In a recent decision, the Florida Supreme Court considered the question of whether an insurance carrier can bring a legal malpractice claim against a law firm that the carrier hired to defend its insured. The Court, in a break with previous Florida case law on this issue, found that the carrier could bring the claim based upon the contractual subrogation provision in the policy. This is a significant change that could result in heightened risk when writing E&O insurance for “insurance defense” type law firms in Florida, but could also enhance protection for carriers that ultimately pay the price for the negligence of the law firms they hire.
In the underlying matter here, Arch Insurance Company (“Arch”) provided accountant’s E&O coverage to Spear Safer CPAs (“Spear”). Spear had been an auditor for Mutual Benefits Corp. (“MBC”), a bankrupt viatical settlement company that was under investigation by the SEC. The receiver for MBC brought a claim of accounting malpractice against Spear. Arch then retained the Kubicki Draper (“KD”) law firm to represent Spear. Ultimately, a settlement of the claim against Spear was reached and Arch paid $3.5 million from its policy. At some point, Arch discovered that the claim against Spear might have been barred by the applicable statute of limitations, which could have drastically reduced the value of the case, but KD allegedly failed to raise the issue in a timely manner. At the conclusion of the case, Arch filed suit against KD for legal malpractice and breach of contract. The firm moved for summary judgment arguing that there was no contractual relationship between it and Arch and therefore it did not owe Arch any duty. Arch essentially argued that it was an intended beneficiary of the contract between the firm and its client and that it would be bad public policy to shield the firm from liability for its malpractice. The underlying trial and appellate courts agreed with KD that there was no contractual relationship and therefore Arch had no standing to sue.
The Florida Supreme Court reversed the lower courts’ rulings and found that Arch did have standing to pursue this claim. Interestingly, the Court did not find that Arch had any sort of contractual relationship with the firm but rather held that where the insurer is subrogated to the insured’s rights under the insurance policy, the insurer can proceed in the shoes of the insured. So, as long as the policy has a subrogation provision an insurer should be able to maintain this type of claim against a law firm, working for an insured, that commits malpractice.
Read the full article on Plus Blog.