Although unexpectedly large jury verdicts have prompted disputes between excess and primary insurers for years, the phenomenon of excess carriers suing defense counsel hired by the primary insurer relatively new. The issue presented in such cases is whether, in the absence of a direct attorney/client relationship, the excess carrier has any right to sue counsel or, in the alternative, pursue a claim for equitable subrogation based upon counsel's client relationship with the insured.
For the most part, courts have declined to acknowledge a direct client relationship between the excess insurer and defense counsel. As a result, some states have ruled that excess counsel has no right of action at all. Indeed, in many states, courts have refused to acknowledge a client relationship between defense counsel and the primary insurer that hires counsel to defend its insured. Whether a lawyer has an attorney-client relationship with an insurer that has hired it to represent a policyholder has been considered in several cases where insurers have sought to sue defense counsel for malpractice. In several of these cases, courts have ruled that the insurer is not a client of defense counsel. See First American Carriers v. Kroger Co., 787 S.W.2d 669, 671 (Ark. 1990)("when a liability insurer retains a lawyer to defend an insured, the insured is the lawyer's client"); Atlanta Int. Ins. Co. v. Bell, 475 N.W.2d 294, 297 (Mich. 1991)(declaring that "the relationship between the insurer and the retained defense counsel [is] less than a client-attorney relationship"); Continental Cas. v. Pullman, Comley, 929 F.2d 103, 108 (2d Cir. 1991)("[i]t is clear beyond cavil that in the insurance context the attorney owes his allegiance, not to the insurance company that retained him but to the insured defendant"); Point Pleasant Canoe Rental v. Tinicum Tp., 110 F.R.D. 166, 170 (E.D. Pa. 1986) ("[w]hen a liability insurer retains a lawyer to defend an insured, the insured is considered the lawyer's client") and In Re Petition of Youngblood, 895 S.W.2d 322, 328 (Tenn. 1995)(counsel's sole client is insured).
A few jurisdictions have also acknowledged that, even if the excess insurer is not a client, it is at least a third-party beneficiary of these legal services and thus entitled to bring suit. Thus, in Paradigm Insurance Company v. The Langerman Law Offices, 24 P.2d 593 (Ariz. 2001), the Arizona Supreme Court found that although an insurer's retention of defense counsel does not necessarily give rise to an inherent conflict of interest in every case, neither does an insurer always enjoy "client" status. The Supreme Court agreed with defense counsel that "the potential for conflict between insurer and insured exists in every case; but we note the interests of insurer and insured frequently coincide." Accordingly, the court found that it was possible, absent a conflict of interest, for defense counsel to represent both insurer and insured "but in the unique situation in which the lawyer actually represents two clients, he must give primary allegiance to one (the insured) to whom the other (the insurer) owes a duty of providing not only protection, but of doing so fairly and in good faith." In any event, even if the insurer is not the lawyer's client but merely an agent of the insured, it is entitled to the same protection as the insured enjoys with respect to the confidentiality of client communications. The court concluded that, "when an insurer assigns an attorney to represent an insured, the lawyer has a duty to the insurer arising from the understanding that the lawyer's services are ordinarily intended to benefit both insurer and insured when their interests coincide. This duty exists even if the insurer is a non-client."
Others have likewise found that no client relationship exists but have permitted such claims to go forward on a theory of equitable subrogation. However, a right to pursue claims for equitable subrogation may be of little value to an insurer in cases where the insured itself is already pursuing a malpractice action of its own, however. In Pine Island Farmers Cooperative v. Erstad & Riemer, P.A., 649 N.W.2d 444 (Minn. 2002), for instance, the Minnesota Supreme Court refused to find that defense counsel had a client relationship with the insurer and, furthermore, refused to permit the insurer to pursue an action for equitable subrogation to pursue rights accrued from the insured as, in this case, the insured itself had already sued defense counsel for malpractice.
In a recent Mississippi case, however, the state Court of Appeals has suggested the possibility that an actual attorney/client relationship may be established as the result of contacts between defense counsel and the excess carrier. In Great American Excess & Surplus Ins. Co. v. Quintairos, Prieto, Wood & Boyer, No. 2009-CA-01063, a nursing home in Mississippi was sued for failing to provide proper care to a resident. The primary insurer (Royal) engaged local counsel to defend the case. A year later, Royal hired the law firm of Quintairos, Prieto, Wood & Boyer to take over the defense. The Quintairos firm is a large national law firm with offices throughout the South and Southwest but is not itself a Mississippi law firm. This fact was pointed out to Royal by the nursing home in expressing concern that none of Quintairos' partners or trial attorneys were licensed to practice law in Mississippi. Although Royal insisted on continuing to use the Quintairos law firm despite its insured's concerns, these concerns were magnified when, a few weeks later, the trial court struck down counsel's belated designation of a physician as an expert witness. Thereafter, the law firm issued an updated evaluation of the case. Whereas prior reports had given a settlement value of $500,000 or less, the March 19, 2004 report concluded that the case had a value of $3 million to $4 million, the first indication that Great American's excess policy might be implicated. Thereafter, Royal tendered its limits and Great American ultimately settled the lawsuit for an undisclosed amount.
In the ensuing malpractice action against Quintairos, Great American sought recovery on theories of equitable subrogation and negligence, including claims for negligent misrepresentation based upon the trial report submitted to Great American by the law firm. In 2009, the trial court granted the defendants' motion to dismiss, holding that Great American lacked standing to file suit because it had no attorney/client relationship with the law firm.
In 2011, the Court of Appeal affirmed the trial court's dismissal of Great American's negligence claims but declared that it should be permitted to go forward on a theory of equitable subrogation. In Great American Excess & Surplus Ins. Co. v. Quintairos, Prieto, Wood & Boyer, 2009-CA-01603 (Miss. App. January 18, 2011), the Mississippi Court of Appeals has ruled that an excess insurer may sue defense counsel hired by the primary insurer for any alleged negligence that resulted in the underlying nursing home suits settling for sums greater than the primary limits of coverage. The court held that Great American could not sue for malpractice, since it lacked an attorney-client relationship with the firm. The court declined to allow a direct claim based upon the excess insurer's reliance on alleged misrepresentations with respect to case valuation. Nevertheless, as have other courts, the Court of Appeals held that even in the absence of an attorney-client relationship, an insurer may bring a claim for equitable subrogation.
It is logical that an excess-insurance carrier should be allowed to pursue a claim in the insured's place. Shady Lawn had no incentive to pursue a legal-malpractice claim against Quintairos even if it believed Quintairos to be negligent because it had insurance in place to pay the settlement. Also, Royal had no incentive to pursue a claim if it believed the settlement value to be at or near the policy limits of the primary coverage regardless of the alleged malpractice. "The only winner produced by an analysis precluding liability would be the malpracticing attorney." Atlanta Intern. Ins. Co. v. Bell, 475 N.W.2d 294, 298 (Mich. 1991). ¶18. We recognize that a possibility exists that this may result in frivolous claims by excess-insurance carriers; but, for this Court to prohibit legitimate claims would leave the attorney who allegedly committed malpractice free from consequences if the primary insurer declined to pursue a claim. Also, we find that a conflict is not created by allowing Great American to seek equitable subrogation against Quintairos for legal malpractice. Great American and Shady Lawn have the same interest in this litigation -- Shady Lawn's competent representation. Further, Quintairos has already shared attorney-client communications and work product with Great American in the underlying cases.
Last month, however, the full Court of Appeals withdrew the 2011 panel opinion and substituted a new decision declaring that Great American could pursue claims for negligence and equitable subrogation against the Quintairos firm. Although the court "denied" Great American's motion for rehearing, its new decision effectively grants the relief that the excess insurer was seeking. Whereas the Court's earlier opinion had only allowed the case to go forward on a theory of equitable subrogation, the court has now ruled 7-2 in Great American Excess & Surplus Ins. Co. v. Quintairos, Prieto, Wood & Boyer, 212 WL 266858 (Miss. App. January 31, 2012) that Great American had direct rights of action against the firm based upon misrepresentations that it made in reports from Quintairos to Great American. Even though Great American had not hired the Quintairos firm, the court ruled that Great American was not a "stranger" to the attorney/client relationship. The court found a relationship was implicit in the communications that defense counsel had been providing to the excess carrier, belying counsel's claims that permitting such a cause of action would interfere with the privilege attached to communications between defense counsel and its client.
Under the circumstances, the Mississippi court ruled that any misrepresentations in the report that Quintairos had provided to Great American would support a claim for malpractice and that the trial court had therefore erred in granting counsel's motion to dismiss. Further, as before, the court recognized a right on the part of an umbrella carrier to bring a claim for equitable subrogation,
Writing in dissent, Justices Carleton and Russell argued that Great American lacked standing to raise these claims and that, "Creating a cause of action for legal malpractice wherein no privity of contract, nor attorney-client relationship exists, jeopardizes the sanctity of the attorney-client relationship."
It remains to be seen whether this Mississippi opinion will provide a template for other courts to imply a client relationship between excess insurers and defense counsel in cases where there were privileged communications between the parties and other trappings of an attorney-client relationship. What does seem apparent is that courts are becoming less concerned about the formal relationships and are increasingly looking to the actual inter-relationships among defense counsel, primary insurers and excess carriers in determining whether the purposes and indiciae underlying the attorney-client relationship should extend to excess insurers. It is less clear, however, that Quintairos would support the finding of a client relationship between an excess insurer and defense counsel where, as is more commonly the case, the excess carrier merely receives information from the primary insurer and has little or no direct dealings with defense counsel.