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Direct Legal Malpractice Claims by Insurance Carriers

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Legal Professional Liability Newsletter
July 16, 2018

Even well-established doctrines gradually change with the times — this we know.  Legal malpractice jurisprudence is no different.  One facet of legal malpractice claims that has undergone significant transformation in recent decades is the privity requirement. 

The principle of privity has traditionally been a staple of legal malpractice claims: it requires the existence of an attorney-client relationship before an action against the attorney may proceed. Over the years, strict views of privity have eroded and an increasing array of non-client plaintiffs are now permitted to bring direct actions against attorneys in various jurisdictions. 

The Supreme Court of South Carolina recently issued a decision that illustrates this trend.  In Sentry Select Insurance Co. v. Maybank Law Firm, LLC, No. 27806, 2018 S.C. LEXIS 67 (May 30, 2018), a 3-2 split decision, the Court held that an insurer may maintain a direct malpractice action against counsel it hired to defend its insured.  Effectively, the Court expanded the state’s privity requirement to allow insurance carriers to maintain malpractice claims directly against the attorneys, despite the lack of an attorney-client relationship.

In the case, Sentry Select hired Maybank to defend a trucking company in a personal injury lawsuit.  Maybank failed to respond timely to requests for admission, and Sentry Select believed that as a result, it was forced to settle the case for much more than it otherwise was worth.  Sentry Select then filed suit against Maybank alleging legal malpractice and seeking damages for the increased settlement figure.

After noting that in South Carolina an attorney owes fiduciary duties only to his/her client, and not to the insurance carrier, the Court recognized that “an insurance company that hires an attorney to represent its insured is in a unique position in relation to the resulting attorney-client relationship,” and as a result “an insurer may bring a direct malpractice action against counsel hired to represent its insured.”  Id. at *3-4.

However, the Court was also careful to limit an insurer’s rights to pursue such claims if there is a conflict between the attorney's client's interests and the interests of the insurer. The Court recognized that at times the client’s interests are not exactly aligned with those of the insurer, and it would be improper to require hired counsel to risk malpractice claims in order to pursue the interests of the client.  In navigating this dilemma, the Court qualified its holding:

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.

Id.at *4. 

As one final limitation on an insurer’s rights to pursue malpractice claims, and to limit the potential for unfounded claims that could jeopardize the sanctity of the attorney-client relationship, the Court also required the insurer to prove its case by clear and convincing evidence.  Id. at *8.

The Sentry Select decision is another in a long line of cases that has loosened long-standing requirements for pursuing malpractice claims.  There is little doubt that privity rules will continue further degradation in favor of expanding legal malpractice torts.  Practitioners should beware of this changing landscape and understand that they may face malpractice claims from non-clients under the right circumstances.