The Florida Supreme Court ruled earlier this week that an insurer has standing to maintain a malpractice lawsuit against a law firm the insurance company hired to defend its insured. Significantly, the ruling was based on the insurance policy’s subrogation provision and not on a basis of privity.
The insurance company, Arch Insurance Co. retained a Florida law firm to defend an insured in a separate litigation. Just before trial, the underlying case settled within the policy limits. After the settlement, Arch filed its malpractice suit against the law firm, claiming the firm failed to raise the applicable statute of limitations as a defense in the underlying case, which significantly increased the cost of the settlement. In addition to malpractice, Arch also asserted breach of fiduciary duty, subrogation, assignment, third-party beneficiary, and breach of contract claims against the firm. The firm moved for summary judgment, arguing Arch lacked standing because there was no privity of contract or an attorney-client relationship. Arch opposed summary judgment on the basis that there was privity, it was an intended third-party beneficiary, or alternatively, the policy provided Arch subrogation rights. The trial court agreed with the law firm, found no privity, and held Arch did not have standing to directly pursue a malpractice action against the firm. The appellate court agreed with the trial court’s reasoning, without addressing the subrogation argument, and certified a question of great public importance to the Florida Supreme Court, which the high Court rephrased as follows:
WHETHER THE INSURER HAS STANDING THROUGH ITS CONTRACTUAL SUBROGATION PROVISION TO MAINTAIN A MALPRACTICE ACTION AGAINST COUNSEL HIRED TO REPRESENT THE INSURED WHERE THE INSURER HAS A DUTY TO DEFEND.
The Supreme Court answered, “yes.” Although the Court agreed with the lower courts’ finding that Arch lacked privity with the law firm, the Court noted Arch’s argument was also based on the subrogation provision in the policy. Subrogation principles allow a party to step in the shoes of another with respect to a claim or right, and may arise by law (equitable or legal subrogation) or by contract (contractual or conventional subrogation). The Court pointed to the contractual subrogation provision in the policy, which provided:
To the extent of any payment under this Policy, we [Arch] shall be subrogated to all your [insured] rights of recovery therefor against any person, organization, or entity and you shall execute and deliver instruments and papers and do whatever else is necessary to secure such rights. You shall do nothing after any loss to prejudice such rights.
The Court found this language to be clear—"Arch is contractually subrogated to the rights of [the insured], which would include claims for legal malpractice against counsel retained to defend the insured.” Thus, if an insurer has a duty to defend and retained counsel breaches the duty owed to the client-insured, contractual subrogation allows the insurance company who pays the damage on behalf of the insured to step into the insured’s shoes and pursue the claim the insured could have pursued, including Arch’s malpractice action.
To read the Supreme Court’s opinion, visit: https://www.floridasupremecourt.org/content/download/746156/opinion/sc19-673.pdf.
The insurance company, Arch Insurance Co. retained a Florida law firm to defend an insured in a separate litigation. Just before trial, the underlying case settled within the policy limits. After the settlement, Arch filed its malpractice suit against the law firm, claiming the firm failed to raise the applicable statute of limitations as a defense in the underlying case, which significantly increased the cost of the settlement. In addition to malpractice, Arch also asserted breach of fiduciary duty, subrogation, assignment, third-party beneficiary, and breach of contract claims against the firm. The firm moved for summary judgment, arguing Arch lacked standing because there was no privity of contract or an attorney-client relationship. Arch opposed summary judgment on the basis that there was privity, it was an intended third-party beneficiary, or alternatively, the policy provided Arch subrogation rights. The trial court agreed with the law firm, found no privity, and held Arch did not have standing to directly pursue a malpractice action against the firm. The appellate court agreed with the trial court’s reasoning, without addressing the subrogation argument, and certified a question of great public importance to the Florida Supreme Court, which the high Court rephrased as follows:
WHETHER THE INSURER HAS STANDING THROUGH ITS CONTRACTUAL SUBROGATION PROVISION TO MAINTAIN A MALPRACTICE ACTION AGAINST COUNSEL HIRED TO REPRESENT THE INSURED WHERE THE INSURER HAS A DUTY TO DEFEND.
The Supreme Court answered, “yes.” Although the Court agreed with the lower courts’ finding that Arch lacked privity with the law firm, the Court noted Arch’s argument was also based on the subrogation provision in the policy. Subrogation principles allow a party to step in the shoes of another with respect to a claim or right, and may arise by law (equitable or legal subrogation) or by contract (contractual or conventional subrogation). The Court pointed to the contractual subrogation provision in the policy, which provided:
To the extent of any payment under this Policy, we [Arch] shall be subrogated to all your [insured] rights of recovery therefor against any person, organization, or entity and you shall execute and deliver instruments and papers and do whatever else is necessary to secure such rights. You shall do nothing after any loss to prejudice such rights.
The Court found this language to be clear—"Arch is contractually subrogated to the rights of [the insured], which would include claims for legal malpractice against counsel retained to defend the insured.” Thus, if an insurer has a duty to defend and retained counsel breaches the duty owed to the client-insured, contractual subrogation allows the insurance company who pays the damage on behalf of the insured to step into the insured’s shoes and pursue the claim the insured could have pursued, including Arch’s malpractice action.
To read the Supreme Court’s opinion, visit: https://www.floridasupremecourt.org/content/download/746156/opinion/sc19-673.pdf.
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