Guest v. Allstate Insurance Co.: Client-Caused Conflict Is Not a Profit Opportunity

Guest v. Allstate Insurance Co.: Client-Caused Conflict Is Not a Profit Opportunity

 By William T. Barker, Partner, SNR Denton

In Guest v. Allstate Insurance Co., No. 31,602 (N.M. Oct. 25, 2010), Allstate first agreed to indemnify its counsel against a third-party lawsuit, then refused, later agreed again, and then got into a dispute about protecting counsel's malicious prosecution claim against counsel for the underlying plaintiff.   Defense counsel took the position that Allstate's conduct created a conflict of interest requiring her to return all pending files (except those too close to trial) and refuse further assignments.  She closed her practice (85% of which was Allstate work), moved to another state, and sued Allstate.  A jury found that Allstate had breached its agreement to indemnify and awarded over $1.8 million in compensatory damages, almost all of which was for fees Guest would have earned from Allstate in the ensuing ten years had it not caused her to cease working for it.  A closely divided (3-2) New Mexico Supreme Court affirmed the finding of liability, but reduced the damages to $123,873 (for legal costs incurred or to be incurred in the underlying case), declaring recovery of fees for services Guest never rendered to be contrary to public policy.  However, it also concluded that, for purposes of fee recovery, the breached agreement to indemnify was an "insurance contract," so it remanded for consideration of a fee award.  The dissenters would have reversed the judgment entirely.

The court found the terms of the indemnification agreement ambiguous, thereby presenting a jury issue, and that the question of whether Guest acted reasonably in rejecting the various settlements that Allstate negotiated was also a jury question.  (The dissent would have resolved those questions in Allstate's favor, as a matter of law, and would also have held that the indemnification agreement was not an insurance contract.)  Curiously, there appears to have been no dispute that the indemnification agreement was a contract.  But there is no indication that Guest gave any consideration for Allstate's promise, or detrimentally relied upon it; when providing a defense, Allstate paid for Guest's chosen counsel to defend her and appears to have exercised on control of the defense.  (Allstate probably did have an implied agency law duty to defend and indemnify, but the scope of that duty would have been a matter of law, not a question for the jury.)  Nor was there any dispute about punitive damages that were also awarded, though the amount of that award would need to be reconsidered in light of the reduction in compensatory damages.

Given the unusual facts and the legal issues that were not contested, the issue of most significance for future cases is likely the ruling on damages.  The starting point of the court's analysis was a client's fundamental and unqualified right to discharge an attorney at any time.  In its view, "[a] necessary corollary of the client's power to discharge an attorney at any time is the general rule that an attorney may collect fees only for services actually rendered."  "Holding a client liable for work not performed [would] undermine[] the trust essential to the attorney-client relationship."  The court found support for this principle in cases denying attorneys recovery for work the client had promised to provide, but didn't.

Guest argued that she was not suing for breach of any contract regarding her services, but rather breach of the contract to defend and indemnify.  While acknowledging some force to this argument, as it might apply to at-will relationships generally, the court was not willing to allow recovery "where the underlying relationship is between an attorney and her client, especially where the collateral agreement bears some relationship to her employment."  To do so would potentially condition or encumber the client's right to discharge the attorney.  The same logic barred Guest's tort claims.

When Allstate refused to defend or indemnify (and at the various points where the disputes about settlement escalated), Guest certainly would have been obliged to warn it that the disputes might impair her zealousness in pursuing Allstate's interests.  But there would not have been an unwaivable conflict unless Guest herself concluded that such an impairment would result.  Because the necessity for withdrawal depended on Guest's analysis of her own ability to properly represent Allstate, it would be dangerous to allow her to covert any errors regarding indemnification into a right of compensation for the services she chose not to perform.

To read the court opinion, visit the New Mexico Compilation Commission website.