claims arising out of Premier’s loss prevention activities. Premier obtained a policy of insurance from Western Heritage Insurance Company (“Western Heritage”), naming Lazy Acres as an additional insured.

Premier’s employee, Johnny Lopez, arrested Scott Courts for shoplifting an item from Lazy Acres Market. Courts sued Premier, Lazy Acres and others, alleging intentional and negligent torts. The complaint demanded punitive as well as compensatory damages. Western Heritage agreed to defend Lazy Acres. It did not reserve any rights to deny coverage. Instead, “Western Heritage accepted full responsibility to defend and indemnify Lazy Acres pursuant to the insurance policy.”

Western Heritage selected Jennifer Tseng to represent Lazy Acres and Premier. On August 7, 2003, Tseng wrote Lazy Acres stating she had been retained to defend it, but Tseng disclosed no actual or potential conflict of interest. Earlier that day, Cappello & Noël, Lazy Acres’s personal counsel, had obtained an extension of time to respond to Courts’s complaint. On August 13, 2003, Terrence Bonham wrote to Tseng advising her that he had been retained by Lazy Acres’s own insurance carrier to represent Lazy Acres’s interest in the suit. Bonham stated that because Western Heritage had accepted defense and indemnity, he would monitor the case. Tseng represented Lazy Acres, Premier and Lopez in the lawsuit until July of 2004. During this time, Tseng spoke to, advised, and corresponded with all defendants. Bonham monitored the case on behalf of Lazy Acres’s carrier, and Cappello & Noël played no role in the litigation.

Plaintiff alleged that Tseng failed to assert defenses that would benefit Lazy Acres; she failed to advise Lazy Acres of her conflict of interest in representing Lazy Acres and Premier; and she failed to advise Lazy Acres that Lazy Acres could be entitled to have Western Heritage assign independent, conflict-free counsel at Western Heritage’s expense.

In July of 2004, Lazy Acres contacted Cappello & Noël regarding the status of the Courts case. Cappello & Noël advised Lazy Acres that Tseng had an actual, or at least potential, conflict of interest in representing both Premier and Lazy Acres. Cappello & Noël told Tseng they were replacing her as Lazy Acres’s counsel. Tseng ultimately resigned from the case, and Western Heritage appointed new counsel for Premier and Lopez.

Lazy Acres was forced to pay for its own defense beginning in July of 2004. Western Heritage did not respond to Lazy Acres’s requests for payment of its fees and costs. Trial began on January 18, 2005. Prior to a jury being impaneled, Western Heritage paid $100,000 to Courts to settle the case. The Lazy Acres defendants were all dismissed with prejudice without paying anything to Courts.

Lazy Acres alleged that, as a proximate result of Tseng’s breach of fiduciary duty, Lazy Acres suffered damages in an amount in excess of $500,000 in attorney fees, expert witness fees, monetary sanctions and costs.

Lazy Acres first argued that at the outset of the Courts action, Tseng was required to advise Lazy Acres of any potential and actual conflicts of interest, and obtain written waivers. (Citing Cal. Rules Prof. Conduct, rule 3-310(B) & (C).) It claimed her failure to do so was a breach of duty per se.

But assuming, without deciding, that Tseng breached such a duty, the complaint fails to state facts sufficient to show the breach proximately caused any damages. The damages Lazy Acres alleges is an expenditure for attorney fees and costs in defending itself. But the complaint alleges Western Heritage, not Tseng, had a duty to pay fees and costs in defending the action. . . . [¶] Nor does the complaint allege facts to show that anything Tseng did, or failed to do, influenced Western Heritage’s decision not to pay Lazy Acres’s attorney fees. The complaint alleges that Western Heritage refused to pay Lazy Acres’s fees, even after Tseng declared a conflict. It is pure speculation to say the outcome would have been any different, had Tseng declared a conflict at the beginning of the case. [¶] Moreover, the complaint alleges that Western Heritage paid Courts $100,000 and obtained a dismissal against all Lazy Acres defendants. Lazy Acres paid nothing to Courts. The complaint alleges no facts that show any different result would have been obtained, no matter what Tseng did or failed to do.

The Court pointed out that a plaintiff alleging legal malpractice in the defense of a lawsuit must prove that, but for the negligence of the attorney, a better result could have been obtained in the underlying action. (Orrick Herrington & Sutcliffe v. Superior Court (2003) 107 Cal.App.4th 1052, 1057.)

Here the complaint alleges no facts to show that Lazy Acres would have achieved a better result in the underlying action but for Tseng’s alleged breach of duty. In fact, the complaint admits the matter was settled without contribution by Lazy Acres when Western Heritage paid Courts $100,000. The complaint does not suggest how Lazy Acres could have achieved a better result than that but for Tseng’s breach of duty.

----Andrea Lynn Rice