Economic-loss rule no defense in professional-liability cases

By Alison H. Grennan

The economic-loss rule does not apply to claims of professional negligence, the Washington Court of Appeals recently held, in a decision that could expand malpractice liability of a wide range of professionals.

In Jackowski v. Borchelt, no. 36944-3-II (June 16, 2009), Tim and Eri Jackowski bought a waterfront home from David and Robin Borchelt. Hawkins Poe, a real estate brokerage, represented the Jackowskis in the purchase. The sale was contingent on an inspection of the property, which included a “soils/stability inspection.” Hawkins Poe also obtained a copy of a letter from the local county’s Department of Community Development that showed that the property was in a “Landslide Hazard Area.” The Jackowskis nevertheless did not have the property’s soils or stability inspected, and they closed on their purchase.

Later, after heavy rains, the house slid, causing major structural damage. The Jackowskis sued Hawkins Poe, the Borchelts, and Windermere, the Borchelts’ real estate brokers. Against Hawkins Poe, the Jackowskis alleged negligent misrepresentation and violation of RCW 18.86, Washington’s real estate agency statute. RCW 18.86.050(1)(c) generally requires a real estate agent to advise buyer-clients seek expert advice on matters that are beyond the agent’s expertise. The Jackowskis alleged that Hawkins Poe should have advised them to have a soils engineer inspect the property during the inspection contingency. The Jackowskis alleged fraud and fraudulent concealment against the sellers and their real estate broker, because they allegedly knew that there was fill on the property that contributed to the landslide and withheld that material fact from the Jackowskis.

The defendants brought various summary judgment motions. They all argued that Washington’s economic-loss rule barred several of the Jackowskis’ claims. The trial court agreed on that issue and dismissed all claims against Hawkins Poe and some of the claims against the other defendants. The Jackowskis appealed.

The Court of Appeals reversed in part. The court held that the economic-loss rule applied to, and barred, the Jackowskis’ claims of negligent misrepresentation. That rule generally provides that one may not recover economic losses in tort when the parties’ contract failed to provide for such a recovery. Economic losses include, for example, loss in value of real property, but do not include personal-injury claims or property damage. The court held that the Jackowskis’ damages stemmed from their contract of purchase as opposed to redress for physical harm. Under Alejandre v. Bull, 159 Wn.2d 674 (2007), the rule bars claims of negligent misrepresentation in connection with the purchase of real estate.

But the Jackowski court sided with the Jackowskis on their RCW 18.86 claim, which it held was a claim of professional negligence, concluding that “to do so would be to abrogate professional malpractice claim for all cases not involving physical harm. We do not believe this to be the Alejandre Court’s intention.”

The Jackowski court also held the economic-loss rule does not impair a property buyer’s claim for rescission of the transaction. The court permitted the Jackowskis’ rescission claim against the Borchelts to proceed at trial.

The 'consent to settle' clause in professional-liability policies

By Matthew D. Taylor

Professional-liability insurance policies routinely provide that the insurer may settle a claim only with the policyholder’s consent. But how much power over the settlement process does that provision really give the insured? Sometimes, not so much, as a result of a related policy provision commonly known as the “hammer” clause.

Commercial general liability, or CGL, insurance policies usually state that the insurer has the sole right to settle any claim. CGL policies do not permit the policyholder to block a settlement that the insurance company wants to make.

Professional-liability and executive-liability errors-and-omissions insurance policies, however, cover claims that bear on the insured’s professional or business reputation and competence. Insureds typically have stronger feelings about fighting versus settling such claims, since a settlement might be perceived as an admission of malpractice and could damage their business. For this reason, such errors-and-omissions policies usually contain a consent-to-settle clause that permits the insured to veto the insurer’s settlement of such claims.

Settlement negotiations in such cases can put the insurer and the insured at odds. Insurance companies often want to resolve claims as inexpensively as possible, sometimes by settling early and cheaply and thereby avoiding large legal expense in defending such claims. Policyholders, on the other hand, may oppose settlements because they want to protect their professional reputations or simply firmly believe that they did nothing wrong.

Thus the “consent to settle” provision would seem to give insureds great say over settlement decisions, in the very types of cases where they care the most about those decisions. But it rarely does. A “consent to settle” clause also usually accompanies a provision nicknamed the “hammer” clause, because it figuratively holds a hammer over the insured’s head that threatens adverse consequences if the insured does not consent to a settlement that the insurer favors.

“Hammer” clauses come in various forms. One common type of “hammer” clause states that if the insurer had an opportunity to settle for a specified amount of money and wanted to do so, but the insured said no, then the policy limit for that claim drops to the amount of the proposed settlement. Assume, for example, that a plaintiff sued on a frivolous claim of $2 million, the policy limit was $1 million, the insured refused to let the insurer settle for $50,000, and the jury sided with the plaintiff and awarded the $2 million sought. In that event, the insurer would be liable for only $50,000 of the judgment, rather than $1 million. The policyholder would be personally liable for $1,950,000.

Other types of “hammer” clauses are less severe. One modified version essentially splits the difference with the insured, so that the insurer and the insured are responsible 50-50 for any judgment that exceeds the amount of a settlement that the insured rejected. Another version provides incentives to the insured to explore settlement by, for instance, discounting or eliminating a sizeable deductible or self-insured retention if the claimant and the insured enter into early mediation.

Some “hammer” clauses go so far as to cut off the insured’s contractual right to a defense. They provide that if the insured rejects a settlement, then not only does the policy limit for the claim drop to the amount of that proposed settlement, but the insurer also need not pay any further costs of defending the insured.

Even though “hammer” clauses have varying provisions, they all diminish the insured’s say over whether to settle an errors-and-omissions claim. Insureds who withhold consent might expose themselves to non-covered liability that did not previously exist, litigation expenses that they must pay out of their own pocket, or both.

Around The Firm

In Glisan Housing Partners v. R&H Const. v. Vallaster Corl Architects, Steven G. Wraith and Rebecca S. Izsak won dismissal of all claims against their client, an architecture firm, from a more than $10 million construction-defect case involving three buildings in Portland, Oregon. Steve and Rebecca moved to dismiss and argued that there was no special relationship between the architectural firm and the plaintiff general contractor that would allow the contractor to sue it for negligent design and contract administration. The court agreed and dismissed the claims against the architects.

Bradley D. Westphal recently won two cases. In Dunham v. Posch, a timber-trespass action, defendants’ handyman had inadvertently cut trees and shrubbery on plaintiff's property. Defendants had paid plaintiff $2,800 of their own money to compensate for the damage and for cleanup costs and obtained plaintiff’s signature on a release, which they had drafted themselves, that said that it was a “full release for damage done.” Plaintiff sued anyway. Brad moved for summary judgment and argued that the payment and release amounted to an accord and satisfaction. Plaintiff argued that a part of the release had been redacted and that the release failed to address her right to treble damages. The court granted the motion and dismissed the action. … In the arbitration of Le v. Le, Brad Westphal’s client contended that a dog ran into the roadway and caused him to swerve and hit a guardrail. His brother was a passenger and later sued him for personal injuries. Brad argued that his client was confronted with an emergency and had to choose between running over a dog and hitting a guardrail and should not be liable. The arbitrator agreed.

Gregory P. Turner and Patrick H. Oishi won summary judgment in McDonald v. Jack in the Box. Plaintiff arrived at a Jack in the Box restaurant and demanded service at a drive-through window, but he was refused service due to the hour of night. Plaintiff immediately became upset and began yelling obscenities while trying to grab at the restaurant manager through the restaurant’s window. Police later placed the uncooperative plaintiff under arrest. Plaintiff claimed defamation, based on misleading statements that that restaurant employees supposedly made to the 911 operator and responding officers. The court agreed with Greg and Pat that there was no proof of that allegation and granted their motion for summary judgment.

Jeffrey P. Downer and Pat Oishi won dismissal in DOL v. Erdmann, a recent Department of Licensing proceeding against two real estate agents. The complaining party was the seller of commercial property. He alleged that his agent engaged in improper dual representation, proffered financial incentives to the buyers without his consent, and disclosed client confidences to the buyers. He alleged that the buyer’s agent, who was seller’s agent’s daughter, was improperly working in concert with the seller’s agent as his trainee. The Department disagreed with the complainant, found insufficient evidence to pursue any disciplinary action, and granted Jeff and Pat’s request to end its investigation and close its file.

Joel E. Wright, William R. Kiendl, and Mark A. Horey won summary judgment of dismissal in Carter v. Suttell & Associates. Plaintiff, a chiropractor, alleged that his clinic was forced to close due to collection litigation brought by the defendant law firm on behalf of a credit card company. Plaintiff's theories were that the law firm was really a collection agency, and that it violated the Consumer Protection Act. Finding no evidence to support plaintiff’s allegations, the trial court dismissed the action.

Janis G. Pelletier obtained dismissal of Regalia Trust v. Neighbours Seattle, Inc., an unlawful-detainer action. Regalia sued its tenant, Neighbours, a nightclub, for unlawful detainer, alleging that Neighbours had failed to pay rent. Regalia actually sought to oust Neighbours from the premises and break a 25-year-old lease, which contained five more two-year options to renew. The lease provided that Neighbours paid a rental rate that was a fraction of the current market rate. However, Janis proved that Neighbours had paid the rent faithfully and even had a credit balance. The lease entitled the prevailing party to attorney fees. Janis also argued that, even if the landlord won a judgment, the law required the court to restore the lease agreement if the judgment were paid within five days. Janis persuaded plaintiff to drop the action a week before trial.

Sam B. Franklin and Marc Rosenberg won summary judgment in Hamann v. Williams, a legal-malpractice action. Plaintiff made several claims regarding the attorney’s representation, including the failure to properly serve a party, improperly advising settlement with another party, and failure to appeal a judgment against the plaintiff. The court agreed with Sam and Marc that the plaintiff had no proof that the attorney breached the standard of care or caused plaintiff's alleged damages.

Washington Law & Politics magazine’s Summer 2009 issue has named “Superlawyers” in several areas of practice. The designation results from recognition of individual attorneys in Washington for their great skill and the highest quality of legal representation. The Superlawyers’ peers evaluate them on 12 indicators of peer recognition and professional achievement. In the Professional Liability: Defense area of practice, eight lawyers were named statewide. Four of the eight were Lee Smart attorneys: David L. Martin, Joel E. Wright, Jeffrey P. Downer, and Sam B. Franklin.