Sentry Select Insurance v. Maybank Law Firm ( 2018 )

THE STATE OF SOUTH CAROLINA
In The Supreme Court
Sentry Select Insurance Company, Plaintiff,
v.
Maybank Law Firm, LLC, and Roy P. Maybank,
Defendants.
Appellate Case No. 2016-001351
CERTIFIED QUESTIONS
J. Michelle Childs, United States District Court Judge
Opinion No. 27806
Heard February 9, 2017 – Filed May 30, 2018
FIRST QUESTION ANSWERED
Daryl G. Hawkins, Law Office of Daryl G. Hawkins, LLC,
of Columbia, for Plaintiff.
David W. Overstreet, Michael B. McCall, and Steven R.
Kropski; all of Earhart Overstreet, LLC; of Charleston; for
Defendants.
JUSTICE FEW: Sentry Select Insurance Company brought a legal malpractice
lawsuit in federal district court against the lawyer it hired to defend its insured in an
automobile accident case. The district court requested that we answer the following
questions:
(1) Whether an insurer may maintain a direct malpractice
action against counsel hired to represent its insured where
the insurance company has a duty to defend?
(2) Whether a legal malpractice claim may be assigned to a
third-party who is responsible for payment of legal fees
and any judgment incurred as a result of the litigation in
which the alleged malpractice arose?
The answer to question one is "yes," under the limitations we will describe below.
We decline to answer question two.
I. Background
Sentry Select hired Roy P. Maybank of the Maybank Law Firm to defend a trucking
company Sentry Select insured in a personal injury lawsuit in state court. Maybank
failed to timely answer requests to admit served by the plaintiff pursuant to Rule
36(a) of the South Carolina Rules of Civil Procedure. Seven months later, Maybank
filed a motion seeking additional time to answer the requests, which the circuit court
held under advisement until the parties completed mediation. Sentry Select claims
that because of Maybank's failure to timely answer the requests, and the likelihood
the circuit court would deem them admitted,1 it settled the case for $900,000, when
Maybank had previously represented to Sentry Select it could settle in a range of
$75,000 to $125,000.
Sentry Select then filed this lawsuit in federal district court against Roy Maybank
and Maybank Law Firm alleging a variety of theories, including negligence. The
district court certified these two questions to us pursuant to Rule 244 of the South
Carolina Appellate Court Rules.
II. Analysis—Question One
When an insurer hires an attorney to represent its insured, an attorney-client
relationship arises between the attorney and the insured—his client. Pursuant to that
relationship, the attorney owes the client—not the insurer—a fiduciary duty. See
1
See Scott v. Greenville Housing Authority, 353 S.C. 639, 646, 579 S.E.2d 151, 154
(Ct. App. 2003) (stating "our courts have repeatedly found that failure to respond to
requests for admissions deems matters contained therein admitted for trial").
Spence v. Wingate, 395 S.C. 148, 158-59, 716 S.E.2d 920, 926 (2011) (stating "an
attorney-client relationship is, by its very nature, a fiduciary relationship"). Nothing
we say in this opinion should be construed as permitting even the slightest intrusion
into the sanctity of the attorney-client relationship, nor to diminish to any degree the
fiduciary responsibilities the attorney owes his client.
However, an insurance company that hires an attorney to represent its insured is in
a unique position in relation to the resulting attorney-client relationship. Pursuant
to the insurance contract, the insurer has a duty to defend its insured, and must
compensate the attorney for his time in defense of his client. If the insured settles or
has judgment imposed against him, the insurance contract ordinarily requires the
insurer to pay the settlement or judgment. Many insurance contracts provide the
insurer has a right to investigate and settle claims as a representative of its insured.
Finally, the insurer's right to settle must be exercised in good faith, and that duty of
good faith requires the insurer to act reasonably in protecting the insured from
liability in excess of the policy limits. Tiger River Pine Co. v. Maryland Cas. Co.,
163 S.C. 229, 234-35, 161 S.E. 491, 493-94 (1931).
Because of the insurance company's unique position, we hold the answer to question
one is yes, an insurer may bring a direct malpractice action against counsel hired to
represent its insured. However, we will not place an attorney in a conflict between
his client's interests and the interests of the insurer. Thus, the insurer may recover
only for the attorney's breach of his duty to his client, when the insurer proves the
breach is the proximate cause of damages to the insurer. If the interests of the client
are the slightest bit inconsistent with the insurer's interests, there can be no liability
of the attorney to the insurer, for we will not permit the attorney's duty to the client
to be affected by the interests of the insurance company. Whether there is any
inconsistency between the client's and the insurer's interests in the circumstances of
an individual case is a question of law to be answered by the trial court.
Our decision is consistent with established policy. In Fabian v. Lindsay, 410 S.C.
475, 491, 765 S.E.2d 132, 141 (2014), analyzing the individual circumstances of that
case, we held an attorney can be liable for breach of duty resulting in damages to a
third party. We relied in part on our conclusion that not recognizing such liability
"would . . . improperly immunize this particular subset of attorneys from liability for
their professional negligence." 410 S.C. at 490, 765 S.E.2d at 140; see also 410 S.C.
at 493, 765 S.E.2d at 142 (Pleicones, J., concurring in part and dissenting in part)
(relying on "public policy considerations" to support his concurrence in the
imposition of liability).
The deterrent purpose of tort law is also served by our decision.
One reason for making a defendant liable in tort for
injuries resulting from a breach of his duty is to prevent
such injuries from occurring. Underlying this justification
is the assumption that potential wrongdoers will avoid
wrongful behavior if the benefits of that behavior are
outweighed by the costs imposed by the payment of
damages . . . .
F. Patrick Hubbard and Robert L. Felix, The South Carolina Law of Torts 7 (4th ed.
2011); see also Rule 1.8 cmt. 14, RPC, Rule 407, SCACR, (stating the reason an
attorney cannot prospectively limit his liability to a client is because doing so is
"likely to undermine competent and diligent representation").
Our decision is also consistent with the rule adopted by the majority of states that
have considered the issue. See generally Ronald E. Mallen, 4 Legal Malpractice §
30.39 (2018 ed.) (listing twenty-four states in which such an action is allowed under
appropriate circumstances, and two states in which it is not allowed); William H.
Black Jr. & Sean O. Mahoney, Legal Bases for Claims by Liability Insurers Against
Defense Counsel for Malpractice, 35 The Brief 33, 33 (Winter 2006) ("Although the
issue is relatively new to American jurisprudence, the majority of states permit a
liability insurer to sue defense counsel for negligent representation in an underlying
action."); General Sec. Ins. Co. v. Jordan, Coyne & Savits, LLP, 357 F. Supp. 2d
951, 955-56 (E.D. Va. 2005) (stating "courts of other jurisdictions generally
recognize such a cause of action"); see also 7A C.J.S. Attorney & Client § 386 (2015)
("When, pursuant to insurance policy obligations, an insurer hires and compensates
counsel to defend an insured, provided that the interests of the insurer and insured
are not in conflict, the retained attorney owes a duty of care to the insurer[2] which
will support its independent right to bring a legal malpractice action against the
attorney for negligent acts committed in the representation of the insured.").
Maybank argues our decision will destroy the sanctity and integrity of the attorney-
client relationship by: (1) dividing the loyalty of the attorney between the client and
the insurer; (2) threatening the attorney-client privilege; (3) allowing the insurer to
2
To be clear, the cause of action we recognize today is based on the attorney's duty
to the client, not to the insurer.
direct the litigation even though the insured is the client; and (4) opening the door to
other non-clients to sue attorneys for legal malpractice. We have the additional
concern of ensuring there can be no double-recovery against an attorney.
In response to these concerns, we emphasize that the loyalties of the attorney may
not be divided. See Fabian, 410 S.C. at 490, 765 S.E.2d at 140 ("It is the breach of
the attorney's duty to the client that is the actionable conduct in these cases."). The
duties an attorney owes his client are well-established according to law, and this
opinion does nothing to change that. See generally Rule 407, SCACR (South
Carolina Rules of Professional Conduct). The attorney owes no separate duty to the
insurer. We do not recognize what the dissent calls the "dual attorney-client
relationship."
As to Maybank's second concern, we emphasize the insurer may not intrude upon
the privilege between the attorney it hires and the attorney's client—the insured. We
are confident the trial courts of this State are well-equipped to protect the attorney-
client privilege according to law if any dispute over it arises.
As to Maybank's third concern, the attorney's control of litigation involving an
insured client is also governed by established law. See, e.g., Rule 1.8(f), RPC, Rule
407, SCACR ("A lawyer shall not accept compensation for representing a client
from one other than the client unless: . . . (2) there is no interference with the lawyer's
independence of professional judgment or with the client-lawyer relationship;
. . . ."); Rule 5.4(c), RPC, Rule 407, SCACR ("A lawyer shall not permit a person
who recommends, employs, or pays the lawyer to render legal services for another
to direct or regulate the lawyer's professional judgment in rendering such legal
services."). Our opinion does nothing to change these principles.
As to Maybank's "opening the door" concern, we expressly limit the scope of this
opinion so that it does nothing beyond what it expressly states. Next, there may be
no double recovery. If a danger of double recovery arises, we are confident our trial
courts can handle it. See Rule 17(a), SCRCP ("Every action shall be prosecuted in
the name of the real party in interest.").
As a final limitation on an insurer's right to bring an action against the lawyer it hires
to represent its insured, the insurer must prove its case by clear and convincing
evidence. The clear and convincing standard is consistent with the result of Fabian.
See 410 S.C. at 493, 765 S.E.2d at 142 (Kittredge, J., concurring) (stating "the burden
of proof should be the clear and convincing standard"); 410 S.C. at 494, 765 S.E.2d
at 142 (Pleicones, J., concurring in part and dissenting in part) (stating "I would
require a beneficiary asserting such a legal malpractice claim to prove by clear and
convincing evidence that the attorney breached the duty," joined by Toal, C.J.).
In this case, there appears to be no risk that our decision will place the attorney in a
conflict position or create any divided loyalty. The attorney's duty to his client
includes the obligation to timely respond to requests to admit. The fact that an
insurance company may suffer financial loss from an attorney's negligence in failing
to timely respond to the requests, and our recognition that the insurer may sue the
attorney to recover this loss after settling the underlying case to protect the interests
of the insured, do not in any way affect the attorney's duty to his client. We stress,
however, the district court should independently make this determination based on
all the facts and circumstances of the case. As to the other concerns, we see no basis
on the limited record before us to find that any of the limitations we impose will be
violated in this factual scenario. If some other fact or circumstance in the record
before the district court raises such a concern, the district court is fully capable of
addressing it.
The dissent offers several points of criticism we feel we should address. First, the
fact that we do not specifically identify a theory of recovery—such as third party
beneficiary theory or equitable subrogation—is fair criticism. This is a deliberate
choice, however, designed to preserve the attorney's fiduciary allegiance to his client
with no interference from the insurer. If permitting liability against the attorney on
the basis of a duty to the client—not a duty to the plaintiff insurer—appears
awkward, we accept that awkwardness as adequately counterbalanced by the benefit
of preserving the sanctity of the attorney-client relationship.
Second, the dissent argues we have ignored the Fabian "factors." However, we
specifically rely on the fifth factor—the policy of preventing future harm—in our
discussion of the deterrent purpose of tort law, and with our citation to the
admonition in Fabian that we should not "improperly immunize [a] particular subset
of attorneys from liability for their professional negligence." 410 S.C. at 490, 765
S.E.2d at 140. We also specifically discuss the sixth factor—the need to avoid an
undue burden on the profession—by putting so much emphasis on not creating
divided loyalties. The third factor warrants no discussion because its applicability
here is obvious. When an attorney's breach of his duty to his client proximately
causes a larger settlement or judgment in a case in which the insurer must pay, the
harm to the plaintiff insurer is not merely "foreseeable"; it is inevitable.
The other Fabian factors are less applicable here, which brings up the reason we do
not dwell on them as the dissent suggests we should. In Lucas v. Hamm, 364 P.2d
685 (Cal. 1961), the decision we primarily relied on in Fabian for the use of the
factors, the Supreme Court of California explained the purpose for their use. The
court stated "the determination whether in a specific case the defendant will be held
liable to a third person not in privity is a matter of policy and involves the balancing
of various factors." 364 P.2d at 687 (emphasis added); see also Beacon Residential
Cmty. Ass'n v. Skidmore, Owings & Merrill LLP, 327 P.3d 850, 857 (Cal. 2014)
(stating "the application of these factors necessarily depends on the circumstances
of each case," relying on Biakanja v. Irving, 320 P.2d 16, 19 (Cal. 1958), which we
indicated in Fabian was the decision the California Supreme Court relied on in
deciding Lucas, 410 S.C. at 484, 765 S.E.2d at 137). In Fickett v. Superior Court of
Pima County, 558 P.2d 988 (Ariz. Ct. App. 1976), another case we relied on in
Fabian, the court similarly recognized the factors are for use in a specific case-by-
case analysis, 558 P.2d at 990, and in particular in cases in which a person's liability
to the beneficiary of an estate is in question, 558 P.2d at 989-90. In fact, only one
of the many cases cited by the dissent regarding the importance of the Fabian/Lucas
factors involves the liability of an attorney to an insurer. See supra notes 6 and 7.
That case, Atlanta International Insurance Co. v. Bell, 475 N.W.2d 294 (Mich.
1991), does not even mention the Fabian/Lucas factors, but does impose liability
against retained counsel—as we do—when the "case does not present a conflict
between the interests of the insurer and the public policy of ensuring undiluted
loyalty by counsel to the insured." 475 N.W.2d at 297.
III. Question Two
As to question two—whether a legal malpractice claim may be assigned to a third
party—we decline to answer the question. We are satisfied that our answer to
question one renders the second question not "determinative of the cause then
pending in the certifying court," Rule 244(a), SCACR, and thus it is not necessary
for us to answer question two, see Rule 244(f), SCACR (providing we "may rescind
[our] agreement to answer a certified question"); see also Thomas v. Grayson, 318
S.C. 82, 89, 456 S.E.2d 377, 381 (1995) (declining to answer a certified question
because the Court's analysis of the other certified questions was dispositive).
KITTREDGE, J., and Acting Justice Thomas Anthony Russo, Sr., concur.
BEATTY, C.J., dissenting in a separate opinion in which HEARN, J., concurs.
CHIEF JUSTICE BEATTY: I respectfully dissent. I would answer both
questions in the negative and hold that an insurer may not maintain a direct legal
malpractice claim against an insured's hired counsel and that a legal malpractice
claim may not be assigned to a third party responsible for any judgment and legal
fees. In deciding otherwise, the majority provides the insurer a windfall at the cost
of preserving the attorney-client relationship, which is a decision I cannot support.
I. May an insurer maintain a direct malpractice action against counsel
hired to represent its insured where the insurance company has a duty to
defend?
Over a century ago, the United States Supreme Court held that, absent fraud,
collusion, or similar circumstances, only those in privity with an attorney may pursue
a legal malpractice claim. Nat'l Sav. Bank v. Ward, 100 U.S. 195, 205-07 (1879).
South Carolina followed suit and required the plaintiff to prove the existence of an
attorney-client relationship in order to establish privity. Fabian v. Lindsay, 410 S.C.
475, 483, 765 S.E.2d 132, 136 (2014) ("Privity for legal malpractice has traditionally
been established by the existence of an attorney-client relationship."); Am. Fed.
Bank, FSB v. No. One Main Joint Venture, 321 S.C. 169, 174, 467 S.E.2d 439, 442
(1996) ("Before a claim for malpractice may be asserted, there must exist an
attorney-client relationship.").
The purpose of the attorney-client relationship requirement is "to ensure the
inviolability of the attorney's duty of loyalty to the client." Atlanta Int'l Ins. Co. v.
Bell, 475 N.W.2d 294, 296 (Mich. 1991); see McIntosh Cnty. Bank v. Dorsey &
Whitney, LLP, 745 N.W.2d 538, 545 (Minn. 2008) ("If an attorney were to owe a
duty to a nonclient, it could result in potential ethical conflicts for the attorney and
compromise the attorney-client relationship, with its attendant duties of
confidentiality, loyalty, and care."); Bovee v. Gravel, 811 A.2d 137, 140 (Vt. 2002)
("The requirement of attorney-client privity to maintain a malpractice action
'ensure[s] that attorneys may in all cases zealously represent their clients without the
threat of suit from third parties compromising that representation.'" (quoting Barcelo
v. Elliot, 923 S.W.2d 575, 578-79 (Tex. 1996))). Thus, by limiting the potential
plaintiffs in a legal malpractice action to the attorney's clients, courts have, in effect,
determined the concerns surrounding the preservation of the attorney-client
relationship outweigh the collateral or peripheral interest of third parties.
In Fabian v. Lindsay, 410 S.C. 475, 765 S.E.2d 132 (2014), however, we
created an exception to this longstanding requirement when we recognized causes
of action in tort and contract for third-party beneficiaries of an existing estate
planning document against an attorney whose drafting error defeats or diminishes
the client's intent. In doing so, we explained:
Recognizing a cause of action is not a radical departure from the
existing law of legal malpractice that requires a lawyer-client
relationship, which is equated with privity and standing. Where a client
hires an attorney to carry out his intent for estate planning and to
provide for his beneficiaries, there is an attorney-client relationship that
forms the basis for the attorney's duty to carry out the client's intent.
This intent in estate planning is directly and inescapably for the benefit
of the third-party beneficiaries. Thus, imposing an avenue for recourse
in the beneficiary, where the client is deceased, is effectively enforcing
the client's intent, and the third party is in privity with the attorney.
Id. at 490, 765 S.E.2d at 140. The Court also acknowledged that "[i]n these
circumstances, retaining strict privity in a legal malpractice action for negligence
committed in preparing will or estate documents would serve to improperly
immunize this particular subset of attorneys from liability for their professional
negligence." Id.
Today, the majority creates another exception to the attorney-client
relationship requirement to allow an insurer to pursue a cause of action against
counsel hired to represent the insured. In doing so, the majority asserts its decision
is "consistent with the rule adopted by the majority of states that have considered the
issue." This is somewhat misleading. While a majority of jurisdictions may permit
an insurer to pursue a legal malpractice action against hired counsel, it is important
to note that most of those jurisdictions appear to do so on the belief that a dual
attorney-client relationship exists between the insurer, insured, and counsel, which
is a belief the majority does not share.3
3
Under the "dual attorney-client relationship," the attorney has two clients, in this
context, the insured and the insurer. Consequently, in those jurisdictions that
recognize this type of relationship, no exception to the privity requirement need be
created for an insurer to bring a direct legal malpractice claim against hired counsel
under certain circumstances because the insurer, as a client, is already in privity with
the attorney. However, that is not the rule in this state. Moreover, as at least one
commentator has recognized, some states that have initially recognized such a rule
have moved away from doing so in light of the conflicts it poses to the insured. See
Those jurisdictions that allow an insurer to pursue a claim against hired
counsel under a premise other than the dual attorney-client relationship have done
so using a number of approaches grounded in contract, equity, and tort law. See,
e.g., Paradigm Ins. Co. v. Lagerman Law Offices, P.A., 24 P.3d 593, 601-02 (Ariz.
2001) (holding an insurer may pursue a legal malpractice claim against hired counsel
because counsel "has a duty to the insurer arising from the understanding that [his]
services are ordinarily intended to benefit both insurer and insured when their
interests coincide"); Hartford Ins. Co. v. Koeppel, 629 F. Supp. 2d 1293 (M.D. Fla.
2009) (granting insurer standing to sue under a third-party beneficiary theory);
Atlanta Int'l Ins. Co. v. Bell, 475 N.W.2d 294 (Mich. 1991) (declining to recognize
the insurer as a client, but nevertheless allowing the insurer to pursue an action
against hired counsel under the doctrine of equitable subrogation).
The majority opinion is devoid of any reference to these approaches. It simply
holds that, because of the insurer's "unique position," the insurer "may recover . . .
for the attorney's breach of his duty to [the insured]." I take issue with the majority's
holding. First, I do not agree with the majority that being contractually obligated to
pay litigation costs places the insurer in a position sufficient to waive the privity
requirement. Second, I am concerned about the manner in which an insurer can
pursue a legal malpractice action against hired counsel after today's decision.
According to the majority, an insurer's cause of action against hired counsel
is predicated on a breach of the duty owed to the insured, not on a breach of a duty
owed to the insurer. At first blush, the cause of action available to the insurer sounds
in tort. However, unlike other jurisdictions that have recognized a cause of action
in tort for insurers against hired counsel, the majority declines to recognize a separate
duty of care owed to the insurer. Thus, by limiting the insurer's recovery to the
extent hired counsel breached its duty to the insured and prohibiting double
recovery, the action is more akin to equitable subrogation or an assignment of an
insured's legal malpractice claim. As will be discussed, I would find such an action,
under either theory, contrary to the public policy of this state.
Amber Czarnecki, Ethical Considerations Within the Tripartite Relationship of
Insurance Law - Who Is the Real Client?, 74 Def. Couns. J. 172, 176 (2007)
(recognizing that "the judicial trend" is moving toward recognizing the insured as
the sole client out of concern that recognizing the insurer as a client would weaken
the attorney's loyalty to the insured).
I turn now to address Sentry's specific arguments in support of recognizing a
direct action against hired counsel.
1. Third-Party Beneficiary of Contract Theory
First, Sentry argues this Court should allow insurers to bring claims against
hired counsel under a third-party beneficiary of contract theory.4 I disagree.
The contract at issue here is the contract of representation between the insured
and hired counsel. Therefore, to pursue a third-party beneficiary claim, an insurer
must show the insured and hired counsel intended, by virtue of the contract, "to
create a direct, rather than an incidental or consequential, benefit to" the insurer. Bob
Hammond Constr. Co. v. Banks Constr. Co., 312 S.C. 422, 424, 440 S.E.2d 890, 891
(Ct. App. 1994). That, however, is not the case.
There is no question that when an insured purchases an insurance policy that
gives rise to the contract of representation, the insured is doing so with the
understanding that his interests, not those of the insurer, will be represented should
an issue arise requiring legal representation. Although the insurer pays for the legal
representation and may share similar interests with the insured, any benefit to the
insurer derived therefrom is incidental to the contract of representation. In sum, the
insurer is merely performing its contractual duty to the insured. Consequently, I
would find that an insurer cannot bring a breach of contract action as a third-party
beneficiary because it is not the intended beneficiary of the contract of representation
between the insured and hired counsel.
2. Negligence
Next, Sentry asserts an insurer should be able to proceed against hired counsel
under a theory of negligence. I disagree.
In Fabian, this Court explained the determination of whether an attorney may
be liable in tort to a plaintiff not in privity "is a matter of policy and involves the
balancing of" the following factors: (1) the extent to which the transaction was
4
A third-party beneficiary is someone "who is not a party to a contract but who
would benefit from its performance." Melvin Aron Eisenberg, Third-Party
Beneficiaries, 92 Colum. L. Rev. 1358, 1359 (1992).
intended to affect the plaintiff; (2) the foreseeability of harm to the plaintiff; (3) the
degree of certainty that the plaintiff suffered injury; (4) the closeness of the
connection between the defendant's conduct and the injury; (5) the policy of
preventing future harm; and (6) whether the recognition of liability would impose
an undue burden on the profession.5 Id. at 485, 765 S.E.2d at 137-38 (citing Lucas
v. Hamm, 364 P.2d 685, 687-88 (Cal. 1961) (en banc)). After careful consideration,
I find none of these factors weigh in the insurer's favor.
Given the significance of the purpose of the representation, I believe the first
factor, the extent to which the transaction was intended to affect, or benefit,6 the
plaintiff, should be weighed more heavily than the others.7 As discussed, the
5
Interestingly, although the majority recognizes a cause of action in tort, the
majority makes no reference to these factors in doing so.
6
I interpret this factor as requiring the representation do more than simply affect
the plaintiff. Similar to other states that have adopted the Lucas test or something
similar, I believe this factor weighs in favor of the plaintiff only if the client intended
for the lawyer's services to benefit that plaintiff. See Blair v. Ing, 21 P.3d 452, 466
(Haw. 2001) (interpreting the first Lucas factor as requiring the principal purpose of
the representation to be for the benefit of the plaintiff); Donahue v. Shughart,
Thomson & Kilroy, P.C., 900 S.W.2d 624, 628 (Mo. 1995) (en banc) (determining
the first factor "weighs in favor of a legal duty by an attorney where the client
specifically intended to benefit the plaintiffs"). It has also been observed that, since
deciding Lucas, California has imposed a duty on an attorney to a plaintiff only
where, inter alia, the attorney and client intended the representation directly benefit
the plaintiff. Templeton v. Catlin Specialty Ins. Co., 612 F. App'x 940, 967-68 (10th
Cir. 2015). Thus, with respect to the first factor, the question is not whether the
plaintiff was affected by the representation, but whether the client intended for the
representation to be for the plaintiff's benefit.
7
Indeed, some states have gone so far as to make this factor a threshold requirement
for a plaintiff pursing a claim against counsel in tort. See McIntosh Cnty. Bank v.
Dorsey & Whitney, LLP, 745 N.W.2d 538, 547 (Minn. 2008) (finding "that in order
for a third party to proceed in a legal malpractice action, that party must be a direct
and intended beneficiary of the attorney's services"); Trask v. Butler, 872 P.2d 1080,
1084 (Wash. 1994) (en banc) (holding "under the modified multi-factor balancing
test, the threshold question is whether the plaintiff is an intended beneficiary of the
transaction to which the advice pertained"). Additionally, at least one state, which
purpose of the representation between counsel and the insured is not intended to
benefit the insurer.
Moreover, to be applicable, factors two, three, and four each necessitate the
plaintiff suffer some type of harm or injury. However, I am unable to identify any
harm suffered by an insurer when the case settles within the agreed-upon policy
limits. In those cases, the insurer is merely fulfilling an agreed-upon promise
between it and the insured. The insurer established a price to cover the risk and the
insured paid it. Understandably, the insurer is unhappy when it pays more than it
wanted to, but that is the risk that it took and it is the nature of the business.
As to the fifth factor, the policy concerns in preventing future harm are not as
great as they are in the will-drafting context. In Fabian, we acknowledged that but
for an exception to the privity requirement, an attorney would not be held
accountable for the negligence in the preparation of a will or estate planning
document. Fabian, 410 S.C. at 490, 765 S.E.2d at 140. However, here, the insured
maintains the option of bringing a malpractice claim, which upholds the policy goals
of preventing future harm by maintaining accountability and deterring further
negligence.
Regarding the final factor, recognizing a cause of action in tort for an insurer
against the insured's hired counsel may pose an undue burden to the profession by
allowing multiple parties to pursue legal malpractice claims against hired counsel.
More significantly, for reasons that will be discussed, such a cause of action could
pose an undue burden to the attorney-client relationship by negatively affecting the
duty of loyalty owed to the client, which is precisely what the privity requirement
was intended to prevent. See Atlanta Int'l Ins. Co., 475 N.W.2d at 296 ("The
essential purpose of the general rule against malpractice liability from third-parties
is . . . to prevent conflicts from derailing the attorney's unswerving duty of loyalty
of representation to the client.").
has not adopted the Lucas test, has nevertheless made this a requirement for allowing
a third party to pursue a legal malpractice claim in tort. See Pelham v. Griesheimer,
440 N.E.2d 96, 100 (Ill. 1982) (concluding "for a nonclient to succeed in a
negligence action against an attorney, he must prove that the primary purpose and
intent of the attorney-client relationship itself was to benefit or influence the third
party").
The principal concern in allowing third parties to pursue legal malpractice
claims against an attorney is that, when a conflict arises between the client and third
party, the attorney may carry out the representation in a manner inconsistent with
the best interests of the client. See id. ("Allowing third-party liability generally
would detract from the attorney's duty to represent the client diligently and without
reservation."); Restatement (Third) of the Law Governing Lawyers § 51 cmt. b
(2000) ("Making lawyers liable to nonclients . . . could tend to discourage lawyers
from vigorous representation."). This is of special concern in the context here given
the heightened risk of conflict due to the often diverging interests between the
insured and insurer and the employment relationship between insurer and hired
counsel.
Unlike the situation in Fabian, the purpose of the representation here is not
for the benefit of the third party pursuing the legal malpractice claim. Here, the third
party's purpose and interests routinely diverge from those of the client. As one court
stated:
[t]here can be no doubt that actual conflicts between insured and insurer
are quite common and that the potential for conflict is present in every
case. Conflicts may arise over the existence of coverage, the manner
in which the case is to be defended, the information to be shared, the
desirability of settling at a particular figure or the need to settle at all,
and an array of other factors applicable to the circumstances of a
particular case.
Paradigm Ins. Co. v. Langerman Law Offices, P.A., 24 P.3d 593, 597 (Ariz. 2001)
(en banc).
In addition to the increased risk of conflict, the employment relationship
between the insurer and insured's hired counsel heightens the concern that the
attorney may make decisions in a manner more preferable to the third party than the
client. See Atlanta Int'l Ins. Co., 475 N.W.2d at 298 (acknowledging "[t]he
possibility of conflict unquestionably runs against the insured, considering that
defense counsel and the insurer frequently have a longstanding, if not collegial,
relationship"); 4 Ronald E. Mallen, Legal Malpractice § 30:53, at 333 (2017 ed.)
("A risk is that the attorney may not recognize [a] conflict or may favor the interests
of the insurer. The lawyer may be tempted to help the [insurer], who pays the bills,
who will send further business, and with whom long-standing personal relationships
have developed."); Mallen, supra, § 30:57, at 346-47 ("During litigation, issues may
arise that could influence the attorney to choose sides. When abuses have occurred,
most reported decisions have involved an attorney, who has favored . . . the
insurer."); Robert M. Wilcox & Nathan M. Crystal, Annotated South Carolina Rules
of Professional Conduct, at 136 (2013 ed.) ("Whenever a person other than the client
pays the lawyer, there exists a risk that the interests of the person paying the fees
may interfere with the lawyer's duty to exercise independent professional judgment
on behalf of the client.").
Sentry contends these concerns are not present in this case because it
undoubtedly shared a mutual interest with the insured in counsel timely filing
answers to the requests to admit. Although that may be true, certified questions are
not based on the narrow facts of the case from which the questions arise. While
there may be no conflict in allowing Sentry to bring a legal malpractice action in this
case, the same may not be true in later cases involving challenges to other decisions
made in an attorney-client relationship of which the insurer was not in privity. See
1 Ronald E. Mallen & Jeffrey M. Smith, Legal Malpractice § 7:8, at 802-03 (2014
ed.) (noting "even if an implied duty does not interfere with fiduciary obligations in
a given case, it may do so in other cases under different facts. For that reason, policy
considerations are not developed on an ad hoc basis, but from a broader perspective
concerning the potential adverse effects on future relationships").
Therefore, for the reasons stated, I would find the Fabian balancing test
weighs against allowing an insurer to bring a cause of action in tort for legal
malpractice against counsel hired to represent its insured.8
Based on the foregoing, I would answer the first certified question in the
negative and hold an insurer may not maintain a direct claim against an insured's
hired counsel. I acknowledge that, under this approach, the insurer would have to
assume the risk concomitant with the attorney it hires to represent its insured. I also
recognize that, in those cases in which a negligent attorney resolves a claim within
the policy limits, it is unlikely the insured will bring a legal malpractice action. As
8
Sentry also asks this Court to find hired counsel owes a duty of care to the insurer.
However, such a duty of care would necessarily sound in negligence. As discussed,
I would hold Sentry and other similarly situated entities do not meet Fabian's
balancing test. Nevertheless, even if the recognition of such a duty of care could
exist harmoniously with Fabian's balancing test, I believe the previously discussed
concerns in allowing an insurer to bring a direct legal malpractice claim would
prohibit this Court from recognizing a duty.
a result, the attorney may avoid liability for his negligence. Although troubling, I
believe my concerns in expanding the privity exception to permit an insurer to pursue
an action against hired counsel outweigh a holding to the contrary.9 Moreover, while
an attorney may not be held liable for his negligence in some circumstances, the
attorney could still be held accountable for his conduct in a disciplinary proceeding
before this Court.
II. May a legal malpractice claim be assigned to a third party who is
responsible for payment of legal fees and any judgments incurred as a
result of the litigation in which the alleged malpractice arose?
Sentry contends this Court should answer the second certified question "yes"
and hold a legal malpractice claim may be assigned to a third party responsible for
the payment of legal fees and any judgment incurred. I disagree.
In Skipper v. ACE Property and Casualty Insurance Company, 413 S.C. 33,
38, 775 S.E.2d 37, 39 (2015), this Court held a legal malpractice claim could not be
assigned between adversaries in litigation in which the alleged legal malpractice
arose. The Court based its holding, in part, on the potential threat to the attorney-
client relationship. Id. at 37, 775 S.E.2d at 38-39. The relationship in Skipper is
different than that here because the insurer and insured are presumably not
adversaries. However, as discussed in the previous section, the threat to the attorney-
client relationship still remains in allowing a third party responsible for the payment
of legal fees to pursue a cause of action challenging the decisions made in an
attorney-client relationship to which he was not in privity.
9
Other courts also favor the preservation of the sanctity of the attorney-client
relationship over the economic interests of the insurer. See, e.g., State Farm Fire &
Cas. Co. v. Weiss, 194 P.3d 1063, 1069 (Colo. App. 2008) (precluding an insurer
from pursuing an equitable subrogation claim against counsel, recognizing that
while "insurance companies and ultimately the public will pay the cost, or the bulk
of the cost, of this burden, protecting every attorney-client relationship must take
precedence over allowing lawsuits against attorneys whose clients do not want to
sue but their subrogees do"); Querrey & Harrow, Ltd. v. Transcon. Ins. Co., 861
N.E.2d 719, 724 (Ind. Ct. App. 2007) (declining to allow an insurer to bring a legal
malpractice claim against hired counsel and dismissing those jurisdictions holding
to the contrary; stating, "we do not agree with those jurisdictions that hold the
possibility of the attorney garnering a windfall by not having to defend against his
or her malpractice outweighs the sanctity of the attorney-client relationship").
To be sure, in denying the assignment of legal malpractice claims outright,
the majority of courts base their holding on the same policy considerations that form
the basis of my position to deny an insurer the right to bring a direct legal malpractice
claim. See, e.g., Goodley v. Wank & Wank, Inc., 133 Cal. Rptr. 83, 87 (Cal. Ct. App.
1976) ("It is the unique quality of legal services, the personal nature of the attorney's
duty to the client and the confidentiality of the attorney-client relationship that
invoke public policy considerations in our conclusion that malpractice claims should
not be subject to assignment."); Christison v. Jones, 405 N.E.2d 8, 11 (Ill. App. Ct.
1980) (prohibiting the assignment of legal malpractice claims, holding "the decision
as to whether a malpractice action should be instituted should be a decision
peculiarly for the client to make" given, in part, "the personal nature of the duty
owed by an attorney to his client"); Picadilly, Inc. v. Raikos, 582 N.E.2d 338, 342
(Ind. 1991) (concluding legal malpractice claims cannot be assigned based on, inter
alia, the need to preserve the sanctity of the attorney-client relationship, including
the duty of loyalty and the duty of confidentiality, which would be weakened under
the policy of assigning legal malpractice claims). See generally Tom W. Bell, Limits
on the Privity and Assignment of Legal Malpractice Claims, 59 U. Chi. L. Rev. 1533,
1544-45 (1992) (recognizing that "relaxing the privity requirement and allowing
assignability stand or fall by the same arguments" because the policy concerns
underlying the decision to prohibit a third party from asserting a direct malpractice
claim also underlie the decision to prohibit the assignment of a legal malpractice
claim to a third party).10
10
Sentry further submits this Court should allow insurers to pursue a claim against
hired counsel under the doctrine of equitable subrogation. I disagree. "In the context
of the insured-insurer relationship, the doctrine of equitable subrogation provides
that an insurer who pays a loss is thereby placed by operation of law in the position
of its insured so that the insurer may recover from a third-party tortfeasor whose
negligence or wrongful act caused the loss." Dale Joseph Gilsinger, Annotation,
Right of Insurer to Assert Equitable Subrogation Claim Against Attorney for Insured
on Grounds of Professional Malpractice, 50 A.L.R. 6th 53, 63 (2009). The concerns
surrounding equitable subrogation in this context are similar to the concerns
surrounding the assignment of legal malpractice claims. See Nat'l Union Fire Ins.
Co. v. Salter, 717 So. 2d 141, 142 (Fla. Dist. Ct. App. 1998) (recognizing the same
public policy reasons advanced for prohibiting the assignment of legal malpractice
claims "apply and prohibit the subrogation of a legal malpractice claim"). Therefore,
for the abovementioned reasons, I would also conclude that an insurer may not bring
a claim against hired counsel under equitable subrogation.
Consequently, I would also answer the second question in the negative and
hold a legal malpractice claim may not be assigned to a third party responsible for
any judgment and legal fees.
HEARN, J., concurs.