Article Courtesy of The
Claims Journal
By Jim Sams
Published June 11, 2021
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Attorneys who are hired by insurance carriers to defend policyholders from
lawsuits have a duty to represent the insured, but the insurer is paying their
fees.
Obviously, the insurer
has a financial interest in the outcome of the litigation.
They have to pay any settlement or award of damages. But if
something goes wrong, do they have a right to pursue a
malpractice claim against the attorney?
The Florida Supreme Court on Thursday ruled that if the
insurance contract gives the insurer subrogation rights,
they do.
“Where an insurer has a duty to defend and counsel breaches
the duty owed to the client insured, contractual subrogation
permits the insurer, who—on behalf of the insured—pays the
damage, to step into the shoes of its insured and pursue the
same claim the insured could have pursued,” the high court
said in a unanimous decision.
Arch Insurance Co. hired the Kubicki
Draper law firm to represent its policyholder, Spear Safer
CPAs and Advisors from a lawsuit filed by a receiver for
Mutual Benefits Corp. in 2003.
MBC had run a fraudulent investment scheme from 1994 to
2004, selling $1 billion in viatical settlements to 29,000
investors. Spear Safer was its accountant. The Securities
and Exchange Commission filed a lawsuit in 2004 that shut
down the operation and put its assets into receivership. |
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The Florida Supreme Court
in Tallahassee
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The appointed receiver filed a malpractice lawsuit against Spear Safer,
alleging that is accounting practices were negligent. Arch, the company’s
insurer, hired Kubiki Draper to defend its client.
During the course of the litigation, Kubiki erroneously advised Arch and
Spear Safer that the statute of limitations for a professional malpractice
action was four years, when in fact it was only two. Based on that advice,
Arch agreed with the MBC receiver to toll the statute of limitations while
the parties negotiated a settlement.
Kubiki at first said that MBC’s case against Spear Safer was “very weak” and
the value of the claim was the “cost of defense.” But the law firm abruptly
changed course later and advised Arch that the value of the lawsuit was
“within policy limits.”
Arch hired Butler Pappas for a second opinion. The new law firm filed a
motion with the district court to amend its defenses to include the statute
of limitations.
But by that time the lawsuit was nearing a trial date. Safer and Spear
demanded that Arch settle the case to avoid a potential verdict of $68
million. Arch agreed to pay $3.5 million, the remaining policy limits.
Arch then filed suit against the Kubiki in Broward County Circuit Court,
alleging that the law firm’s negligence forced it to pay a “grossly
inflated” settlement. The trial court granted summary judgment in favor of
Kubicki. The court said the question had never before been raised, but
decided than an insurer has no standing to bring a malpractice action
against an attorney who represented its insured.
The court said Arch did not have “privity” with Kubicki, meaning there was
no legal relationship between the two parties that created a duty of care. A
panel of the Fourth District Court of Appeal agreed and affirmed the
decision, but the court also sent a certified question to the Florida
Supreme Court. “Whether an insurer has standing to maintain a malpractice
action against counsel hired to represent the insured where the insurer has
a duty to defend.”
Arch argued that a ruling that if insurers are barred from pursuing
malpractice claims against attorneys who negligently represent their
insureds would allow those attorneys to escape responsibility for gross
negligence or even malfeasance.
“Absent the insurer’s ability to assert a malpractice claim against defense
counsel, the only beneficiary is the negligent attorney, who ends up immune
from accountability for his or her negligence,” the insurer’s brief says.
The American Property and Casualty Insurers Association filed an amicus
brief in the case. The APCIA said Florida and Ohio are the only states where
the judicial branch has created a rule of professional conduct that governs
whether a defense attorney defending a lawsuit against an insured has one
client or two.Rule 4-1.7(e) explains that lawyers representing insured
clients have a “tripartite” relationship in which they represent both the
insured and the insurance company unless there is a conflict of interest,
the brief says. Attorneys that intend to solely defend the insured are
required to inform the insurer at the beginning of representation.
Kubicki Draper failed to follow Rule 4-1.7(e) and never advisied Arch
whether the firm represented both Arch and the insured, “which is a
departure from the norm,” the APCIA said.
“The firm’s failure to adhere to its ethical duty to notify Arch and its
insured whether the firm represented both or only the insured should not
give the firm an ‘out’ to argue the insurer has no standing to pursue a
malpractice claim against it,” the brief says.
The Supreme Court agreed. The high court rephrased the certified question to
include the existence of a subrogation clause in the insurance contract. The
opinion says that the subrogation clause gives Arch privity with the defense
counsel because it created a contractual right for the insurer to step into
the shoes of the insured to pursue recovery from third parties of any
payouts.
The opinion says, “Florida public policy does not support shielding the law
firm from accountability for its professional malpractice.”
Kubicki Draper President Brad McCormick did not respond to an email and
telephone call requesting comment on Thursday.
COURT OPINION: ARCH INSURANCE
COMPANY vs. KUBICKI DRAPER, LLP,
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