Attorneys who are hired by insurance carriers to defend policyholders from lawsuits have a duty to represent the insured, but the insurer is paying their fees.
Obviously, the insurer has a financial interest in the outcome of the litigation. The insurer has to pay any settlement or award of damages. But if something goes wrong, does the insurer have a right to pursue a malpractice claim against the attorney?
The Florida Supreme Court on Thursday ruled that if the insurance contract gives the insurer subrogation rights, yes, it does.
“Where an insurer has a duty to defend and counsel breaches the duty owed to the client insured, contractual subrogation permits the insurer, who—on behalf of the insured—pays the damage, to step into the shoes of its insured and pursue the same claim the insured could have pursued,” the high court said in a unanimous decision.
Arch Insurance Co. hired the Kubicki Draper law firm to represent its policyholder, Spear Safer CPAs and Advisors from a lawsuit filed by a receiver for Mutual Benefits Corp. in 2003.
MBC had run a fraudulent investment scheme from 1994 to 2004, selling $1 billion in viatical settlements to 29,000 investors. Spear Safer was its accountant. The Securities and Exchange Commission filed a lawsuit in 2004 that shut down the operation and put its assets into receivership.
The appointed receiver filed a malpractice lawsuit against Spear Safer, alleging that is accounting practices were negligent. Arch, the company’s insurer, hired Kubiki Draper to defend its client.
During the course of the litigation, Kubiki erroneously advised Arch and Spear Safer that the statute of limitations for a professional malpractice action was four years, when in fact it was only two. Based on that advice, Arch agreed with the MBC receiver to toll the statute of limitations while the parties negotiated a settlement.
Kubiki at first said that MBC’s case against Spear Safer was “very weak” and the value of the claim was the “cost of defense.” But the law firm abruptly changed course later and advised Arch that the value of the lawsuit was “within policy limits.”
Arch hired Butler Pappas for a second opinion. The new law firm filed a motion with the district court to amend its defenses to include the statute of limitations.
But by that time the lawsuit was nearing a trial date. Safer and Spear demanded that Arch settle the case to avoid a potential verdict of $68 million. Arch agreed to pay $3.5 million, the remaining policy limits.
Arch then filed suit against the Kubiki in Broward County Circuit Court, alleging that the law firm’s negligence forced it to pay a “grossly inflated” settlement. The trial court granted summary judgment in favor of Kubicki. The court said the question had never before been raised, but decided than an insurer has no standing to bring a malpractice action against an attorney who represented its insured.
The court said Arch did not have “privity” with Kubicki, meaning there was no legal relationship between the two parties that created a duty of care. A panel of the Fourth District Court of Appeal agreed and affirmed the decision, but the court also sent a certified question to the Florida Supreme Court. “Whether an insurer has standing to maintain a malpractice action against counsel hired to represent the insured where the insurer has a duty to defend.”
Arch argued that a ruling that if insurers are barred from pursuing malpractice claims against attorneys who negligently represent their insureds would allow those attorneys to escape responsibility for gross negligence or even malfeasance.
“Absent the insurer’s ability to assert a malpractice claim against defense counsel, the only beneficiary is the negligent attorney, who ends up immune from accountability for his or her negligence,” the insurer’s brief says.
The American Property and Casualty Insurers Association filed an amicus brief in the case. The APCIA said Florida and Ohio are the only states where the judicial branch has created a rule of professional conduct that governs whether a defense attorney defending a lawsuit against an insured has one client or two.Rule 4-1.7(e) explains that lawyers representing insured clients have a “tripartite” relationship in which they represent both the insured and the insurance company unless there is a conflict of interest, the brief says. Attorneys that intend to solely defend the insured are required to inform the insurer at the beginning of representation.
Kubicki Draper failed to follow Rule 4-1.7(e) and never advisied Arch whether the firm represented both Arch and the insured, “which is a departure from the norm,” the APCIA said.
“The firm’s failure to adhere to its ethical duty to notify Arch and its insured whether the firm represented both or only the insured should not give the firm an ‘out’ to argue the insurer has no standing to pursue a malpractice claim against it,” the brief says.
The Supreme Court agreed. The high court rephrased the certified question to include the existence of a subrogation clause in the insurance contract. The opinion says that the subrogation clause gives Arch privity with the defense counsel because it created a contractual right for the insurer to step into the shoes of the insured to pursue recovery from third parties of any payouts.
The opinion says, “Florida public policy does not support shielding the law firm from accountability for its professional malpractice.”
Kubicki Draper President Brad McCormick did not respond to an email and telephone call requesting comment on Thursday.
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