Insurer Must Prove Insured’s Malpractice of Defense Counsel

Barry Zalma's Profile

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, 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.

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.

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.

Because of the insurance company’s unique position the answer to question one is “yes,” an insurer may bring a direct malpractice action against counsel hired to represent its insured. 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. The attorney’s duty to the client may never be affected by the interests of the insurance company.

South Carolina decided to be consistent with the rule adopted by the majority of states that have considered the issue. 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.

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 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.

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. The attorney owes no separate duty to the insurer. The court refused to recognize the dual attorney-client relationship.

A South Carolina 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.

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.

In this case, there appears to be no risk that the 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 the Court’s 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.

Question Two

As to question two—whether a legal malpractice claim may be assigned to a third party—we decline to answer the question. The court was satisfied that the answer to question one renders the second question not determinative of the cause then pending in the certifying court and thus it is not necessary for it to answer question two.

ZALMA OPINION

I have, since 1972, defended insureds at the request of their insurer.  I lost insurance company clients by rendering advice contrary to the insurer’s interest that was necessary to protect the client they hired me to defend. Although an insurer can sue the lawyer it hired to represent its insured for malpractice, I recommend against it. Few lawyers will be willing to take on cases from that insurer. If the lawyer commits malpractice he or she is not appropriate to defend insureds and should never be hired again.

To learn more about Corporate Liability Insurance and its many ins-and-outs, check out Barry's courses on Illumeo.

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Barry Zalma, Consultant and Expert Witness
A practicing lawyer and CFE with more than 42 years experience of insurance coverage and claims handling, author of "The Insurance Fraud Deskbook" and numerous eBooks on insurance and fraud