Insurance Companies Suing Their Lawyers

People in Grand Prairie, Arlington, Fort Worth and Weatherford, might find this interesting. An article published by Bloomberg BNA, was published on February 15, 2012, that discussed stories of insurance carriers suing their lawyers.
The article, by Joan Rogers, appears to be from ABA/BNA Lawyers’ Manual on Professional Conduct.
The article tells us that on January 31, a Mississippi Court of Appeals decided to take a second look at a case where the issue was whether an excess insurance carrier has a direct cause of action for malpractice against the law firm the primary insurance carrier retained to defend the insured. Now re-read the previous sentence … the issue is whether an excess insurance carrier has a direct cause of action for malpractice against the law firm the primary insurance carrier retained to defend the insured.
In its original opinion, handed down a year ago, the court said the excess insurer was limited to an equitable subrogation claim against the law firm. Although it denied the insurer’s motion for rehearing, the court withdrew that opinion and issued a new one that significantly expands the grounds on which an excess insurer may seek damages from an insurance defense law firm that it did not retain.
The court decided in its opinion that the lack of direct contractual relationship between defense counsel and the excess insurer does not prevent the insurer from going after the law firm for allegedly mishandling the insured’s defense.
The excess carrier’s allegations that the law firm supplied it with privileged settlement assessments and that the insurer detrimentally relied on the firm’s representations of the insured figured heavily in the court’s reasoning for its new ruling.
When complaints were filed against an insured, its primary liability insurer hired a law firm as defense counsel. The settlement in the litigation against the insured exceeded the limits of the primary policy, thus triggering the additional coverage provided by the excess insurer.
The excess insurer sued the law firm for malpractice, asserting that its mishandling of the defense resulted in a settlement that was unnecessarily outsized. The complaint alleged that the law firm’s status updates during the litigation consistently undervalued the plaintiffs’ claims so as to avoid alerting the excess carrier that its coverage might be needed.
The lawsuit also asserted that the law firm partners and trial counsel were not licensed to practice law in Mississippi and that the attorneys had failed to designate medical experts on time.
The trial court threw out the complaint on the ground that the excess carrier lacked standing to sue, as it had no attorney-client relationship with the law firm.
The court of appeals reinstated the lawsuit.
In its modified opinion, the court held that the excess insurer has a direct action for malpractice, negligence, and negligent misrepresentation against the law firm, not just an equitable subrogation claim.
Regarding the malpractice claim, the court focused on its allegation that the law firm provided the excess carrier with privileged evaluations of the settlement value of the lawsuit against the nursing home. If proved, this allegation may be the basis for finding an attorney-client relationship between the insurer and the law firm.
Providing the privileged settlement evaluations would be considered the rendition of professional legal services, the court said, because the shared information would not be privileged unless the excess insurer were a “client” or a “representative of a client” under Mississippi’s evidentiary rule on lawyer-client privilege.
This case is noteworthy to this writer in this context: Realizing that insurance is a bet, and that insurance companies do not losing their bets, they will do almost anything to lessen that loss, even sue their own lawyers when things do not go well for them. This case serves as yet further evidence of the extent an insurance company will go to retain the money they receive on premiums and why an experienced Insurance Law Attorney needs to be consulted when a person has a claim denied.