Why it matters: The Washington Supreme Court ruled that even when an insurer foots the bill, the lawyer’s duty is to the insured absent other circumstances. Simply paying for legal fees, having some alignment of interests, and being entitled to a contractual duty to stay informed do not entitle the insurer to the same duty owed to the policyholder, the actual client. For purposes of potential malpractice, the defense attorneys represent the policyholder and not the insurance company, even if it pays the bills. As the court noted, its ruling represents a split with some other jurisdictions. Courts in Arizona, California, and Michigan have allowed malpractice suits by insurers where the interests of the insureds and insurers “coincide,” “generally merge,” or do not otherwise conflict.
The mere fact that an attorney was paid by an insurer does not create a duty of care that would allow the insurer to sue for malpractice, the Washington Supreme Court has ruled.
Sterling Savings Bank provided a loan to a borrower for the purpose of developing property. The bank included one important condition to the loan, requiring a first priority security interest on the property. But Sterling’s title insurance company, Stewart Title, failed to inspect the property before the loan was completed. Stewart Title therefore did not discover that Mountain West, the builder on the property, had already gained a mechanic’s lien as of the date of construction.
When the borrower was unable to make payments, Sterling and Mountain West faced off over priority interests. Stewart Title agreed to defend Sterling in the foreclosure action and hired the law firm of Witherspoon, Kelley, Davenport & Toole PS to represent the lender.
But Stewart Title and Witherspoon butted heads with regard to legal strategy. Seeking a quick settlement, Witherspoon stipulated that Mountain West had first priority. Stewart Title sought a more aggressive stance, arguing that equitable subrogation was a viable defense. Stewart Title fired Witherspoon to pursue its strategy, but the trial court held that the stipulation bound the parties and would not allow the alternative argument. The case was resolved in favor of Mountain West.
Stewart Title then filed a malpractice suit against Witherspoon. The law firm sought to dismiss the suit, arguing that it owed no duty to the insurer because Sterling was its client – not Stewart Title – despite the fact Stewart Title paid the bills. The Washington Supreme Court agreed.
“Witherspoon’s only client was Sterling. Stewart Title was a nonclient third party payor,” the court wrote. A lawyer or law firm may be liable to a third-party insurer based on a multifactor test employed by the state’s courts, but Stewart Title failed to meet the necessary requirements.
The alignment of interests between Sterling and Stewart Title was insufficient, the court found. Stewart Title argued that absent an actual conflict of interest between the insurer and the insured, the third-party insurer should be presumed to be an intended beneficiary and therefore able to bring a malpractice claim against the attorney. But the court said no such presumption existed, because it would create a duty of care to any third party.
“The fact that an insurer’s and insured’s interests happen to align in some respects – though perhaps not in all respects, as shown by contrasting Witherspoon’s strategy of seeking a speedy, yet just, settlement with Stewart Title’s different strategy – does not by itself show that the attorney or client intended the insurer to benefit from the attorney’s representation of the insured,” the court wrote.
Stewart Title also pointed to the retention letter, contending that the firm had a contractual duty to keep it informed about the progress of the litigation. Again, the court found this requirement insufficient. “Witherspoon’s duty to inform Stewart Title is insufficient to establish a further duty of care permitting Stewart Title to bring a malpractice claim based on an alleged breach of a different duty to a different entity – that is, Witherspoon’s duty of care to its client, Sterling.” The “limited duty to inform the nonclient third party payor does not give rise to a broad duty of care that would support a malpractice claim by the third party payor,” the court wrote. “It does not create that separate duty of care for the same reasons that the client’s and nonclient payor’s alignment of interests does not create such a separate duty: first, because acceptance of a duty to inform a nonclient third party payor does not show that the attorney’s representation was intended to benefit the third party payor...and second, because an attorney cannot contract away his or her professional duty to ‘not permit a person who pays the lawyer to render legal services for another to direct or regulate the lawyer’s professional judgment in rendering such legal services.”
Even putting both the alignment of interests and the contractual duty to inform “together does not cure the insufficiency.”
To read the decision in Stewart Title Guaranty Co. v. Sterling Savings Bank, click here.