Arch Insurance Company v. Kubicki Draper, LLP ( 2021 )

Supreme Court of Florida
____________
No. SC19-673
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ARCH INSURANCE COMPANY,
Petitioner,
vs.
KUBICKI DRAPER, LLP,
Respondent.
June 3, 2021
POLSTON, J.
We review the Fourth District Court of Appeal’s decision in
Arch Insurance Co. v. Kubicki Draper, LLP, 266 So. 3d 1210 (Fla. 4th
DCA 2019), in which the Fourth District certified the following
question of great public importance:
WHETHER AN INSURER HAS STANDING TO MAINTAIN
A MALPRACTICE ACTION AGAINST COUNSEL HIRED TO
REPRESENT THE INSURED WHERE THE INSURER HAS
A DUTY TO DEFEND.
Id. at 1215.1 We rephrase the certified question as follows:
1. We have jurisdiction. See art. V, § 3(b)(4), Fla. Const.
WHETHER THE INSURER HAS STANDING THROUGH
ITS CONTRACTUAL SUBROGATION PROVISION TO
MAINTAIN A MALPRACTICE ACTION AGAINST COUNSEL
HIRED TO REPRESENT THE INSURED WHERE THE
INSURER HAS A DUTY TO DEFEND.
For the reasons explained below, we answer the rephrased certified
question in the affirmative, quash the Fourth District’s decision,
and remand for proceedings consistent with this opinion.
I. BACKGROUND
This case involves a legal malpractice action by an insurer
against a law firm retained to represent its insured in a separate
prior litigation. Spear Safer CPAs and Advisors (Spear Safer) 2 is an
accounting firm that performed audits of the financial statements of
Mutual Benefits Corporation (MBC). MBC was in the viatical and
life settlement business and became subject to an action by the
Securities and Exchange Commission (SEC) “for the violation of
various federal securities regulations in the trade of life insurance
policies of terminally ill people.” S.E.C. v. Mut. Benefits Corp., 323
F. Supp. 2d 1337, 1337 (S.D. Fla. 2004). The SEC ultimately
2. There are differing names used in the record for this entity.
The record below also refers to “Spear Safer CPAs & Consultants,
L.P.” and “Spear, Safer, Harmon & Company, PC.”
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reached a settlement with MBC. MBC, through a court-appointed
receiver, then filed a lawsuit in federal court against Spear Safer for
alleged accounting malpractice.
This lawsuit against Spear Safer by MBC gave rise to its claim
on its professional liability policy with Arch Insurance Company
(Arch). Pursuant to the insurance policy, Arch had a duty to defend
Spear Safer:
We [Arch] have the right and duty to defend any Claim
made against you [Spear Safer]. Subject to our review
and consent, you have the right to appoint legal counsel
to defend any covered Claim and such consent will not be
unreasonably withheld or delayed by us. No legal
counsel shall be appointed without our prior approval.
Subject to prior written notice to you, we reserve the right
to remove and replace selected counsel if it is deemed by
us that such action is warranted.
The insurance policy also included the following subrogation
provision:
To the extent of any payment under this Policy, we [Arch]
shall be subrogated to all your [Spear Safer] rights of
recovery therefor against any person, organization, or
entity and you shall execute and deliver instruments and
papers and do whatever else is necessary to secure such
rights. You shall do nothing after any loss to prejudice
such rights.
In accordance with the terms of the insurance policy, Arch
retained Kubicki Draper, LLP (Kubicki) to defend its insured, Spear
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Safer, in the separate underlying federal litigation filed by the
receiver. Kubicki sent an engagement letter informing Spear Safer
that Kubicki had been retained by Arch to represent and defend
Spear Safer. Just before trial, the underlying litigation settled
within the insured’s policy limits for $3.5 million.
Arch subsequently filed the present lawsuit against Kubicki
under various legal theories. At the heart of Arch’s lawsuit against
Kubicki is that the underlying federal litigation filed by the receiver
against Spear Safer was barred by the applicable statute of
limitations, and Kubicki’s failure to timely raise the statute of
limitations defense significantly increased the cost of settlement.
Arch filed various complaints, subject to Kubicki’s motions to
dismiss, alleging legal malpractice, breach of fiduciary duty,
subrogation, assignment, third-party beneficiary, and breach of
contract claims. Kubicki filed a motion for summary judgment
arguing, in pertinent part, that Arch lacked standing to sue Kubicki
because there was no privity of contract or attorney-client
relationship between Arch and Kubicki. Arch countered that there
was privity between Arch and Kubicki. Alternatively, Arch argued
that it was an intended third-party beneficiary and that the
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insurance policy provided Arch subrogation rights. The trial court
granted Kubicki’s motion for summary judgment, concluding that
Arch lacked standing to directly pursue a legal malpractice action
against Kubicki. The trial court reasoned that there was no privity
between Arch and Kubicki, and therefore, Kubicki did not owe Arch
a duty of care.
On appeal to the Fourth District, Arch argued alternatively
that it has standing to maintain a legal malpractice action based on
privity with Kubicki, as an intended third-party beneficiary, and as
subrogee of Spear Safer’s legal malpractice claim against Kubicki.
The Fourth District “agree[d] with the circuit court’s reasoning that
the insurer was not in privity with the law firm, and thus the
insurer lacked standing to sue the law firm.” Arch Ins. Co., 266
So. 3d at 1211. The Fourth District explained that there was
“nothing in the record to indicate that the law firm was in privity
with the insurer” and “nothing in the record to indicate that the
insurer was an intended third-party beneficiary of the relationship
between the law firm and the insured.” Id. at 1214. The Fourth
District also adopted the trial court’s order as its own reasoning.
Id. In response to Arch’s public policy concerns that law firms
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would be shielded from liability resulting from their malpractice, the
Fourth District explained, “We understand the insurer’s public
policy argument. However, we are bound to follow the law as it
exists, not as the insurer argues it ought to be.” Id. Ultimately, the
Fourth District “affirm[ed] the circuit court’s conclusion that the
insurer lacked standing to pursue a professional negligence claim
against the law firm in the underlying action” and certified the
above question of great public importance. Id. at 1215.3
II. ANALYSIS
Arch alleges that an insurer has standing to maintain a legal
malpractice action against counsel hired to represent the insured
where the insurer has a duty to defend. Kubicki counters that Arch
does not have standing to bring a legal malpractice action because
Kubicki was in privity with Spear Safer, and there was no privity
between Kubicki and Arch. The circuit court agreed with Kubicki
3. The Fourth District denied Arch’s request to certify the
following additional question: “Whether the unique tripartite
relationship between the insurer, insured, and law firm is a limited
exception to the strict privity rule.” Arch Ins. Co., 266 So. 3d at
1215. The Fourth District explained that certification of the
additional question was “subsumed within the first proposed
certified question.” Id.
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that the law firm was in privity with the insured as the client. Id. at
1213. The Fourth District agreed, stating that “[w]e see nothing in
the record to indicate that the law firm was in privity with the
insurer.” Id. at 1214. We agree with the circuit court and the
Fourth District that Kubicki was in privity with the insured as the
client rather than Arch. However, Arch also bases its standing
argument, in part, on the subrogation provision in the insurance
policy issued to Spear Safer. We agree with Arch and conclude that
an insurer has standing to maintain a legal malpractice action
against counsel hired to represent its insured where the insurer is
contractually subrogated to the insured’s rights under the
insurance policy. 4
Broadly defined, “[s]ubrogation is the substitution of one
person in the place of another with reference to a lawful claim or
right.” State Farm Mut. Auto. Ins. Co. v. Johnson, 18 So. 3d 1099,
1100 (Fla. 2d DCA 2009) (quoting W. Am. Ins. Co. v. Yellow Cab Co.
of Orlando, Inc., 495 So. 2d 204, 206 (Fla. 5th DCA 1986)); see also
4. The certified question presents a question of law, which we
review de novo. Travelers Com. Ins. Co. v. Harrington, 154 So. 3d
1106, 1108 n.2 (Fla. 2014).
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16 Couch on Insurance § 222:2 (3d ed. 2005) (“Subrogation is the
substitution of one person in the place of another with reference to
a lawful claim, demand or right . . . .”). “Subrogation is designed to
afford relief when one is required to pay a legal obligation which
ought to be met, either wholly or partially, by another.” Allstate Ins.
Co. v. Metro. Dade Cnty., 436 So. 2d 976, 978 (Fla. 3d DCA 1983);
see also 3 John Alan Appleman, Insurance Law and Practice § 1675
(1941) (explaining that the purpose of subrogation “is to place that
loss ultimately upon the wrongdoer”). “Subrogation rights place a
party . . . in the legal position of one who has been paid money
because of the acts of a third party,” and “the subrogee ‘stands in
the shoes’ of the subrogor and is entitled to all of the rights of its
subrogor . . . .” Allstate Ins. Co., 436 So. 2d at 978. Florida law
recognizes two types of subrogation: equitable (often referred to as
legal) and contractual (often referred to as conventional). Cont’l
Cas. Co. v. Ryan Inc. E., 974 So. 2d 368, 376 (Fla. 2008).
Contractual subrogation “is based on an agreement between
the parties that the party paying the debt will be subrogated to the
rights and remedies of the original creditor.” E. Nat’l Bank v.
Glendale Fed. Sav. & Loan Ass’n, 508 So. 2d 1323, 1325 (Fla. 3d
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DCA 1987). “Essentially, it is an agreement that ‘the party paying
the debt will be subrogated to the rights of the original creditor.’ ”
Cont’l Cas. Co., 974 So. 2d at 376 (quoting Nat’l Union Fire Ins. Co.
v. KPMG Peat Marwick, 742 So. 2d 328, 332 (Fla. 3d DCA 1999),
approved, 765 So. 2d 36 (Fla. 2000)). “[A]n insurer’s subrogation
right may be expressly provided for by a clause that is included
either in the applicable insurance policy or in a settlement
agreement with an insured . . . .” Nat’l Union Fire Ins., 742 So. 2d
at 332.
Arch’s right to contractual subrogation is expressly provided
for in the insurance policy:
To the extent of any payment under this Policy, we [Arch]
shall be subrogated to all your [Spear Safer] rights of
recovery therefor against any person, organization, or
entity and you shall execute and deliver instruments and
papers and do whatever else is necessary to secure such
rights. You shall do nothing after any loss to prejudice
such rights.
The language of the subrogation provision is clear—Arch is
contractually subrogated to the rights of Spear Safer, which would
include claims for legal malpractice against counsel retained to
defend the insured. See 16 Couch on Insurance § 222:31 (“[A]fter an
insurance company has paid a loss on behalf of its insured under a
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policy containing a subrogation of rights clause, it is entitled to
subrogation by express contract rights.”). 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. See, e.g., Don Reid Ford, Inc. v. Feldman, 421 So. 2d 184,
185-86 (Fla. 5th DCA 1982) (determining when the statute of
limitations began to run on the malpractice action brought through
subrogation against the defense attorney retained by the liability
insurer where the defense attorney failed to appear for trial and a
final judgment by default was entered against the insured); Dantzler
Lumber & Exp. Co. v. Columbia Cas. Co., 156 So. 116, 120-21 (Fla.
1934) (holding that the insurer had a subrogated claim against the
insured’s accountants for negligence).
In accordance with the terms of the insurance policy, Arch
retained Kubicki to defend Spear Safer and paid the $3.5 million
settlement against its insured. Accordingly, we conclude that Arch
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has standing through contractual subrogation to maintain a
malpractice action against counsel hired to represent its insured. 5
Kubicki argues that the parties stipulated at a trial court
hearing that Arch abandoned its subrogation, assignment, and
third-party beneficiary claims, pointing to the trial court’s order
entered in response to Kubicki’s motion to dismiss Arch’s Second
Amended Complaint, which stated: “All counsel appear and state all
parties agree. ORDERED AND ADJUDGED that said motion be,
and the same is hereby granted to extent Arch seeks recovery as
assignee or subrogee of Spear Safer or intended third party
beneficiary of attorney-client relationship between Kubicki Draper
and Spear Safer.” However, Arch counters that the trial court’s
order is simply an acknowledgement that the order reflected the
trial court’s prior ruling on dismissal, not that Arch agreed with the
5. Because Arch has direct subrogation claims through its
insurance policy with insured Spear Safer, we do not reach any
third-party beneficiary arguments. A third-party beneficiary asserts
rights through a contract between other parties. See Taylor
Woodrow Homes Fla., Inc. v. 4/46-A Corp., 850 So. 2d 536, 544 (Fla.
5th DCA 2003) (“A third party may sue under a contract as an
intended third party beneficiary only if the parties express, or the
contract clearly expresses, the intention to primarily and directly
benefit the third party.”).
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trial court’s decision on the merits or that it abandoned its claims.
Arch notes that there is nothing otherwise in the record to evidence
its purported abandonment. To the contrary, the record shows that
Arch continued to argue its subrogation claim to the trial court, the
Fourth District, and to this Court.
The Fourth District’s opinion below did not address
subrogation and instead focused on whether privity existed between
Kubicki and Arch, concluding “that the insurer was not in privity
with the law firm, and thus the insurer lacked standing to sue to
the law firm.” Arch Ins. Co., 266 So. 3d at 1211. However,
consistent with established principles of subrogation, because the
insured is in privity with the law firm, contractual subrogation
allows the insurer to step into the shoes of the insured. See
Underwriters at Lloyds v. City of Lauderdale Lakes, 382 So. 2d 702,
704 (Fla. 1980) (explaining that, in a subrogation action, the
subrogee stands in the shoes of the subrogor and can be
subrogated to no greater rights than those possessed by the
subrogor). Accordingly, contrary to the opinion’s conclusion below,
Arch would have standing to pursue a legal malpractice claim
against Kubicki.
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Kubicki also argues that this Court’s public policy
considerations have caused it to generally prohibit assignment of
legal malpractice claims. However, this Court has recognized that
there are exceptions when public policy is not applicable. See, e.g.,
Cowan Liebowitz & Latman, P.C. v. Kaplan, 902 So. 2d 755, 760-61
(Fla. 2005) (holding that legal malpractice claims were assignable
against attorneys who prepared private placement memoranda).
This Court noted that “[c]ourts are mainly concerned about creating
a market for legal malpractice claims.” Id. at 760 (“The assignment
of such claims could relegate the legal malpractice action to the
market place and convert it to a commodity to be exploited and
transferred to economic bidders who have never had a professional
relationship with the attorney and to whom the attorney has never
owed a legal duty . . . .” (quoting Goodley v. Wank & Wank, Inc., 133
Cal. Rptr. 83, 87 (Cal. Ct. App. 1976))). The public policy concern
does not exist in these circumstances. The subrogated claim
originates by contract from the insured to the insurer, the same
entity who hired the lawyer in the first instance. See 16 Couch on
Insurance § 222:31 (“ ‘Conventional subrogation’ is contractual in
nature, the product of an agreement between insured and
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insurer.”). The insurer is not a “stranger” to the attorney who is
“bidding” on a cause of action and “exploiting” it. To the contrary,
the insurer is trying to recover money it paid to its insured from the
lawyer it hired. The lawyer is on notice of subrogation claims
included in the policy, and Florida public policy does not support
shielding the law firm from accountability for its professional
malpractice. To the contrary, subrogation exists to hold premium
rates down by allowing the insurers to recover indemnification
payments from the tortfeasor who caused the injury. See
Cunningham v. Metro. Life Ins. Co., 360 N.W.2d 33, 37 (Wis. 1985)
(subrogation “returns the excess, duplicative proceeds to the
insurer who can then recycle them in the form of lower insurance
premiums”); see also 22 Eric Mills Holmes, Appleman on Insurance
§ 141.1[D][3] (2d ed. 2003). (“Subrogation advances an important
public policy by forcing the tortfeasor to bear the burden of
reimbursing the insurer for indemnity payments to its insured.”); 16
Couch on Insurance § 222:8 (“When the insurer has made payment
for the loss caused by a third party, it is only equitable and just
that the insurer should be reimbursed for its payment to the
insured, because otherwise either the insured would be unjustly
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enriched by virtue of a recovery from both the insurer and the third
party, or in the absence of such double recovery by the insured, the
third party would go free notwithstanding the fact that he or she
has a legal obligation in connection with the damage.”).
Accordingly, permitting the contractual subrogation claim alleging
the law firm missed a statute of limitations defense to the detriment
of the insured supports Florida public policy.
III. CONCLUSION
For the above reasons, we answer the rephrased certified
question in the affirmative, quash the Fourth District’s decision in
Arch Insurance Co., and remand for proceedings consistent with
this opinion. In doing so, we conclude that the insurer has
standing to maintain a legal malpractice action against counsel
hired to represent its insured where the insurer is contractually
subrogated to the insured’s rights under the insurance policy.
It is so ordered.
CANADY, C.J., and LABARGA, LAWSON, MUÑIZ, COURIEL, and
GROSSHANS, JJ., concur.
NOT FINAL UNTIL TIME EXPIRES TO FILE REHEARING MOTION
AND, IF FILED, DETERMINED.
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Application for Review of the Decision of the District Court of Appeal
– Certified Great Public Importance
Fourth District - Case No. 4D17-2889
(Broward County)
Benjamin J. Biard and Brittany P. Borck of Winget Spadafora &
Schwartzberg, LLP, Miami, Florida; and Edward G. Guedes and Eric
S. Kay of Weiss Serota Helfman Cole & Bierman, P.L., Coral Gables,
Florida,
for Petitioner
Christopher V. Carlyle and John N. Bogdanoff of The Carlyle
Appellate Law Firm, Orlando, Florida; and Steven K. Hunter and
Christopher J. Lynch of Hunter & Lynch, Coral Gables, Florida,
for Respondent
Katherine E. Giddings and Melanie Kalmanson of Akerman LLP,
Tallahassee, Florida,
for Amicus Curiae American Property Casualty Insurance
Association
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