United States: Illinois Court Holds That Reinsurers And Insurer Need To File Complaint In Legal Malpractice Lawsuit In Their Own Names Pursuant To Illinois Statute

Last Updated: August 4 2017
Article by Jeanne Kohler

In this case, an Illinois appellate court held that Section 2-403 of the Illinois Code of Civil Procedure, 735 ILCS 5/2-403, required the reinsurers and insurer of Developers Surety and Indemnity Co. ("DSI") a surety, to file a complaint as plaintiffs against an attorney in their own names, or by the surety "for the use of" the reinsurers and the insurer, and thus dismissed DSI's legal malpractice lawsuit.

The background of the case, which arose from an underlying construction dispute, can be found here. The University of Chicago hired a general contractor to construct a building, which subcontracted some of the work to F.E. Moran Inc. ("Moran"), which, in turn, subcontracted some of its work to 3D Industries Inc. ("3D"). DSI issued performance and payment bonds to 3D. 3D's employees walked off the job, leaving 3D's work incomplete. DSI retained Marc Lipinski as surety counsel. 3D then sued Moran in Illinois state court, claiming that Moran breached its contract by failing to make payments when due. 3D claimed that Moran's failure to pay left 3D with inadequate funds to pay its employees, leading them to walk off the job. Moran counterclaimed against 3D for breach of contract and fraud. Moran added a third-party claim against DSI for failure to fulfill its duties as surety and for acting in bad faith. DSI's general counsel later brought in another law firm to help with preparing for trial. DSI and Moran eventually settled, with DSI paying Moran $3.7 million. DSI then filed a complaint for legal malpractice against Lipinski and the firms at which he worked for breach of his duties as an attorney and that because of his failures, DSI lost the opportunity to settle for less than $3.7 million. In discovery, Lipinski requested information concerning DSI's recovery from insurance and reinsurance for the settlement payment, to which DSI eventually admitted that an insurer and two reinsurers had paid a total of $2,901,914.05 of the total settlement plus costs, leaving DSI with unreimbursed damages of $1,871,378.18. Lipinski then moved in limine to bar DSI from recovering as damages amounts covered by the insurer and two reinsurers. The court held that the collateral source rule did not apply in legal malpractice actions and, thus, Lipinski could present evidence of DSI's recovery from the insurer and the reinsurers and use that recovery to offset any damages awarded to DSI. DSI could then not prove its damage element (as it admitted it would have paid Moran an amount exceeding the amount left unreimbursed by the reinsurers and insurer), and the court dismissed the case.

DSI then appealed, arguing that the collateral source rule does not apply because the reinsurers and insurer do not count as collateral sources. The Illinois appeals court noted that DSI admitted that its reinsurers and insurer covered all of the damages it suffered due to Lipinski's legal malpractice. Therefore, the appellate court ruled that Section 2-403(c) of the Illinois Code of Civil Procedure required DSI's reinsurers and insurer to file the complaint against Lipinski in their own name, or for DSI to file the complaint ''for the use of'' the reinsurers and the insurer, as they were the real parties in interest. Thus, the court held that trial court did not err when it dismissed the complaint.

Developers Surety and Indem. Co. and Insco Ins. Services Inc. v. Lipinski, et al., No. 1-15-2658 (Ill. App. June 30, 2017).

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