Insurer Permitted to Sue Panel Law Firm for Malpractice

Christopher J. (Chris) Butler is the Head of Claims for Bowhead Specialty Underwriters.  Prior to this he was a Managing Director overseeing the Professional and Management Liability claims groups in North America and Bermuda for Markel, which encompassed all E&O and D&O claims as well as the Environmental and Healthcare claims groups. He held a similar position at Alterra prior to its merger with Markel. Before this he spent over nine years with The Hartford managing the Financial Services E&O and D&O claims group. Chris received his bachelor’s degree from the College of the Holy Cross and his law degree from St. John’s University School of Law.

In a recent decision, the Florida Supreme Court considered the question of whether an insurance carrier can bring a legal malpractice claim against a law firm that the carrier hired to defend its insured.  The Court, in a break with previous Florida case law on this issue, found that the carrier could bring the claim based upon the contractual subrogation provision in the policy.  This is a significant change that could result in heightened risk when writing E&O insurance for “insurance defense” type law firms in Florida, but could also enhance protection for carriers that ultimately pay the price for the negligence of the law firms they hire.

In the underlying matter here, Arch Insurance Company (“Arch”) provided accountant’s E&O coverage to Spear Safer CPAs (“Spear”).   Spear had been an auditor for Mutual Benefits Corp. (“MBC”), a bankrupt viatical settlement company that was under investigation by the SEC.  The receiver for MBC brought a claim of accounting malpractice against Spear.   Arch then retained the Kubicki Draper (“KD”) law firm to represent Spear.  Ultimately, a settlement of the claim against Spear was reached and Arch paid $3.5 million from its policy.  At some point, Arch discovered that the claim against Spear might have been barred by the applicable statute of limitations, which could have drastically reduced the value of the case, but KD allegedly failed to raise the issue in a timely manner.  At the conclusion of the case, Arch filed suit against KD for legal malpractice and breach of contract.  The firm moved for summary judgment arguing that there was no contractual relationship between it and Arch and therefore it did not owe Arch any duty.   Arch essentially argued that it was an intended beneficiary of the contract between the firm and its client and that it would be bad public policy to shield the firm from liability for its malpractice.   The underlying trial and appellate courts agreed with KD that there was no contractual relationship and therefore Arch had no standing to sue.

The Florida Supreme Court reversed the lower courts’ rulings and found that Arch did have standing to pursue this claim.  Interestingly,  the Court did not find that Arch had any sort of contractual relationship with the firm but rather held that where the insurer is subrogated to the insured’s rights under the insurance policy, the insurer can proceed in the shoes of the insured.   So, as long as the policy has a subrogation provision an insurer should be able to maintain this type of claim against a law firm, working for an insured, that commits malpractice.

This seems like very basic insurance policy interpretation as subrogation provisions are regularly enforced.  However, in this context it is a major departure from the public policy of Florida (and other states) that has shielded law firms from these claims.  Courts have held that claims for legal malpractice cannot be assigned because they involve a “confidential fiduciary relationship of the very highest character, with an undivided duty of loyalty owed to the client”.  Some have viewed this standard as a judge designed rule to “protect their own” by shielding the legal profession from more expansive lawsuits rather than high minded regard for the integrity of the profession.  In any event, the latest decision demonstrates that the trend line might be moving in the direction of greater assignability of legal malpractice claims.

The ultimate impact of this decision can be examined through two separate lenses: (1) as a market for legal malpractice insurance and (2) as a carrier that hires defense counsel for insureds  As a writer of legal malpractice insurance this could have an impact on the class of law firms that serve as panel counsel to insurance companies.  When these claims were viewed as unassignable and the insured “client” was fully covered by a policy, the malpractice of a defense attorney would not give rise to damages to the “client” and therefore a great amount of risk was mitigated.  Now, with contractual subrogation of these claims recognized, carries have the ability to make a direct claim on firms which is likely to result in additional claims.   On the flip side, for carriers that hire panel firms to represent their insureds, this decision provides an added level of protection.  While firms are often willing to “pay for” their mistakes in an informal manner to maintain a business relationship, this ruling will allow them to pass these matters on to their carrier which can be especially useful when resolving a complicated case, made more so by the conduct of a retained law firm.

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The Professional Liability Underwriting Society (PLUS) was founded in 1986 by industry professionals who recognized the need for a forum for individuals involved in the field of professional liability. The Society is a non-profit organization with membership open to persons interested in the promotion and development of the professional liability industry. Membership consists of over 6,500 individuals, representing over 1,000 companies active in the many fields of professional liability. PLUS currently receives the support of more than 200 companies through corporate membership. PLUS is recognized as the primary source of professional liability educational programs and seminars, assistance to its members to help serve clients, and information regarding professional liability. The Society is continually seeking new means to fulfill its mission statement and better serve its members.

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