Insurer May Sue Lawyer Hired to Defend Insured for Malpractice

Insurer Must Prove Insured’s Malpractice of Defense Counsel by Clear and Convincing Evidence

The relationship between insurers and defense counsel they hire to defend an insured has always been difficult. Since the insurer pays the lawyer’s fees and gives counsel many cases to defend over the years, loyalty to the client – the insured – often conflicts with the loyalty to the insurer who pays the bills. When a defense counsel commits malpractice it appears the only person harmed is the client. However, a defense counsel’s malpractice will really damage the insurer who must pay a settlement or judgment rendered against the insured.

When I was a young adjuster the malpractice simply resulted in the lawyer being fired and never getting a new case from that insurer, a punishment greater than any malpractice verdict. Insurers considered the dozens of cases the lawyer saved them money and saw no reason to add insult to the injury of taking the lawyer off an approved list.

That common sense rule no longer exists. Insurers seek a pound of flesh from the lawyer who acted negligently in defending an insured.

In Sentry Select Insurance Company v. Maybank Law Firm, LLC, and Roy P. Maybank, Appellate Case No. 2016-001351, Opinion No. 27806, State Of South Carolina In The Supreme Court (May 30, 2018) Sentry Select Insurance Company brought a legal malpractice lawsuit in federal district court against the lawyer it hired to defend its insured in an automobile accident case. The trial court, unable to find precedent in the state asked the Supreme Court two questions:

  1. Whether an insurer may maintain a direct malpractice action against counsel hired to represent its insured where the insurance company has a duty to defend?
  2. Whether a legal malpractice claim may be assigned to a third-party who is responsible for payment of legal fees and any judgment incurred as a result of the litigation in which the alleged malpractice arose?

Background

Sentry Select hired Roy P. Maybank of the Maybank Law Firm to defend a trucking company Sentry Select insured in a personal injury lawsuit in state court. Maybank failed to timely answer requests to admit served by the plaintiff pursuant to Rule 36(a) of the South Carolina Rules of Civil Procedure. Seven months later, Maybank filed a motion seeking additional time to answer the requests, which the circuit court held under advisement until the parties completed mediation. Sentry Select claims that because of Maybank’s failure to timely answer the requests, and the likelihood the circuit court would deem them admitted, it settled the case for $900,000, when Maybank had previously represented to Sentry Select it could settle in a range of $75,000 to $125,000.

Sentry Select then filed this lawsuit in federal district court against Roy Maybank and Maybank Law Firm alleging a variety of theories, including negligence.

Analysis—Question One

When an insurer hires an attorney to represent its insured, an attorney-client relationship arises between the attorney and the insured—his client. Pursuant to that relationship, the attorney owes the client—not the insurer—a fiduciary duty.

An insurance company that hires an attorney to represent its insured is in a unique position in relation to the resulting attorney-client relationship. Pursuant to the insurance contract, the insurer has a duty to defend its insured, and must compensate the attorney for his time in defense of his client. If the insured settles or has judgment imposed against him, the insurance contract ordinarily requires the insurer to pay the settlement or judgment.

Because of the insurance company’s unique position the answer to question one is “yes,” an insurer may bring a direct malpractice action against counsel hired to represent its insured. The insurer may recover only for the attorney’s breach of his duty to his client, when the insurer proves the breach is the proximate cause of damages to the insurer. If the interests of the client are the slightest bit inconsistent with the insurer’s interests, there can be no liability of the attorney to the insurer. The attorney’s duty to the client may never be affected by the interests of the insurance company.

South Carolina decided to be consistent with the rule adopted by the majority of states that have considered the issue. Although the issue is relatively new to American jurisprudence, the majority of states permit a liability insurer to sue defense counsel for negligent representation in an underlying action.

When, pursuant to insurance policy obligations, an insurer hires and compensates counsel to defend an insured, provided that the interests of the insurer and insured are not in conflict, the retained attorney owes a duty of care to the insurer which will support its independent right to bring a legal malpractice action against the attorney for negligent acts committed in the representation of the insured.

It is the breach of the attorney’s duty to the client that is the actionable conduct in these cases. The duties an attorney owes his client are well-established according to law. The attorney owes no separate duty to the insurer. The court refused to recognize the dual attorney-client relationship.

A South Carolina lawyer shall not permit a person who recommends, employs, or pays the lawyer to render legal services for another to direct or regulate the lawyer’s professional judgment in rendering such legal services.

As a final limitation on an insurer’s right to bring an action against the lawyer it hires to represent its insured, the insurer must prove its case by clear and convincing evidence.

In this case, there appears to be no risk that the decision will place the attorney in a conflict position or create any divided loyalty. The attorney’s duty to his client includes the obligation to timely respond to requests to admit. The fact that an insurance company may suffer financial loss from an attorney’s negligence in failing to timely respond to the requests, and the Court’s recognition that the insurer may sue the attorney to recover this loss after settling the underlying case to protect the interests of the insured, do not in any way affect the attorney’s duty to his client.

Question Two

As to question two—whether a legal malpractice claim may be assigned to a third party—we decline to answer the question. The court was satisfied that the answer to question one renders the second question not determinative of the cause then pending in the certifying court and thus it is not necessary for it to answer question two.

ZALMA OPINION

I have, since 1972, defended insureds at the request of their insurer.  I lost insurance company clients by rendering advice contrary to the insurer’s interest that was necessary to protect the client they hired me to defend. Although an insurer can sue the lawyer it hired to represent its insured for malpractice, I recommend against it. Few lawyers will be willing to take on cases from that insurer. If the lawyer commits malpractice he or she is not appropriate to defend insureds and should never be hired again.


© 2018 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Books from Full Court Press

Full Court Press continues to publish expert secondary content. This time it’s a new collection of ew insurance law treatises from consultant, expert witness, arbitrator, and mediator Barry Zalma.

Barry Zalma practiced law in California for more than 44 years as an insurance coverage and claims-handling lawyer, and has spent more than 50 years in the insurance business. We welcome his deskbooks as the first published under our Full Court Press imprint. Three titles are available in ePub and MOBI format, as well as on the Fastcase legal research platform.

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California Insurance Law Deskbook: California has long led the way when it comes to insurance jurisprudence in the United States, and few know more about California insurance law than Barry Zalma. The California Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. Similar to Barry Zalma’s general Insurance Law Deskbook, this title focuses on the state where the author has long resided and practiced as an expert in California law. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, and California appellate courts, as well as vital explanatory chapters and historical context.

Insurance Bad Faith and Punitive Damages Deskbook: Understand the relationship between insurance, the tort of bad faith, and why punitive damages are awarded to punish insurers. Previously, a person suing an insurance company in the United States could only recover contract damages, but when the tort of bad faith was created by the courts contract law was enormously affected, allowing insureds to sue insurers for both contract and tort damages, including punitive damages. Read a thoughtful analysis of how punitive damages apply in the United States to insurance bad faith suits, and why some states allow judges and juries to award punitive damages against insurers in civil litigation.

An annual subscription to secondary content on the Fastcase platform includes new editions and updates published by the author as they are rolled out, so you can rest assured that your research is up to date. Go to fastcase.com for more detail and how to use the material on-line as part of your legal or insurance research or as stand-alone e-books. Details on the three new e-books are available at https://www.fastcase.com/product-category/fcp/ Subscribers to fastcase.com can search the three books as they do case law.

An annual subscription to secondary content on the Fastcase platform includes new editions and updates published by the author as they are rolled out, so you can rest assured that your research is up to date. Go to fastcase.com for more detail and how to use the material on-line as part of your legal or insurance research or as stand-alone e-books.

Mr. Zalma’s books available as Kindle books or paperbacks at Amazon.com can be reached at http://zalma.com/zalma-books/

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/bzalma  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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