A New York Appellate Court recently held that an excess insurer has no direct cause of action for malpractice against a law firm retained by the primary insurer to defend the insured as there was no privity or even "near privity" with the law firm. Federal Ins. Co. v. North American Specialty Ins. Co., 2007 N.Y. Slip. Op. 08391 (N.Y.A.D. 1 Dept. 2007).

The underlying action was a personal injury action filed against Galaxy General Contracting Corp. and several property owners arising out a construction accident that was settled for $3 million. Commercial Underwriters Insurance Company ("CUIC") issued a primary policy to Galaxy and a primary policy to the property owners, each with a policy limit of $1 million. Federal Insurance Company provided Galaxy with excess coverage up to $10 million. The property owners asserted a cross-claim for indemnification from Galaxy and assigned counsel for Galaxy did not move to dismiss the cross-claim pursuant to the New York antisubrogation rule. In order to avoid manipulation of litigation so as to allow an insurer to avoid liability under one policy and trigger coverage by another insurer, the New York antisubrogation rule bars indemnification claims between parties where they are both insured for the subject claim by the same insurance company. If counsel for Galaxy had asserted the antisubrogation rule, Galaxy would have defeated the owners' claims for indemnification and CUIC's exposure would have been $2 million, not $1 million, as was the case after the owners successfully moved for summary judgment on their indemnification cross-claim against Galaxy, thereby shifting the payment for the owner's share of the settlement to Galaxy. Despite Federal 's assertion that CUIC was required to exhaust the limits of both policies before Federal would become obligated to make any payment, CUIC only paid $1 million of the settlement. Federal paid the remaining $2 million based on summary judgment on the indemnification cross-claim against Galaxy.

Federal, on its own behalf and as subrogee of Galaxy, commenced an action against CUIC and the attorney CUIC assigned to defend Galaxy. In the suit, Federal alleged that CUIC violated the antisubrogation rule by asserting the property owners' right of indemnity against Galaxy, its own insured. Federal further alleged that CUIC acted in bad faith in defending Galaxy against the property owners' indemnity claims by failing to raise the antisubrogation rule in opposition to the owners' motion for summary judgment. Finally, Federal also argued that the insured's defense attorneys committed legal malpractice by failing to raise the antisubrogation rule. Federal claimed it should have been required to contribute only $1 million to the settlement because the owner's policy should have paid $1 million and sought to recoup half of the $2 million it paid as Galaxy's excess insurer.

The trial court held that (1) an excess insurer may sue the attorneys assigned by the primary insurer to represent the insured on the ground that the counsel owes a duty to the insured and to the excess insurer as the insured's subrogee; and (2) near privity existed between the defense attorney and Federal to support a claim for legal malpractice. The appellate court reversed and held that no privity exists between assigned counsel and an excess carrier. Assigned counsel, the court held, only has an attorney-client relationship with the insured, and neither the primary nor the excess carrier can maintain a legal malpractice claim against assigned counsel unless the primary or excess carrier is acting as the insured's equitable subrogee and the insured would have had a viable malpractice claim. While Federal did have a claim as Galaxy's equitable subrogee, the court found that Galaxy had suffered no loss, meaning Galaxy would not have had a viable malpractice claim. The court therefore dismissed Federal's claim.

The full text of the decision can be found here.