Client Update Florida Supreme Court Ruling
Florida Supreme Court Holds That Insurer Has Standing Through Its Contractual Subrogation Provision to Bring Malpractice Suit Against Legal Counsel Retained to Represent the Insured Under Its Duty to Defend.
June 7, 2021
By John Bond Atkinson, Esq.; Tiffany A. Bustamante, Esq.; and Marcos Martinez, J.D. Candidate
The Florida Supreme Court ruled on Thursday that an insurer has standing through its contractual subrogation clause to bring suit for malpractice against legal counsel hired to represent the insured where the insurer has an obligation to defend. In other words, an insurer does not have to rely on an insured to bring a malpractice action against counsel but may instead sue the law firm directly.
This was an appeal from Florida’s Fourth District Court of Appeals. The question presented is of great public importance, and we are happy to unpack the Florida Supreme Court’s decision.
This case stems from an accounting malpractice suit. Spear Safer CPAs and Advisors (“Spear Safer”) is an accounting firm that performed audits of the financial statements of Mutual Benefits Corporation (“MBC”). MBC was in the viatical and life settlement business and became subject to an action by the Securities and Exchange Commission (“SEC”) for violating various federal securities regulations. MBC settled with the SEC, and subsequently sued Spear Safer for alleged accounting malpractice.
This lawsuit against Spear Safer by MBC gave rise to its claim on its professional liability policy with Arch Insurance Company (“Arch”). Pursuant to the insurance policy, Arch had a duty to defend Spear Safer:
We [Arch] have the right and duty to defend any Claim made against you [Spear Safer]. Subject to our review and consent, you have the right to appoint legal counsel to defend any covered Claim and such consent will not be unreasonably withheld or delayed by us. No legal counsel shall be appointed without our prior approval. Subject to prior written notice to you, we reserve the right to remove and replace selected counsel if it is deemed by us that such action is warranted.
The insurance policy also included the following subrogation provision:
To the extent of any payment under this Policy, we [Arch] shall be subrogated to all your [Spear Safer] rights of recovery therefor against any person, organization, or entity and you shall execute and deliver instruments and papers and do whatever else is necessary to secure such rights. You shall do nothing after any loss to prejudice such rights.
Accordingly, Arch retained Kubicki Draper, LLP (“Kubicki”) to defend Spear Safer in this accounting malpractice suit. Kubicki sent an engagement letter informing Spear Safer that Kubicki had been retained by Arch to represent and defend Spear Safer. The case settled within the insured’s policy limits for $3.5 million.
Arch then initiated a legal malpractice suit against Kubicki for failing to raise a statute of limitations defense that would have barred the underlying suit. Arch asserts that Kubicki’s failure substantially increased the cost of the settlement.
Kubicki filed a motion for summary judgment arguing that Arch lacked standing to sue Kubicki because there was no privity of contract or attorney-client relationship between
Arch and Kubicki. Arch countered that there was privity, and alternatively that it was a third-party beneficiary that held contractual subrogation rights. The trial court granted Kubicki’s motion for summary judgment, concluding that Arch lacked standing because there was no privity between the parties, and therefore no duty of care owed to Arch.
The Fourth District upheld the trial court’s decision, explaining that there was “nothing on the record to indicate that the law firm was in privity with the insurer” and “nothing in the record to indicate that the insurer was an intended third-party beneficiary of the relationship between the law firm and the insured.”
In response to Arch’s public policy concerns that law firms would be shielded from liability resulting for their malpractice, the Fourth District explained, “We understand the insurer’s public policy argument. However, we are bound to follow the law as it exists, not as the insurer argues it ought to be.”
The Supreme Court agrees with the Fourth District that “Kubicki was in privity with the insured as the client rather than Arch.” The Court, however, holds that standing does exist through the subrogation provision in the insurance policy issued to Spear Safer. The Court notes that subrogation essentially places the insurer “in the shoes” of the insured, and that Arch’s subrogation provision clearly states that Arch is contractually subrogated to the rights of Spear Safer, including claims for legal malpractice against counsel retained to represent the insured.
The Court also addressed the privity issue head-on: “…consistent with established principles of subrogation, because the insured is in privity with the law firm, contractual subrogation allows the insurer to step into the shoes of the insured.”
Lastly, the Court addressed Kubicki’s public policy argument regarding the assignment of legal malpractice claims, thereby creating a market for legal malpractice claims to the highest bidders. The Court notes that this consideration does not apply in cases where a subrogation provision is expressly provided in the insurance contract, because the attorney is put on notice of this subrogation by the written provision and that “the insurer is not a ‘stranger’ to the attorney who is ‘bidding’ on a cause of action and ‘exploiting’ it,” but instead is trying to recover money it paid to its insured from the attorney it hired.
This Supreme Court decision is a significant victory for insurers seeking to recover in circumstances where retained counsel committed malpractice resulting in an increased settlement or judgment. We have included the subrogation provision issued by Arch to provide a clear example of what the Court is looking for to establish such rights.
We would advise all carriers to review their insurance policies to ascertain whether a similar subrogation provision exists and/or to alternatively preserve its right to assert a malpractice claim through settlement agreement.
Should you have any questions with respect to the contents of this letter, or the Florida Supreme Court’s decision, we welcome your call.
Very truly yours,
JOHN BOND ATKINSON
TIFFANY A. BUSTAMANTE
John Bond Atkinson Tiffany A. Bustamante John B. Atkinson
561-212-4089 305-431-7497 561-289-2331