Insurer can sue lawyer it hired for malpractice

An insurance company can bring a malpractice action against an attorney it hired to represent an insured, a divided South Carolina Supreme Court has ruled. While some are applauding the decision of first impression, others are concerned that it will erode the attorney-client relationship.

The court’s May 30 decision in Sentry Select Insurance Co. v. Maybank Law Firm follows a 2014 opinion from the high court in Fabian v. Lindsay, which marked a departure from the general rule requiring privity between a claimant and an attorney in a malpractice action.

But the 3-2 decision in Sentry greatly expands the scope of liability recognized in Fabian, which was limited to third-party beneficiaries of an estate who wanted to sue attorneys accused of botching the drafting of a will.

Writing for the majority in Sentry, Justice John Few said that an insurance company finds itself in a “unique position” when it hires an attorney to represent an insured. And that unique position, he found, allows an insurer, in certain circumstances, to bring a direct malpractice action against the counsel it hires on behalf of an insured.

“Thus, 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,” Few wrote. “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.”

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 discovery requests for admission. 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 and instead certified the case to the state Supreme Court.

Childs 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.

While the court’s majority answered the first question, the court declined to address the second query, concluding that it was unnecessary to do so. Justice John Kittredge and acting Justice Thomas Russo Sr. concurred.

In his dissent, Chief Justice Donald Beatty criticized the majority for not identifying a specific theory of recovery—and, remarkably, Few called the criticism “fair.” But he wrote that the choice was “deliberate” and “designed to preserve the attorney’s fiduciary allegiance to his client with no interference from the insurer.” Justice Kaye Hearn joined the dissent.

Beatty contended that the majority had created “another exception to the attorney-client relationship,” which left him “concerned about the manner in which an insurer can pursue a legal malpractice action against hired counsel after today’s decision.”

Maybank’s attorney, David Overstreet of Earhart Overstreet in Charleston, said his client planned to petition the high court for a rehearing. He added that the “erosion of  privity is a real problem for the legal profession,” but declined to discuss the case further.

Daryl Hawkins, a Columbia-based attorney who represents Sentry, said the court was “very careful in its ruling to protect attorney-client privilege and to note that the attorney’s loyalty to the client was not to be affected by the opinion.”

Hawkins added that 24 states have recognized the right of a non-client to sue a lawyer for malpractice, typically under the theory of equitable subrogation, which allows insurers to step into the shoes of their insured. South Carolina now has a “hybrid” theory of recovery, he said.

The court is “only allowing the claim to happen when the breach of duty was a duty owed to the insured but as a direct result of that breach the carrier has been harmed,” Hawkins said. He added that by creating a new cause of action, the court was “preserving the lawyer’s allegiance to the insured.”

Thomas Pendarvis, a Beaufort lawyer who represented the third-party beneficiary in Fabian, agreed with the Supreme Court’s decision in Sentry, though he found it “curious” that the court had decided against identifying a specific legal theory for recovery.

“But at least there’s some comfort in knowing that there’s a claim available,” he said. “I liked the way they gave the trial courts the benefit of figuring it out.”

In the wake of Fabian, Pendarvis said he heard much talk about “floodgates opening” as

observers worried about the ramifications of allowing third-party beneficiaries to sue attorneys for malpractice. But he said those floodgates never opened, and he expects that the concerns surrounding Sentry also will prove to be unfounded.

Some who disagree with the opinion assert that it will have lawyers constantly looking over their shoulders, worried that they might get sued if they do something that the insurer dislikes. But Pendarvis dismissed that notion.

“I think this [decision] is valuable for the practitioners,” he said. “They now know that their duties go one place. As long as they’re doing their job for that client, the insured, there’s no exposure.”

Ronnie Richter, a Charleston-based lawyer who specializes in legal malpractice litigation, also applauded the decision, calling it a “logical extension of where we are today with legal malpractice, which is tearing down the walls of privity.

“The decision says they’re not technically doing that, but that’s really what’s happening,” he said. While the court declined to identify a theory of recovery, Richter gave the new claim a name: “derivative legal malpractice.”

“The way the court structured it, it still has to flow through an attorney-client relationship,” he said. “The court was very clear that harm must be suffered by the insured before the insurer would have any basis for the claim.”

The 18-page decision is Sentry Select Insurance Co. v. Maybank Law Firm, LLC (Lawyers Weekly No. 010-057-18). An opinion digest is available at sclawyersweekly.com.

Follow Phillip Bantz on Twitter @SCLWBantz