Professional Negligence Law Reporter

A federal district court held that an attorney may be liable to an insurance company for providing erroneous advice that led to a bad faith settlement with an insured.

Ehrich Pakala applied for home insurance with North Star Mutual Insurance Co. The application asked whether any insurer had ever canceled Pakala’s home insurance, and he replied that when his auto insurance was canceled, his home insurance followed. North Star issued a home insurance policy to Pakala. Water pipes in his home burst less than two weeks later. Pakala submitted a claim to North Star for the damage.

North Star then discovered that Pakala’s former insurer had decided not to renew his policy because of the home’s excessive deterioration and lack of a stairwell handrail. North Star hired attorney Thomas Lipps, who advised the insurer that it could rescind Pakala’s policy based on a material misrepresentation in his application. North Star subsequently voided Pakala’s insurance policy. Pakala hired a lawyer, who demanded a settlement for the full policy limits plus extracontractual damages for bad faith and emotional distress. The parties entered into a settlement for over $700,000. The insurer sued Lipps, alleging legal negligence. The defendant moved for summary judgment.

Denying the motion, the district court found that North Star could prove that Lipps was the proximate cause of its damages without proving that it would have lost the underlying Pakala lawsuit. Citing case law, the court found that providing a case within a case is not a strict requirement in legal negligence lawsuits. Even were North Star to go to trial and prevail over Pakala, the court said, it still would have faced damages in having to participate in the case at all. The insurer has offered evidence it would not have defended against the Pakala suit and incurred settlement costs absent Lipps’s opinion letter, the court found. It concluded that, therefore, a jury could find that North Star had suffered actual loss from Lipps’s advice.

Citation: North Star Mut. Ins. Co. v. Lipps, 2022 WL 4131700 (N.D. Iowa Sept. 12, 2022).

Plaintiff counsel: AAJ member Max E. Kirk, Waterloo, Iowa.