Can an Excess Insurer Sue a Primary Insurer’s Defense Counsel for Malpractice?

Courts are split on whether an excess insurer can sue the primary insurer’s defense counsel for legal malpractice. There are two competing viewpoints that have emerged in the limited published case law. As an example, in American Centennial Ins. Co. v. Canal Ins. Co., 843 S.W.2d 480, 484-85 (Tex,1992), the Texas Supreme Court supported a cause of action by the excess insurer against the attorney retained by the primary insurer.

The Court explained:

[T]he concerns of the excess and primary carriers and the insured generally overlap in ensuring that the merits of the defense are not precluded from being heard because of attorney malpractice. “The best interests of both insurer and insured converge in expectations of competent representation.” [Citation omitted] While in some circumstances these interests may diverge, presenting a different situation, here the excess insurers do not predicate liability on tactical decisions by trial counsel implicating conflicting interests between the insured and the insurer. … [N]o new or additional burdens are imposed on the attorney, who already has the duty to represent the insured. … [I]f the asserted malpractice has resulted in payment of a judgment or settlement within the excess carrier’s policy limits, the insured has little incentive to enforce its right to competent representation. Refusal to permit the excess carrier to vindicate that right would burden the insurer with a loss caused by the attorney’s negligence while relieving the attorney from the consequences of legal malpractice. Such an inequitable result should not arise simply because the insured has contracted for excess coverage.

The Court in American Employers Ins. Co. v. Medical Protective Co., 165 Mich.App. 657, 660-61, 419 N.W.3d 4476, 448-49 (Mich. App. 1988) took the opposing view. In denying a claim by an excess insurer, the Court ruled:

To hold otherwise would in our judgment acknowledge a direct duty owed by the insured’s attorney to the excess insurer and would be tantamount to saying that insurance defense attorneys do not owe their duty of loyalty and zealous representation to the insured client alone. Such a holding would contradict the personal nature of the attorney-client relationship, which permits a legal malpractice action to accrue only to the attorney’s client. [Citations omitted.] Such a holding would also encourage excess insurers to sue defense attorneys for malpractice whenever they are disgruntled by having to pay within limits of policies to which they contracted and for which they received premiums. Were this to occur, we believe that defense attorneys would come to fear such attacks, and the attorney-client relationship would be put in jeopardy.

The question of whether an excess insurer could bring a legal malpractice claim against the attorneys retained by the primary insurer was recently addressed by the courts in Mississippi.

In Great American E&S Ins. Co. v. Quintairos, Prieto, Wood & Boyer P.A., 100 So.3d 420 (Miss. App. 2012), the Mississippi Court of Appeals considered whether the trial court properly dismissed the claims made by an excess insurance carrier against the law firm hired to defend the insured by the primary carrier. The underlying case involved a claim brought against a nursing home brought by a patient who had received inadequate and negligent care while a resident at the nursing home. The nursing home’s excess liability insurer, Great American, brought a legal malpractice action against the primary insurer’s defense counsel for mishandling the nursing home case which resulted in an alleged unnecessarily large settlement of that action.

During the pendency of the nursing home malpractice case, Great American requested evaluations and assessments of the claim from defense counsel. Defense counsel provided Great American with status reports. The status reports opined the settlement value of the case was between $150,000 and $400,000, based on the initial evaluation of the nursing home’s chart in the medical records. The reports stated that experts needed to be designated and that a physician expert had been contacted, but no experts had been retained. Thereafter, the primary insurer reassigned the defense of the case to the law firm of Quintairos, Prieto, Wood & Boyer P.A. (“Quintairos”).

At the time that Quintairos took over the defense there was a scheduling order in place setting the deadline for designation of experts for December 15, 2003. In November, the Plaintiff designated two expert witnesses with one of the expert witnesses being a physician. Plaintiff’s designation of experts included an expert report on how the negligent care of the nursing home had caused the plaintiff’s injuries and ultimate death.

Quintairos did not designate experts prior to the deadline for the designation of expert witnesses. After this missed deadline, in January 2004, Quintairos sent a status report to the primary insurer for the nursing care lawsuit which stated that experts had not been retained but that a physician expert would be necessary to offer expert testimony as to the cause of the medical conditions, injuries, and death. The January report stated that the case could have a compensatory damages value of $250,000 and that there did not seem to be a basis for awarding punitive damages, but if punitive damages were awarded the case would have a significantly higher value. The report also stated that the trial value of the case was approximately $500,000.

During the pendency of the nursing home malpractice case the lawyers opined that, “based on known facts, this case should have the value of $250,000 in compensatory damages. If punitive damages are awarded, the case value would be significantly higher. However, at this time [,] there does not seem to be a basis for awarding of damages … at this time, the trial value of this case is approximately $500,000.”

In February 2004 Quintairos attempted to designate a physician as an expert witness. Plaintiff moved to strike the witness and the motion was granted. As a result, the nursing home would not be able to offer expert witness testimony at trial. The next day, following the court’s ruling, Quintairos sent an updated lawsuit evaluation increasing the settlement value of the case from a maximum of $500,000 to a range of $3 to $4 million. This was the first indication Great American received that its excess policy may be necessary to satisfy the claims.

Upon receiving the updated case evaluation, the primary insurer immediately tendered its policy limits. Great American’s excess policy became responsible for any verdict returned in excess of those limits. The case was then settled by Great American for a significant, albeit undisclosed sum. Great American then filed a lawsuit against Quintairos for equitable subrogation, legal malpractice, negligence, gross negligence, negligent misrepresentation and negligent supervision. This article will only address the legal malpractice claim brought against Quintairos.

The trial court ruled in favor of Quintairos, dismissing the action. In doing so, the trial court made the following observation:

This Court concludes that because of the different interests and goals of the primary carrier and excess carrier particularly as to varying risks of recovery with potential damages, it is unwise to require the same counsel to be responsible and liable to both at the same time. To do so would put counsel in a conflict of loyalty and interest. Therefore, the Court declines to extend the doctrine of equitable subrogation and legal malpractice, negligence, gross negligence, and negligent misrepresentation to claims of an excess carrier against counsel hired by the primary carrier.

On appeal, the trial court’s ruling was reversed. The appeals court concluded that Great American had been provided with Quintairos’ evaluation of the “settlement value” of the underlying lawsuit and that defense counsel’s evaluation was the rendering of professional legal services by a lawyer. Additionally, communicating the “settlement value” of a case to an excess carrier could be considered a “confidential communication.”

The Appellate Court found that at least the allegation in the amended complaint that Quintairos provided attorney-client privileged communications to Great American was sufficient to survive a rule 12(b)(6) motion to dismiss for failure to state a claim because it was possible that Great American would be able to prove that an attorney-client relationship existed.

Relying upon prior precedent – Century 21 Deep S. Properties, Ltd. v. Corson, 612 So.2d 359 (Miss. 1992) – the Court of Appeals ruled that a direct attorney-client relationship or privity of contract was not necessary to maintain a legal malpractice action in Mississippi. The presence or absence of the attorney-client relationship was merely one factor to consider in determining the duty owed. The Court then stated: “an attorney performing [insurance-defense] work will be liable to reasonably foreseeable persons who, for a proper business purpose, detrimentally rely on the attorney’s [insurance-defense] work, suffering loss proximately caused by his negligence.” Therefore Great American had a basis to file the lawsuit and the rule 12(b)(6) dismissal was inappropriate.

The Mississippi Supreme Court weighed in on the issue. See Great American E&S Ins. Co. v. Quintairos, Prieto, Wood & Boyer P.A., 100 So.3d 420 (Miss. App. 2012). The Supreme Court disagreed with the Court of Appeals conclusion that Great American had sufficiently pleaded an attorney-client relationship. The amended complaint said nothing about its relationship with Quintairos. Great American merely alleged that Quintairos provided it with legal services when it sent Great American the case-status reports that estimated the settlement and trial values of the case. Taking that allegation as true, the Supreme Court found that the case-status reports, without more, were insufficient to establish an attorney-client relationship. To accept Great American’s view would require the court “to ignore the realities of real-world litigation, which often involves several defendants with common interests.”

In the liability insurance carrier context, the court noted that attorneys often provide information and strategies to others with common interests in the litigation. Moreover, the Court noted that a policyholder generally gains no benefit from its counsel sharing information with the excess carrier.Such information is shared as a courtesy, with no expectation of an attorney-client relationship.

Justice Chandler concurred in part with the majority ruling and dissented in part. He concurred in the majority’s ruling that Quintairos had no attorney-client relationship with Great American and therefore Great American could not bring a direct action for legal malpractice against Quintairos. (Chandler, J., concurring in part and dissenting in part) focused on equitable subrogation:

The equities weigh against permitting an excess insurer to “step into the shoes” of the insured to instigate a legal malpractice action against defense counsel hired by the primary carrier. Permitting equitable subrogation subverts the relationships imposed … on insureds, insurers, and defense counsel as well as defense counsel’s attendant duties of loyalty and confidentiality. [Citation omitted] Defense counsel, already representing both the insured and insurer, with a duty to remain alert to potential conflicts, will now face the additional threat of liability to a dissatisfied third-party excess insurer. But the interests of primary and excess insurers are distinct, because the excess insurer’s interest is to settle the claim within the limits of the primary policy, while the primary insurer’s interest may be to risk a trial. [Citation omitted] Allowing equitable subrogation will undermine the attorney’s ability to act solely in the interest of the primary insurer and the insured.

Justice Chandler also found that allowing such a legal malpractice action would encourage excess insurers, dissatisfied with the outcome of a settlement, to attempt to shift the loss to defense counsel despite the fact that the insured was satisfied with the outcome of the underlying case. He noted that “[t]he availability of equitable subrogation will encourage excess insurers to shelve pending lawsuits and then sue or threaten to sue for legal malpractice if the outcome implicates the excess policy.”

Additionally, Justice Chandler pointed out that the recognition of equitable subrogation would undermine client confidences, because, ordinarily, a legal malpractice plaintiff voluntarily may waive the attorney-client privilege by placing confidential matters at issue. Allowing a third-party excess insurer to “step into the shoes” of the insured client would permit a stranger to the attorney-client relationship to control the attorney-client privilege. This outcome would cast uncertainty upon the attorney’s statutory duty to maintain client confidences, and undermine the sanctity of the attorney-client relationship.

Both the Court of Appeals and Supreme Court rulings in the Great American E&S Ins. Co. v. Quintairos, Prieto, Wood & Boyer P.A. decisions are insightful in identifying the public policy considerations for why excess insurers should not be permitted to sue defense counsel hired by the primary insurer for legal malpractice.