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Lieberman v. Employers Insurance of Wausau

Decided: September 15, 1980.


On Certification to the Superior Court, Appellate Division, whose opinion is reported at 171 N.J. Super. 39 (1979).

For affirmance as modified -- Chief Justice Wilentz and Justices Pashman, Clifford, Handler and Pollock. Concurring in part and dissenting in part -- Justice Sullivan. The opinion of the Court was delivered by Handler, J. Sullivan, J. (concurring in part and dissenting in part).


The present appeal arises out of the settlement of a medical malpractice action which had been brought against plaintiff, a neurosurgeon, by a former patient for injuries allegedly resulting from a negligently-performed arteriogram. The neurosurgeon's professional liability insurer retained and assigned outside counsel to defend its insured against that medical malpractice claim. Contrary to the physician's express wishes, the liability insurer eventually settled the medical malpractice suit. As a consequence of that settlement, the annual premiums for the insured physician's malpractice insurance were increased substantially. The plaintiff subsequently instituted this present action against his professional liability insurer for breach of contract and against the attorney who had been retained to defend the medical malpractice claim for breach of duties owed to the physician arising from the attorney-client relationship.


Plaintiff Howard Lieberman has been a licensed physician practicing neurological surgery in New Jersey since 1962. Together with another neurosurgeon, Frederick H. Ambrose, Lieberman has conducted his practice since 1970 in Elizabeth, New Jersey, as a professional corporation known as Elizabeth Neurosurgical Associates. Lieberman was also a staff member of several hospitals.

In early 1968, Lieberman obtained a short-term malpractice insurance policy with defendant Employers Insurance of Wausau (hereinafter Employers); this policy was renewed on November 1, 1968 and annually thereafter. With regard to the settlement of claims, these insurance policies read in pertinent part as follows:

[The insurer is empowered to] make such investigation and negotiation and, with the written consent of the insured, such settlement of any claim or suit as the company deems expedient. . . .

In the summer of 1968, while insured under the initial liability policy written by Employers, Lieberman performed an arteriogram*fn1

on Philip DeSarno. On September 8, 1970, DeSarno filed a medical malpractice action against Lieberman, Ambrose, and Elizabeth Neurosurgical Associates alleging that this arteriogram had caused him to lose the use of his hands. DeSarno sought $3,000,000 in damages. Lieberman then notified Employers, his liability insurer, about DeSarno's suit. On September 17, 1970, John B. Regazzi, an employee of Employers, assigned the defense of the DeSarno claim to Robert P. McDonough, an attorney licensed to practice law in New Jersey. McDonough then informed Lieberman and Ambrose that he was representing them in the DeSarno malpractice suit.

Under prevailing insurance practices, DeSarno's malpractice claim against Lieberman and Ambrose was later reviewed by the Union County Medical Society Committee, a county-based Medical Review Advisory Committee, in order to ascertain whether the claim was medically "non-defensible"; if it were, it would be deemed to be "chargeable" for purposes of imposing or increasing premium surcharges under the medical malpractice insurance surcharge program then in effect.*fn2 The committee found DeSarno's claim to be non-defensible and the suit accordingly became a chargeable claim against Lieberman under the surcharge program. Lieberman faced no immediate surcharge imposition, however, since the DeSarno claim was his only chargeable claim at that time and at least two such claims were required before a surcharge could be assessed under the program.

On June 4, 1971, Lieberman and Ambrose*fn3 met with a representative of Employers to discuss settlement possibilities with regard to the DeSarno suit. As a result of this meeting, Lieberman and Ambrose each signed identical settlement consent forms. Although McDonough never received copies of these signed consent forms, he did receive a memorandum from Employers confirming that the forms had been signed. Lieberman's signed consent form read in full as follows:

I, Howard Lieberman, M.D., hereby authorize Employers Insurance of Wausau, or their legal representative [blank] [,] to settle the claim of Philip DeSarno against me, within the limits of my policy with Employers Insurance.

After signing the settlement consent form, Lieberman received information indicating possible fraud or malingering on the part of DeSarno. Certain physicians had informed Lieberman that DeSarno had been using his hands normally. Lieberman communicated this information to Regazzi, who was responsible for the defense of the DeSarno claim at Employers. Regazzi in turn passed the information on to McDonough who then journeyed to the Mayo Clinic in Minnesota, where DeSarno had undergone treatment subsequent to the alleged malpractice. McDonough investigated the allegation of malingering and reported back to Employers but not to Lieberman. Employers concluded that the issues at trial would ultimately turn upon DeSarno's credibility and that proving fraud or malingering would, therefore, be almost impossible.

Lieberman asserts that he had orally informed Regazzi of the possible malingering and had expressed his view that a trial would be preferable to settlement under these circumstances. On January 26, 1973, Lieberman sent a certified letter to Regazzi referring to this conversation regarding DeSarno and again expressed his wish to proceed to trial on the medical malpractice claim.

This certified letter to Regazzi, which purports to be Lieberman's revocation of the previously-granted consent to settlement, reads in its entirety as follows:

In reference to our conversation, I should like to state that no settlement is to be made in the case of DeSarno vs. Lieberman, for any particular amount until said amount is agreed to by both Dr. Ambrose and myself.

A copy of this letter was shortly thereafter sent to McDonough's law firm.

Regazzi wrote to Lieberman on February 13, 1973 and rejected any attempt by the physician to revoke his consent to settlement negotiations. This letter read in pertinent part as follows:

I acknowledge receipt of your Certified Mail letter. . . .

Regretably [ sic ], based upon consents that were previously given, negotiations have been in progress prior to receipt of your letter and accordingly, must advise you ...

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