Sharrow v. State Farm Mutual Automobile Insurance

MURPHY, Chief Judge. This case involves allegations by an attorney that an insurance carrier has tortiously interfered with his contingent fee contract by settling a personal injury claim directly with the attorney’s client. -Determinative of the issue before us is the nature of the insurer’s conduct that must be alleged in order for such a claim to be actionable and whether the allegations of fact in the attorney’s complaint “state a claim upon which relief can be granted.” Md. Rule 2-322(b)(2). I. On December 24,1983, Donald P. Zorbach was involved in an accident with an automobile insured by State Farm. Zorbach retained Ronald M. Sharrow, an attorney, for the purpose of pursuing a claim relating to personal injuries sustained in that accident.

In a written agreement dated December 29, 1983, Sharrow agreed to represent Zorbach for a fee of one-third of any recovery obtained through settlement or 40% if suit was filed. On March 16,1984, Sharrow filed a three count complaint in the Circuit Court for Baltimore City against State Farm and two of its employees, Mary A. Burns and William Rinehardt, alleging that they tortiously interfered with his contingent fee contract by negotiating and settling the claim directly with Zorbach. Count I of the complaint, entitled “Intentional Interference with Contract Rights— ⁷⁵⁷ State Farm,” alleges the existence of the contingent fee contract; that Sharrow wrote Burns on January 4, 1984, advising State Farm of his representation of Zorbach; that State Farm, through Burns, acknowledged Sharrow’s representation and mailed the appropriate claim form to him for completion by Zorbach; that Sharrow forwarded a completed “State Farm Insurance Company Personal Injury Protection Form” to the insurer which subsequently forwarded to Sharrow confirmation of payments which it made to various medical providers on Zorbach’s behalf. The complaint then alleges: “11.

On or about February 20, 1984, Zorbach advised Sharrow he was in desperate financial condition and requested that Sharrow lend him money. Sharrow declined and advised Zorbach that it is unethical for an attorney to make a loan to a client. Zorbach was further advised that it was not the practice of an insurance carrier to advance money against a settlement and it would be unwise to approach State Farm with such a request. 12. Due to his dire financial condition, Zorbach, on or about February 21, 1984, contached State Farm and requested an advance.

Zorbach acted without Sharrow’s knowledge or acquiescence and contrary to Sharrow’s advice. State Farm, through its agents, servants and employees, denied Zorbach’s request and instead negotiated a settlement of Zorbach’s claim for $2,500.00. Zorbach was directed to go to the Harford Road office to execute certain documents to finalize the settlement. 12. [sic ] Zorbach went to State Farm’s offices as directed and executed a release. Zorbach was also required by State Farm’s agents, servants and employees to execute a document discharging Sharrow as his attorney and stating that he had advised Sharrow of his intention to settle directly with State Farm.

This written statement was false and was known by State Farm to be false. (See Exhibit 7 attached hereto.)[ 1 ] ⁷⁵⁸ 13. State Farm through its agents, servants and employees, was aware of the existence of a contractual agreement between Sharrow and Zorbach and had full knowledge that the contractual agreement was in existence at the time of the settlement negotiations with Zorbach. 14. State Farm, through its agents, servants and employees, intentionally, willfully and maliciously interfered with Sharrow’s contractual rights by negotiating with Zorbach while he was still represented by Sharrow, by causing Zorbach to terminate Sharrow’s representation without Sharrow’s knowledge, and by requiring that Zorbach falsely state, in writing, that he had advised Sharrow of his intention to deal directly with State Farm. 15.

State Farm’s actions in interfering with Sharrow’s contract rights were perpetrated solely to injure Sharrow and wrongfully deprive it of the benefit of its contract with Zorbach.” Count II, entitled “Intentional Interference with Contract Rights—Mary A. Burns,” reasserts the same allegations and adds that Burns was the claim adjuster assigned to ⁷⁵⁹ Zorbach’s claim; that she had full knowledge of the existence of Sharrow’s contract with Zorbach; that she acted within the scope of her employment and that she “18. ... intentionally, willfully and maliciously interfered with Sharrow’s contract rights by negotiating with Zorbach while he was still represented by Sharrow, by causing Zorbach to terminate Sharrow’s representation without Sharrow’s knowledge, and by requiring that Zorbach falsely state in writing that he had advised Sharrow of his intention to deal directly with State Farm. Burns further interfered with Sharrow’s contract rights by stating to Zorbach that since it was Zorbach, not Sharrow, that settled the claim, Sharrow should not receive a fee for legal services.” Sharrow further alleged that Burns’ actions were undertaken solely to injure and wrongfully deprive him of the benefit of his contract. Count III, entitled “Intentional Interference with Contract Rights—William Rinehardt,” adopts the allegations of the prior two counts and focuses on Rinehardt’s claimed tortious conduct. The count alleges that Rinehardt was acting within the scope of his employment as Burns’ supervisor and had full knowledge of Sharrow’s contract with Zorbach.

It states: “22. Subsequent to learning of the settlement with Zorbach, Sharrow contacted Rinehardt by telephone to discuss Burns’ conduct and to demand that a fee be paid to Sharrow. Rinehardt refused to discuss the matter and abruptly terminated that conversation. 23. Rinehardt was aware of the acts perpetrated by Burns and participated with Burns in maliciously interfering with Sharrow’s contract rights. 24.

Rinehardt failed to take appropriate action to correct the conduct of Burns despite being specifically informed of her conduct by Sharrow and further refused to honor Sharrow’s demand that a fee be paid in accordance with the contractual agreement with Zorbach. ⁷⁶⁰ 25. Rinehardt intentionally, willfully and maliciously interfered with Sharrow’s contract rights by participating in, and refusing to correct, the acts of Burns and by refusing to honor Sharrow’s claim to a fee.” It is further alleged that Rinehardt acted solely to injure and deprive Sharrow of the benefit of his contingent fee contract. With respect to all three counts, Sharrow alleged that as a direct and proximate result of the conduct of State Farm, Burns and Rinehardt, he was damaged; he claimed $50,000 compensatory and $1,000,000 in punitive damages. State Farm demurred to Sharrow’s complaint.

Treating the demurrer as a motion to dismiss under Md. Rules 2-302 and 2-322(b), the trial court dismissed the complaint and Sharrow appealed. The Court of Special Appeals affirmed the judgment in Sharrow v. State Farm Mutual, 63 Md. App. 412 , 492 A.2d 977 (1985). The intermediate appellate court held that an action for tortious interference with contractual relations is applicable to professional service contracts between attorneys and clients. In considering whether particular conduct by a third party is actionable, the court recognized that an attorney has a legitimate interest in a contingent fee contract.

The court also recognized the good faith right of the client to settle his cause of action without the attorney’s knowledge or consent. And, moreover, it observed that an insurance company “has a right—and whenever reasonable and possible, a duty—to settle a claim made against its insured.” 63 Md.App. at 424 , 492 A.2d 977 . But nothing in these respective rights and interests, the court said, constitutes justification for a third party to maliciously interfere with an attorney-client contract while it is in existence. Citing cases from other jurisdictions, the court, speaking through Judge Wilner, said that as a general rule “the mere negotiation and settlement of a claim by an insurance company directly with the claimant, even when the company is aware of the attorney’s employment, is not enough to create liability for malicious interference with the attorney’s contingent fee contract.

In most of ⁷⁶¹ the cases finding such liability, there has been the presence of some more egregious conduct on the part of the defendant, usually in the nature of fraudulent statements made to the claimant, which induces him to dismiss the attorney and settle with the company.” Id. at 420 , 492 A.2d 977 . The court noted that the cases supporting this view have predicated liability “upon fraudulent or unconscionable conduct that actually induced the claimant to dismiss his or her attorney and settle directly with the insurer.” Id. at 421 , 492 A.2d 977 . The actionable conduct, according to the intermediate appellate court, “was not the settlement itself, or even the pursuit of direct negotiations, but rather the acts or statements that induced the claimant to discharge the attorney and conclude the settlement.” Id. That there be “culpable conduct” apart from the mere settlement or direct negotiation between the client and the insurer was said to be consistent with the nature of the tort.

Id. at 422 , 492 A.2d 977 . The court found additional support for its analysis in Restatement (Second) of Torts § 766 (1977), which states that the tort consists of “intentionally and improperly interfering] with the performance of a contract ... between another and a third person by inducing or otherwise causing the third person not to perform the contract.” The court emphasized that under Comment a to this section, the interference, to be actionable, must be “improper”; and that under § 767 a “chief” factor, to be balanced with other factors there specified, in deciding whether an actor’s conduct is improper is the nature of the conduct, e.g., that “physical violence, fraudulent misrepresentation and threats of illegal conduct are ordinarily wrongful means” and thus actionable. The court thereafter concluded that an insurer’s conduct in settling a claim directly with a client known to be represented by counsel is actionable in these circumstances: “If, to achieve its own ends, an insurer deliberately induces the claimant to repudiate his retainer agreement by means of threats, misrepresentations, or oth ⁷⁶² er coercive or unconscionable conduct, its ‘right to settle’ cannot save it from liability to the lawyer who has suffered economic detriment from the repudiation.” Id. at 424, 492 A.2d 977 . On the other hand, the court said that if a claimant indicates that he is willing to settle without the intervention of his lawyer and the insurer “simply responds to that and proceeds in good faith to settle the claim without engaging in any of the opprobrious conduct noted above,” the insurer’s conduct is not improper and is therefore not actionable.

Id. at 424 , 492 A.2d 977 . Applying these principles, the court then undertook to determine “whether, assuming the truth of all wellpleaded allegations of fact, appellant’s complaint ‘state[s] a claim upon which relief can be granted.’ Md. Rules 2-322(b)(2).” 63 Md.App. at 413 , 492 A.2d 977 . In affirming the trial court’s judgment that Sharrow’s allegations provided no basis for liability, the court noted, as to Count I, that Zorbach approached State Farm and reached a settlement agreement without “blandishments or improper inducements” on State Farm’s part. Id. at 425 , 492 A.2d 977 .

Furthermore, said the court, “[t]he allegedly false statement required by State Farm [as to Zorbach having advised Sharrow of his intention to settle directly with State Farm and that he had discharged Sharrow] (1) came after the parties had already made their agreement to settle, and (2) was not entirely false” in that the statement that Sharrow had been discharged became true the instant the document was signed. Id. at 425 , 492 A.2d 977 (emphasis in original). The allegations of Counts II and III were also found to be insufficient. Burns’ alleged statement that Zorbach did not have to pay Sharrow was construed as having been made only after a settlement was concluded and could not, therefore, have served to induce Zorbach to repudiate his agreement with Sharrow.

Since Burns did nothing improper, the court reasoned that Rinehardt did nothing improper in refusing to disavow Burns’ actions and to pay Sharrow. Id. at 425-26 , 492 A.2d 977 . ⁷⁶³ We granted Sharrow’s petition for certiorari to determine whether the allegations of his complaint were sufficient to state a cause of action and thus preclude the granting of a motion to dismiss.

II

Intentional or malicious interference with contract is a well-established tort in Maryland. See, e.g., Vane v. Nocella, 303 Md. 362 , 494 A.2d 181 (1985); Natural Design, Inc. v. Rouse Co., 302 Md. 47 , 485 A.2d 663 (1984); Rite Aid Corp. v. Lake Shore Inv., 298 Md. 611 , 471 A.2d 735 (1984); Wilmington Trust Co. v. Clark, 289 Md. 313 , 424 A.2d 744 (1981); Stannard v. McCool, 198 Md. 609 , 84 A.2d 862 (1951); Goldman v. Building Assn., 150 Md. 677 , 133 A. 843 (1926); Cumberland Glass Mnf'g Co. v. DeWitt, 120 Md. 381 , 87 A. 927 (1913), aff'd, 237 U.S. 447 , 35 S.Ct. 636 , 59 L.Ed. 1042 (1915); Knickerbocker Co. v. Gardiner Co., 107 Md. 556 , 69 A. 405 (1887); Gore v. Condon, 87 Md. 368 , 39 A. 1042 (1898). As we said in Natural Design, supra, 302 Md. at 69 , 485 A.2d 663 , the tort may arise where intentional interference by a third party with another in his business or occupation induces a breach of an existing contract or where, absent a breach of contract, there is malicious or wrongful interference with an economic relationship. See also Lake Shore Investors v. Rite Aid Corp., 67 Md.App. 743 , 509 A.2d 727 (1986).

The 1887 case of Knickerbocker Co. v. Gardiner Co., supra, is a leading authority in Maryland on the tort of intentional or malicious interference with contract. There, a dairy and the Sumwalt Ice and Coal Company entered into a contract whereby Sumwalt agreed to supply ice to the dairy. Sumwalt, however, was forced by the exigencies of its business to purchase ice from the Knickerbocker Ice Co. which threatened to cease supplying ice to Sumwalt if it continued to supply the dairy. The dairy was then forced to purchase ice from Knickerbocker at a greater price and ⁷⁶⁴ sued Knickerbocker, alleging interference with its contract with Sumwalt.

Relying largely on Lumley v. Gye, 2 El. & Bl. 216, 118 Eng. Rep. 749 (1853), Chief Judge Boyd noted for the court that the relevant authorities sustained the right to maintain a tort action upon the doctrine that a person who induces one of two parties to a contract to break it,