Insurers’ Claims for Legal Malpractice Against Defense ...

Insured’s Claim for Legal Malpractice Against Defense Counsel

Insurers’ Claims for Legal Malpractice
Against Defense Counsel Hired
for Their Insureds†

John S. Wilkerson, III
Jeffrey T. Stover

I.
Introduction

Insurers are increasingly filing legal malpractice claims against the attorneys who the
insurers hired to defend their insureds. Case law on the topic is inconsistent, but certain
common issues in these cases can help attorneys determine whether these malpractice claims
are viable in a given jurisdiction. The legal justification for these claims and the different
legal theories for recovery are the most debated issues on the subject. Courts faced with
deciding whether to recognize a claim are generally persuaded by how the jurisdiction deals
with assignment of legal malpractice claims, claims of legal malpractice by will beneficiaries
against the testator’s attorney, and the insurer’s role in the relationship. This Article will
explore the legal justification for these claims and the potential legal theories of recovery
for an insurer, and it will provide a framework to help lawyers assess the likely success of
a claim in a jurisdiction that has not addressed the issue.

† Submitted by the authors on behalf of the FDCC Professional Liability section.

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FDCC Quarterly/Spring 2011

John S. Wilkerson is a shareholder at Turner, Padget, Graham
& Laney P.A. in the Charleston, South Carolina office. He is
an experienced trial lawyer, having served as lead counsel
in over 150 jury verdicts. Mr. Wilkerson handles litigation
in a wide range of substantive areas including insurance
coverage and bad faith, employment, professional liability,
and business and probate litigation. He is a member of the
South Carolina Bar and also admitted to practice before the
United States District Court, District of South Carolina, the
United States Court of Appeals for the Fourth Judicial Circuit,
and the United States Tax Court. Mr. Wilkerson has been an
active member of the Federation of Defense and Corporate
Counsel for over 15 years. He is currently serving as the Vice Chair of the Professional
Liability Section and the Admissions Committee. He is a member of Defense Research In-
stitute, Litigation Counsel of America, Lawyers for Civil Justice, the South Carolina Law
Institute, and a past president of the South Carolina Defense Trial Attorneys Association.
Mr. Wilkerson has presented seminar programs to the FDCC, ABA, DRI and many state
and local bar associations.

II.
Legal Justification for Insurers’ Malpractice Claims

A. Why Insurers’ Claims Against Counsel Retained to Defend an Insured Should Be
Allowed
When an attorney commits malpractice in defending an insured, the damage is often
shouldered by the insurer rather than the insured.1 Even if the insured suffers some of the
damage, the amount may not be sufficient to motivate the individual to pursue a malpractice
claim against her attorney, especially given the fact that she has likely already been involved
in litigation for some time. The insurer, on the other hand, likely suffers the lion’s share
of the damage caused by the malpractice. As one court noted, it is inequitable to require
an insurance company to absorb the loss due to negligent defense counsel without a legal
remedy.2 Accordingly, allowing these claims provides a remedy to the insurer when the
insurer has suffered detriment due to the negligence of its hired defense counsel.

1 For another discussion of the justification for these claims, see Michael Sean Quinn & Susan Scott
Hayes, Lawyer-Performance Suits Brought by Liability Insurers Against Defense Counsel, 30 Ins. Litig.
Rep. 245 (2008).
2 See Atlanta Int’l Ins. Co. v. Bell, 475 N.W.2d 294, 298 (Mich. 1991) (“[D]efense counsel’s immunity
from suit by the insurer would place the loss for the attorney’s misconduct on the insurer. The only winner
. . . would be the malpracticing attorney.”).

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Jeffrey T. Stover is an associate at Turner, Padget, Graham &
Laney P.A. in the Charleston, South Carolina office where he
handles professional liability and product liability claims and
litigates business contract and insurance coverage disputes.
A member of the patent bar, he also handles intellectual prop-
erty issues. In additional to his B.S. and M.S. from Clemson
University, Mr. Stover holds a J.D. from Charleston School of
Law where he graduated summa cum laude. He is a member
of the South Carolina Bar.

These actions “promote[] enforcement of the lawyer’s obligations to the insured” by
holding the lawyer accountable for breaches of a duty that the insured may not have the
incentive to litigate.3 If the lawyer were to commit malpractice from which the insured suf-
fered no pecuniary detriment (even though the insurer suffered damages), the insured likely
would not bother suing the attorney—and would have no damages to collect. Without a risk
of legal liability, the attorney would have less financial incentive to represent future clients
any better.4 However, if the insurer is allowed to sue the attorney for his malpractice, the
attorney would be more inclined to represent the insured commensurate with the standard
of care.

B. Arguments Against Permitting Insurers to Bring Claims against Counsel Hired
to Defend the Insured
The two major reasons legal malpractice claims against lawyers hired by insurers are
disputed are (1) the impact on the relationship between the insured and her defense counsel
and (2) the impact these suits have on the attorney-client privilege itself. The relationship
between an attorney and his client has always been one of the most protected relationships
recognized by the law. The attorney is an agent of his client, the insured. The rule that “[a]n
agent cannot ‘serve two masters whose interests [are] incompatible’” has been recognized
as relevant in these cases because of the inherent conflict in allowing these suits to proceed

3 Restatement (Third) of the Law Governing Lawyers § 51 cmt. g (2000).
4 Insurers would likely provide less business to defense counsel who commit malpractice to the detriment
of an insurer, and this would provide some economic incentive to perform well.

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on a direct duty theory; if the attorney is primarily concerned about minimizing exposure
to the insurer, then his primary focus may shift from the insured to the insurer.5 Accord-
ingly, one major hurdle to asserting these claims is persuading a court that the impact on the
attorney-client relationship is outweighed by the benefit to society that results from requiring
a wrongdoer to bear the burden of his wrongdoing.

1. The Attorney-Client Relationship
The impact on the attorney-client relationship is often cited as an argument against di-
rect actions for legal malpractice by the insurer. Some argue that the insurer does not have
standing to assert a malpractice claim against the insured’s attorney because the attorney
owes the duty solely to the client, not to the insurer. The Restatement of the Law Governing
Lawyers identifies three factors to consider when determining whether an attorney owes a
duty to a third party:

[A] lawyer owes a duty to use care . . . to a nonclient when and to the extent that:
(a) the lawyer knows that a client intends as one of the primary objectives of the
representation that the lawyer’s services benefit the nonclient; (b) such a duty would
not significantly impair the lawyer’s performance of obligations to the client; and
(c) the absence of such a duty would make enforcement of those obligations to the
client unlikely.6

Courts in some jurisdictions have held that attorneys do not owe a duty to the insurers because
the existence of such a duty may impair the lawyer’s performance when handling the client’s
matter. The traditional rule that only a client may sue an attorney for malpractice is meant
to ensure that the attorney fulfills his duty to the client.7 Allowing the insurer to bring these
claims directly is said to undermine the relationship by detracting from the undivided duty
of loyalty the attorney owes to his client.8 The tripartite relationship has been characterized
as having “rife possibility of conflict.”9
Another concern over giving the insurer standing is that the threat of a malpractice claim
is just another tool insurers may use to “control” defense counsel. In most cases, insurers
have the ability to control the defense by virtue of the policy language. Additionally, defense
counsel are usually hired by the insurer, paid by the insurer, and seek to maintain a strong

5 See, e.g., Swiss Reinsurance Am. Corp. v. Roetzel & Andress, 837 N.E.2d 1215, 1221 (Ohio Ct. App.
2005).
6 Restatement (Third) of the Law Governing Lawyers § 51(3) (2000).
7 Bell, 475 N.W.2d at 296.
8 See id.
9 Id. at 297.

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relationship with the insurer in hopes of acquiring more business in the future. In essence,
the insurer’s ability to influence the attorney’s decisions is already present, and recognizing
an insurer’s cause of action for malpractice against the defense attorney would only further
tip the scales toward the insurance company actually controlling the relationship. As the
court in Atlanta International Insurance Co. v. Bell noted, “there is great temptation [for
defense counsel] to favor [the insurance company] who pays the bills and will send further
business, and where long standing personal relations may exist” and “[a]n attorney . . . may
be confronted with serious conflicts of interest issues almost from the very outset of the
relationship.”10
Other courts have found that the problem is unlikely to arise in practice. “In a malprac-
tice action against a defense counsel, however, the interests of the insurer and the insured
generally merge.”11 In general, the interests are aligned, and any alleged malpractice is
mutually detrimental.12 The interests of the insured and the insurer are more often than not
completely congruent in handling the case against the insured.

2. The Attorney-Client Privilege
Another argument against allowing malpractice claims against lawyers hired to defend
insureds is the impact such claims may have on the attorney-client privilege. When a cli-
ent brings a claim against an attorney, the attorney has the right to disclose information
protected by the attorney-client privilege in order to defend himself against the claim.13
When an insurer brings a legal malpractice claim against its insured’s attorney, the attorney
has the same right to disclose these confidences. In that scenario, the insured may lose the
protections of the privilege based on the carrier’s decision to file suit against its attorney.
Allowing the insurance company to unilaterally waive the privilege between the attorney and
insured “erodes the trust necessary to a successful attorney-client relationship” by making
the client less likely to share confidences for fear they will be disclosed later.14 A client who
brings a malpractice claim against her attorney has the ability to drop the suit to prevent
any confidences from being disclosed. At some point in litigation, the client may feel it is
not worth pursuing the claims in exchange for public exposure of the confidences. If the
insurer brings the suit, however, the insured does not have the ability to drop the suit and
prevent the disclosure and may be “blind-sided” by the insurer’s suit that allows a breach of

10 Id. at 297 n.6 (quoting Mallon & Levit, Legal Malpractice 356–57 § 263; Keeton & Widiss, Insurance
Law: A Guide to Fundamental Principles, Legal Doctrines, and Commercial Practices, 829-30 (West
1988)).
11 Bell, 475 N.W.2d at 298.
12 See, e.g., Gen. Sec. Ins. Co. v. Jordan, Coyne, & Savits, LLP, 357 F. Supp. 2d 951 (E.D.Va. 2005).
13 See Model Rules of Prof’l Conduct R.1.6(b)(6) (2010).
14 State Farm & Cas. Co. v. Weiss, 194 P.3d 1063, 1068 (Colo. App. 2008).

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confidences.15 One solution to this problem is to require the insured’s consent to either the
lawsuit or to having the insurer as a represented party.16 The court in Pine Island Farmers
Coop v. Erstad & Riemer, P.A. recognized that prior informed consent helps eliminate the
possibility of conflict of interest problems and increases awareness of the impact of a legal
malpractice claim by the insurer.17

III.
Legal Theories of Recovery

The states that allow malpractice claims against attorneys hired to represent insureds (and
the federal courts that have allowed the claims absent contrary state law) can be grouped by
the type of legal theory under which they require an insurer to bring its claim. Two distinct
theories have been recognized: a direct action for malpractice, and an equitable subrogation
claim in which the insurer is subrogated to the rights of its insured against the attorney.18

A. Direct Actions for Malpractice
In a direct action for malpractice, the insurer is allowed to sue the defense attorney
retained to represent the insured directly. Insurers are allowed to bring these claims either
because the jurisdiction recognizes that the carrier is an actual client of the attorney or
because the relationship has been held sufficient to allow the insurer to proceed directly.19
The Restatement seems most in line with the direct action theory, as it recognizes a duty
flowing directly from the attorney to the insurer by stating that

a lawyer designated by an insurer to defend an insured owes a duty of care to the
insurer with respect to matters as to which the interests of the insurer and the insured
are not in conflict, whether or not the insurer is held to be a co-client of the lawyer.

15 St. Paul Fire & Marine Ins. Co. v. Birch, Stewart, Kolasch, & Birch, LLP, 379 F. Supp. 2d 183, 192 (D.
Mass. 2005).
16 See id. at 193–94 (insured’s consent to the trial); Pine Island Farmers Coop. v. Erstad & Riemer, P.A.,
649 N.W.2d 444 (Minn. 2002) (holding that insurer can be a co-client with insured if client consents after
informed consultation with a lawyer and if there is no conflict of interest).
17 See Pine Island, 649 N.W.2d 444.
18 For another classification of the legal foundations for these claims, see William H. Black, Jr. & Sean
P. Mahoney, Legal Basis for Claims by Liability Insurers Against Defense Counsel, 35 Aba Wtr Brief 33
(2006).
19 See Pine Island, 649 N.W.2d 444 (recognizing that insurer can be a client); State & County Mut. Fire
Ins. Co. v. Young, 490 F. Supp. 2d 741 (N.D. W. Va. 2007) (conferring standing for a direct claim based
on relationship).

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Insured’s Claim for Legal Malpractice Against Defense Counsel

For example, if the lawyer negligently fails to oppose a motion for summary judg-
ment against the insured and the insurer must pay the resulting adverse judgment,
the insurer has a claim against the lawyer for any proximately caused loss.20

A very similar argument for this legal theory can be based upon an intended benefi-
ciary analysis. Courts that construe the insurer-insured-attorney relationship as involving
an intended beneficiary find that the insurer, like the beneficiary of a will, is an “intended
beneficiary of the services provided by the attorney retained to represent an insured.”21 This
rationale is closely aligned with the tripartite relationship theory of the relationship, which
recognizes that the insurer is intermingled in the litigation as much as the insured and at-
torney.

B. Equitable Subrogation
“Equitable subrogation has been described as the ‘legal fiction’ that permits one party
to stand in the shoes of another” and seek recovery from the true wrongdoer.22 The Bell
court held that the remedy of equitable subrogation is “a less sweeping, less rigid solution
than creation of an attorney-client relationship between the insurer and defense counsel, but
a more flexible, more equitable solution than absolution from liability from professional
malpractice.”23 Inherent in that statement is the Bell court’s reluctance to allow insurers to
assert a direct action because of its propensity to place the insured and insurer on equal foot-
ing in the tripartite relationship as far as the attorney is concerned. Equitable subrogation
appreciates the insured’s role as the sole client and requires the carrier to argue the position
of its insured if it wants to gain a recovery against defense counsel.
Those courts that hesitate to recognize equitable subrogation as the proper theory of
recovery generally suggest that the “uniquely personal nature of an attorney’s duty to his or
her client” frustrates recognition of a theory that allows a third party to stand in the shoes of
an individual in this close relationship.24 In Swiss Reinsurance America Corp., Inc. v. Roet-
zel & Andress,25 the insurer sought to recover under an equitable subrogation theory when
defense counsel allegedly committed malpractice while defending a medical malpractice
case. In disallowing the equitable subrogation theory, the Ohio Court of Appeals looked to

20 Restatement (Third) of the Law Governing Lawyers § 51 cmt. g (2000).
21 Hartford Ins. Co. v. Koeppel, 629 F. Supp. 2d 1293, 1301 (M.D. Fla. 2009).
22 Atlanta Int’l Ins. Co. v. Bell, 475 N.W.2d 294, 298 (Mich. 1991).
23 Id. at 299.
24 Dale J. Gilsinger, Annotation, Right of Insurer to Assert Equitable Subrogation Claim Against Attorney
for insured on Grounds of Professional Malpractice, 50 A.L.R. 6th 53, 53 (2009).
25 837 N.E.2d 1215 (Ohio Ct. App. 2005).

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the insured’s deposition transcript and found that the insured stated that he was happy with
defense counsel’s representation.26 The court noted that allowing equitable subrogation
would be inconsistent with the views of the client.27 Accordingly, a broad application of this
theory would be inconsistent with a theory that requires standing in the shoes of the client.
Equitable subrogation is best suited for cases where the insured and insurer are completely
congruous in their interpretation of defense counsel’s performance.

IV.
Indicators for Unresolved Jurisdictions

A majority of states have no reported decisions specifically allowing an insurer to file
a malpractice claim against the attorney hired for its insured, nor do they have reported
decisions precluding an insurer’s ability to do so. Those courts that have reported decisions
have generally relied upon analogous situations to fashion a remedy including (1) whether
an intended will beneficiary has standing to bring a claim in the jurisdiction for malpractice
in drafting a will; (2) whether the jurisdiction allows an assignment of legal malpractice
claims; and (3) how the jurisdiction views the insurer’s role in the tripartite relationship.28
How a given jurisdiction handles these issues is a good indicator of how a potential claim
by an insurance carrier against retained defense counsel may fare in the jurisdiction.

A. Will Beneficiary
When analyzing whether to allow claims against defense counsel retained by the insurer
to represent the insured, many courts will look to whether a will beneficiary can assert a
claim for malpractice against an attorney who negligently drafted a will. Like an insurance
company, a will beneficiary is an intended beneficiary of the attorney’s services although
the beneficiary is not the attorney’s actual client; also, the will beneficiary is the one who
actually suffers a potential loss from the malpractice in most cases.
In predicting West Virginia state law, the Northern District of West Virginia allowed
an insurance company to recover after considering, among other things, West Virginia’s
stance on allowing will beneficiaries to bring malpractice claims against the testator’s at-
torney.29 The court cited the importance of this indicator when it stated that “if the West
Virginia Supreme Court of Appeals adopted the minority position, precluding an insurance
company from bringing this type of legal malpractice suit, but allowed a will beneficiary to
bring a legal malpractice suit against a will drafter, it would be the only such jurisdiction

26 Id. at 1224.
27 Id.
28 See supra Part III.
29 State & County Mut. Fire Ins. Co. v. Young, 490 F. Supp. 2d 741 (N.D. W. Va. 2007).

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of its kind.”30 The court pointed out that the minority of jurisdictions that do not allow an
insurance company to bring these claims also do not permit the will beneficiary malpractice
claims.31

B. Assignment of Legal Malpractice Claims
Assignment of legal malpractice claims, like legal malpractice claims by insurers in
these scenarios, involves a third party bringing an action against an attorney for malprac-
tice. Jurisdictions that flatly prohibit assignment of legal claims are less inclined to allow
insurers to bring these actions as well. In Essex Insurance Co. v. Tyler, the District Court
of Colorado predicted that Colorado state law would disallow malpractice claims against
defense counsel hired by the insurer based in part on the fact that Colorado prohibits the
assignment of malpractice claims.32 The district court’s prediction was buttressed by a later
decision of the Colorado Court of Appeals.33

C. The Insurer’s Role in the Relationship
Those states that stress the fact that the insured is the sole client to whom the attorney
owes a duty tend to find that the insurer lacks standing to bring a claim against counsel
whom the insurer hired to defend the insured. For example, the District Court of Colorado,
citing a Colorado Bar Association’s Ethics Committee Formal Opinion, stressed that in
Colorado, an attorney’s only a duty is to the insured.34 The Colorado Court of Appeals also
cited the Ethics Committee’s Formal Opinion when discussing the Essex case and affirmed
its stance on the role of the insurer in disallowing an insurer’s claim for malpractice against
its insured’s defense counsel.35
States that consider the relationship between the attorney, the insured, and the insurer to
be a tripartite relationship, and those that go so far as to designate the insurer a “client” of
the insured’s attorney are much more likely to allow an insurer to bring a malpractice action.
For example, in Paradigm Insurance Co. v. Langerman Law Offices, P.A., the Supreme Court
of Arizona recognized that an attorney retained by the insurer to defend the insured also
owes a duty to the insurer. The attorney’s duty arises from the understanding that ordinar-
ily the lawyer’s services are intended to benefit both the insurer and the insured when their

30 Id. at 747.
31 Id.
32 See Essex Ins. Co. v. Tyler, 309 F. Supp. 2d 1270, 1273–74 (D. Colo. 2004).
33 See State Farm Fire & Cas. Co. v. Weiss, 194 P.3d 1063, 1069 (Colo. App. 2008) (affirming dismissal of
insurer’s malpractice claim and stating that “just as assignment of legal malpractice claims does, equitable
subrogation degrades the legal system”).
34 Essex, 309 F. Supp. 2d at 1272.
35 Weiss, 194 P.3d at 1066.

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interests coincide.36 In Paradigm, the court noted that the insured and the insurer often have
mutual interests because both the insured and the insurer benefit from developing a strong
defense and discovering potential coverage by another insurer.37 The existence of defense
counsel’s duty to the insurer does not depend upon whether the attorney and the insurer
have an attorney-client relationship because attorneys can owe duties to non-clients.38 Thus,
in Arizona, if the duty owed by defense counsel to the insurer is negligently breached, the
attorney may be held liable for damages sustained by the insurer regardless of whether the
insurer is considered to be the defense attorney’s client.39

V.
Conclusion

Allowing legal malpractice claims by insurers against defense counsel hired to represent
their insureds places the burden of malpractice on the defense attorney who commits that
malpractice. Though the legal theory under which an insurer seeks recovery may vary depend-
ing on the jurisdiction in which it brings its claim, the majority of jurisdictions confronted
with the issue have allowed insurers to assert claims. Those jurisdictions that have not been
confronted with the issue will likely look to a few key areas as guideposts in making this
determination. Thus, it is not impossible to predict which jurisdictions are likely to permit
these malpractice claims and which jurisdictions are unlikely to allow them.

36 Paradigm Ins. Co. v. Langerman Law Offices, P.A., 24 P.3d 593, 602 (Ariz. 2001).
37 Id. at 598.
38 Id. at 600.
39 Id. at 602.

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