When can a plaintiff’s lawyer be held liable to a defendant’s insurance carrier for tortious interference with contract? According to a recent Arizona Court of Appeals case, when the lawyer solicits a Damron/Morris agreement for the purpose of “manufacturing” a bad faith case and obtaining a recovery in excess of the defendant’s policy limits.
Over the last decade or so, setting up third-party bad faith cases has become something of an art form. You know the story. Plaintiff’s lawyer brings in a million-dollar case only to find the defendant has minimal insurance. What does the lawyer do? Often she will pursue the case on the hope that the defendant’s insurer will trip up somehow and commit bad faith. Then all she needs to do is obtain the defendant’s bad faith claim against his insurer -- through an assignment or through garnishment -- and her minimal limits personal injury case has become full blown third-party bad faith litigation.
Some lawyers are more active than others in encouraging the carrier to trip up. For example, one common strategy is to make a policy limits settlement demand with a short deadline. If the insurer fails to accept the demand by the deadline, you have an arguable case of bad faith failure to settle. You are off to the races.
In Safeway v. Guerrero (decided January 7, 2004), a seriously injured plaintiff made a demand from the defendant’s insurer for its policy limits of $15,000. The insurer offered those limits and the plaintiff indicated a willingness to accept subject to some conditions regarding verification of the defendant’s financial condition. The insurer never formally accepted those conditions and the agreement was never consummated when the plaintiff backed out of the settlement.
Much later, the plaintiff entered into an agreement with the defendant whereby the defendant consented to a $12 million judgment and assigned any claims it had against its insurer in exchange for a covenant not to execute. Such agreements have different names in different states, but in Arizona we call them Damron/Morris agreements. The plaintiff, now armed with a substantial judgment, sued the insurer under its assigned bad faith claim. The alleged basis for bad faith? Failure to settle for policy limits.
The insurer filed a separate lawsuit against the plaintiff’s lawyers, claiming they tortiously interfered with the insurance contract by soliciting and entering into a Damron/Morris agreement with the defendant. The trial court dismissed the lawsuit but the Court of Appeals reversed.
An interference with contract claim will lie, the court held, if a plaintiff’s lawyer solicits a Damron/Morris agreement for the purpose of “manufacturing” a bad faith claim. Based on the evidence in the Safeway case, a jury could find that the plaintiffs solicited the Damron/Morris agreement without a basis for believing the defendant had a bad faith claim against his insurer. Such action constitutes “improper” conduct as required to state a tortious interference claim. The court remanded the case for trial.
It is too early to tell how the Safeway case will affect how lawyers practice in the personal injury and bad faith fields. But its potential impact is enormous. Any plaintiff’s lawyer who enters into such agreements must make sure that the basis for doing so is both sound and well-documented. Defense lawyers who advise their clients to enter into such agreements must think about whether they, too, might be party to an interference with contract. And any lawyer defending a third-party bad faith case will have to consider legally and tactically whether to bring an interference claim against the plaintiff’s lawyers.
The Safeway case is still subject to further review. A copy of the case can be found at www.cofad1.state.az.us.
