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Federal District Court Allows Excess Insurer To Bring Legal Malpractice Claim

Excess Insurer Can Bring Legal Malpractice Claim Against Lawyer

ACE AMERICAN INSURANCE CO. v. SANDBERG, PHOENIX & VON GONTARD, PC., Dist. Court, SD Illinois 2012 – Google Scholar.

This is a dispute between an insurer and the lawyers who were hired to defend a case. Illinois has recognized that an insurance company has a right to sue defense counsel for malpractice. Illinois has never decided whether to allow an excess insurer to bring such a lawsuit.

In this case, the court held that an excess insurer can bring a legal malpractice action under equitable subrogation principles. The district court, in a thorough discussion of the cases and the policy issues, rejected the argument that the excess insurer’s case was really an assignment of a legal malpractice claim. (Assignments are prohibited under Illinois law and the law of most states).

The court summed up its reasoning as follows:

“The concerns expressed in Illinois cases like Grimes (holding that legal malpractice cases cannot be assigned, because the assignee is a stranger to the attorney-client relationship who suffered no injury from the lawyer’s conduct) lose persuasive force on the facts, as pled, in the instant case. Here, the excess insurer is not a “stranger” to the attorney-client relationship. Here, the excess insurer did suffer injury directly from the attorney’s actions. Plus this plainly is not a case of an insurer selling its cause of action on the open market.

On the facts before this Court, to hold that an excess carrier can never be equitably subrogated to an insured’s legal malpractice claim would be tantamount to declaring that the attorney hired by the primary insurer could never owe a duty to an excess carrier. Such a broad prohibition well might produce unintended, unfair, and undesirable consequences, leaving excess insurers devoid of any remedy in certain circumstances.[6]

Finally, this result will not declare open season on attorneys or be detrimental to the legal profession. Insurers in general, and excess insurers in particular, rarely bring legal malpractice claims against attorneys, because (1) often the amount in controversy is not significant enough to be worth the trouble of another lawsuit; (2) with limited exceptions, insurers do control whether the case settles or not, so they are involved in the process; (3) insurers are in the business of paying claims; and (4) rather than sue the lawyers, the insurers just place the lawyers on the equivalent of a “do not call” list and refuse to retain their services in the future.

Like the Northern District of Illinois, this Court finds that equitable principles and policy concerns support permitting an excess liability insurer to be equitably subrogated to an insured’s legal malpractice claims, thereby allowing the excess carrier (who has paid for excess liability) to enforce duties already owed by the attorney to the insured, and assuring that the social costs of any malpractice are borne by those responsible for the loss (the lawyers who committed themalpractice). As Plaintiffs properly emphasize here, an excess insurer must satisfy certain requirements before it can assert such a right of subrogation, and the claim would be strictly limited to nonclients who, pursuant to a legal duty, paid for the client’s loss or debt as the direct result of the lawyer’s malpractice. See Doc. 30, pp. 13-14, citing National Union, 2 F. Supp. 2d at 1024. In these circumstances, equitable subrogation is not akin to assignment to a stranger.”

Comment: this is an issue of some importance and I agree with the decision.  The excess carrier bore the burden of the legal malpractice (alleged) and should have the right to recover from the attorney even if the excess insurer did not control the defense of the case.

Edward X. Clinton, Jr.