LEGAL MALPRACTICE & THE LIABILITY INSURANCE INDUSTRY: AN INTRODUCTION WITH A FOCUS UPON
questions. First, should liability
carriers that have defended an insured and lost be able to sue the lawyers they
have hired to defend their insureds, when the case has been fouled up by those
defense lawyers and the insurer had to pay far more than necessary? The problem here arises from a strong rule,
which is nearly absolute in many places, that only a client can sue a lawyer
for malpractice. Second, if liability
insurers should be able to sue the defense lawyers they hire for their insureds,
what is the best legal doctrine upon which to base that right? This last question can be addressed from two
points of view: jurisprudential and practical. The latter of these two points
of view, in answering virtually any legal question, pays special attention to
recent legal history. As already pointed
out, legal history is such that only the client, and no one else, may sue their
lawyers for malpractice.
malpractice is a tort cause of action a
client (“C”) has against his/her/its lawyer (“L”) for negligent (e.g., poor,
unreasonable, below standard, sub-par, below accepted standards, etc.) lawyerly
performance. This idea includes gross
negligence, i.e., really poor performance that L (or someone in his
group) consciously knew was very, very high risk and really quite dangerous,
although no injury was consciously intended. It would be helpful if grossly
negligence professional conduct by lawyers was called “gross malpractice,” but
this is not customary. If L quite deliberately injuries C, that is
not malpractice, it is a breach of fiduciary duties. Attorneys are legally obligated to be loyal
to their clients and trustworthy.
These are two of the central elements of having a fiduciary duty. There are many fiduciary duties, and lawyers
have most, if not all, of them.
court has said that, under
law, there is a way to distinguish legal malpractice from breach of
fiduciaries. “If a claim, regardless of
what it is called, involves a lawyer’s performance in representing a client,
then it is a legal malpractice claim.” “If a claim involves a lawyer’s ‘integrity
and fidelity,’ then it is a breach of fiduciary duty claim.” Any claim involving only the latter is purely
a fiduciary duty claim.
the court is implying that if a client’s claim involves both, then it is a
malpractice claim. If this is true, it would account for the
assertion of some courts of appeals that a plaintiff should not be able to
assert both types of claims against a lawyer.
Sometimes this is called “fracturing.” One wonders if the courts has this
fundamental distinction right. Why
couldn’t one group of actions—or even one action—count as both. What should L’s selling C out in litigation
be called? Perhaps deliberate conduct which
would be malpractice if done negligently counts as fiduciary duty if done
deliberately. If so, of course, this
would make one of the equations asserted by the Fifth Circuit in the Gardere & Wynne case discussed in
the last paragraph quite mistaken.
for malpractice. But what if C’s liability insurer hired L,
paid L, and had to pay the judgment which resulted for L’s error? Thus, L’s errors did not cost C anything
except for anxiety. It cost the insured
liability insurer huge amounts, however.
Shouldn’t it be able to sue L?
And what if the relevant insurer and plaintiff in the malpractice action
is something other than a primary carrier, say, an excess carrier? What if the allegedly injured party and
plaintiff in the legal malpractice action is a reinsurer?
any of the actions already mentioned against a lawyer which has provided it
with coverage decisions or who represented the insurer badly in a lawsuit it
brought either by it or against it by an insured, the assignee of an insured
who was victorious in an underlying tort case, the holder of the insured’s
rights as the result of a court order, and so forth. These are paradigms of the orthodox
attorney-client relationship. No one has
ever thought an insurer could not be the client of one or more lawyers.
History. Malpractice-type cases against lawyers have always been difficult
to win. The work of litigation attorneys
is almost never as simple as lots of other kinds of work, and it often involves
more complexity, more prolonged time intervals, more uncertainties, more
vagaries and is more influenced by numerous uncertain judgments that even much
of medical practice. This is true with
respect to hypothesizing, thinking, imagining, acting, interacting,
psychological insight, and so forth. (Of
course, the practice law is often not anything like those professions and
vocations which depend upon sophisticated mathematics and advanced
science. It is not difficult in that
way.) Most types of malpractice cases
against attorneys are still difficult to win, hard to develop, and expensive to
conduct, and this last point includes prosecution, as well as to defense. (An exception is an actually blown statute of
limitations governing a suit against a clearly solvent business entity
involving unquestionable liability in the underlying case.)
legal mal cases are becoming somewhat more common, and more lawyers are pursuing
them for their clients. A few lawyers are even advertising to take them. Many believe that this is a consequence of
“tort reform,” which is politically popular in
prosecute, often lengthy, and usually expensive, the lawyer for the plaintiff
in a legal mal case is usually safe from
being sued for mal practice if she loses it.
against L1 who lost C v. X or X
v. C, there this second lawsuit is based upon the efforts of C’s next lawyer, L2, will—almost
certainly—not give way to successful
case by C against L2 if the
latter fouls up C v. L1 and loses it. “Enough is enough,” the jury will think, if
not actually say. “This fellow finds fault with everything. I bet he doesn’t
even like his kids.” C suing L2 for
having lost a legal mal case against L1—particularly one where the
first defendant where L1 was a litigation lawyer—is informally and
without actual legal standard, subject to a very broad and high burden of
historical point is dramatically true when it comes to the insurance
industry. In the past, relations between
lawyers and liability insurers have had several characteristics, for the most
part. Historically, liability insurers
(“L-Irs”) have sent most of the lawyers they use for handling possibly covered
litigation against their insureds–the lawyers who worked for them by
representing their insureds (“L-Ids”)–streams of business. The hourly legal fees of these lawyers were
usually substantially discounted, partly because there was lots of business.
liability insurers did not monitor or audit the hours charged carefully. (It was not uncommon for an insurance defense
lawyer to charge a lawyer-hour for a secretary preparing a standard general denial-only
answer in a Texas state court, project which might take the secretary
10-15”.) Lawyers need not complain much if fees had to be adjusted in this or
that case from time to time for some L-Ir-favoring reason. And L-Irs hardly ever—at least, almost
never–sued the lawyers they hired, although they would stop using some of them
for various relevant reasons, and they would stop helping market them to other
adjusters, unless, of course, they wanted to injure the other adjuster or
on Vocabulary. The attorneys L-Irs
used regularly for defending their L-Ids have for a long time been called
“insurance defense lawyers” and their organizations have, for a long time, been—and
still are—called “insurance defense firms.”
Lawyers who represented insurers directly were not insurance defense
lawyers, and they had no common designation.
The relevant public would be better off–from a communications point of
view, as well as a social/business understanding standpoint–if the lawyers
representing insurance companies directly were called “insurance company
lawyers, “insurer lawyers,” “insurance lawyers,” or something of the sort.
these lawyers are called “coverage lawyers,” but this phrase too is misleading.
Obviously, this phrase means that the lawyer analyses insurance policies in
various contexts and provides legal opinions to whoever hires him. For one
thing, policy need “coverage counsel” just as insurers do, and the mere phrases
being used do not indicate the probable side of the lawyer. Of course, L is not always on one side or the
other, but this is often true.
another thing, the phraseology do not explicitly refer to the role such lawyers frequently play in
litigated coverage disputes, where the insurer might be either a plaintiff (as
in declaratory judgment actions the insurer brings) or a defendant (as in
declaratory judgment actions brought against them by or on behalf of insureds).
Some coverage lawyers are fit to be involved in litigation, and some are
not. Not all coverage lawyers involved
in litigation realized that they are not fit to do it.
addition, there is a third point. The
phrases “coverage lawyer” or “coverage counsel” do not indicate the other sorts
of things lawyers for insurers do for insurer in litigation with current or
former policyholders. They might, for
example, defend against common law and/or statutory bad faith claims of various
sorts, including those involving so-called “Stowers
might handle suits seeking the payment of premiums; they might handle suits in
which the insurer is seeking policy cancellation or rescission; they might
handle insurer-intermediary or intermediary-customer disputes; they might work
on restitution cases; and/or they might handled suits or administrative actions
involving state governing bodies, not to mention lobbying and that might
involve insurance departments, legislatures or both.
very useful phrase, at least in some contexts, is “insurance lawyer.” Not even, the phrase “insurance lawyer” divides
those who work for insurers from those who work for policyholders or those who
are mainly a type of plaintiff’s lawyer trying to get recover from a resisting
insurer after having prevailed against a policyholder. Nor does it separate all of the various
activities listed in the preceding paragraph.
Change. The system surrounding the insurance defense industry began to
change dramatically about 15-20 year ago.
Many liability insurers have captive firms handling most of their work
defending policyholders. From a
practical point of view, these are really—or, at least, to some extent–“in
house” firms, though this claim is not a true description from a legal
standpoint. Extensive auditing systems have
become common among L-Irs using outside lawyers. At the same time, hourly rates have not gone
up quickly or proportionately to the rest of the legal profession. Fees of $500 an hour are not unheard of at
senior levels in high prestige firms, but they are nonexistent for insurance
defense lawyers. Indeed, outside big, complex cases, carriers still pay lower
fees than wealthy individuals or families pay per hour for legal services.
Moreover, various types of Irs are now suing Ls for malpractice. Usually, they are suing when they themselves
were the principal and perhaps only client.
Sometimes insurers are suing when L’s principal and perhaps only client was
an Id, and L-Ir had to pay bunches of money, arguably as the result of L’s negligence. The money paid is usually for discharging the
L-Ir’s duty to defend and its duty to indemnify.
L-Irs now insist that the Ls they utilize for any purpose whatsoever have to
purchase and prove that they have malpractice insurance. Lawyers should take this as an admonition, if
not a warning. Unless the L-Irs intends
to do something about the actionable conduct of lawyers they hire to represent
their insureds, why would the L-Ir care whether the L has legal malpractice
insurance? (Keep in mind that this kind of liability insurance covers more than
legal malpractice as described above. It
covers a variety of torts actions which can be brought against lawyer for
professional errors. Thus, the insurance
might better be called “Lawyer Error & Omission Insurance;” that’s what it
How does this system work now?
roughly speaking, divisible into three parts.
(I) There is life insurance. (II)
There is first-party coverage, where Irs pays Ids for losses involving his
property, his asserts, or his body (e.g., property, loss of value in an
intangible asset, business interruption, and health insurance) or pays for Id’s
covered expenses (e.g., hotel bills, medical bills, or losses which the Id does
not pay but which are paid for him, roof repair, ransom to kidnappers, and so
forth). (III) And there is third-party
coverage, a/k/a liability insurance, where L-Ir defends Id (or pays for the
defense), and pays settlements or judgments when appropriate or when the
insured’s responsibility is established and found to be within coverage.
hardly ever sue Ls in life insurance cases, although disappointed beneficiaries
sometimes do. This might
happen when an angry relative who thinks he should have been a (larger)
beneficiary sues the estate and trust lawyer for malpractice. Usually these beneficiaries are not clients of
the will-devising lawyers they sue, although testators could make them into L’s
clients by fairly simple devices.
Because there is no attorney-client relationship in these cases, the
plaintiffs often lose these cases in many jurisdictions, but not always.
insurers occasionally sue their lawyers.
The foundations here are usually poor coverage advice or opinions, poor
adjustment advice, or poor litigation regarding either coverage—as in
declaratory judgment actions–or adjustment practices—as in statutory or
common-law bad faith actions. Property insurers functioning as plaintiffs in
subrogation cases could also sue their lawyers, but these cases are rare. Health insurers have not really started suing
their coverage lawyer much, but they will.
Insurer v. Lawyer malpractice—or
lawyer error―cases arise in first party situations; some arise in various areas
of liability insurance. As indicated,
sometimes the latter type of suit results from an L representing a L-Ir
directly. In these, the insurer is usually
the only relevant or at least the principal relevant client of L. Sometimes these suits arise differently. They result from the way L, hired by L-Ir, but
who represented L-Id when he/she/it was sued.
Sometimes that same lawyer has provided the insurer with legal
advice. Usually not. In the latter situation, of course, L
represented only the L-Id. Trouble
begins here. For the most part, in most states, only clients can sue their
lawyers for mal practice,
although lawyers can be sued by non clients on the basis of some theories,
e.g., malicious prosecution.
a diversity of examples from different sectors of the insurance industry might
help place the problems facing liability insurers in context. Each of these examples is real from a
historical standpoint, or nearly so. Some fiction has been added, for
concealment purposes, as have some twists and turns.
from Rita because it resulted from a hurricane and water damage is excluded,
because, although the wind blew Id’s roof off first, and that caused the water
damage, the roof was old and therefore probably decrepit, depreciated, and
deteriorated, and so therefore not covered.
me! This advice is horrible. If Ir followed it, L might—in theory―have an
affirmative defense: “My advice was so obviously poor, that you were fools to
take, so I ought not have to pay.” No
such affirmative defense—if made explicit–has ever worked, and they never
will. Comparative negligence may work
well in many types of negligence cases, but they do not work well in insurance
disputes, except when it is clear that the client rejected the attorney’s clear
case. Suppose an expensive casino
building takes wind damage and damage from what is known in the weather trade
as a “storm surge.” Suppose further that
the policy excludes coverage for damages from either floods or waves, but does
not mention storm surge in the exclusion, although its standard policies beginning
the following year do. Finally suppose
that a “storm surge” is arguably not really either of these—in at least some
sense. If a court takes this view and if
L does not advise Ir about the fact that all ambiguities are resolved in favor
of coverage, especially in exclusions, then L will have committed malpractice. (The legal world created by Katrina has been
made to argue that a storm surge is really just a flood.)
years, say 26 of them, and the Id now seeks coverage for accidental events
which happened during the 15th year, but cannot find the policy. This Ir does not have computerized or
microfilmed records going back that far, so it denies coverage, although the
policies in Years 12-14 and 16-19 are all exactly the same, and the only
difference between Year 19 and Year 20 is an increase in the policy
limits. If L advised Ir that there is
very little risk in denying coverage for Year 15, L has almost certainly
committed malpractice. If L does not
explain tendencies in the law to his client, Ir, malpractice has been
committed. (Usually this kind of case arises in
connection with L-Ir, but one could imagine it happening with a P-Ir, or some
other first party insurer.
A clear L-Ir hypo. Suppose L-Id is sued.
The case is a big deal. The Petition
contains four causes of action. Three of
them are obviously not covered with a liability insurance policy, but one of
them will have to be paid by the insurer, if it is proved. L has told L-Ir to agree to refuse to defend
but to offer to pay one quarter of reasonable legal fees, not to exceed $125.00
per hour. The policy says nothing about
any of these matters. It is a standard
liability policy of any sort.
is guilty of at least three different forms of malpractice. (1) In
if L-Ir has a legal obligation to defend one cause of action, it has a legal
obligation defend all of them. (2) L-Ir’s duty to defend is determined by the
fact pleadings in a case against an insured, whether or not true, and not by
the expressly stated causes of action. (3) The amount of money specified for attorneys
is way too small for a serious case
Here is what many regard as the most interesting type of hypothetical case. It involves liability carriers. Suppose
L is representing L-Id, having been hired by L-Ir. The suit is a large one and serious. The plaintiff offers to settle for primary policy
limits or less. This is called a “Stowers Demand,” if it is done
right. Assume this was done. L tells both the primary carrier, PL-Ir, and
the excess carrier, ExL-Ir, that they need not worry. The case will be won, and if lost the damages
will be less that ½ policy limits of the primary carrier.
then loses the case; PL-Ir pays its policy limits and becomes insolvent (in
part as a result of exactly this); so ExL-Ir pays the rest of the
judgment. There is substantial evidence
that if PL-Ir had offered ¾ of its policy limits, the case would have
settled. L knew this but failed to tell
anyone. He forgot.
they can move from person to person by other means. They can move (a) through an award from a
and (b) therefore presumably through the order of a district court controlling PL-Ir’s
insolvency, and so also (c) they can probably move through subrogation,
without any court order. (If A is B’s
subrogee, if A takes care of B, spends money, and so steps into B’s shoes, as it
were, think “Good Samaritan” metaphor.)
explicitly holds that excess carriers may sue “insurance defense” lawyers,
given the facts of this hypo. There
is no reason why that law would not apply to primary carriers that have to pay
amounts above policy limits. Besides,
the advice L gives the PL-Ir about whether to pay policy limits may make it L’s
temporary client on a narrow issue.
case. Suppose a stripper falls off a
stage and injures a customer. The
customer then sues the bar, but L-Ir denies a defense, based upon L’s advice. The basis of the advice was that the stripper
was called an independent contractor by the bar, a category of persons whose
conduct the policy explicitly excludes.
Now, suppose that the plaintiff’s pleading is not relevantly clear, that the bar is accused
of inadequate supervision, and—although not mentioned in the tort pleadings―the
joint actually had a set of rules for “its” strippers which is entitled “Dancers’ Decalogue: Dance-Determined
De-clothing.” Suppose further L-Ir’s
L knew about this document, which was always given to every new dancer. This is an easy case! Once L-Ir is made to pay the customer’s
damages, L will lose the malpractice brought against her by her client, L-Ir.
what principles govern lawyer conduct in this area of practice? Here are a few.
Do not do insurance work alone without experience or supervision
by the experienced.
Do not advise
insurers by telling them what they want to hear, or what you think they want to
Remember insurers are at least close to being fiduciaries of their insureds. This is what it means to say that an insurer
has a “special relationship” with an insured, so that the insurer must treat
its insured’s interests as at least equal to its own. The
business of insurance is to take care of
insureds, protect them from various, and
attend to the risks which injure them. This point applies with special force to
liability insurers providing defenses, although this point is not succinctly written
ambiguities in policies and advise
writing about their possible exposures and consequent dangers.
Finally, Ls working for L-Ir needs to think carefully about how to write denial letters and
listed topic–# (v)—is beyond the scope of even this essay.
There is something radically wrong with liability carriers not being
able to sue the lawyers they retain, direct, and pay for defending their insureds and
ultimately recover from them if they were negligent and lost the case which the
were entrusted and thereby insured L-Ir. As already indicated herein (and
defense lawyers frequently render legal services to the L-Ir that hired them
and whose L-Id they are obviously, publicly, and often explicitly representing,
and these services are often rendered in the very case where the lawyers are
defending Id. Even if Ls do not provided
legal services to “their” L-Irs, the following facts can all obtain: (i) the Ls have been paid for rendering legal
services–granted: they have not been paid by their explicit (and perhaps only
actual) client but by L-Ir—(ii) those legal services were defection, and (iii)
the Ls caused financial injury to the entity that was paying the legal bills. Under these circumstances, it is hard to
think of reasons why the actually injured party—L-Ir—should not be able to
recover from L (or its professional liability carrier). In fact, there are no good reasons for this
gap; there are very good reasons why the gap should be closed or abolished: and
there are some elegant ways to do precisely this. The remainder of this essay will concern that
are several routes by means of which L-Irs can become the genuine legal owners
of their L-Id rights against the Ls who defend them and whose bills for defense
the L-Irs usually and mostly pay. Here
they are: (A) L-Ir clienthood, (B) assignment, (C) lien transfer, (D)
subrogation, and (E) contract. Each of
these will be discussed.
is a substantial controversy in relevant legal circles regarding whether a
liability insurer providing a defense to an insured is automatically a client
of the defense lawyers used. To some extent, the answer to this question
hinges on the meaning of the word “provide” in this context, and there are
three alternatives. First, L-Ir may provide
a defense by paying for it. Second, L-Ir
might provide a defense by picking L and then watching. Third, L-Ir might provide a defense by
controlling the defense and therefore at least having the right to provide
orders to L. Fairly obviously, only the
third case matters. In the first and
second cases, there is no reason to think that L-Ir is a client of L.
legal services and no legal advice.
if L-Ir picks L and controls him? After
all, L is providing legal services and L-Ir is using them to discharge its
contractual obligations to L-Id. If the
answer to this question is affirmative, then there is what the profession is
calling a “tripartite”—“Three Part” relationship exists amongst (1) L, (2) Id,
and (3) Ir. It is difficult to see why “Tripartitianism”
is impelled upon the profession if L provides legal services to Id and provides
L-Ir with no advice. After all, L is not
rendering legal services to L-Ir, instead; it is helping L-Ir discharge its
insurance services by functioning as a defense lawyer for
Still, when abstraction is eliminated and the real world is the focal
point, defense lawyers often render legal services to L-Irs by providing advise
about how to conduct a case, what the settlement value is, how to conduct
settlement negotiations, and how to conduct a trial. Obviously, these are all legal services, and
they are rendered directly to L-Ir. Of
course, L-Ir then uses them to perform its duties as a liability insurer, but
it needs legal advice to do this well.
If L gives it bad advice—or no advice, what advice is needed or sought—say,
as to settlement value, and this act or omission results in a mistaken but necessary judgment, the injury and damages
were caused by L, assuming that L-Ir would have done significantly better had
good advice been provided and followed. (Interestingly, many easier legal
malpractice cases involve not just one blunder by the lawyer but a series or an
foundation for L-Ir’s standing to sue L for fouling up the defense of
which L-Irs would have to pay.
Obviously, L will not work on complex and lengthy cases at cheap rates
if their mistakes are highly probable to trigger expensive lawsuits in which
they will be defendants. Of course, this
problem can be avoided to some extent by setting up arbitration agreements
between Ls and the I-Ir that use them.
have an attorney-client relationship with respect to advice L has provided L-Ir
does not entail or even imply that this relationship is as broad as the
attorney-client relationship between L and Id.
Indeed, it will be much narrower.
Many negligent acts and omissions of defense lawyers would not fall within
the metaphorical pin points which constitute the areas of attorney-client
relationship between L and L-Ir.
Consequently, this use of Tripartitianism will be unreliable and so not
terribly helpful, although it might be a little bit helpful occasionally and so
should not be written off.
assignment is a document by means of which A transfers ownership of an asset to
B. Sometimes this is A’s status as a
creditor; sometimes it is A’s legal rights; sometimes it is an intangible asset
the ownership of which is changing hands. Assignments can be voluntary or
involuntary. The latter of these two is
often where ownership changes hands by means of a court order of some sort. One of these cases has already been
discussed. The majority of states that
have considered the issue of whether legal mal rights can be voluntarily
assigned have come down in the negative side of this question.
is one of these, and (unfortunately, in my view) this rule
is likely to remain, even though a few other states have rejected it. As already indicated, sine gave rejected it.
given for this rule:
Having a rule of assignability would drive an
immediate wedge between lawyers and client.
Having a rule of assignability would reduce the
eminence of the legal system.
Clients would pull rugs out from under their
clients in order to settle cases.
Assignability would destroy the sanctity of the
Assignability would create a commercial market
for buying these rights and that would demean the legal profession.
Assignability would impose temptations upon Ids
to carelessly give up significant secrets at times they were under stress.
Assignability would become public knowledge and the
public (including potential jurors) would come to have less confidence in the
Assignability would create new and active choses
in action markets and hence increase litigation. They would even become a new form of
have been considered by a few commentators who have rejected them. So far, few courts have been persuaded. (Skeptical cynics may be inclined to believe
that the legal profession is merely protecting itself). This device is unlikely to catch on around the
country. Nevertheless, an attorney
thinking about using this device in a given state should check the state’s law
and file, if at all possible, where the laws of assignment favor validity.
devices somewhat like assignments which could be used, without any of its
various apparent “dangers.” The Texas
Supreme Court has held that a former client may sue an attorney for malpractice
even if the client executed a partial assignment to a person or entity that was
financing the suit. A partial assignment which was legally
invalid does not destroy the client’s right to file and pursue suit. The client still owns something, namely, a
right to pursue a chose in action, which can be the foundation of a lawsuit. If so, isn’t there something somewhat like
an assignment which might do the same work.
lawyer―now the plaintiff against him in a legal mal case―provide the person or
entity financing his claim some sort of lien on what is recovered? One should think he could. After all, plaintiff’s lawyers have can have
a lien on a contractually determined amount of any recovery. Under § 1.08(h) of
the Texas Disciplinary Rules of
Professional Conduct a plaintiff’s lawyer (among others) cannot own a
property interest in his client’s claim.
He can have a lien, however, and various sorts of people can be notified
is that outside established property law, the law of liens is vague,
undeveloped, and unstable. Consequently,
enforcing alleged grants of liens depends very much on at least judicial
cooperation. Therefore, the “law of
liens” is not to be trusted.
of enterprise floating around. One
wonders why not. Too speculative? Too complicated? Too many uncertainties?
every state permits a defending liability insurer to be subrogated to its
insured’s legal mal rights. Some states are just beginning to consider
the issue. L-Irs may acquire an insured’s right of legal
malpractice through subrogation under
law. Even excess insurers can as well, as already
reinsurers probably cannot. Subrogation
is not open to L-Irs in all states, however.
In one recent case, the
Court of Appeals of
rejected equitable subrogation for a defending primary liability carrier finding
it would drive a wedge between attorney and client. “Indeed, the attorney would
be placed in an even more precarious position than is inherent in a tripartite
relationship. In another a Court of Appeals of
to be subrogated in a legal mal action. Oddly enough, it did this on the grounds that
legal mal rights cannot be assigned.
presented in the last paragraph was quite different. There a conflict clearly existed between the
insurer and the insured[, since the insured wanted the case settled. L,] and the attorney paid by the insurance
company but with primary allegiance to the insured, could not escape liability
if this court chose to follow the doctrine of equitable subrogation.” According to the court, if L had done as the
insurer wished, the insured would have sued him, but if he had done as the
insured wished, the insurer would have sued him. “To permit such a result would
‘substantially impair an attorney’s ability to make decisions that require a
choice between the best interests of the insurer and the best interests of the
subrogation is a good place to start when thinking about L-Ir bringing a
malpractice action against defense counsel.
Subrogation has its dangers however.
Since the subrogee steps into the shoes of the subrogor, any defenses
which can be asserted against the subrogor can be asserted against the
subrogee. Further, if “Gee” and “Gor”
are co-plaintiffs, a procedural error by “Gor” which causes the dismissal of
its case, can lead to the dismissal of “Gee’s” case as well. In addition, if there will be substantial
resistance. Some of it will be
formalistic. Defense counsel will review
the elements of subrogation and try to find various ways out. Judges who are unsympathetic to insurers will
try to find hidden ways to get rid of the cases. Of course, this is not a legal
point is more like a political point.
Still it is an influential and important consideration.
has been true in
for many years, and in other jurisdictions as well, that actions against a
lawyer for injurious screw-ups sound in tort, not contract. One well-known
law apparently treats legal mal practice claims, even those framed as breach of
contract, as tort claims.”
not much is said about the possibly of using breach of contract as a cause of
action in the Mallen & Smith treatise for example. In fact, §8.6 begins by saying this: “Few
modern actions against attorneys are for breach of a written or an express
contract.” The reason is interesting: “The prevailing
rule is that there is no cause of action for breach of an express contract
unless the wrong sued for is breach of a specific promise.” In addition, implied promises to do a
reasonably good job are difficult to distinguish from negligence actions, and
the authors say, “there is no difference between the remedies for the different
theories, except that a negligence claim usually is subject to a shorter
statute of limitation.” Thus the matter is discussed in three short
seconds in Volume I of a five (5) volume treatise.
contrast, §55(1) in 1 Restatement (Third)
of the Law Governing Lawyers (2000), entitled “Civil Remedies of a Client
Other Than for Malpractice,” unequivocally affirms the use of contract law as a
way to sue lawyers. It reads this way: “A lawyer is subject to liability to a client
for injury caused by breach of contract in the circumstances and to the extent
provided by contract law.” Comment c
says this, in part: “A client’s claims
for legal malpractice . . .can be considered either as tort claims or as
contract claims for breach of implied terms in a client-lawyer agreement.” The “Reporter’s Note” goes on to discuss the
idea of “warranty of result,” which is obviously a dramatic remedy possibility. (Interestingly, the same texts make it clear
that a breach of fiduciary duty could also be treated as a contract action.) Now, ask yourself, “If § 55(1) can be the
foundation of legal mal claims, what would be wrong with permitting
any case, in
and many other jurisdictions, legal malpractice does not constitute a contract
action. This is true even though breach
of contract is often pleaded by plaintiffs in legal mal cases, and then ignored
by the judge, the defendants, and ultimately plaintiff’s counsel herself. Why this is or should be true is extremely
difficult to grasp. Lawyers and clients
have agreements which must be contracts.
Lawyers can sue clients and former clients for breach of contract. This is what it is to sue for unpaid
fees. The statute of limitations for
anyway is longer for contract that for tort; thus it would be helpful to
clients to allow actions for breach of contract. The usual problems of injury
are the sorts of thing which are covered in contract cases, to wit: economic
and financial loss. Legal mal actions
seldom, if ever, involve the infliction of either bodily injury or property
damages, yet this is what most ordinary and historical negligence actions
concern. And besides, contract actions authorize the recovery of attorney’s
fees whereas tort actions do not. Then
again, tort actions permit the recovery of punitive damages, whereas contract actions
do not. Perhaps it is relevant that
liability insurers have much less hesitancy about providing defense and
indemnity when the actions pleaded are tort actions and not contract actions. In theory, however, this should ultimately
make no difference.
let’s change the discussion slightly.
What could be said about a liability insurer suing a lawyer who agreed
to provide a defense to an insured and then fouled the whole thing up? Isn’t there an agreement—and hence a
contract—involved in this. The insurer
basically says, “Defend this insured ably.
Consult with us. Do what we say,
if we say anything. Keep us posted. And we will pay you. If you keep the file and start to work, you
have accepted this deal.” If L loses a
case which should have been won, or if L loses a case at $10MM when it should
have been lost for $3MM, the lawyer has not done what he promised or contracted
is neat—even elegant—about this idea is that there would be two separate causes
of action: the tort of legal mal for clients of L, and breach of contract to
defend ably in the case of L-Ir. Of
course, L-Ir would still have the tort, when it was the sole relevant client or
when it was the direct client.
(Remember! If the defending L-Ir says to L, “What is this case against
Id worth? I need to know so I can think
about settlement.” and then L gives a
poor answer L has provided legal
services through advice to L-Ir. It is
an interpreting whether this mistake would be tort, contract, or both.)
close this essay by positing and then discussing a hypothetical and asking a
question. A man suffering from a deadly
disease is treated for it at a doctor’s clinic.
A mistake is made by the nurse delivering the medication and the man
dies on the spot. His estate and his
family sue the doctor, the nurse, and the corporate entity employing them
both. Everyone on the defense case comes
to believe that this case is a looser, indeed, an extremely dangerous one. The doctor was inattentive to administration,
the nurse was ill-trained; and the entity was an administrative nightmare. Everyone on the defense side also believed
that the case against the corporate entity is more serious than the one against
case against the doctor was settled, but the one against the corporation was
not. This happens even though the field
adjuster saw disaster coming and tries tactfully to tell his administrative and
Interestingly, neither defense counsel—not the one for the doctor and not
the one for the entity and the nurse—told the insurer that the case needed to
be settled. There were several
opportunities to settle within policy limits, and an appropriate “Stowers Demand” was timely delivered.
of the lawyers involved ever advised the insurer that the case would be lost
big-time and should be settled for policy limits, if no lower number was
possible. This happened even though
there was a controversy in one of the firms about what should be done. One of the associates helping on the case
wrote a strong memo arguing that precisely this advice should be given and that
it was legally wrong not to give it.
tried. Hardly any affirmative defense
was attempted, and the argument given by the defense was that it was the
doctor’s fault and not that of the nurse or the entity, even though the entity
employed not only the nurse but the doctor as well. The nurse dropped dead at the end of the
defense lawyer’s closing argument. The
jury returned a large—multimillion dollar verdict against the entity, including
punitive damages, judgment was entered upon it, and the judgment was affirmed.
There was no verdict rendered against the nurse, since she died dramatically
and— of course—the doctor herself was gone from the case.
case was highly publicized. The doctor
lost her patients. Her practice
closed. She was treated for depression.
Her husband divorced her and got custody of the children. She changed back to her maiden name, moved,
and joined a gigantic multi-doctor practice.
appellate process, the doctor and the entity assigned any causes of action they
might have against the insurer to the plaintiffs—the decedent’s estate and his
many children. They did not assign their
cause of action for legal malpractice against the lawyers that represented
them, but they created a lien against all proceeds until all the expenses were
paid then $X.00 went to the plaintiffs in the underlying case. Thereafter, suit was filed. It included causes of action against the
lawyers for malpractice and breach of fiduciary duties, and it included causes
of action against the insurer for breach of contract and both statutory and
common law bad faith. This happened
three years after the entry of judgment in the underlying case.
care only about a few of them just now.
Could the insurer sue the lawyer it hired to defend its insured, by
means of a cross claims. Would there be
any statute of limitations problems? Could the insurer seek indemnity of some
sort from the lawyers? What would the
lawyers’ defenses be? Would it be mal practice for the insurer’s lawyer to fail
to recommend that these cross actions be filed?
insurer have causes of action against the lawyers under circumstances like this
The leading treatise on this subject is the 5 volume set, Ronald Mallen &
Jeffrey M. Smith, Legal Malpractice (5th Ed. 2000) (“M & S”). The phrase “legal malpractice” is treated
broadly to cover any civil action which might be brought against a lawyer for
allegedly injurious errors or omissions.
Fed. Appx. 116, 118 n. 3 (5th Cir. 2003)
types of causes of action are different.
For one thing it is necessary to prove damages and causation in
malpractice cause of action, but not in a breach of fiduciary duties cause of
action. Burrow v. Arce, 997 S.W.2d 229 (Tex.1999) (restitution is a
property remedy and or punishment when there has been a violation of fiduciary
“Historically, an attorney’s malpractice exposure for negligence has been
limited to a client. Within that
confine, attorneys can gauge the nature of their duties and how to fulfill
those duties. Beginning in the 1970’s,
thee has been an expansion of liability to persons who are not clients but to
whom attorneys can owe a duty of care.” M & S, n. 1, at § 7.1, p. 675 of V.
See Archer v. Medical Protective Co., 197
S.W.3d 422 (
v. McConnell, 982 S.W.2d 165 (
1998). And there are more cases from
various Courts of Appeals in
favoring an “Anti-Fracturing Doctrine.” The Supreme Court has not ruled,
at least one case, the advertising lawyer is chasing a particular person who is
at least posing as a lawyer. Mary Ann
Cavazos, Man May Have Impersonated Peace
reviewed a case recently in which a professional level liability insurer paid
two lawyers with well over a decade of experience each $135 and $145 and hour
to defend the insured, and this occurred in the years between 2003 and 2005.
approved). Interestingly, there was a
dissent in the Commission for Appeals, but it has never been reprinted in an
official place. See Vincent Morgan and Michael Sean Quinn, “Damn Fools”—Looking Back at Stowers After 75 Years, 6 J.
Ins. Law 2 (May 2005). This whole
idea has national significance. See
Michael Sean Quinn, The Defending
Liability Insurer’s Duty to Settle: A Meditation Upon Some First Principles, 35
Tort & Ins. L. J. 929 (2000).Of course, not all states have adopted the view argued here. Perhaps the best example of this is the State of Washington. See Steward Title Guar. Co. v. Sterling Savings Bank, et al., 179 Wash.2d 561 (2013) for a particularly interesting case.
Probably most liability insurance policies have a first-party content, namely
the right to a defense if sued and the factual assertions in the pleadings add
up to a covered claim if proved. Lamar Homes Inc. v. Mid-Continent Casualty
Co., No. 05-0832 §V (
See 3 M & S, Chapter 32.
liability insurer defending a policyholder cannot sue the defense lawyer, so
the reinsurer cannot either).
See 1 M & S,
6, §§ 6.8-.23. Nonclients can also sue
lawyers for fraud, conspiracy, abuse of process, false arrest or imprisonment,
intentional infliction, defamation, invasion of privacy, conversion, etc. See William T. Barker, Floyd P. Beinstock,
and Bennett Evan Cooper, Litigating About
Litigation: Can Insurers Be Liable for Too Vigorously Defending Their Insureds?
42 Tort Trial & Ins.
Practice L. J. 827 (2007) (not
often with respect to abuse of process).
S.W.2d 313 (Tex. App.—San Antonio, 1994, writ ref’d). Given that the Texas Supreme Court refused
the writ in this case, a rare event, instead of refusing it explicitly because
there was “no reversible error.” This
decision became a Supreme Court decision.
There have been few of these over a long time.) The high court itself refers to Zuniga as its case. See Mallios v. Baker, 11 S.W.3d 157, 163 (
This is true even when the plaintiff is an ExL-Ir. Am.
Centennial Ins. Co. v. Canal Ins. Co., 843 S.W.2d 480 (
Subrogation is permissible when assignment is not because assignment
endangers the lawyer-client relationship, while subrogation does not. The
latter does not impact the structure or level of the attorney-client
relationship. The court here was following Atlanta
Int’l Ins. Co. v. Bell, 475 N.W.2d 294, 298 (
influential cases on this matter nationwide.
in the previous note.
Sean Quinn, Whom Does the Insurance
Defense Lawyer Represent? 2 J. Tex. Ins.
L. 12 (2000).
William H. Black, Jr. and Sean O. Mahoney, Legal
Bases for Claims by Liability Insurers Against Defense Counsel for Malpractice,
35 The Brief 33 (Winter 2006). (This article discusses two that I do not
discuss: “the third-party liability theory” and “the Restatement theory.”
The first of these two is implausible and lacks significant
authority. The second is based on §
51(3)(c), cmt. g of the Restatement
(Third) of the Law Governing Lawyers (2000).
This section is entitled “Duty of Care to Certain Nonclients,” and its
main body plus subsection (3)(c) reads as follows: For the purposes of the elements of legal
malpractice and a lawyer’s duty of care, a lawyer owes the usual and recognized
duty of care in each of the following circumstances: “when and to the extent
that the absence of such a duty would make enforcement of those obligations to
the client unlikely[.]” Comment g begins
as follows, pretty much: A “lawyer designated by an insurer to defend an
insured owes a duty of care to the insurer with respect to maters as to which
the interests of the insurer, and the insured are not in conflict, whether or
not the insurer is held to be a co-client of the lawyer[.]” See Spratley
v. State Farm Mut. Auto. Ins. Co., 78 P.3d 603, 607 (Utah. 2003) (relying
upon Paradigm Ins. Co. v. Langerman Law
Office, P.A., 24 P.3d 593 (
2001).Of course, not all states have adopted the view argued here. Perhaps the best example of this is the State of Washington. See Steward Title Guar. Co. v. Sterling Savings Bank, et al., 179 Wash.2d 561, 311 P.3d 1 (2013) for a particularly interesting case.
Charles M. Silver, Does Insurance Defense
Counsel Represent the Company or the Insured? 72 Tex. L. Rev. 1583
See Assignments, 7 Tex. Jur. 3d 173 (1997). See also Assignments,
6 Am. Jur.2d 143 (1999).
v. Groce, Locke & Hebdon, 878 S.W.2d 313 (
ref’d). The use of the last phrase in
the citation at that time means that the Supreme Court adopted the decision as
its own. See Mallios v. Baker, 11 S.W.3d
2000)(involving partial assignment to judgment broker).
Ins. Co., Inc. v. McCann, 707 N.E.2d 332 (Mass.1999), followed by St. Paul Fire
and Marine Ins. Co. v. Birch,
Stewart, Kolasch & Birch, LLP., 379 F.Supp.2d 183 (D. Mass. 2005) and
233 F. Supp.2d 171 (D. Mass. 2002)(for a detailed account of the facts). These are subrogation cases, but they rest on
law regarding assignment. See also Kommavongsa v. Haskell, 67 P.3d 1068,
Here are a few such decisions. Law Office of David J. Stern, P.A. v.
Security Nat’l Servicing Corp., No. SC06-361 (July 5, 2007); Delaware
CWC Liquidation Corp. v. Aitcheson, 584 S.E.2d 473 (
2003), and Querrey & Harrow, Ltd. v.
Transcontinental Ins. Co., 861 N.E.2d 719 (
granted, and this opinion was vacated in “rap 58(a).”
See Kevin Pennell, Note: On the
Assignment of Legal Malpractice Claims: A Contractual Solution to a Contractual
Problem, 82 Tex. L. Rev. 481 (2003)(A “legal
malpractice claim is a form of property and should be freely assignable; however, attorneys
should be allowed to limit a prospective client’s right to assign a potential legal malpractice claim, provided
the client provides his informed consent.”
anti-assignment provisions in their retainer agreements, assuming that they
fully inform the client of the effect of that provision.”
at 483. For a bibliography of
at n.11). See also Michael Sean Quinn, On the Assignability of Legal Malpractice
rejects Pennell’s view that lawyers should be free to forbid assignment in
their retainer agreements with respect to any client, even if they explain
Where there is an invalid partial assignment, can the former client sue for all
the damages? One would think so if the
assignment is invalid.
Unruh, Kuhn & Wilson, 827 P.2d 758 (
Stewart, Kolasch & Birch, LLP, 379 F.Supp. 183 (D.
judgment and describes the issue as novel under Mass law).
For a systematic summary of the law of subrogation, see Michael Sean Quinn, Subrogation, Restitution and Indemnity, 74
Tex. L. Rev. 1361 (1996)(an aging
account but mostly right). For a recent
See also Keck, Mahin & Cate v. Nat’l
Union Fire Ins. Co. of Pgh, Pa., 20 S.W.2d 692 (
Roetzel, 837 N.E.2d 1215 (
App. 2005). The actual primary carrier
in that case was Frontier. It was the
second-named plaintiff, and Swiss Re was
Charles F. Herring,
cites numerous cases. He also cites a
very small number of
cases saying that contract theory might be used. See Michael Sean Quinn, The Eleven Commandments of Professional
Responsibility: Gallimaufry Secundum 128-29 (2004) (discussing legal malpractice
and pointing out that contracts between lawyers and clients are presumed to be
unfair, and the attorney has burden to prove fairness). See Honeycutt
v. Billingsley, 992 S.W.2d 570, 582 (
denied) citing Archer v. Griffith, 390
S.W.2d 735, 739 (
& S, at 816.
Quinn, at 129 n. 35.
*Michael Sean Quinn, Ph.D., J.D. Etc.
The Law Firm of Michael Sean Quinn and
Quinn and Quinn
1300 West Lynn Street, Suite 208
Austin, Texas 78703
Originally posted on 12/03/2015 @ 9:59 pm