Hello everyone and welcome to this Ethics Alert, which will discuss the recent Florida Supreme Court decision holding that an insurer has standing to pursue a malpractice action against a lawyer who was retained to represent its insured where the insurer had a duty to defend, and through its contractual subrogation provision. The case is Polston v. Kubicki Draper, No. SC19-673, and the June 3, 2021 SC opinion is here: https://www.floridasupremecourt.org/content/download/746156/opinion/sc19-673.pdf.
As background, Spear Safer CPAs and Advisors (Spear Safer), an accounting firm, performed audits of the financial statements of Mutual Benefits Corporation (MBC). MBC later became subject to an action by the Securities and Exchange Commission (SEC) for federal securities regulations violation and reached a settlement with the SEC. MBC then sued Spear Safer for accounting malpractice.
Under the terms of the professional liability insurance policy, Arch Insurance Company (Arch) had a duty to defend Spear Safer in the accounting malpractice lawsuit and the insured had the right to retain legal counsel with Arch’s approval. The policy also included a subrogation provision, which stated that Arch was subrogated to all of Spear Safer rights of recovery against any person, organization, or entity, and that Spear Safer was required do whatever necessary to secure such rights.
Arch retained the Kubicki Draper law firm to defend Spear Safer in the accounting malpractice action. That litigation was settled within Spear Safer’s policy limits for $3.5 million before trial. Arch then filed a legal malpractice lawsuit against Kubicki Draper, alleging that the law firm breached its duty of care by failing to timely raise a statute of limitations defense in the underlying litigation.
Kublicki Draper filed a motion for summary judgment arguing that Arch lacked standing due to a lack of privity of contract or attorney-client relationship between Arch and defendant. Arch argued there was privity or, alternatively, that Arch was an intended third-party beneficiary and that the policy provided Arch with subrogation rights. The trial court granted Kubicki Draper’s motion, finding that there was no privity and Kubicki Draper did not owe Arch a duty of care.
The Fourth District Court of Appeal (4th DCA) affirmed and adopted the trial court’s order as the basis for the affirmance. The 4th DCA then certified the following question of great public importance:
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.
The Florida Supreme Court rephrased the certified question 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 Florida Supreme Court agreed with the trial court and 4th DCA that defendant was in privity with Spear Safer and not Arch; however, Arch had standing to maintain a legal malpractice action against the defense counsel retained to defend its insured where Arch was contractually subrogated to the insured’s rights under the insurance policy.
The opinion found that Arch’s right to contractual subrogation was expressly provided for in the insurance policy, which included claims for legal malpractice against counsel retained to defend the insured. The opinion found that where an insurer has a duty to defend and counsel breaches the duty owed to the insured, contractual subrogation permits the insurer to pursue the same claim the insured could have pursued and, since the insured was in privity with defendant, Arch could step into the insured’s shoes and pursue the malpractice claim.
The opinion further stated that the public policy concerns that generally cause courts to prohibit the assignment of legal malpractice claims did not exist in these circumstances since the insurer is not unfamiliar with the attorney and the insurer is trying to recover money it paid from defense counsel who was retained to defend its insured. The right of subrogation also holds premium rates down by allowing insurers to recover indemnification payments from the tortfeasor who caused the injury. The SC opinion quashed the 4th DCA’s opinion and remanded the case for proceedings consistent with the opinion..
Bottom line: In this case, the Florida Supreme Court adopted the reasoning that a malpractice lawsuit alleging breach of care can be brought against a lawyer not only by the former client, but also by the former client’s insurer, if a duty to defend and subrogation rights are included in the policy.
Be careful out there.
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Joseph A. Corsmeier, Esquire
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