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Florida Justices to Mull Insurer’s Ability to Sue Law Firm

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The Florida Supreme Court will review and hear oral argument on a lower court’s decision denying the ability of an insurance carrier to file a legal malpractice complaint against a law firm it retained to defend its insured.

The Court has certified the question presented as a matter of great public importance: whether an insurer has standing to maintain a malpractice action against counsel hired to represent its insured where the insurance company has a duty to defend. Subsumed in the question, per the Florida Fourth District Court of Appeals, is whether the unique tripartite relationship between the insurer, insured and law firm is a limited exception to Florida’s strict privity rule.

In Arch Insurance Company v. Kubicki Draper, LLP, 2019 WL 318466 (Fla. App. Jan. 23, 2019), the Fourth DCA determined that Arch Insurance Company could not maintain a legal malpractice action against the law firm of Kubicki Draper, LLP, because the parties were not in privity and Arch was not an intended third-party beneficiary of the relationship between the law firm and Arch’s insured. The appellate court relied on two cases cited by the firm that noted the Florida Supreme Court had held an attorney’s liability for negligence in the performance of his or her professional duties is limited to clients with whom the attorney shares privity of contract.

In the underlying case, Kubicki Draper was hired by Arch to defend an accounting firm in a civil action for accounting malpractice. Arch alleged in its complaint against the firm that the law firm negligently delayed filing a statute of limitations defense, resulting in a larger-than-warranted settlement.

The Fourth DCA was not persuaded by the insurer’s argument that public policy and common sense dictate that an insurer be able to seek legal malpractice damages against the defense attorney retained as otherwise law firms would be shielded from liability. It held that the law had been settled by the Florida Supreme Court, which found that to bring a legal malpractice action, the plaintiff must either be in privity with the attorney – wherein one party has a direct obligation to another – or alternatively the plaintiff must be an intended third-party beneficiary. Florida courts had declined to expand the latter exception to include incidental third-party beneficiaries. The law firm noted that there was neither case law in support of the carrier’s arguments nor was there any submitted evidence that the law firm represented the carrier as well as the accounting firm in the litigation. It was the law firm’s duty to resolve the case within the policy limits and the firm had done so.

Nationally, the Florida courts’ position on a carrier’s standing to sue its retained firms for legal malpractice is by no means unusual. For example, a Pennsylvania federal district court in 2013 held that an insurer was not entitled to access communications between the insured and its attorney and that the carrier and insured were not the attorney’s joint clients. The fact that fees are paid by a third party, that court reasoned, does not necessarily make the insurer a co-client of the attorney.

The Washington Supreme Court has held that a limited duty to inform a third-party payor does not result in a duty of care owed to that third party for purposes of the attorney’s malpractice liability. That state had developed a six-part test to determine when an attorney may be liable for malpractice to a nonclient third party: 1) the extent to which the transaction was intended to benefit the plaintiff/third party suing the attorney; 2) the foreseeability of harm to the plaintiff; 3) the degree of certainty that the plaintiff suffered injury; 4) the closeness of the connection between the attorney defendant’s conduct and the injury; 5) the policy of preventing future harm; and 6) the extent to which the profession would be unduly burdened by a finding of liability. That court held that always permitting a carrier to sue its insured’s attorney for malpractice absent an actual and demonstrable conflict of interest would violate the ethical rule that an attorney shall not permit a third-party payer to direct or regulate the lawyer’s professional judgment.

Other jurisdictions, however, have held that though the attorney-client relationship between insurer and defense firm may not exist, a carrier may be equitably subrogated to the insured’s malpractice claim against the firm. A federal district court in Oklahoma in 2016 held accordingly in examining a case in which an insurer retained a firm to represent three insureds in a medical malpractice action. Two of the insureds were liable for over $1 million and the verdict was affirmed on appeal. After the firm sued the carrier for failing to pay fees, the insurer counterclaimed for breach of contract, legal malpractice and equitable subrogation. On a motion to dismiss, the equitable subrogation claim was sustained while the others dismissed. The court reasoned that it was equitable to permit an insurer to pursue an insured’s malpractice claim because the insured had no incentive to do so, and attorneys would escape accountability for their malpractice unless insurers were equitably subrogated to the insureds’ claims.

Still other jurisdictions permit an insurer to maintain a legal malpractice claim against a hired defense attorney, although requiring a high burden. In South Carolina, courts have held that because the insurer is in a unique position with respect to the attorney-client relationship and could maintain an action only when the attorney’s breach of duty to the insured causes damage to the insurer. A conflict of interest between the interest of the insured and insurer would prohibit a malpractice claim against an attorney. Insurers were also required to prove their malpractice claims by clear and convincing evidence.

Joyce S. Pickles
Associate

Cathleen Kelly Rebar
Partner