An Exception That Could Swallow the Rule of Qualified Immunity

Attorneys have historically enjoyed a measure of immunity that shields them from suits by non-clients for alleged injury arising from legal advice provided to their clients. Yet the existence of immunity has not dissuaded non-clients from filing suit, and many have sought compensation from attorneys for harm allegedly flowing from the application of their legal advice, especially where the attorney's former client cannot be found or has become judgment proof. In response to such suits, courts have narrowed the scope of attorney immunity in what might be considered foreseeable ways, for example by recognizing exceptions where the attorney and non-client are found to be in a quasi'attorney-client relationship, or where the attorney was acting in his or her own self-interest and beyond the bounds of any attorney-client relationship.

Courts' application of these exceptions has been limited and fact specific. Exceptions are most often found where an attorney has failed to properly draft a will or trust for a known and intended beneficiary, where the attorney was found to have competing duties between a corporation, its board, and its shareholders, and where the attorney was acting for his own self-interest rather than, or in addition to, the interests of his client. Courts have, however, strictly applied attorney immunity in adversarial situations and rarely if ever find an attorney liable to an adverse party in a litigation situation. Consequently, attorneys acting within the proper scope of the attorney-client relationship can generally provide legal advice to their clients without fear of incurring potential liability to those they are not representing, especially during litigation or other demonstrably adversarial settings.

Unfortunately, traditional attorney immunity to suits by non-clients is under a new line of attack that threatens to vitiate the general rule. The threat is exemplified by a recent insurance-related decision of the Arizona Court of Appeals, Chalpin v. Snyder, 220 Ariz. 413, 207 P.3d 666 (Ariz. App. 2008), review denied April 20, 2009, wherein the court largely ignored the customary exceptions and permitted non-clients to pursue causes of action against attorneys for aiding and abetting breaches of fiduciary duty by their client. By all appearances the attorney defendant in this action appears to have been acting within the scope of the attorney-client relationship in the zealous representation of his insurer client. Nonetheless, in a departure from prior analysis, which required a finding that the attorney had taken on a duty to the non-client, either by knowingly creating a quasi'attorney-client relationship or by self-dealing, the Arizona Court of Appeals permitted an action to go forward against the insurer-defendant's attorney for nothing more than providing legal advice relating to the insurer's breach of a duty to its insureds.

While the long-term viability of this decision remains uncertain (a petition for certiorari has been filed with the Arizona Supreme Court and is presently pending), its reasoning, if followed, threatens to create an exception that will largely swallow the long-standing immunity rule. The decision is especially troubling in the current economic environment, which is likely to cause desperate policyholders to pursue any attack to stave off economic demise. This article briefly explores the present framework of attorney immunity to non-clients and the parameters of the exceptions that have been recognized. Once this foundation is laid, this article discusses the Arizona Court of Appeals' opinion recognizing an insurance attorney's “aiding and abetting” liability and the opinion's potential to eviscerate traditional notions of immunity from claims by non-clients.

The Traditional Parameters of Attorney Liability to Non-clients

In the civil context, an attorney can become liable for his conduct just like any other professional. For example, an attorney can be held responsible for failure to satisfy contractual obligations, for professional negligence, or for the commission of certain torts such as malicious prosecution. However, the public policies supporting the sanctity of the attorney-client relationship confine attorney liability to those whom they represent and those to whom they purposefully or knowingly undertake a duty. Thus, to establish a cause of action for professional negligence, the aggrieved party must first demonstrate that an attorney-client relationship existed. See, e.g., Shoemaker v. Gindlesberger, 887 N.E.2d 1167, 1170 (Ohio 2008). And even if a non-client suffers harm as a result of an attorney's negligence, the non-client may not maintain a cause of action against the attorney unless the non-client can demonstrate the existence of some sort of a quasi'attorney-client relationship that gives rise to a professional duty. Id.; Fredriksen v. Fredriksen, 30 A.D.3d 370, 372 (N.Y. App. Div. 2006) (“Absent fraud, collusion, malicious acts, or other special circumstances, an attorney is not liable to third parties not in privity or near-privity for harm caused by professional negligence.”); Skarbrevik v. Cohen, England & Whitfield, 231 Cal.App.3d 692, 701 (Cal. Dist. Ct. App. 1991), quoting Goodman v. Kennedy, 556 P.2d 737, 742 (Cal. 1976) (“An attorney generally will not be held liable to a third person not in privity of contract with him since he owes no duty to anyone other than his client.”); Scholler v. Scholler, 462 N.E.2d 158, 163 (Ohio 1984) (“[A]n attorney is immune from liability to third persons arising from his performance as an attorney in good faith on behalf of, and with the knowledge of his client, unless such third person is in privity with the client or the attorney acts maliciously.”).

The reasons behind the privity rule are simple and deeply rooted in the duties of advocacy and loyalty the attorney owes to his client: “the attorney's obligation is to direct attention to the needs of the client, not to the needs of a third party not in privity with the client.” Shoemaker v. Gindlesberger, 887 N.E.2d at 1170. Put another way, attorneys should be able to focus on representing the interests of their client and should not have to consider their own potential liability to non-clients before rendering legal advice. Courts generally find that this public policy overrides an individual's right to pursue a claim “because safeguarding the lawyer-client relationship protects more than just an individual or entity in any particular case or transaction; it is integral to the protection of the legal system itself.” Reynolds v. Schrock, 142 P.3d 1062, 1068 (Or. 2006). As the commentators to the Restatement (Third) of The Law Governing Lawyers have noted:

[I]t is often difficult to distinguish between harm resulting from inappropriate lawyer conduct on the one hand and, on the other hand, detriment to a nonclient resulting from a lawyer's fulfilling the proper function of helping a client through lawful means. Making lawyers liable to nonclients, moreover, could tend to discourage lawyers from vigorous representation.

Restatement (Third) of The Law Governing Lawyers ' 51, comment b.

Notwithstanding this public policy, an attorney's immunity to suit by non-clients is not complete, and claims against an attorney may lie in certain circumstances, such as where a quasi'attorney-client relationship exists because the attorney knows that the non-client will rely on the services rendered to the client. See, e.g., Spinner v. Nutt, 631 N.E.2d 542, 544 (Mass. 1994) (“[A]n attorney owes a duty to nonclients who the attorney knows will rely on the services rendered.”), quoting Robertson v. Gaston Snow & Ely Bartlett, 536 N.E.2d 344, 349-350 (Mass. 1989). This implied duty to the non-client is typically limited to circumstances where: 1) the attorney is aware of the non-client; 2) the attorney intends the non-client to rely on the representation; and 3) the non-client justifiably relies on the representation. See, e.g., McCamish, Martin, Brown & Loeffler v. F.E. Appling Interests, 991 S.W.2d 787, 794 (Tex. 1991); Kastner v. Jenkens & Gilchrist, 231 S.W.3d 571, 577 (Tex. Ct. App. 2007).

A similar test has been applied where the transaction in question was specifically intended to benefit the non-client. In such circumstances, courts will inquire into: 1) the extent to which the transaction was intended to benefit the non-client; 2) the foreseeability of harm; 3) the degree of certainty that the non-client suffered injury; 4) the closeness of the connection between the attorney's conduct and the injury; 5) the policy of preventing future harm; and 6) the public policy implications to a finding of liability. See, e.g., Trask v. Butler, 872 P.2d 1080, 1084 (Wash. 1994). “[W]hen a third party can show that both the attorney and the client intended by their agreement to benefit the third party, then he or she has a remedy in contract against the attorney.” Leyba v. Whitley, 907 P.2d 172, 175 (N.M. 1995). However, the benefit to the third party must be intentional, not merely incidental to the attorney's relationship with her client. See, e.g., Schechter v. Blank, 627 N.E.2d 106, 111 (Ill. App. Ct. 1993) (“The fact that a third party may benefit ' does not mean that the attorney thereby owes a duty to the third party. [T]he law only imposes a duty upon an attorney ' when the 'primary purpose and intent' of the attorney-client relationship is to benefit the third party.”) (citation omitted); see also In re Estate of Drewenski, 83 P.3d 457, 464 (Wyo. 2004) (“[T]he threshold inquiry must be whether the plaintiff is an intended beneficiary of the transaction; if not, no further inquiry need be made.”).

In determining whether the reliance elements are satisfied, reviewing courts typically examine the nature of the relationship between the lawyer and non-client. Skarbrevik v. Cohen, England & Whitfield, 231 Cal.App.3d at 701, quoting Lucas v. Hamm, 364 P.2d 685, 687 (Cal. 1961). In most circumstances that means that a “non-client cannot rely on an attorney's representations unless the attorney invites that reliance.” Kastner v. Jenkens & Gilchrist, 231 S.W.3d at 578. In short, although an actual attorney-client relationship may not be required, “the foundation of any malpractice claim by an intended beneficiary remains the express or implied contract that gives rise to the lawyer-client relationship.” Leyba v. Whitley, 907 P.2d at 176. Because this express or implied attorney-client relationship must exist, courts will typically not impose liability on the attorney, even if reliance is claimed, “where the attorney is also under an independent and potentially conflicting duty to a client,” such as where the non-client is in an adversarial position vis-'-vis the attorney's client. Page v. Frazier, 445 N.E.2d 148, 153 (Mass. 1983); Garcia v. Rodey, Dickason, Sloan, Akin & Robb, P.A., 750 P.2d 118, 122 (N.M. 1988) (“An adverse party cannot justifiably rely on the opposing lawyer to protect him from harm; negligence contemplates a legal duty owing from one party to another and the violation of that duty by the person owing it.”).

Some courts have also found attorneys liable to third parties where a suitable relationship exists between the attorney and the non-client to support a claim for equitable subrogation. See, e.g., Beaty v. Hertzberg & Golden, P.C., 571 N.W.2d 716, 720 (Mich. 1997) (“[A]n attorney's negligence may expose him to liability to third parties under certain circumstances. One vehicle for affording relief has been the doctrine of equitable subrogation.”). For equitable subrogation to exist:

(1) a special relationship must exist between the client and third party in which the potential for conflicts of interest is eliminated because the interest of the two are merged with regard to the particular issue where negligence of counsel is alleged, (2) the third party must lack any other available legal remedy, and (3) the third party must not be a “mere volunteer,” i.e., the damage must have been incurred as a consequence of the third party's fulfillment of a legal or equitable duty the third party owed to the client. Id.

In the insurance context, courts are divided as to whether these elements are satisfied by the relationship that exists between an insurer or excess insurer and the insured's counsel so as to permit the insurer or excess insurer to use the equitable subrogation doctrine to assert a malpractice claim against the insured's counsel. Some courts have allowed such claims, see, e.g., Kumar v. Am. Transit Ins. Co., 854 N.Y.S.2d 274 (N.Y. Ct. App. 2008); Allstate Ins. Co. v. Am. Transit Ins. Co., 977 F. Supp. 197, 201 (E.D.N.Y. 1997); Am. Centennial Ins. Co. v. Canal Ins. Co., 843 S.W.2d 480, 484 (Tex. 1992); Atlanta Intl. Ins. Co. v. Bell, 475 N.W.2d 294 (Mich. 1991), while others have not permitted them to go forward, see, e.g., State Farm Fire and Cas. Co. v. Weiss, 194 P.3d 1063 (Colo. Ct. App. 2008); Swiss Reinsurance Am. Corp., Inc. v. Roetzel & Andress, 837 N.E.2d 1215, 1224-25 (Ohio Ct. App. 2005); St. Paul Ins. Co. v. AFIA Worldwide Ins. Co., 937 F.2d 274, 279 (5th Cir. 1991) (applying Louisiana law); Continental Cas. Co. v. Pullman, Comley, Bradley & Reeves, 929 F.2d 103, 107 (2d Cir. 1991) (applying Connecticut law).

While perhaps self-evident, attorneys can also be held liable for committing tortious acts where the attorney has committed a tort in furtherance of his own motives or self-interest. See, e.g., Doctor's Co. v. Superior Court, 775 P.2d 508, 513 (Cal. 1989) (Attorney immunity does not “preclude the subjection of agents to conspiracy liability for conduct which the agents carry out 'as individuals for the individual advantage' and not solely on behalf of the principal.”). Nonetheless, attorneys who are paid for their litigation services are typically found to have no obligations to an adverse party in the litigation setting. The reasoning behind this rule is axiomatic, “[a]n attorney has no duty ' to protect the interests of a non-client adverse party for the obvious reason that the adverse party is not the intended beneficiary of the attorney's services and that the attorney's undivided loyalty belongs to the client.” Garcia v. Rodey, Dickason, Sloan, Akin & Robb, P.A., 750 P.2d at 122; see also Lewis v. Swenson, 617 P.2d 69, 72 (Ariz. Ct. App. 1980); Fox v. Pollack, 181 Cal.App.3d 954, 961 (Cal. Ct. App. 1986); Nelson v. Miller, 607 P.2d 438, 450 (Kan. 1980); Tappen v. Ager, 599 F.2d 376, 376 (10th Cir. 1979). A finding of liability to an adverse, non-client resulting from the attorney's paid representation of a client in litigation is contrary to the purpose and role of attorneys in the adversarial process. As stated by the New Mexico Supreme Court, “[a]s a matter of public policy in order to maintain and enforce the fidelity and duty of the attorney toward the client, we cannot jeopardize the integrity of the adversarial system by imposing a professional duty on an attorney toward an adverse party.” Garcia v. Rodey, Dickason, Sloan, Akin & Robb, P.A., 750 P.2d at 122; see also In re Estate of Drewenski, 83 F.2d at 465 (“An attorney owes no actionable duty to an adverse party emanating from the zealous representation of his own client.”). Thus, courts have immunized an attorney's litigation conduct even where the attorney's conduct is “frivolous or without merit” as long as such action is taken in “discharge of the lawyer's duties in representing his or her client.” Alpert v. Crain, Caton & James, P.C., 178 S.W.3d 398, 406 (Tex. App. 2005); Garcia v. Rodey, Dickason, Sloan, Akin & Robb, P.A., 750 P.2d. at 121-22 (Holding that action could not be maintained against opposing party's lawyers despite the fact that they affirmatively misrepresented their client's position in related litigation, and the non-client relied upon the representation).

The upshot of these general principles of attorney immunity is that an attorney will generally not be liable to those with whom he has no attorney-client relationship for conduct he undertakes within the confines of an actual attorney-client relationship. Attorneys are thus free to zealously represent their clients without fear that, in doing so, they may become liable to others who are outside of that relationship.

The Aiding and Abetting Exception to Attorney Immunity to Non-clients

There is no question that the attorney-client relationship is typically characterized as being fiduciary in nature. See, e.g., Jackson Law Office, P.C. v. Chappell, 37 S.W.3d 15, 22 (Tex. App. 2000), citing Archer v. Griffith, 390 S.W.2d 735, 739 (Tex. 1964). But while an attorney may be held liable for a breach of fiduciary duty to his or her client, such as the breach of the duty of care that gives rise to a claim for professional malpractice, “[t]he predicate of an attorney's fiduciary obligations is the existence of an attorney-client relationship.” Pierce v. Lyman, 1 Cal.App.4th 1093, 1102 (Cal. Ct. App. 1991). Thus, an attorney cannot be liable to a non-client for a breach of fiduciary duty unless it can be shown that the non-client had a reasonable basis to rely on the attorney's conduct and the attorney anticipated such reliance. See, e.g., McCamish, Martin, Brown & Loeffler v. F.E. Appling Interests, 991 S.W.2d at 794; see also, Barcelo v. Elliott, 923 S.W.2d 575, 577 (Tex. 1996) (“At common law, an attorney owes a duty of care only to his or her client, not to third parties who may have been damaged by the attorney's negligent representation of the client.”). Moreover, because of the obligations an attorney owes to his client, no fiduciary duties are found where the attorney's relationship to a third party is adversarial. Schechter v. Blank, 627 N.E.2d at 109 (“Since an attorney 'must represent his client with zeal and undivided loyalty in adversarial matters,' he cannot have fiduciary responsibilities to third parties which may interfere with this duty to his client and leave him vulnerable to liability.”).

Notwithstanding the lack of any direct, fiduciary relationship with a non-client, however, a number of courts have been faced with claims suggesting that an attorney can be held liable for “aiding or abetting” the breach of a fiduciary duty that the client, not the attorney, owes to the non-client. See, e.g., Durham v. Guest, 171 P.3d 756, 759 (N.M. App. 2007), reversed in part on other grounds, 145 N.M. 694, 204 P.3d 19 (N.M. 2009) (“[A]n attorney who is representing a client in an arbitration is not liable for aiding and abetting a breach of the client's fiduciary duty, unless the attorney acted outside the scope of representation, acted only in his or her own self-interest and contrary to the client's interest, or acted in a manner that would fall within the “crime or fraud” exception to the attorney-client privilege provided by the rules of professional conduct.”); Reynolds v. Schrock, 142 P.3d at 1069 (“[F]or a third party to hold a lawyer liable for substantially assisting in a client's breach of fiduciary duty, the third party must prove that the lawyer acted outside the scope of the lawyer-client relationship.”); In Re Student Finance Corp., 335 B.R. 539 (D. Del. 2005) (finding no cause of action for aiding and abetting a breach of fiduciary duty under Pennsylvania law); Alpert v. Crain, Caton & James, P.C., 178 S.W.3d at 407 (“Absent any allegation that Crain Caton committed an independent tortious act or misrepresentation, we decline Alpert's invitation to expand Texas law to allow a non-client to bring a cause of action for 'aiding and abetting' a breach of fiduciary duty '”); Spinner v. Nutt, 631 N.E.2d at 546 (“An allegation that the trustees acted under the legal advice of the defendants, without more, is insufficient to give rise to a claim that an attorney is responsible to third persons for the fraudulent acts of his clients.”). As demonstrated by the cases cited above, the majority of courts to have considered this claim have rejected it outright based on the policies supporting attorney immunity to suits by non-clients.

As succinctly stated by the New Mexico Court of Appeals in its rejection of a claim against a lawyer for aiding and abetting her client, an insurer, in allegedly breaching the fiduciary duty owed to its insured:

To determine otherwise would have a chilling effect on representation. If we were to accept Plaintiffs' argument, the following would result: anytime a plaintiff alleged that a defendant had breached a fiduciary duty to the plaintiff, an additional claim against the defendant's counsel for aiding and abetting that breach would withstand a rule 1-012 (B)(6) motion [to dismiss], even though the defendant's counsel had simply been representing the client's position in an adversarial proceeding.

Durham v. Guest, 171 P.3d at 760; see also Reynolds v. Schrock, 142 P.3d 1062, 1068 (Or. 2006) (“A lawyer who is sued for substantially assisting a client's breach of fiduciary duty becomes subject to divided loyalties.”).

Other courts have taken a slightly broader view, permitting a cause of action for aiding and abetting breach of fiduciary duty to be maintained by a non-client against a lawyer in a non-litigation situation, but have limited the cause of action to situations where it can be shown the lawyer was an active and knowing participant in the breach. For example, in Chem-Age Industries v. Glover, Inc., 652 N.W.2d 756 (S.D. 2002), the South Dakota Supreme Court was faced with a suit by a corporation's investors against an attorney who prepared the incorporation documents. Among other things, the plaintiffs claimed that the attorney should be held liable for breaching his fiduciary duty to the investors. While the court found that the attorney owed no direct fiduciary duty to the non-client investors, the court nonetheless permitted a cause of action for aiding and abetting a breach of fiduciary duty. However, while it recognized the cause of action, the South Dakota Supreme Court limited the claim to instances in which a “defendant substantially assisted the fiduciary in the achievement of the breach ' [and] knew that the fiduciary's conduct constituted a breach of duty.” Id. at 775. Similarly, in Thornwood v. Jenner & Block, 799 N.E.2d 756 (Ill. App. 2003), the Illinois Court of Appeals limited application of the tort to situations in which attorneys “knowingly and substantially assist their clients in causing another party's injury.” Id. at 768. Thus, while these courts recognized the cause of action, they confined it to an attorney's active participation in the breach, i.e., where the attorney has stepped outside the normal bounds of the attorney-client relationship. Cf. Doctor's Co. v. Superior Court, 775 P.2d 508, 516 (Cal. 1989).

In contrast to the situations discussed above, the Arizona Court of Appeals' holding in Chalpin v. Snyder, 220 Ariz. 413, 207 P.3d 666 (Ariz. App. 2008), discussed below, appears to be a wholesale departure from the traditional application of attorney immunity to non-clients. There, the Arizona Court of Appeals greatly expanded traditional notions of attorney liability by permitting claims for aiding and abetting breaches of fiduciary duty where, historically, the qualified immunity principles discussed above would have shielded the attorneys from suit. The case is particularly important because it is decided in the liability insurance context.

Chalpin v. Snyder

In Chalpin v. Snyder, the Arizona Court of Appeals found that an
attorney could be held liable for aiding and abetting his insurer-client's tortious litigation conduct, specifically the insurer's alleged unjustified disclaimer of coverage under a commercial automobile policy. This case is particularly troubling for two reasons: 1) it involves only the provision of legal advice and legal strategy recommendations that, on their face, appear to be squarely within the bounds of the attorney-client relationship and do not involve any indication of self-dealing by the attorney; and 2) contrary to the weight of authority, it permits an adverse non-client to assert a claim against the attorney for legal advice given both prior to and during the course of litigation. Some discussion of the facts is appropriate to appreciate the significance of the court's holding.

The Chalpin case arose from an automobile accident involving Simon Chalpin's daughter, Debra. In March 1996, Hi-Health Supermarket Corporation (“Hi-Health”), where Chalpin was president and CEO, requested that its insurer, Reliance Insurance Company (“Reliance”) provide automobile insurance coverage for Debra under Hi-Health's commercial liability policy. The policy permitted Hi-Health to add personal vehicle coverage for any vehicle in which it had a property interest. While Debra served as a director of Hi-Health, at the time coverage was requested she lived in California where she attended law school, and had a California driver's license. It is unclear from the opinion whether Hi-Health had any ownership interest in her vehicle.

Hi-Health's insurance broker worked with Reliance to add Debra to the policy. Among other information, the broker submitted to Reliance a written Commercial Policy Change Request Form, indicating that the car was “garaged in Phoenix, AZ.” Reliance did not ask the broker or Hi-Health any questions about the intended coverage prior to issuance, and it accepted Hi-Health's premium payment for the coverage.

Approximately five months later, after leaving a bar in Los Angeles, Debra ran a red light and struck another car driven by Rhonda W., who was severely injured and left in a vegetative state. Rhonda W's family sued Debra, who tendered the claim to Reliance. Reliance conducted a review of the claim and concluded that “[t]here were no coverage question[s] on this claim.” Reliance agreed to defend Debra and assured both her and Chalpin that “there was coverage for her and her car,” despite its knowledge that Debra had only limited involvement with Hi-Health, used the vehicle for personal use, and lived in California. Thereafter, Reliance attempted to settle the matter with Rhonda W.'s family. At mediation, Rhonda W.'s family demanded a settlement of $5 million, but Reliance had only provided its representative with $2 million in authority (Reliance's representative had requested $5 million in authority prior to the mediation), so the matter did not settle.

The day of the mediation, Reliance prepared an internal document indicating that “Reliance will face a 'bad faith' claim on this case” if it does not settle. The document also indicated that Reliance's representatives wanted to conduct a conference call for the purpose of “developing info[rmation] sufficient to disavow coverage for this incident.” After the failed mediation, Reliance prepared additional internal documents indicating that it intended to “conduct an investigation with an eye toward disavowing coverage.” Chalpin v. Snyder, 220 Ariz. at 416, 207 P.3d at 669.

To affect its strategy, Reliance hired J. Kevin Snyder (“Snyder”) and his firm, Robin, Kaplan, Miller & Cipesi (“Robin, Kaplan”) to act as its investigator. Reliance also involved its special investigation unit and retained a Phoenix law firm to provide a coverage opinion. Neither the special investigation unit nor the Phoenix law firm found a basis to disavow coverage. In fact, the Phoenix law firm opined that Arizona's doctrine of reasonable expectations precluded Reliance from disavowing coverage. Snyder also initially issued a coverage opinion concluding that because Reliance had accepted premium payments, “there would then be expectation of coverage for the vehicle and driver.” Id. After receiving these opinions, Reliance's internal documentation indicated its conclusion that “there does not appear to be any help from the coverage opinions,” and “under the doctrine of expectation of coverage, it appears we are on the hook for this claim.” Id.

Despite his initial opinion that there was no basis to deny coverage, Snyder later recommended that Reliance challenge coverage to put pressure on Rhonda W.'s family to settle the claim for fear that coverage might be rescinded. Snyder's suggestion was made with the expectation that all claims would be settled prior to resolution of the coverage dispute. Apparently Reliance adopted Snyder's suggestion and Snyder sent Hi-Health a reservation of rights letter, on behalf of Reliance, notifying Hi-Health that Reliance planned to “file an action for declaratory relief to determine whether there is coverage.” Id. The letter also told Hi-Health that “under California law, the policy is void and can be rescinded,” and identified four material facts not disclosed at the time Hi-Health requested coverage, specifically: (1) a prior DUI charge; (2) a policy cancellation by a prior insurer; (3) Debra's non-employee status; and (4) Debra's use of the vehicle for personal purposes. Id.

Prior to filing any lawsuit, however, in May 1997 Reliance provisionally settled the claim with Rhonda W.'s family for $8.5 million. A month later, Debra and Hi-Health filed their own action seeking a declaration that coverage existed. Reliance counterclaimed for fraud, negligent misrepresentation, unjust enrichment, breach of contract, and breach of an implied promise, and sued Chalpin personally on the theory that Hi-Health was simply his corporate alter ego. The trial court ultimately granted summary judgment in favor of Chalpin and Hi-Health, but it permitted Reliance's claims for fraud and to pierce the corporate veil to go to the jury. The jury ultimately found that coverage existed and rejected Reliance's claims, and the trial judge awarded attorneys' fees and costs to Chalpin and Hi-Health.

Due to Reliance's bankruptcy, Chalpin's and Hi-Health's attorneys' fees were never paid. Chalpin and Hi-Health then instituted suit against Snyder and his firm. They asserted various claims, including aiding and abetting, breach of fiduciary duty, and aiding and abetting bad faith. The trial court dismissed or granted summary judgment to Snyder and his firm on all claims. Chalpin and Hi-Health appealed, and the Court of Appeals reversed based upon a general application of the Restatement (Third) of the Law Governing Lawyers ' 56 (2000), stating, “[t]he Arizona Supreme Court has adopted the general rule set forth in the Restatement (Third) of the Law Governing Lawyers that 'lawyers have no special privilege against civil suit.'” Chalpin v. Snyder, 220 Ariz. at 423, 207 P.3d at 676. The Court of Appeals further held that “[w]hen a lawyer advises or assists a client in acts that subject the client to civil liability to others, those others may seek to hold the lawyer liable along with or instead of the client.” Id. citing Restatement (Third) of the Law Governing Lawyers ' 56.

The Court of Appeals ignored Comment b to ' 56, which specifically provides that “courts considering the civil liability of lawyers must consider how a ruling that affirms or precludes liability would affect the vigorous representation of clients within the limits of the law '” Id. Had this factor been considered, consistent with the findings in the cases cited above, the Arizona Court of Appeals would likely have concluded that the tort should not be recognized for the reasons articulated by the New Mexico Court of Appeals in Durham, or at minimum, would have imposed significant limitations such as those delineated by the South Dakota Supreme Court in Chem-Age Industries, and the Illinois Court of Appeals in Thornwood. In either circumstance, the long-standing policies supporting attorney immunity against non-client suits would have been vindicated.

While the Chalpin case may be viewed as a case of very bad facts making very bad law, the recognition of a cause of action for aiding and abetting a breach of fiduciary duty under the circumstances establishes a troubling, albeit aberrant, insurance precedent for a number of reasons. First, contrary to Chem-Age Industries and Thornwood, the court imposed no requirement that Snyder have actively and knowingly participated in the breach of Reliance's fiduciary duty. While it may be inferred that Snyder was aware of Reliance's steps to deny the claim ' apparently based on his advice ' there was no showing that he took any action in furtherance of the denial, except at the behest of the client and within the context of the attorney-client relationship. Second, the conduct in question was legal advice given in a litigation context, and Chalpin, Hi-Health, and Rhonda W. were clearly adverse parties from Snyder's perspective. Unlike other situations in which the tort of aiding and abetting has been adopted, the only action taken by Snyder was the filing of a counterclaim on behalf of his client in the declaratory judgment lawsuit filed by Chalpin and Hi-Health. Coverage was never denied, and while the early coverage opinions indicated that neither Snyder nor the unnamed Phoenix law firm believed that Reliance would prevail in a coverage dispute, there was no showing that the decision to contest coverage was without some merit (it is unclear from the opinion whether Snyder may have developed additional information during the course of the litigation with Rhonda W.'s family that caused him to revise his coverage opinion). Finally, there was no showing that Snyder or his firm took any action outside of the parameters of their attorney-client relationship with Reliance or that they stood to benefit from the coverage position taken by Reliance.

A petition for certiorari is presently pending with the Arizona Supreme Court. Unless the Arizona Supreme Court grants review and reverses, however, the Arizona Court of Appeals' decision now potentially places Arizona attorneys ' and in particular Arizona insurance coverage attorneys ' in the predicament attorney immunity is intended to avoid. Specifically, counsel is now in the position of having to consider his or her own interests along with the interests of the insurer-client when providing legal advice and making litigation-strategy recommendations, because the attorney now has to anticipate the possibility, however remote, that he or she will face a claim for aiding and abetting a breach of fiduciary duty in every coverage dispute where the insurer is accused of breaching a fiduciary duty owed to its insured.

Conclusion

Without appropriate limitation, the cause of action allowed in Chalpin v. Snyder threatens to swallow the long-standing application of attorney immunity to shield attorneys from suits by non-clients. While the viability of this claim in Arizona remains unclear, for the present, insurance coverage counsel and others who advise insurance companies who may owe fiduciary duties to their insureds need to be aware of at least the possibility that they may become a defendant in any breach of fiduciary duty claim against their client.

Jon T. Neumann is a commercial litigation partner in the Phoenix, AZ office of Steptoe & Johnson LLP. His practice focuses predominantly on insurance coverage, bad faith litigation, and reinsurance claims.

Attorneys have historically enjoyed a measure of immunity that shields them from suits by non-clients for alleged injury arising from legal advice provided to their clients. Yet the existence of immunity has not dissuaded non-clients from filing suit, and many have sought compensation from attorneys for harm allegedly flowing from the application of their legal advice, especially where the attorney's former client cannot be found or has become judgment proof. In response to such suits, courts have narrowed the scope of attorney immunity in what might be considered foreseeable ways, for example by recognizing exceptions where the attorney and non-client are found to be in a quasi'attorney-client relationship, or where the attorney was acting in his or her own self-interest and beyond the bounds of any attorney-client relationship.

Courts' application of these exceptions has been limited and fact specific. Exceptions are most often found where an attorney has failed to properly draft a will or trust for a known and intended beneficiary, where the attorney was found to have competing duties between a corporation, its board, and its shareholders, and where the attorney was acting for his own self-interest rather than, or in addition to, the interests of his client. Courts have, however, strictly applied attorney immunity in adversarial situations and rarely if ever find an attorney liable to an adverse party in a litigation situation. Consequently, attorneys acting within the proper scope of the attorney-client relationship can generally provide legal advice to their clients without fear of incurring potential liability to those they are not representing, especially during litigation or other demonstrably adversarial settings.

Unfortunately, traditional attorney immunity to suits by non-clients is under a new line of attack that threatens to vitiate the general rule. The threat is exemplified by a recent insurance-related decision of the Arizona Court of Appeals, Chalpin v. Snyder , 220 Ariz. 413, 207 P.3d 666 (Ariz. App. 2008), review denied April 20, 2009, wherein the court largely ignored the customary exceptions and permitted non-clients to pursue causes of action against attorneys for aiding and abetting breaches of fiduciary duty by their client. By all appearances the attorney defendant in this action appears to have been acting within the scope of the attorney-client relationship in the zealous representation of his insurer client. Nonetheless, in a departure from prior analysis, which required a finding that the attorney had taken on a duty to the non-client, either by knowingly creating a quasi'attorney-client relationship or by self-dealing, the Arizona Court of Appeals permitted an action to go forward against the insurer-defendant's attorney for nothing more than providing legal advice relating to the insurer's breach of a duty to its insureds.

While the long-term viability of this decision remains uncertain (a petition for certiorari has been filed with the Arizona Supreme Court and is presently pending), its reasoning, if followed, threatens to create an exception that will largely swallow the long-standing immunity rule. The decision is especially troubling in the current economic environment, which is likely to cause desperate policyholders to pursue any attack to stave off economic demise. This article briefly explores the present framework of attorney immunity to non-clients and the parameters of the exceptions that have been recognized. Once this foundation is laid, this article discusses the Arizona Court of Appeals' opinion recognizing an insurance attorney's “aiding and abetting” liability and the opinion's potential to eviscerate traditional notions of immunity from claims by non-clients.

The Traditional Parameters of Attorney Liability to Non-clients

In the civil context, an attorney can become liable for his conduct just like any other professional. For example, an attorney can be held responsible for failure to satisfy contractual obligations, for professional negligence, or for the commission of certain torts such as malicious prosecution. However, the public policies supporting the sanctity of the attorney-client relationship confine attorney liability to those whom they represent and those to whom they purposefully or knowingly undertake a duty. Thus, to establish a cause of action for professional negligence, the aggrieved party must first demonstrate that an attorney-client relationship existed. See, e.g., Shoemaker v. Gindlesberger , 887 N.E.2d 1167, 1170 (Ohio 2008). And even if a non-client suffers harm as a result of an attorney's negligence, the non-client may not maintain a cause of action against the attorney unless the non-client can demonstrate the existence of some sort of a quasi'attorney-client relationship that gives rise to a professional duty. Id. ; Fredriksen v. Fredriksen , 30 A.D.3d 370, 372 (N.Y. App. Div. 2006) (“Absent fraud, collusion, malicious acts, or other special circumstances, an attorney is not liable to third parties not in privity or near-privity for harm caused by professional negligence.”); Skarbrevik v. Cohen, England & Whitfield , 231 Cal.App.3d 692, 701 (Cal. Dist. Ct. App. 1991), quoting Goodman v. Kennedy , 556 P.2d 737, 742 (Cal. 1976) (“An attorney generally will not be held liable to a third person not in privity of contract with him since he owes no duty to anyone other than his client.”); Scholler v. Scholler, 462 N.E.2d 158, 163 (Ohio 1984) (“[A]n attorney is immune from liability to third persons arising from his performance as an attorney in good faith on behalf of, and with the knowledge of his client, unless such third person is in privity with the client or the attorney acts maliciously.”).

The reasons behind the privity rule are simple and deeply rooted in the duties of advocacy and loyalty the attorney owes to his client: “the attorney's obligation is to direct attention to the needs of the client, not to the needs of a third party not in privity with the client.” Shoemaker v. Gindlesberger , 887 N.E.2d at 1170. Put another way, attorneys should be able to focus on representing the interests of their client and should not have to consider their own potential liability to non-clients before rendering legal advice. Courts generally find that this public policy overrides an individual's right to pursue a claim “because safeguarding the lawyer-client relationship protects more than just an individual or entity in any particular case or transaction; it is integral to the protection of the legal system itself.” Reynolds v. Schrock , 142 P.3d 1062, 1068 (Or. 2006). As the commentators to the Restatement (Third) of The Law Governing Lawyers have noted:

[I]t is often difficult to distinguish between harm resulting from inappropriate lawyer conduct on the one hand and, on the other hand, detriment to a nonclient resulting from a lawyer's fulfilling the proper function of helping a client through lawful means. Making lawyers liable to nonclients, moreover, could tend to discourage lawyers from vigorous representation.

Restatement (Third) of The Law Governing Lawyers ' 51, comment b.

Notwithstanding this public policy, an attorney's immunity to suit by non-clients is not complete, and claims against an attorney may lie in certain circumstances, such as where a quasi'attorney-client relationship exists because the attorney knows that the non-client will rely on the services rendered to the client. See, e.g., Spinner v. Nutt , 631 N.E.2d 542, 544 (Mass. 1994) (“[A]n attorney owes a duty to nonclients who the attorney knows will rely on the services rendered.”), quoting Robertson v. Gaston Snow & Ely Bartlett , 536 N.E.2d 344, 349-350 (Mass. 1989). This implied duty to the non-client is typically limited to circumstances where: 1) the attorney is aware of the non-client; 2) the attorney intends the non-client to rely on the representation; and 3) the non-client justifiably relies on the representation. See, e.g., McCamish, Martin, Brown & Loeffler v. F.E. Appling Interests , 991 S.W.2d 787, 794 (Tex. 1991); Kastner v. Jenkens & Gilchrist , 231 S.W.3d 571, 577 (Tex. Ct. App. 2007).

A similar test has been applied where the transaction in question was specifically intended to benefit the non-client. In such circumstances, courts will inquire into: 1) the extent to which the transaction was intended to benefit the non-client; 2) the foreseeability of harm; 3) the degree of certainty that the non-client suffered injury; 4) the closeness of the connection between the attorney's conduct and the injury; 5) the policy of preventing future harm; and 6) the public policy implications to a finding of liability. See, e.g., Trask v. Butler , 872 P.2d 1080, 1084 (Wash. 1994). “[W]hen a third party can show that both the attorney and the client intended by their agreement to benefit the third party, then he or she has a remedy in contract against the attorney.” Leyba v. Whitley , 907 P.2d 172, 175 (N.M. 1995). However, the benefit to the third party must be intentional, not merely incidental to the attorney's relationship with her client. See, e.g., Schechter v. Blank , 627 N.E.2d 106, 111 (Ill. App. Ct. 1993) (“The fact that a third party may benefit ' does not mean that the attorney thereby owes a duty to the third party. [T]he law only imposes a duty upon an attorney ' when the 'primary purpose and intent' of the attorney-client relationship is to benefit the third party.”) (citation omitted); see also In re Estate of Drewenski , 83 P.3d 457, 464 (Wyo. 2004) (“[T]he threshold inquiry must be whether the plaintiff is an intended beneficiary of the transaction; if not, no further inquiry need be made.”).

In determining whether the reliance elements are satisfied, reviewing courts typically examine the nature of the relationship between the lawyer and non-client. Skarbrevik v. Cohen, England & Whitfield , 231 Cal.App.3d at 701, quoting Lucas v. Hamm, 364 P.2d 685, 687 (Cal. 1961). In most circumstances that means that a “non-client cannot rely on an attorney's representations unless the attorney invites that reliance.” Kastner v. Jenkens & Gilchrist , 231 S.W.3d at 578. In short, although an actual attorney-client relationship may not be required, “the foundation of any malpractice claim by an intended beneficiary remains the express or implied contract that gives rise to the lawyer-client relationship.” Leyba v. Whitley , 907 P.2d at 176. Because this express or implied attorney-client relationship must exist, courts will typically not impose liability on the attorney, even if reliance is claimed, “where the attorney is also under an independent and potentially conflicting duty to a client,” such as where the non-client is in an adversarial position vis-'-vis the attorney's client. Page v. Frazier , 445 N.E.2d 148, 153 (Mass. 1983); Garcia v. Rodey, Dickason, Sloan, Akin & Robb, P.A. , 750 P.2d 118, 122 (N.M. 1988) (“An adverse party cannot justifiably rely on the opposing lawyer to protect him from harm; negligence contemplates a legal duty owing from one party to another and the violation of that duty by the person owing it.”).

Some courts have also found attorneys liable to third parties where a suitable relationship exists between the attorney and the non-client to support a claim for equitable subrogation. See, e.g., Beaty v. Hertzberg & Golden, P.C. , 571 N.W.2d 716, 720 (Mich. 1997) (“[A]n attorney's negligence may expose him to liability to third parties under certain circumstances. One vehicle for affording relief has been the doctrine of equitable subrogation.”). For equitable subrogation to exist:

(1) a special relationship must exist between the client and third party in which the potential for conflicts of interest is eliminated because the interest of the two are merged with regard to the particular issue where negligence of counsel is alleged, (2) the third party must lack any other available legal remedy, and (3) the third party must not be a “mere volunteer,” i.e., the damage must have been incurred as a consequence of the third party's fulfillment of a legal or equitable duty the third party owed to the client. Id.

In the insurance context, courts are divided as to whether these elements are satisfied by the relationship that exists between an insurer or excess insurer and the insured's counsel so as to permit the insurer or excess insurer to use the equitable subrogation doctrine to assert a malpractice claim against the insured's counsel. Some courts have allowed such claims, see, e.g., Kumar v. Am. Transit Ins. Co. , 854 N.Y.S.2d 274 (N.Y. Ct. App. 2008); Allstate Ins. Co. v. Am. Transit Ins. Co. , 977 F. Supp. 197, 201 (E.D.N.Y. 1997); Am. Centennial Ins. Co. v. Canal Ins. Co. , 843 S.W.2d 480, 484 (Tex. 1992); Atlanta Intl. Ins. Co. v. Bell , 475 N.W.2d 294 (Mich. 1991), while others have not permitted them to go forward, see, e.g., State Farm Fire and Cas. Co. v. Weiss , 194 P.3d 1063 (Colo. Ct. App. 2008); Swiss Reinsurance Am. Corp., Inc. v. Roetzel & Andress , 837 N.E.2d 1215, 1224-25 (Ohio Ct. App. 2005); St. Paul Ins. Co. v. AFIA Worldwide Ins. Co. , 937 F.2d 274, 279 (5th Cir. 1991) (applying Louisiana law); Continental Cas. Co. v. Pullman, Comley, Bradley & Reeves , 929 F.2d 103, 107 (2d Cir. 1991) (applying Connecticut law).

While perhaps self-evident, attorneys can also be held liable for committing tortious acts where the attorney has committed a tort in furtherance of his own motives or self-interest. See, e.g. , Doctor's Co. v. Superior Court , 775 P.2d 508, 513 (Cal. 1989) (Attorney immunity does not “preclude the subjection of agents to conspiracy liability for conduct which the agents carry out 'as individuals for the individual advantage' and not solely on behalf of the principal.”). Nonetheless, attorneys who are paid for their litigation services are typically found to have no obligations to an adverse party in the litigation setting. The reasoning behind this rule is axiomatic, “[a]n attorney has no duty ' to protect the interests of a non-client adverse party for the obvious reason that the adverse party is not the intended beneficiary of the attorney's services and that the attorney's undivided loyalty belongs to the client.” Garcia v. Rodey, Dickason, Sloan, Akin & Robb, P.A. , 750 P.2d at 122; see also Lewis v. Swenson , 617 P.2d 69, 72 (Ariz. Ct. App. 1980); Fox v. Pollack , 181 Cal.App.3d 954, 961 (Cal. Ct. App. 1986); Nelson v. Miller , 607 P.2d 438, 450 (Kan. 1980); Tappen v. Ager , 599 F.2d 376, 376 (10th Cir. 1979). A finding of liability to an adverse, non-client resulting from the attorney's paid representation of a client in litigation is contrary to the purpose and role of attorneys in the adversarial process. As stated by the New Mexico Supreme Court, “[a]s a matter of public policy in order to maintain and enforce the fidelity and duty of the attorney toward the client, we cannot jeopardize the integrity of the adversarial system by imposing a professional duty on an attorney toward an adverse party.” Garcia v. Rodey, Dickason, Sloan, Akin & Robb, P.A. , 750 P.2d at 122; see also In re Estate of Drewenski , 83 F.2d at 465 (“An attorney owes no actionable duty to an adverse party emanating from the zealous representation of his own client.”). Thus, courts have immunized an attorney's litigation conduct even where the attorney's conduct is “frivolous or without merit” as long as such action is taken in “discharge of the lawyer's duties in representing his or her client.” Alpert v. Crain, Caton & James, P.C. , 178 S.W.3d 398, 406 (Tex. App. 2005); Garcia v. Rodey, Dickason, Sloan, Akin & Robb, P.A. , 750 P.2d. at 121-22 (Holding that action could not be maintained against opposing party's lawyers despite the fact that they affirmatively misrepresented their client's position in related litigation, and the non-client relied upon the representation).

The upshot of these general principles of attorney immunity is that an attorney will generally not be liable to those with whom he has no attorney-client relationship for conduct he undertakes within the confines of an actual attorney-client relationship. Attorneys are thus free to zealously represent their clients without fear that, in doing so, they may become liable to others who are outside of that relationship.

The Aiding and Abetting Exception to Attorney Immunity to Non-clients

There is no question that the attorney-client relationship is typically characterized as being fiduciary in nature. See, e.g., Jackson Law Office, P.C. v. Chappell , 37 S.W.3d 15, 22 (Tex. App. 2000), citing Archer v. Griffith , 390 S.W.2d 735, 739 (Tex. 1964). But while an attorney may be held liable for a breach of fiduciary duty to his or her client, such as the breach of the duty of care that gives rise to a claim for professional malpractice, “[t]he predicate of an attorney's fiduciary obligations is the existence of an attorney-client relationship.” Pierce v. Lyman , 1 Cal.App.4th 1093, 1102 (Cal. Ct. App. 1991). Thus, an attorney cannot be liable to a non-client for a breach of fiduciary duty unless it can be shown that the non-client had a reasonable basis to rely on the attorney's conduct and the attorney anticipated such reliance. See, e.g., McCamish, Martin, Brown & Loeffler v. F.E. Appling Interests , 991 S.W.2d at 794; see also, Barcelo v. Elliott , 923 S.W.2d 575, 577 (Tex. 1996) (“At common law, an attorney owes a duty of care only to his or her client, not to third parties who may have been damaged by the attorney's negligent representation of the client.”). Moreover, because of the obligations an attorney owes to his client, no fiduciary duties are found where the attorney's relationship to a third party is adversarial. Schechter v. Blank , 627 N.E.2d at 109 (“Since an attorney 'must represent his client with zeal and undivided loyalty in adversarial matters,' he cannot have fiduciary responsibilities to third parties which may interfere with this duty to his client and leave him vulnerable to liability.”).

Notwithstanding the lack of any direct, fiduciary relationship with a non-client, however, a number of courts have been faced with claims suggesting that an attorney can be held liable for “aiding or abetting” the breach of a fiduciary duty that the client, not the attorney, owes to the non-client. See, e.g., Durham v. Guest, 171 P.3d 756, 759 (N.M. App. 2007), reversed in part on other grounds, 145 N.M. 694, 204 P.3d 19 (N.M. 2009) (“[A]n attorney who is representing a client in an arbitration is not liable for aiding and abetting a breach of the client's fiduciary duty, unless the attorney acted outside the scope of representation, acted only in his or her own self-interest and contrary to the client's interest, or acted in a manner that would fall within the “crime or fraud” exception to the attorney-client privilege provided by the rules of professional conduct.”); Reynolds v. Schrock , 142 P.3d at 1069 (“[F]or a third party to hold a lawyer liable for substantially assisting in a client's breach of fiduciary duty, the third party must prove that the lawyer acted outside the scope of the lawyer-client relationship.”); In Re Student Finance Corp., 335 B.R. 539 (D. Del. 2005) (finding no cause of action for aiding and abetting a breach of fiduciary duty under Pennsylvania law); Alpert v. Crain, Caton & James, P.C. , 178 S.W.3d at 407 (“Absent any allegation that Crain Caton committed an independent tortious act or misrepresentation, we decline Alpert's invitation to expand Texas law to allow a non-client to bring a cause of action for 'aiding and abetting' a breach of fiduciary duty '”); Spinner v. Nutt , 631 N.E.2d at 546 (“An allegation that the trustees acted under the legal advice of the defendants, without more, is insufficient to give rise to a claim that an attorney is responsible to third persons for the fraudulent acts of his clients.”). As demonstrated by the cases cited above, the majority of courts to have considered this claim have rejected it outright based on the policies supporting attorney immunity to suits by non-clients.

As succinctly stated by the New Mexico Court of Appeals in its rejection of a claim against a lawyer for aiding and abetting her client, an insurer, in allegedly breaching the fiduciary duty owed to its insured:

To determine otherwise would have a chilling effect on representation. If we were to accept Plaintiffs' argument, the following would result: anytime a plaintiff alleged that a defendant had breached a fiduciary duty to the plaintiff, an additional claim against the defendant's counsel for aiding and abetting that breach would withstand a rule 1-012 (B)(6) motion [to dismiss], even though the defendant's counsel had simply been representing the client's position in an adversarial proceeding.

Durham v. Guest , 171 P.3d at 760; see also Reynolds v. Schrock , 142 P.3d 1062, 1068 (Or. 2006) (“A lawyer who is sued for substantially assisting a client's breach of fiduciary duty becomes subject to divided loyalties.”).

Other courts have taken a slightly broader view, permitting a cause of action for aiding and abetting breach of fiduciary duty to be maintained by a non-client against a lawyer in a non-litigation situation, but have limited the cause of action to situations where it can be shown the lawyer was an active and knowing participant in the breach. For example, in Chem-Age Industries v. Glover, Inc. , 652 N.W.2d 756 (S.D. 2002), the South Dakota Supreme Court was faced with a suit by a corporation's investors against an attorney who prepared the incorporation documents. Among other things, the plaintiffs claimed that the attorney should be held liable for breaching his fiduciary duty to the investors. While the court found that the attorney owed no direct fiduciary duty to the non-client investors, the court nonetheless permitted a cause of action for aiding and abetting a breach of fiduciary duty. However, while it recognized the cause of action, the South Dakota Supreme Court limited the claim to instances in which a “defendant substantially assisted the fiduciary in the achievement of the breach ' [and] knew that the fiduciary's conduct constituted a breach of duty.” Id. at 775. Similarly, in Thornwood v. Jenner & Block , 799 N.E.2d 756 (Ill. App. 2003), the Illinois Court of Appeals limited application of the tort to situations in which attorneys “knowingly and substantially assist their clients in causing another party's injury.” Id. at 768. Thus, while these courts recognized the cause of action, they confined it to an attorney's active participation in the breach, i.e., where the attorney has stepped outside the normal bounds of the attorney-client relationship. Cf. Doctor's Co. v. Superior Court , 775 P.2d 508, 516 (Cal. 1989).

In contrast to the situations discussed above, the Arizona Court of Appeals' holding in Chalpin v. Snyder , 220 Ariz. 413, 207 P.3d 666 (Ariz. App. 2008), discussed below, appears to be a wholesale departure from the traditional application of attorney immunity to non-clients. There, the Arizona Court of Appeals greatly expanded traditional notions of attorney liability by permitting claims for aiding and abetting breaches of fiduciary duty where, historically, the qualified immunity principles discussed above would have shielded the attorneys from suit. The case is particularly important because it is decided in the liability insurance context.

Chalpin v. Snyder

In Chalpin v. Snyder, the Arizona Court of Appeals found that an
attorney could be held liable for aiding and abetting his insurer-client's tortious litigation conduct, specifically the insurer's alleged unjustified disclaimer of coverage under a commercial automobile policy. This case is particularly troubling for two reasons: 1) it involves only the provision of legal advice and legal strategy recommendations that, on their face, appear to be squarely within the bounds of the attorney-client relationship and do not involve any indication of self-dealing by the attorney; and 2) contrary to the weight of authority, it permits an adverse non-client to assert a claim against the attorney for legal advice given both prior to and during the course of litigation. Some discussion of the facts is appropriate to appreciate the significance of the court's holding.

The Chalpin case arose from an automobile accident involving Simon Chalpin's daughter, Debra. In March 1996, Hi-Health Supermarket Corporation (“Hi-Health”), where Chalpin was president and CEO, requested that its insurer, Reliance Insurance Company (“Reliance”) provide automobile insurance coverage for Debra under Hi-Health's commercial liability policy. The policy permitted Hi-Health to add personal vehicle coverage for any vehicle in which it had a property interest. While Debra served as a director of Hi-Health, at the time coverage was requested she lived in California where she attended law school, and had a California driver's license. It is unclear from the opinion whether Hi-Health had any ownership interest in her vehicle.

Hi-Health's insurance broker worked with Reliance to add Debra to the policy. Among other information, the broker submitted to Reliance a written Commercial Policy Change Request Form, indicating that the car was “garaged in Phoenix, AZ.” Reliance did not ask the broker or Hi-Health any questions about the intended coverage prior to issuance, and it accepted Hi-Health's premium payment for the coverage.

Approximately five months later, after leaving a bar in Los Angeles, Debra ran a red light and struck another car driven by Rhonda W., who was severely injured and left in a vegetative state. Rhonda W's family sued Debra, who tendered the claim to Reliance. Reliance conducted a review of the claim and concluded that “[t]here were no coverage question[s] on this claim.” Reliance agreed to defend Debra and assured both her and Chalpin that “there was coverage for her and her car,” despite its knowledge that Debra had only limited involvement with Hi-Health, used the vehicle for personal use, and lived in California. Thereafter, Reliance attempted to settle the matter with Rhonda W.'s family. At mediation, Rhonda W.'s family demanded a settlement of $5 million, but Reliance had only provided its representative with $2 million in authority (Reliance's representative had requested $5 million in authority prior to the mediation), so the matter did not settle.

The day of the mediation, Reliance prepared an internal document indicating that “Reliance will face a 'bad faith' claim on this case” if it does not settle. The document also indicated that Reliance's representatives wanted to conduct a conference call for the purpose of “developing info[rmation] sufficient to disavow coverage for this incident.” After the failed mediation, Reliance prepared additional internal documents indicating that it intended to “conduct an investigation with an eye toward disavowing coverage.” Chalpin v. Snyder , 220 Ariz. at 416, 207 P.3d at 669.

To affect its strategy, Reliance hired J. Kevin Snyder (“Snyder”) and his firm, Robin, Kaplan, Miller & Cipesi (“Robin, Kaplan”) to act as its investigator. Reliance also involved its special investigation unit and retained a Phoenix law firm to provide a coverage opinion. Neither the special investigation unit nor the Phoenix law firm found a basis to disavow coverage. In fact, the Phoenix law firm opined that Arizona's doctrine of reasonable expectations precluded Reliance from disavowing coverage. Snyder also initially issued a coverage opinion concluding that because Reliance had accepted premium payments, “there would then be expectation of coverage for the vehicle and driver.” Id. After receiving these opinions, Reliance's internal documentation indicated its conclusion that “there does not appear to be any help from the coverage opinions,” and “under the doctrine of expectation of coverage, it appears we are on the hook for this claim.” Id.

Despite his initial opinion that there was no basis to deny coverage, Snyder later recommended that Reliance challenge coverage to put pressure on Rhonda W.'s family to settle the claim for fear that coverage might be rescinded. Snyder's suggestion was made with the expectation that all claims would be settled prior to resolution of the coverage dispute. Apparently Reliance adopted Snyder's suggestion and Snyder sent Hi-Health a reservation of rights letter, on behalf of Reliance, notifying Hi-Health that Reliance planned to “file an action for declaratory relief to determine whether there is coverage.” Id. The letter also told Hi-Health that “under California law, the policy is void and can be rescinded,” and identified four material facts not disclosed at the time Hi-Health requested coverage, specifically: (1) a prior DUI charge; (2) a policy cancellation by a prior insurer; (3) Debra's non-employee status; and (4) Debra's use of the vehicle for personal purposes. Id.

Prior to filing any lawsuit, however, in May 1997 Reliance provisionally settled the claim with Rhonda W.'s family for $8.5 million. A month later, Debra and Hi-Health filed their own action seeking a declaration that coverage existed. Reliance counterclaimed for fraud, negligent misrepresentation, unjust enrichment, breach of contract, and breach of an implied promise, and sued Chalpin personally on the theory that Hi-Health was simply his corporate alter ego. The trial court ultimately granted summary judgment in favor of Chalpin and Hi-Health, but it permitted Reliance's claims for fraud and to pierce the corporate veil to go to the jury. The jury ultimately found that coverage existed and rejected Reliance's claims, and the trial judge awarded attorneys' fees and costs to Chalpin and Hi-Health.

Due to Reliance's bankruptcy, Chalpin's and Hi-Health's attorneys' fees were never paid. Chalpin and Hi-Health then instituted suit against Snyder and his firm. They asserted various claims, including aiding and abetting, breach of fiduciary duty, and aiding and abetting bad faith. The trial court dismissed or granted summary judgment to Snyder and his firm on all claims. Chalpin and Hi-Health appealed, and the Court of Appeals reversed based upon a general application of the Restatement (Third) of the Law Governing Lawyers ' 56 (2000), stating, “[t]he Arizona Supreme Court has adopted the general rule set forth in the Restatement (Third) of the Law Governing Lawyers that 'lawyers have no special privilege against civil suit.'” Chalpin v. Snyder , 220 Ariz. at 423, 207 P.3d at 676. The Court of Appeals further held that “[w]hen a lawyer advises or assists a client in acts that subject the client to civil liability to others, those others may seek to hold the lawyer liable along with or instead of the client.” Id. citing Restatement (Third) of the Law Governing Lawyers ' 56.

The Court of Appeals ignored Comment b to ' 56, which specifically provides that “courts considering the civil liability of lawyers must consider how a ruling that affirms or precludes liability would affect the vigorous representation of clients within the limits of the law '” Id. Had this factor been considered, consistent with the findings in the cases cited above, the Arizona Court of Appeals would likely have concluded that the tort should not be recognized for the reasons articulated by the New Mexico Court of Appeals in Durham, or at minimum, would have imposed significant limitations such as those delineated by the South Dakota Supreme Court in Chem-Age Industries, and the Illinois Court of Appeals in Thornwood. In either circumstance, the long-standing policies supporting attorney immunity against non-client suits would have been vindicated.

While the Chalpin case may be viewed as a case of very bad facts making very bad law, the recognition of a cause of action for aiding and abetting a breach of fiduciary duty under the circumstances establishes a troubling, albeit aberrant, insurance precedent for a number of reasons. First, contrary to Chem-Age Industries and Thornwood, the court imposed no requirement that Snyder have actively and knowingly participated in the breach of Reliance's fiduciary duty. While it may be inferred that Snyder was aware of Reliance's steps to deny the claim ' apparently based on his advice ' there was no showing that he took any action in furtherance of the denial, except at the behest of the client and within the context of the attorney-client relationship. Second, the conduct in question was legal advice given in a litigation context, and Chalpin, Hi-Health, and Rhonda W. were clearly adverse parties from Snyder's perspective. Unlike other situations in which the tort of aiding and abetting has been adopted, the only action taken by Snyder was the filing of a counterclaim on behalf of his client in the declaratory judgment lawsuit filed by Chalpin and Hi-Health. Coverage was never denied, and while the early coverage opinions indicated that neither Snyder nor the unnamed Phoenix law firm believed that Reliance would prevail in a coverage dispute, there was no showing that the decision to contest coverage was without some merit (it is unclear from the opinion whether Snyder may have developed additional information during the course of the litigation with Rhonda W.'s family that caused him to revise his coverage opinion). Finally, there was no showing that Snyder or his firm took any action outside of the parameters of their attorney-client relationship with Reliance or that they stood to benefit from the coverage position taken by Reliance.

A petition for certiorari is presently pending with the Arizona Supreme Court. Unless the Arizona Supreme Court grants review and reverses, however, the Arizona Court of Appeals' decision now potentially places Arizona attorneys ' and in particular Arizona insurance coverage attorneys ' in the predicament attorney immunity is intended to avoid. Specifically, counsel is now in the position of having to consider his or her own interests along with the interests of the insurer-client when providing legal advice and making litigation-strategy recommendations, because the attorney now has to anticipate the possibility, however remote, that he or she will face a claim for aiding and abetting a breach of fiduciary duty in every coverage dispute where the insurer is accused of breaching a fiduciary duty owed to its insured.

Conclusion

Without appropriate limitation, the cause of action allowed in Chalpin v. Snyder threatens to swallow the long-standing application of attorney immunity to shield attorneys from suits by non-clients. While the viability of this claim in Arizona remains unclear, for the present, insurance coverage counsel and others who advise insurance companies who may owe fiduciary duties to their insureds need to be aware of at least the possibility that they may become a defendant in any breach of fiduciary duty claim against their client.

Jon T. Neumann is a commercial litigation partner in the Phoenix, AZ office of Steptoe & Johnson LLP. His practice focuses predominantly on insurance coverage, bad faith litigation, and reinsurance claims.