Privity – Protection for Insurance Defense Counsel

Defense Lawyer: Always Create Contract With Insured you are Asked to Defend

When I was an insurance defense lawyer I always understood – and explained to the insured – that I was retained to represent the insured by the insurer who would pay my bills but who was not my client. In fact, when the insurer refused to settle a case against my advice I felt compelled to make demands on the insurer and threaten them with the tort of bad faith because that was what the insurer paid me to do. I never got another referral from that insurer but I was never sued for malpractice. Today, some insurers have decided to sue lawyers they hired to defend an insured if the results are different than the insurer believed should have resulted.

Wise and prudent defense lawyers – when assigned the defense of an insured by an insurer – enter into a contract with the insured advising the insured that the lawyers were retained to represent the insured and only the insured and setting out the terms and conditions of the agreement.

In Arch Insurance Company v. Kubicki Draper, LLP, a law firm, No. 4D17-2889, District Court Of Appeal Of The State Of Florida Fourth District (January 23, 2019) Arch Insurance Company (“Arch”) appealed from the circuit court’s final judgment granting the Kubicki Draper law firm’s motion for summary judgment, which argued that the insurer lacked standing to sue the law firm and because its representation was only of Arch’s insured.

FACTS

Arch hired the law firm to defend the insured in a separate suit. After the separate suit settled within the insured’s policy limits, the insurer sued the law firm for professional negligence. The insurer’s negligence suit alleged, in pertinent part, that the law firm’s delayed filing of the insured’s statute of limitations defense resulted in a large settlement, using the insurer’s funds, which would have been avoided, in whole or in part, if the law firm had raised the insured’s statute of limitations defense earlier in the separate suit.

The law firm’s motion for summary judgment alleged, in pertinent part, that the insurer lacked standing to sue the law firm because the insurer and the law firm were not in privity with each other.

The Florida Supreme Court has held that 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. 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 have refused to expand this exception to include incidental third-party beneficiaries.

No Florida case law recognizes an attorney-client duty owed by defense counsel to an insurance carrier where the attorney is hired to defend an insured with respect to a liability claim filed under the carrier’s policy. There is no agreement to the effect that the lawyers represented both the insured and the insurer.

ANALYSIS

The law firm was in privity of contract with the insured and the insurer’s role was that of a third party paying the law firm to represent the insured. Since the underlying lawsuit was settled within the policy limits the insured suffered no damages as a result of any alleged actions or inactions on the part of the law firm.

After careful review, the court determined that the insurer lacked standing to directly pursue the claims against the law firm. Attached to the retention letter sent to the insured by the law firm was a Statement of Client’s Rights demonstrating that the insured was in privity with the law firm as the law firm’s client.

The circuit court’s conclusion that the law firm was in privity with the insured as the client was accepted by the appellate court. There was nothing in the record to indicate that the law firm was in privity with the insurer. There was no evidence that indicated that the insurer was an intended third-party beneficiary of the relationship between the law firm and the insured.

According to Arch, precluding an insurer from bringing a malpractice action against the law firm retained for its insured would have dire consequences. Essentially, law firms would be shielded from liability resulting from their malpractice as long as the insured is not personally harmed.

Following the law as it exists, not as the insurer argues it ought to be, is required of a court of appeal. The Florida supreme court has recognized only two situations in which a third party was permitted to pursue a legal malpractice claim against counsel who was not in privity with the third party, neither of which applies here: (1) a will drafting situation. (2) Lawyers preparing private placement memoranda, like independent auditors, owe a duty to those who rely on statements contained in their published documents, parties may assign claims for legal malpractice committed in preparing them.

Since nothing indicated that the law firm was in privity with the insurer, or that the insurer was an intended third-party beneficiary of the relationship between the law firm and the insured, the court of appeal was unwilling to expand the field of privity exceptions to apply to this case.

ZALMA OPINION

This case presents an important lesson to all insurance defense lawyers – they must, when asked to defend an insured by an insurer – obtain a retention letter from the insured that makes clear that the lawyer only represents the interest of the insured, not the insurer, who will pay the lawyers bills in accordance with its contractual obligation to the insured.


© 2019 – 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

Zalma on Property and Casualty Insurance

The earnings of almost every civil lawyer in the United States are funded by the insurance industry. Insurance can best be described as the mother’s milk of the law profession. The civil defense lawyer is paid by an insurer for each hour he or she works. The civil plaintiffs’ lawyer is usually paid by taking a percentage of any judgment entered in favor of the plaintiff, which judgment is usually paid by the defendant’s insurer.

In almost every situation in which a civil lawyer practices law the funds for that work come, either directly or indirectly, from insurance. Consequently, lawyers must use their wits and energies to avoid or to pursue litigation to the benefit of the client. Both sides understand that an insurer will eventually pay one or both sides in the dispute. Insurance is important to every civil dispute and even some that fall within the criminal courts.

Every lawyer retained to prosecute or defend a civil suit should begin the representation with a serious effort to find insurance coverage for the benefit of the client or the defendant the client is suing. Without that knowledge, the lawyer will find he or she is litigating with duct tape firmly self-placed across his or her mouth.

Insurance Law Deskbook: Learn the insurance basics that are essential to every civil practitioner. The Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. 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, state appellate courts, and foreign courts that have molded the American insurance law, as well as vital explanatory chapters, historical context, form letters, and more.

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.

 

 

 

 

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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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