Can carrier sue lawyer it hired for malpractice?

South Carolina’s Supreme Court is slated to hear arguments next month in a legal malpractice case that should pique the interest of lawyers throughout the state, especially those who work with insurance companies.

Confronting the high court in Select Sentry Insurance Co. v. Maybank Law Firm are two questions of first impression, both of which center on the ability of an insurance company to bring a malpractice action against an attorney it hired to represent an insured.

South Carolina has never recognized such a claim in the absence of an attorney-client relationship and the few states that have considered the issue have reached conflicting decisions.

“Shifting sands” is how Sentry’s attorney, Daryl Hawkins of Columbia, described the nascent, teeter-tottering case law. He wants the Supreme Court to adopt a rule that would allow insurers to hold attorneys liable for costly mistakes.

“If the insurer doesn’t have the ability to bring these claims, then the beneficiary of that is a lawyer who has committed legal malpractice and caused injury to the carrier, which had to pay the damages,” he said. “We want lawyers to meet the standard of care when they represent clients in court. They need an incentive to do that.”

Sentry alleges that the Charleston-based Maybank Law Firm mishandled the defense of a trucking company in an underlying traffic crash lawsuit by missing the deadline to respond to a routine discovery request. Sentry says the mistake cost it at least $725,000.

Sentry sued Maybank in Columbia’s federal court, where U.S. District Judge J. Michelle Childs denied Maybank’s motion to dismiss in June and instead certified the case to the state Supreme Court.

She asked the court to determine whether an insurer can maintain a direct malpractice action against an attorney it hired to represent an insured, and whether such a claim can be assigned to a third party who is on the hook for legal fees and judgments that arise as a result of the underlying litigation.

In her order, Childs noted the dearth of case law addressing the issues at the center of the case. But she cited the state Supreme Court’s 2014 opinion in Fabian v. Lindsay, which marked a departure from the general rule requiring privity between a claimant and attorney in a malpractice action.

However, Fabian’s reach has been limited to third-party beneficiaries of an estate who want to sue attorneys accused of botching the drafting of a will. What Sentry seeks is a significant expansion of the scope of liability recognized in Fabian.

Last year, the state Supreme Court discussed the assignability of legal malpractice claims in Skipper v. Ace Property and Casualty Insurance Co., the only case that has addressed the issue.

The court found that legal malpractice claims cannot be assigned between opposing litigants due to the risk of collusion. But Sentry concerns the assignability of claims between parties standing on the same side of a case.

After studying Skipper, Childs found in Sentry that it was “not clear whether the [Supreme] Court would find, based on the facts of this case, that the assignment of the legal malpractice claim is void against public policy or otherwise not permitted in South Carolina.”

‘An uncomfortable position’

Maybank contends in its brief to the Supreme Court that a decision in Sentry’s favor “will make attorneys hired by non-client third party payers beholden to two masters rather than to solely their clients, allow insurance companies rather than clients to unilaterally decide whether to pursue legal malpractice claims, and place an insurer’s economic interests above the attorney-client relationship.”

An attorney for Maybank, Stephen Kropski of Earhart Overstreet in Charleston, added in an interview that the “danger is having an attorney who is consistently concerned about whose interests they have to prioritize and is serving the interests of two people who do not necessarily have the same goals in the litigation.”

But Hawkins, Sentry’s attorney, stressed that his client and its insured had the same interests in the case at hand — namely, to respond to the other side’s discovery request before the deadline expired.

He acknowledged that conflicts can and often do arise between an insurer and its insured, but said he wants the court to adopt a case-by-case rule that would essentially allow an insurer to sue for malpractice when its goals are aligned with the insured’s and it can show that it sustained foreseeable injury.

“While the rules establishing an exclusive relationship between an insured and defense counsel retained by the insurer have purpose and merit, all purpose and merit is void when the only person benefitting from such protection is the defense counsel in the shadow of its own malpractice against both parties,” he wrote in Sentry’s brief.

He added that the only beneficiary of Maybank’s position “would be a malpracticing lawyer, the party of least merit.”

But Kropski contended that Sentry’s proposed case-by-case rule would force attorneys into the difficult situation of having to determine whether the interests of their clients — the insured — were in line with the insurance companies paying their legal bills.

“To do so puts the attorney in an uncomfortable position basically throughout the entire relationship in trying to make that determination,” he added.

‘A wink and a nod’

A pair of attorneys who specialize in malpractice litigation, Ronnie Richter and Eric Bland of Bland Richter in Charleston, favored a decision that would open the door for insurers to sue the attorneys they hire to represent their insureds — but only if the insurance carriers are also exposed to liability.

“They [insurance companies] love to say, ‘All we are is a source to pay for the representation,’” Bland said. “But if you want to be able to sue that attorney, then you have to also be a party to that relationship when you don’t fulfill your duties to the insured. Then the insured should have the right to sue you directly.”

“They can’t have it both ways,” he added. “You’re either all in or you’re all out.”

Meanwhile, Richter dismissed Maybank’s argument that exposing lawyers to malpractice liability from insurers would drive a wedge between attorneys and their clients — the insured. He said lawyers are “always inherently conflicted” when they’re representing an insured but getting a check from the insurer.

“We’ve just always treated it with a wink and a nod,” he said.

Bland added, “When we were in law school and went over this … everyone sat there scratching their heads saying, ‘This isn’t right. The guy that’s paying your bills is the guy you’re going to listen to.’”

Sentry and Maybank are scheduled to argue their positions at the Supreme Court on Feb. 9, and the hearing is expected to draw a crowd.

“This will be fun to see because usually our courts don’t rule for the insurance companies,” Bland said. “I think they should decide for Sentry, but I wouldn’t bet a lot of money on it.”

Follow Phillip Bantz on Twitter @SCLWBantz

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