The National Debate Continues: When Can An Excess Carrier Sue The Insured’s Defense Counsel For Malpractice?
April, 2011
by Melinda S. Kollross and Edward M. Kay
This is one of the most hotly debated subjects on the national legal scene today -- can an excess carrier sue an insured's defense counsel when, through defense counsel's malpractice, the excess carrier must pay a judgment or a settlement within its layer? When counsel's malpractice forces the excess carrier to make that payment, neither the insured nor the primary carrier has any desire to pursue a malpractice claim against defense counsel. Only the excess carrier has that interest. But the courts are split on whether the excess carrier can maintain such an action. Some courts have disallowed such actions, holding that it would create incentives for excess carriers to create a fund for the payment of judgments within the excess layer. See, e.g., Gt. Am. Ins. Co. v. Dover Vixenhorn PLLC, 456 F.3d 909 (8th Cir. 2006) (Arkansas law); Continental Cas. Co. v. Pullman Comley Bradley & Reeves, 929 F.2d 103 (2d Cir. 1981) (Connecticut law); Essex Ins. Co. v. Tyler, 309 F. Supp. 2d 1270 (D. Colo. 2004) (Colorado law); Querrey & Harrow, Ltd. v. Transcontinental Ins. Co., 885 N.E.2d 1235 (Ind. 2008); American Employers' Ins. Co. v. Medical Protective Co., 419 N.W.2d 447 (Mich. 1987); American Continental Ins. Co. v. Webber & Rose PSC, 997 S.W.2d 12 (Ky. Ct. App. 1998). Other courts have, however, held that an excess insurer should not be left without a remedy. See National Union Ins. Co. v. Dowd & Dowd, P.C., 2 F. Supp. 2d 1013 (N.D. Ill. 1998) (Illinois law); American Centennial Ins. Co. v. Canal Ins. Co., 843 S.W.2d 480 (Tex. 1992); Allianz Underwriters Ins. Co. v. Landmark Ins. Co., 787 N.Y.S. 2d 15 (N.Y. App. Div. 2004).
On January 18, 2011, Mississippi joined the ranks of this debate, allowing an excess carrier to sue an insured's defense counsel for legal malpractice. Great. Am. E. & S. Ins. Co. v. Quintairos, Prieto, Wood & Boyer P.A., 2011 WL 135682 (Miss. App. Jan. 18, 2011).
Underlying Facts
A number of nursing home liability lawsuits were filed against Shady Lawn Nursing Home ("Shady Lawn") in Mississippi. Shady Lawn held a $1 million primary liability policy with Royal Indemnity Company; Shady Lawn also had $8 million in excess coverage with Great American. Royal retained the Quintairos law firm to represent Shady Lawn in the lawsuits. The lawsuits against Shady Lawn resulted in a settlement implicating Great American's excess policy. Great American sued the Quintairos law firm, alleging that but for the negligent handling of the lawsuits, its excess layer would not have been implicated. Great American specifically alleged that the status updates provided by the Quintairos law firm consistently undervalued the underlying cases so as to intentionally avoid giving Great America notice that its excess coverage might be needed. Other concerns with the Quintairos law firm were that the partners and trial counsel were not licensed to practice law in Mississippi and the attorneys had failed to designate medical experts in a timely manner. Great American alleged that it did not learn of these problems until the Quintairos law firm issued a litigation report valuing the expected costs of the case to be between $3 - $4 million. The Quintairos law firm had previously projected the costs to be $500,000.
Trial Court Proceedings
The Quintairos law firm moved to dismiss Great American's complaint, asserting that Great American lacked standing to sue because there was no attorney/client relationship between Great American and the Quintairos law firm. The trial court agreed and dismissed the lawsuit. Great American appealed to the Mississippi Court of Appeals.
Appellate Decision
Great American raised two arguments on appeal: whether an excess insurance carrier can pursue a legal malpractice claim against an attorney retained by the primary insurance carrier to represent the insured and, in the alternative, if a direct action was not allowed, could the excess insurance carrier recover through equitable subrogation? This was a question of first impression in Mississippi.
The Mississippi Court of Appeals first ruled that Great American could not bring a direct action against the Quintairos law firm. The Court found that since there was no Mississippi case law abolishing the requirement of an attorney/client relationship in regard to an excess insurer, the court did not have authority to sanction a direct action for legal malpractice. The Court ruled, however, that Great American was not left without a remedy because it could recover through "equitable subrogation" which would permit Great American to enforce the existing duties of defense counsel to the insured and recover damages if malpractice was found. The Court stated:
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.
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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 insured declined to pursue a claim.
The case was returned to the trial court for further proceedings against Quintairos.
Learning Point
Quintairos teaches that there is no good reason to leave excess insurers "holding the bag" when defense counsel's malpractice results in a judgment or settlement within the excess insurer's layer. Given the constant debate over this issue and the logic of decisions such as that in Quintairos, excess insurers should give some thought to continually bringing malpractice actions where they deem it appropriate, even in those states/jurisdictions which have disallowed such suits. Only in this way can excess insurers hope to achieve a change in the law in those jurisdictions by advancing such recent decisions as Quintairos and the logic behind allowing such suits to proceed. The courts in those states/jurisdictions disallowing such suits must be made to understand that "the only winner produced by an analysis precluding liability would be the malpracticing attorney." Atlanta Intern'l Ins. Co. v. Bell, 475 N.W.2d 294, 298 (Mich. 1991).
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