RECENT DEVELOPMENTS IN LAW GOVERNING PROFESSIONALS', OFFICERS', AND DIRECTORS' LIABILITY

• Published in: Tort trial & insurance practice law journal Vol. 44; no. 2; pp. 679 - 710
• Main Authors: David, Allen N., Duffy, Michael P., Cohen, Susan E., Mulloy, Sherry Y., Fry, Sharon S., Papadeas, Kathleen A., Jumper, Aisling A., Brannelly, Jill, Rogers, John C., Hettinger, Lindsey P.
• Format: Journal Article
• Language: English
• Published: Chicago Tort Trial and Insurance Practice Section, American Bar Association 01.01.2009; American Bar Association
• Subjects: Accounting; Attorneys; Clauses; Corporations; Dental care; Engagement letters; Financial statements; Insurance claims; Insurance companies; Insurance coverage; Insurance policies; Insurance providers; Insurance settlements; Legal malpractice; Legislation; Malpractice; Plaintiffs; State court decisions; Summary judgment; Trends; Trials
• ISSN: 1543-3234; 1943-118X

The U.S. District Court for the Southern District of California allowed an insurance company to sue its insured's attorney, holding that the attorney owed a duty of care to the insurance company as weU as to the insured.1 In American Modern Home Insurance Co. v. Gallagher,2 the plaintiff insurer retained the defendant to represent its insured on a personal injury claim arising from an accident in which the claimant was rendered a quadriplegic.3 Before suit was filed, the claimant's attorney demanded the policy limits, and the insured's attorney responded that he needed to conduct a complete investigation of the claim but did not specifically respond to the demand.4 The claimant then withdrew the pobcy limits demand and filed suit against the insured, which was eventually settled for $5.5 million.5 The insurer then sued the attorney it had assigned to represent the insured during the prebtigation period for legal malpractice and breach of fiduciary duty.6 The attorney moved for summary judgment on the grounds that he owed no duty to the insurance company with respect to settlement.7 The court rejected the attorney's argument that the receipt of the pobcy limits demand created a conflict of interest between the insurance company and the insured that nullified the attorney's duty to the insurance company in favor of the attorney's duty to the insured.8 The court also rejected the attorney's argument that he could not be held fiable for failing to act with respect to the settlement demand because the duty regarding settlement falls squarely on the insurance company, which owes a nondelegable duty to its insured to settle the underlying claim within its pobcy limits.9 Because the attorney faded to present any authority or evidence supporting a finding that an attorney retained by an insurance company on behalf of an insured has a duty of care to the insurance company to act with respect to all legal issues except settlement, the court denied the attorney's motion for summary judgment.10 In Querrey & Harrow, Ltd. v. Transcontinental Insurance Co., the Supreme Court of Indiana held that an excess insurer may bring an action for legal malpractice against the insured's attorneys under a theory of equitable subrogation.11 The excess insurer, which had paid more than $3.7 million as part of the settlement of a personal injury claim, sued the attorneys who represented its insured on a theory of equitable subrogation, contending that the attorneys were negbgent by not timely raising a particular defense to the underlying claim.12 The trial court denied the attorneys' motions for summary judgment, but the court of appeals reversed.13 Professing to follow the majority of states that have decided the issue, the Supreme Court of Indiana affirmed the decision of the court of appeals allowing the excess insurer to pursue its claim of legal malpractice against its insured's attorneys under a theory of equitable subrogation.14 The court observed that in order for the insurer to assert a right of subrogation, the insured must have a cause of action against the purported tortfeasor, and it must be equitable to allow the insurer to enforce a right of subrogation.15 The court found both elements were met.16 The court concluded that the proper allocation of the loss caused by attorney malpractice favored allowing the claim to proceed.17 Odierwise, attorneys who committed malpractice would enjoy a windfall merely because the insured contracted for excess insurance coverage.18 Moreover, immunity from suit by the insurer would place the loss for the attorney's malpractice on the insurer.19 The court noted, however, that any claim brought by an insurance company against its insured's attorney would have to be prosecuted without access to any confidential client information.20 Similarly, in Kumar v. American Transit Insurance Co., a New York court denied a motion to dismiss a legal malpractice claim brought by an insurer against its insured's attorney under a theory of equitable subrogation.21 In that case, assignees of the insured aUeged that the insurer acted in bad faith by refusing to settle dieir claims against its insured for the policy limits, thereby rendering the insurer potentially liable for damages in excess of the policy limits.22 The insurer brought a third-party action against its insured's attorney, alleging that the attorney's failure to appear and defend the insured caused the damages sought by the plaintiffs.23 The court rejected the attorney's argument that the principle of equitable subrogation did not apply because the insurer had not yet paid the loss of its insured.24 A different result was reached in another New York case where the court held that an excess insurer could not maintain a suit for legal malpractice against its insured's attorney.25 In Federal Insurance Co. v. North American Specialty Insurance, an employee of the insured's subcontractor was injured while performing construction work.26 The insured had a commercial general hability policy with a $1 million limit, the owner of the premises had a pobcy purchased from the same insurer on the primary pobcy with a $1 million limit, and the excess insurer had a policy with excess coverage up to $10 million over its underlying coverage.27 The underlying action was eventually settled for $3 million, with $1 million paid under the insured's primary policy and $2 million paid by the excess insurer.28 The excess insurer then brought a legal malpractice claim against the insured's attorney individually and as subrogee of the insured.\n210 As the claim accrued within the period of limitation, the court reversed a directed verdict for the accountants.211 J. Exculpatory Clauses Two recent decisions enforced exculpatory clauses in accountants' engagement letters.