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The U.S. District Court for the Eastern District of California has refused to dismiss a lawsuit seeking to hold an insurer liable for its staff counsel's allegedly inadequate defense of insureds in litigation arising from an auto accident.

The Case

Sherita Wicks, driving a vehicle owned by her father, Arthur Wicks, rear-ended a car that, in turn, was pushed into an automobile driven by Jeanette DiMuccio. Ms. DiMuccio received workers' compensation benefits for her injuries from Pacific Indemnity Company, which filed a subrogation action against the Wicks to recoup its workers' compensation payments to Ms. DiMuccio.

Ms. Wicks' insurer, Government Employees Insurance Company (“GEICO”), initially declined to defend the Wicks but subsequently extended coverage without any reservation of rights. It advised Ms. Wicks in writing that it would be referring the matter for defense to an attorney who was “a salaried GEICO employee.”

Before GEICO decided to assume the Wicks' defense, Pacific moved for summary judgment. Its motion was scheduled to be heard about two weeks after GEICO had assumed the Wicks' defense and had referred the matter to its in-house counsel.

The GEICO counsel to whom the defense was assigned failed to file any opposition to Pacific's request for summary judgment, seek a continuance of the hearing, or appear at the hearing itself, and Pacific's motion was granted as unopposed. The court entered judgment for Pacific in the amount of $187,656.85 as to Ms. Wicks, individually, and in the amount of $15,000 plus $1,123.50 in recoverable costs against Ms. Wicks and her father, jointly and severally.

GEICO's counsel was notified of the judgment but neither appealed the judgment nor took any action to set it aside, although even before formally being served with notice of the judgment, he asked Pacific's counsel to vacate the judgment to “save” his clients' credit rating. The email GEICO's counsel sent with that request was signed off by the attorney as “GEICO Staff Counsel.”

Ultimately, most of the litigation over the accident was settled. GEICO obtained a release on behalf of Ms. Wicks and her father from Jeanette and Noah DiMuccio as to their own personal injury lawsuit, and further settled two other subrogation claims against Ms. Wicks and her father in exchange for policy limits.

Ms. Wicks, however, assigned Pacific her purported breach of contract claims against GEICO in exchange for Pacific's agreement not to enforce its judgments against Ms. Wicks and her father. Pacific, in turn, assigned the breach of contract rights it had obtained to the DiMuccios, who sued GEICO.

GEICO moved for summary judgment, arguing that its initial denial of coverage had been proper.

The DiMuccios opposed the motion, contending that this case was not about GEICO's initial denial of coverage, but instead hinged on GEICO's alleged failure to meets its contractual obligations to Ms. Wicks and her father once it had decided to provide a defense.

In particular, the DiMuccios claimed that GEICO, through its staff counsel, hadfailed to do anything to prevent judgments in excess of policy limits being entered against Ms. Wicks and her father and, once GEICO's staff counsel found out about the judgments, had failed to do anything to either appeal or set them aside.

The District Court's Decision

The district court denied GEICO's summary judgment motion.

In its decision, the district court explained that the “salient” issue was whether the defense, once provided by GEICO, had fallen short in meeting the duties owed to its insureds.

The district court reasoned that GEICO's counsel “was a salaried employee of GEICO and even described himself in correspondence to Pacific's lawyer as 'GEICO Staff Counsel.'” According to the district court, GEICO could “hardly argue” that its counsel had acted as an “independent contractor …. not subject to the control and direction of [his] employer,” when GEICO had admitted that he was a GEICO employee.

At this point, the district court said, it could not find that GEICO had “no responsibility whatsoever” for its counsel's conduct in providing a defense. The district court recognized that the retention of in-house counsel did not necessarily alter the “tripartite attorney-client relationship” that existed when an attorney was retained by an insurance company to defend its insured and the attorney owed fiduciary duties to both insurer and insured. However, the district court said, that principle did not mean that a carrier could “not bear responsibility for representation provided by its own employees,” as GEICO appeared to claim.

Moreover, the district court added, because the DiMuccios were not suing GEICO's counsel for malpractice, but instead were proceeding against GEICO by way of assignment for allegedly having failed to provide an adequate defense in the first instance, GEICO's claim that their lawsuit should be barred because legal malpractice claims were not assignable was “unavailing.”

The case is DiMuccio v. Government Employees Ins. Co., No. 2:16-cv-01307-MCE-KJN (E.D. Cal. March 19, 2018). Attorneys involved include: For Jeanette DiMuccio, Noah DiMuccio, Plaintiffs: Eric James Ratinoff, Marla C. Strain, LEAD ATTORNEYS, Eric Ratinoff Law Corp., Sacramento, CA. For Government Employees Insurance Company, Defendant: Timothy Kenna, LEAD ATTORNEY, Gilbert, Kelly, Crowley & Jennett LLP, Los Angeles, CA; Kristin A. Ingulsrud, Freeman Mathis & Gary, LLP, Los Angeles, CA.

Steven A. Meyerowitz, Esq., is the Director of FC&S Legal, the Editor-in-Chief of the Insurance Coverage Law Report, and the Founder and President of Meyerowitz Communications Inc. As FC&S Legal Director, Mr. Meyerowitz, a member of the team that conceptualized FC&S Legal, provides daily analysis and commentary on the most significant insurance coverage law decisions from courts across the country and news regarding legislative and regulatory developments. A graduate of Harvard Law School, Mr. Meyerowitz was an attorney at a prominent Wall Street law firm before founding Meyerowitz Communications Inc., a law firm marketing communications consulting company.