U.S. District Court Predicts That Virginia Would Recognize Legal Malpractice Cause of Action by Insurer Against Law Firm Hired to Represent its Insured
April, 2005
The United States District Court for the Eastern District of Virginia has predicted that Virginia state law would recognize a legal malpractice cause of action by an insurer against a law firm retained to represent one of its insureds. Gen. Sec. Ins. Co. v. Jordan, Coyne & Savits, LLP, 357 F.Supp. 2d 951 (E.D. Va. 2005).
Facts
An insurer brought a legal malpractice action against a law firm retained to defend an insured in a personal injury suit arising from an automobile accident. The insurer's claims were brought by the insurer's attorney-in-fact, a former corporate affiliate that assumed the insurer's liability for the underlying personal injury claim.
General Security Indemnity Company of Arizona (“GSINDA”) was a wholly-owned subsidiary of SCOR Reinsurance Company (“SCOR”). General Security Indemnity Company (“GSI”) was a co-subsidiary of SCOR. GSI retained the law firm of Jordan, Coyne & Savits LLP (“Jordan Coyne”), and Carol Stone (“Stone”), a member of that firm, to defend one of its insureds, VIP & Celebrity Limousines, Inc. (“VIP"), in an underlying personal injury action. A default judgment was entered against VIP.
SCOR then sold GSI. In connection with the sale, GSINDA assumed GSI's liabilities and obligations under its existing insurance policies, including GSI's liability for payment of the judgment against VIP. After GSINDA paid the judgment, GSI executed a power-of-attorney granting GSINDA the authority to act in its name for matters relating to the policy obligations GSINDA had assumed. In an exercise of the power-of-attorney, GSINDA filed a diversity legal malpractice action in the United States District Court, Eastern District of Virginia, on behalf of GSI against Jordan Coyne and Stone. GSI was also named as a plaintiff.
Defendants moved to dismiss the complaint for failure to state a claim. The court granted the motion in part, holding that although Virginia law would likely recognize a cause of action by an insurer against a law firm retained to defend its insured, the insurer's attorney-in-fact was not a proper plaintiff because Virginia does not allow assignment of legal malpractice claims.
Analysis
The court initially noted that the Virginia Supreme Court has not previously addressed the question of whether an insurer can bring a legal malpractice claim against a law firm it retains to defend an insured. However, the court predicted that Virginia law would recognize such a cause of action for two reasons. First, nearly all jurisdictions permit some form of a legal malpractice action by an insurer against retained counsel – whether as a client, an intended non-client beneficiary of counsel's legal services, or a subrogee of the insured. Reading the “judicial tea leaves,” the court predicted that Virginia would adopt the insurer-as-non-client-beneficiary theory.
Second, public policy reasons favor recognizing such a cause of action. Permitting a legal malpractice action promotes enforcement of a law firm's obligations to the insured. An insured rarely has incentive the sue counsel because the insurer is typically required to pay a judgment resulting from negligent legal representation.
The court nevertheless dismissed GSINDA's claim because it was not a proper plaintiff. GSI's grant of power-of-attorney to GSINDA for purposes of bringing the lawsuit was the equivalent of an impermissible assignment of a legal malpractice claim. Virginia law prohibits such assignments because they subject attorneys to negligence actions by strangers to the attorney-client relationship. Thus, only GSI was a proper plaintiff. But because GSINDA had paid the judgment, it appeared that GSI had sustained no loss as a result of the malpractice. The court held that if so, GSI's claim should also be dismissed. The court ordered GSI to plead whether it had sustained any such loss and, if not, why its claim should not be dismissed.
Learning Point:
It now remains for Virginia state courts to explicitly adopt the district court's recognition of a state law legal malpractice cause of action by an insurer against counsel retained to represent its insured. Inasmuch as Virginia law has previously recognized an attorney's liability to non-clients in other contexts (i.e., will beneficiaries), it seems likely that Virginia will join the majority of jurisdictions and permit legal malpractice actions by insurers to proceed. •
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