Tort Law - Liability Insurers and Defense Costs - Seventh Circuit Affirms Dismissal of Insurer's Legal Malpractice Suit

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TORT LAW--LIABILITY INSURERS AND DEFENSE COSTS--SEVENTH CIRCUIT AFFIRMS DISMISSAL OF INSURER's LEGAL MALPRACTICE SUIT.--TIG Insurance Co. v. Giffin Winning Cohen & Bodewes, P.C., 444 F.3d 587 (7th Cir. 2006).

Liability insurers frequently challenge in court their obligation to pay the full legal defense costs of their policyholders. (1) They hire legal-fee auditors and submit detailed assessments of timesheets as evidence that they are not responsible for every item billed by defense firms. (2) Recently, in TIG Insurance Co. v. Giffin Winning Cohen & Bodewes, P.C., (3) the Seventh Circuit blocked a liability insurer's attempt to recoup some of its policyholder's defense costs by filing a legal malpractice suit against the law firm that initially represented the policyholder. At its core, the case was about an allocation of risk between repeat players in the insurance market. Failing to address comprehensively the crux of this case, the TIG court missed an opportunity to force liability insurers to rely on more efficient private cost-apportionment procedures, rather than foisting malpractice claims on the courts for costly ex post review.

The malpractice claim in TIG arose out of Giffin Winning's failure to produce documents in an underlying lawsuit, Varner v. Illinois State University. (4) Giffin Winning initially represented Illinois State University (ISU) in that case, a gender discrimination class action brought by university employees. (5) As is common in such cases, ISU's liability insurer, TIG, directed and paid for most of the litigation under the terms of coverage. (6) The class action had a long, stalling history, and in late 1996, the case was stayed. (7) During that time, TIG replaced the small, Central Illinois-based Giffin Winning with the powerhouse national firm Latham & Watkins. (8) Meanwhile, the plaintiffs' attorney learned from a disgruntled former ISU employee that Giffin Winning had failed to produce three gender equity studies that the university had commissioned. (9)

Once the stay was lifted, the plaintiffs filed a motion for monetary sanctions against ISU and Giffin Winning. (10) Alleging a conspiracy to hide these documents so as to conceal the existence of a damning "Planning Policy database," they also sought a default judgment as a sanction. (11) Latham, fearing the trial court judge's history of entering default judgments against defendants, (12) spent "a whopping $1.2 million, give or take" defending the motions. (13) After a four-day hearing, the trial court found that no such database ever existed and denied the request for default judgment. (14) However, it fined Giffin Winning $10,000 for discovery lapses, a sanction that was later vacated. (15) While the parties in Varner settled, TIG filed a tort-based malpractice claim to recover from Giffin Winning the $1.2 million that Latham had spent. (16)

The district court excluded testimony from TIG's "legal expert" after finding that it was "clear from [his] own admissions that he ha[d] simply parroted the information presented to him by" TIG. (17) The court then found that because Latham used block billing--that is, the bills showed daily fees but did not disaggregate for individual activities--TIG's estimate of the portion of ISU's legal fees attributable to Giffin Winning was "pure speculation." (18) Further, the court barred the Latham attorney who oversaw Varner from testifying that approximately ninety percent of the legal fees incurred were due to the defendants' negligence, dismissing this as "inadmissible speculation." (19) With no admissible evidence of damages, the district court granted Giffin Winning's motion for summary judgment. (20)

The Seventh Circuit affirmed, but on different grounds. Writing for a unanimous panel, Judge Evans (21) addressed neither the district court's holding that TIG had failed to present any admissible evidence of damages, nor Giffin Winning's broader claim that Seventh Circuit precedent precluded malpractice suits in which the only damages are legal fees. …