By William T. Barker, Partner, SNR Denton LLP
In Great American Excess & Surplus Insurance Co. v. Quintairos, Prieto, Wood & Boyer, P.A., the Mississippi Supreme Court adopted the opinion of a divided Mississippi Court of Appeals holding (on an issue that has divided other jurisdictions) that an excess insurer could sue defense counsel appointed by the primary insurer for malpractice based on equitable subrogation. It reversed an unprecedented holding that provision of status reports and case evaluations to the excess insurer might establish an attorney-client relationship. But primary insurers and defense counsel in other jurisdictions may wish to consider precautions against unwanted direct duties to excess insurers.
Great American was the excess insurer of Shady Lawn Nursing Home, providing $8 million per person, $16 million per occurrence coverage excess to a $1 million per person, $3 million per occurrence policy issue by Royal. Shady Lawn was sued by the estate of Huldah Chase for allegedly inadequate care. Initial defense counsel retained by Royal allegedly provided Great American with status reports evaluating the case as worth between $150,000 and $400,000 and stated that experts needed to be retained but that had not been done. In November, 2003, Royal reassigned the defense to the Quintairos firm. At that time, Shady Lawn's expert designation was due December 15, 2003. The designation was not timely filed, and Shady Lawn was left without an expert. Royal tendered its limits and Great American settled the case for an unstated "significant sum."
Great American sued both Royal and the Quintairos firm, but the claims against Royal were not involved in this appeal. The claims against the Quintairos firm alleged equitable subrogation, legal malpractice, negligence, gross negligence, negligent misrepresentation, and negligent supervision. (See 2012 Miss. App. LEXIS 56, ¶ 17 & n.5.) The circuit court dismissed them all, but the court of appeals reversed and the supreme court agreed, in part.
The court of appeals reasoned that negligent misrepresentation does not require a lawyer-client relationship and was adequately stated by allegations that (1) Great American requested and received status reports which falsely failed to indicate that liability was likely to reach Great American's attachment point and (2) Great American had suffered damage from relying on these reports by taking no action to protect itself.
As to the equitable subrogation claim, the commentary explains that the court of appeals (whose opinion on this point the supreme court adopted) concluded that such claims should be allowed:
Shady Lawn had no incentive to pursue a 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. "The only winner produced by an analysis precluding liability would be the malpracticing attorney." Indeed, Great American and Shady Lawn have the same interest in this litigation - Shady Lawn's competent representation.
With respect to the direct claim of legal malpractice, the court concluded that liability might be found either on the basis that the Quintairos firm had an attorney-client relationship with Great American or that Great American was a foreseeable third party who, for a proper business purpose, detrimentally relied on the lawyers' work. But the supreme court found no even arguable attorney-client relationship and no basis for liability without one.
As to negligent misrepresentation, the commentary concludes that:
a negligent misrepresentation can be actionable without an attorney-client relationship. The January, 2004 evaluation was arguably negligent, because it failed to take account of the risk that the court would deny leave to designate an expert late. But it is doubtful that Great American, had it been accurately informed, could have done anything to salvage the situation. The deadline was already past, though it is possible that a quicker motion to designate an expert might have been granted. Unless leave would have been granted, Great American would seem to have suffered no damage from relying on any misrepresentation.
The commentary argues that the equitable subrogation claim was properly allowed, but that precluding the direct legal malpractice claim was correct. It also discusses how defense counsel and primary insurers can protect against direct liability to others to whom they provide status reports and settlement evaluations.
William T. Barker is a member of SNR Denton's Insurance Litigation & Coverage Practice Group and practices in the firm's Chicago office. He has a nationwide practice in the area of complex commercial insurance litigation, including coverage, claim practices, sales practices, risk classification and selection, agent relationships, and regulatory matters. He is the co-author, with Ronald D. Kent of The New Appleman Insurance Bad Faith Litigation, Second Edition and with Charles Silver of the forthcoming Professional Responsibilities of Insurance Defense Counsel; he has written over 100 published articles on insurance and litigation subjects. He has been described as "[t]he leading lawyer commentator" on the relationships between insurance and civil procedure. Charles Silver & Kent Syverud, The Professional Responsibilities of Insurance Defense Lawyers, 45 Duke L.J. 255, 257 & n.4 (1995). He is an Adviser to the American Law Institute project on Principles of the Law of Liability Insurance. He is a member of the Editorial Board of The New Appleman on Insurance Law Library Edition and The New Appleman Insurance Law Practice Guide. He is Editorial Board Director and Senior Contributing Editor of Insurance Litigation Reporter and a member of the Board of Editors of Defense Counsel Journal.
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