Emotional Distress in Malpractice Claims

Emotional distress is not uncommon in malpractice cases. Some jurisdictions have expressly permitted the recovery of such damages, while other jurisdictions don’t have any law addressing this potential healing area. A few states have addressed this issue in the past year, and the decisions are worth noting.

Last year, the Washington Supreme Court issued a decision that opened the door for potential damages in a legal malpractice action. In Schmidt v. Coogan, the malpractice claim was triggered by the alleged negligent representation in a personal injury suit that was filed after the statute of limitations. During the trial of the malpractice case, the plaintiff sought to amend her complaint to add damages for emotional distress. She alleged that her attorney harassed, intimidated, and belittled her when she raised the issue with the statute of limitations.

On appeal to the state Supreme Court, one of the issues addressed was whether emotional damages are recoverable in a legal malpractice case.   The Court held “that emotional distress damages are available for attorney negligence when distress is foreseeable due to the particularly egregious (or intentional) conduct of an attorney or the sensitive or personal nature of the representation.”   The Court noted that egregious conduct is not necessarily the only way to establish the right to recover damages for emotional distress, but is not “required” if the plaintiff can prove that the attorney’s conduct subjected him to significant emotional distress. In this particular instance, however, the plaintiff was unable to recover from emotional distress because the subject matter of the litigation was not particularly sensitive, she did not lose any freedoms, and her attorney’s actions were not egregious.

In contrast, two other courts recently held that distress damages in malpractice claims are not recoverable. In Rodriguez v. Nam Min Cho, the California Court of Appeals addressed the issue of what damages were recoverable in a default judgment. In its analysis, the Court relied on other state court opinions and noted that “a plaintiff generally could not recover emotional distress damages for legal malpractice.”  Similarly, in Desposito v. New Jersey, the U.S. District Court in New Jersey indicated that emotional distress damages are generally unavailable in a legal malpractice action. Quoting from prior state court decisions, the Court noted that “emotional distress damages should not be awarded in legal malpractice cases at least in the absence of egregious and extraordinary circumstances.”

Attorneys need to be mindful of the laws in their jurisdiction regarding the recovery of damages. While an attorney’s actions should never rise to the level of “egregious conduct,” knowing whether the law permits recovery for such damages and the type of conduct that would trigger such a claim is essential. Likewise, attorneys involved in a malpractice suit need to know the available defenses and when a claim for can be raised.

Engagement Letter Defense

An engagement letter is typically the first line of defense. It clarifies obligations, the scope of duties, the client’s identity, billing terms, and other vital clauses that are generally a must for most engagements. They may also include exculpatory language such as limitation of liability provisions, damages caps, or different contractual language, which may aid in defending a lawsuit. Yet, according to a recent decision, the clause was not enforceable because it was not explicit and clear.

In Warren Averett, LLC v. Landcastle Acquisition Corp., 349 Ga. App. 479 (2019), an accounting firm – “Accountant” – argued on appeal that the underlying court erred by finding unenforceable a contract provision that limited the number of recoverable damages. Accountant conducted year-end audits for its client, a law firm. When the law firm discovered that its managing partner had allegedly embezzled more than $15 million, it sued Accountant for breach of contract, professional negligence, and gross negligence.

The Accountant filed a motion for partial summary judgment contending that a provision within the parties’ contract limited any recoverable damages to the number of professional fees paid to the Accountant, which amounted to about $87,000. The clause within the parties’ engagement states:

Should you become dissatisfied with our services at any time, we ask that you promptly bring your dissatisfaction to our attention. If you remain dissatisfied, it is agreed that you will participate in non-binding mediation under the commercial mediation rules of the American Arbitration Association before you assert any claim. In any event, no claim shall be asserted which is more than the lesser of actual damages incurred or professional fees paid to us for the engagement.

In response, the plaintiff filed a cross-motion arguing that the clause was unenforceable as a matter of law because it was not sufficiently prominent to provide notice, and it was ambiguous and insufficiently explicit as to whether it applied to the claims for professional negligence and gross negligence. The court agreed and concluded that the clause was unenforceable due to its “lack of prominence among the surrounding terms, the ambiguous scope of the provision, and its invalidity as to the … claim for gross negligence.”

According to the court, the clause at issue was not prominent enough because:

  • The clause was “the same font size as that used throughout the entirety of the [contracts].”
  • The clause “is not capitalized, italicized, or set in bold type for emphasis.”
  • The clause is “not set off in a separate section that specifically addressed liability or recoverable damages, with a bold, underlined, capitalized, or italicized specific heading, such as “Limitation on Liability” or “DAMAGES.”
  • The clause is not “a prominent place within the contracts to emphasize the importance of the provision’s limitation on recoverable damages, such as being adjacent to another similarly significant provision or being next to the parties’ signature lines.”

Perhaps the silver lining in this decision that did not go the way of the professional is that it could provide us with a road map of how best to avoid a similar result in engagement letters moving forward.

Prudent professionals maintain different types of insurance to protect against various risks. Some typical policies for professionals may include D&O, cyber, and/or E&O policies. The foregoing policies and others may overlap, while others allow gaps for claims that would not be covered. It is incumbent upon each professional to purchase the perfect mix applicable to her practice; there is no one size fits all and more is not necessarily sufficient. Although multiple policies may fit together seamlessly to form a safety net, other policies allow for gaps in coverage that could result in out-of-pocket exposure.

Professionals may assume that multiple policies working together will afford them coverage from all claims. Wrong. Professionals should be cautious that policies do not leave holes. Consider, for example, a consumer services company that is sued for alleged violations of state unfair business statues for misleading advertising claims. The company maintains both D&O and E&O coverage, and tenders the claim to each carrier. Instead of receiving “double” coverage, the employer soon learns that the D&O insurer has rejected that claim because it falls within its “professional services” exclusion, while the E&O carrier avers that the claim is a non-insured wrongful act, which falls outside the scope of its narrowly defined “professional services” provision.

While it is impossible to foresee every type of claim, professionals can take steps to protect themselves from gaps in coverage when negotiating their D&O and E&O policies. Specifically, when possible, the company should review the language of each policy together to ensure that the D&O “professional services” exclusion is clearly defined and is no broader than the definition “professional services” covered under the E&O policy.  Additionally, the insured professional should be sure to scrutinize how each policy interacts and clarify which policy has priority under particular circumstances. By taking steps in advance to clarify and coordinate policies, professionals will be in a better position to respond to a potential claim.