Excess Insurer May Bring Malpractice Action Against Lawyers Retained by Primary Carrier

The ABA/BNA Lawyers’ Manual on Professional Conduct™ is a trusted resource that helps attorneys understand cases and decisions that directly impacts their work, practice ethically, and...

By Joan C. Rogers  

An excess insurance carrier has a direct cause of action for malpractice against the law firm the primary carrier retained to defend their insured, the Mississippi Court of Appeals declared Jan. 31 in a second look at this case (Great American E&S Insurance Co. v. Quintairos, Prieto, Wood & Boyer PA, Miss. Ct. App., No. 2009-CA-01063-COA, 1/31/12, on rehearing in 27 Law. Man. Prof. Conduct 70).

In its original opinion, handed down a year ago, the court said the excess insurer was limited to an equitable subrogation claim against the law firm. Although it denied the insurer's motion for rehearing, the court withdrew that opinion and issued a new one that significantly expands the grounds on which an excess insurer may seek damages from an insurance defense law firm that it did not retain.

Dividing 7-2, the court decided in an opinion by Judge T. Kenneth Griffis Jr. that the lack of a direct contractual relationship between defense counsel and the excess insurer does not prevent the insurer from going after the law firm for allegedly mishandling the insured's defense.

The excess carrier's allegations that the law firm supplied it with privileged settlement assessments and that the insurer detrimentally relied on the firm's representation of the insured figured heavily in the court's reasoning for its new ruling.

Firm Defended Nursing Home

When complaints were filed against Shady Lawn Nursing Home, its primary liability insurer hired the law firm of Quintairos, Prieto, Wood & Boyer as defense counsel. The settlement in the litigation against Shady Lawn exceeded the limits of the primary policy, thus triggering the additional coverage provided by the nursing home's excess insurer, Great American E&S Insurance Co.

Great American sued Quintairos for malpractice, asserting that its mishandling of Shady Lawn's defense resulted in a settlement that was unnecessarily outsized. The complaint alleged that the law firm's status updates during the litigation consistently undervalued the plaintiffs' claims so as to avoid alerting Great American that its excess coverage might be needed.

The insurer's lawsuit also asserted that the Quintairos partners and trial counsel were not licensed to practice law in Mississippi and that the attorneys had failed to designate medical experts on time.

In addition, Great American alleged that it was damaged by the Quintairos firm's mishandling of three other cases in which the primary insurer had hired the firm to defend Shady Lawn.

The trial court threw out the complaint on the ground that Great American lacked standing to sue, as it had no attorney-client relationship with Quintairos.

The court of appeals reinstated the action. Initially it concluded that although Mississippi still requires an attorney-client relationship for a direct malpractice action by an excess insurer against insurance defense counsel, the doctrine of equitable subrogation permits an excess insurer to stand in the shoes of the insured to enforce the duties of defense counsel and recover damages if negligence is found. See 27 Law. Man. Prof. Conduct 70.

In its modified opinion, the court held that Great American also has a direct action for malpractice, negligence, and negligent misrepresentation against Quintairos, not just an equitable subrogation claim.

Settlement Evaluations

Regarding Great American's malpractice claim, the court focused on its allegation that the law firm provided the excess insurer with privileged evaluations of the settlement value of the lawsuit against the nursing home. If proved, Griffis said, this allegation may be the basis for finding an attorney-client relationship between the insurer and the law firm.

Providing the privileged settlement evaluations would be considered the rendition of professional legal services, the court said, because the shared information would not be privileged unless Great American were a “client” or a “representative of a client” under Mississippi's evidentiary rule on lawyer-client privilege.

If Great American were characterized as a stranger to the attorney-client relationship, defense counsel's disclosure of information to an excess carrier would be discoverable by the plaintiffs in their lawsuit against the insured, the court observed in a footnote.

Strict Privity Not Required

The court also held that Great American's lack of privity did not doom its malpractice claim. In reaching this conclusion, Griffis invoked Century 21 Deep S. Props. Ltd. v. Corson, 612 So. 2d 359 (Miss. 1992), which held that privity was not a necessary element of a malpractice claim for negligent title work.

The court also cited Miss. Code Ann. §11-7-20, which provides that privity is not required to maintain a cause of action for economic loss brought on account of negligence.

Together, Corson and this statute indicate that “Mississippi is not a strict privity state,” the court declared.

The court rejected the law firm's argument that extending Corson to excess insurance carriers would be against public policy. The existence of the excess policy is simply an extension of the insured, it said.

It also disagreed with the law firm's argument that to protect their interests excess insurers should hire their own counsel rather than seeking recovery from defense counsel that another insurer has retained for the insured.

Allowing or expecting excess carriers to appear and defend their own interests in the underlying case would be inefficient and divert the focus away from the insured's interest, it reasoned.

Moreover, the court disputed that its holding would jeopardize the sanctity of the attorney-client relationship. Quoting from a treatise on insurance law, the court declared that “‘negligent defense attorneys should not be able to escape malpractice liability simply because an insured prudently purchased excess insurance.'”

Other Valid Claims

The court also held, as it did in its original opinion, that Mississippi law permits an excess carrier to seek recovery via equitable subrogation from an attorney hired by the primary carrier to defend the insured. Subrogation, it explained, is the substitution of one person in place of a creditor or claimant, so that the substituted person succeeds to the rights of the other in relation to the debt or claim.

The court found it logical that an excess carrier should be allowed to pursue a claim in the insured's place. Because Shady Lawn had insurance coverage to pay the settlement, it had no incentive to pursue a malpractice claim against Quintairos even if it believed that the law firm was negligent, the court noted.

Nor did Shady Lawn's primary insurer have an incentive to pursue a claim against the law firm for negligence, Griffis said, if it believed that the settlement value of the underlying cases was near the policy limits of the primary coverage.

In addition, the court concluded that Great American's complaint stated plausible claims against the law firm for:

  • negligent misrepresentation, by allegedly misrepresenting the settlement value of the case;
  • negligence, by not employing and designating expert witnesses; and
  • negligent supervision, by relying on allegedly inexperienced lawyers without partners or adequate trial counsel to handle the assigned cases in the Mississippi office of the firm's Florida-based practice.
Dissent: No Basis for Any Claims

Judge Virginia C. Carlton, joined by Judge Ermea J. Russell, argued in dissent that the trial court was correct to dismiss the case for failure to state a claim. Counsel hired by the primary insurer owed no duty as a result of that attorney-client relationship to the excess carrier, she contended.

Carlton disputed the idea that an attorney-client relationship arose merely because the law firm provided information to the excess carrier. The Mississippi Rules of Professional Conduct recognize that attorneys communicate with persons other than their clients, she pointed out.

Moreover, Carlton said she saw no basis for the excess carrier's assertion that it reasonably relied on the insured's trial counsel to perform in the company's best interest as well.

If the excess carrier wanted the insured's counsel to represent its interests too, it could have negotiated and contracted for dual representation with appropriate waivers of conflicts of interests, she asserted.

Carlton also said the court should side with State Farm Fire & Cas. Co. v. Weiss, 194 P.3d 1063, 24 Law. Man. Prof. Conduct 481 (Colo. Ct. App. 2008), to bar an insurer from using equitable subrogation to sue lawyers who were retained to represent an insured.

Michael A. Heilman, Christopher T. Graham, and John W. Nisbett of Heilman Law Group, Jackson, Miss., represented Great American.

David A. Barfield and Steven L. Lacey of Barfield & Associates, Madison, Wis., represented the Quintairos firm.

For More Information

Full text at http://op.bna.com/mopc.nsf/r?Open=kswn-8r3svb.

The ABA/BNA Lawyers’ Manual on Professional Conduct is a joint publication of the American Bar Association Center for Professional Responsibility and BNA.

Copyright 2012, the American Bar Association and The Bureau of National Affairs, Inc. All Rights Reserved.