Skin In The Game: Insurers’ Standing To Seek Subrogation For Attorneys’ Malpractice In Defending Insureds

by Anne E. Kevlin and Paul V. Esposito

It’s stating the obvious, but we live in a litigious society. Truth be told, there is probably a lawsuit or two we’d all like to file. Fortunately, cooler heads prevail more often than not.

But when they don’t, there are rules that wisely control access to the courts. One of them is the doctrine of standing. The doctrine limits the people and entities who may bring a lawsuit to those actually involved in a controversy. Suit may not be brought by someone wanting to get an issue resolved, yet lacking a real interest in a case. A party bringing suit must have skin in the game.

Very recently, a question of standing arose in a Florida case. It questioned an insurer’s standing to bring a malpractice claim against an attorney who didn’t do such a hot job representing an insured. Arch Ins. Co. v. Kubicki Draper, LLP, 2021 Fla. LEXIS 898.

Facts

Arch’s insured, accounting firm Spear Safer, performed financial audits for firm client MBC. Apparently, the federal Securities and Exchange Commission had problems with how MBC was reporting its operations. Proceedings followed. After settling with the SEC, MBC’s receiver sued Spear Safer for accounting malpractice.

Arch had a duty to defend Spear Safer pursuant to a professional liability policy. Arch retained Kubicki Draper LLP to defend Spear Safer in the litigation. Shortly before trial, the receiver’s claim settled within policy limits for $3.5 million.

Arch was upset that Kubicki missed a statute-of-limitations defense that would have greatly reduced the settlement value. The policy contained a subrogation provision letting Arch recover from third persons all amounts paid under the policy. Arch sued Kubicki for legal malpractice, breach of fiduciary duty, subrogation, assignment, third-party beneficiary, and breach of contract. Kubicki responded that Arch lacked standing to sue and also lacked privity supporting Kubicki’s duty of care. Agreeing on both grounds, the trial court ruled that Arch had no standing to sue Kubicki for legal malpractice. 

The Fourth District Court of Appeal affirmed. It agreed with the trial court’s reasoning and found that Arch was not an intended third-party beneficiary of the Kubicki/Spear Safer relationship.

Analysis

The Florida Supreme Court reversed. The Supreme Court agreed with the lower courts that Kubicki was in privity with Spear Shafer, not with Arch. But the Court also ruled that Arch had standing to sue Kubicki pursuant to the policy’s subrogation provision. The Court defined subrogation as “the substitution of one person in the place of another with reference to a lawful claim or right.” Florida recognizes both equitable and contractual subrogation, the latter flowing from an agreement allowing recovery for a debt owed by a third party. The subrogation language in the Arch policy was plain, and so is the law: “Where an insurer has a duty to defend and counsel breaches the duty owed to the client insured, contractual subrogation permits the insurer, who—on behalf of the insured—pays the damage, to step into the shoes of its insured and pursue the same claim the insured could have pursued.” Because Arch’s subrogation right was unmistakable, the Court found no need to consider Arch’s third-party beneficiary argument.

The Supreme Court ruled that the Fourth District erred in focusing on the lack of privity between Arch and Kubicki. It was sufficient that privity existed between Kubicki and Spear Safer. This allowed Arch to step into Spear Safer’s shoes pursuant to the insurance contract.

The Supreme Court rejected the notion that the general bar against the assignment of legal malpractice claims blocked Arch’s claim. The bar prevents a marketplace for malpractice claims from developing in which parties lacking a legal relationship to a tortfeasor may sue. But here a relationship existed between Arch and Kubicki—the firm Arch hired. Public policy does not shield a law firm from liability for its malpractice. Instead, subrogation advances public policy by keeping insurance premiums down and by forcing tortfeasors to pay for losses they caused.

Learning Point: The Arch decision is very helpful for insurers—who definitely have skin in a lot of games. The decision makes perfect sense, consistent with contract language and equitable to all concerned. It will be interesting to watch its play nationwide.