Does an excess liability insurer have standing to bring a malpractice claim against counsel appointed by its insured’s primary carrier to defend against a lawsuit? In Mississippi, the answer is a qualified, “Yes.” According to a recent decision by that state’s intermediate appellate court, a client relationship may be implied if there were direct dealings between the excess insurer and defense counsel. The en banc decision is Great American E&S Insurance Company v. Quintairos, Prieto, Wood & Boyer, P.A., No. 2009-CA-01063-COA, ___ So.3d ___, 2012 WL 266858 (Miss. App. Jan. 31, 2012). A copy of the decision is available here.
Shady Lawn Nursing Home and the Vicksburg Convalescent Home (collectively, “Shady Lawn”) are located in Vicksburg, Mississippi. Royal Indemnity Company insured Shady Home under a primary CGL policy, with limits of $1 million per occurrence. Great American insured Shady Lawn under an umbrella policy for the same policy period, with limits of $8 million per occurrence, excess of the $1 million primary coverage provided by Royal.
In August 2002, the estate of a former resident at Shady Lawn brought suit, alleging that Shady Lawn’s negligent and inadequate care caused her to sustain various injuries, which ultimately resulted in her death. Royal promptly appointed counsel to defend Shady Lawn. Great American, having been notified of the suit but not having any present obligation to defend its insured, asked to be kept informed about the status of the case until it was resolved.
In due course, defense counsel provided Great American with status reports on the underlying litigation. Those reports opined that the settlement value was no more than $400,000, based on an initial review of Shady Lawn’s medical records. Counsel noted, too, that experts needed to be designated, but that none had been retained.
The underlying case progressed. The trial court’s scheduling order called for Shady Lawn to designate its experts by the middle of December 2003. For reasons that the court’s opinion did not provide, however, Royal reassigned the defense of Shady Lawn to a Florida-based firm in November 2003. Shady Lawn wrote to Royal to express its concern about Royal’s choice of new counsel, noting particularly that none of the Florida firm’s partners or trial attorneys were licensed to practice law in Mississippi. It subsequently came to light that new counsel never associated with local counsel in Mississippi.
The deadline for designation of expert witnesses came and went without any submission by Shady Lawn’s Florida-based lawyers. In January 2004, defense counsel provided an updated status report, which continued to value the case at somewhere between $250,000 and $500,000. Finally, in February, defense counsel attempted to designate a physician as an expert witness. The underlying plaintiff moved to strike the designation on grounds that it was untimely. The trial court granted the motion in March 2004. As a result, Shady Lawn was prohibited from offering its own expert testimony at the trial of the underlying case.
The day after the trial court granted the motion to strike, defense counsel sent Shady Lawn’s insurers an updated status report, increasing the settlement value of the case to the range of $3,000,000 to $4,000,000. Royal immediately tendered its limits. After a chaotic transition to new counsel, Great American settled the underlying suit for a significant sum, which was not disclosed in the record.
Burned by Royal’s conduct of Shady Lawn’s defense, and struck by the fact that Florida-based defense counsel would not have been able to represent Shady Lawn at trial, Great American sued both Royal and defense counsel in November 2006. Great American’s claims against defense counsel were for equitable subrogation, legal malpractice, negligence, gross negligence, negligent misrepresentation, and negligent supervision. Defense counsel moved to dismiss, arguing that Great American lacked standing to pursue its claims. The trial court agreed, and Great American appealed.
Noting that the case presented a question of first impression in Mississippi, the Court of Appeals reversed in a 7-2 en banc decision. It held that Great American had alleged causes of action against defense counsel that withstood scrutiny at the motion-to-dismiss stage. The court had little difficulty concluding that Great American had pled a claim for negligent misrepresentation, based on the status reports that defense counsel sent both before and after the trial court’s decision striking Shady Lawn’s proffered expert designations.
The legal malpractice claim presented a much closer question. Noting repeatedly that it was being called upon to decide whether a motion to dismiss had properly been granted, the court framed the inquiry as whether Great American had alleged “any set of facts” which could establish the existence of an attorney-client relationship with new counsel. At least for purposes of the motion, the court opined that defense counsel’s provision of confidential information to Great American through the status reports – particularly defense counsel’s evaluation of the underlying case’s settlement value – was sufficient to establish an attorney-client relationship.
The court then noted that, under Mississippi law, privity of contract was not required to establish a legal malpractice claim. Because legal malpractice is essentially a form of negligence, the court held, the absence of any privity of contract between defense counsel and Great American was not in itself fatal to Great American’s claim. The standard, the court said, was whether an insurance-defense attorney could be liable to others who, for proper business purposes, would reasonably and foreseeably reply on that attorney’s work to their detriment, and suffer loss proximately caused by the attorney’s negligence. Under that standard, the appeals court held that Great American had stated a claim. Public policy, according to the court, did not compel a contrary result.
In light of the foregoing, the court went on to hold that Great American’s remaining negligence claims had been sufficiently pled, and that Great American also had an equitable subrogation claim against new counsel. On the latter point, the court noted that neither Shady Lawn nor Royal had any incentive to pursue a malpractice claim, and that only the “malpracticing attorney” stood to benefit if the court barred the claim.
The Mississippi Court of Appeals handed a victory to Great American, and in so doing provided excess carriers with helpful precedent when they seek to recover unexpectedly large sums that they are called upon to pay. The court’s decision displayed little sympathy for arguments about the formal relationships between and among insureds, defense counsel, primary insurers, and excess insurers, and instead recognized how insurers at multiple levels address the defense of their common insureds in practice. The Great American decision may, therefore, presage a greater willingness by courts to examine the realities of defense arrangements in cases that could easily exceed an insured’s primary layer of liability coverage, as well as a willingness to adopt a more searching approach when deciding whether an insurer has an attorney-client relationship with defense counsel.
Excess carriers must not, however, attempt to read too much into the Great American holding. The court repeatedly noted that it was only deciding whether Great American had asserted a claim that could withstand a motion to dismiss. In that procedural posture, the Court was thus limited to the facts pled in Great American’s complaint, and those facts had to be accepted as true. The court’s decision did not hold that there actually was an attorney-client relationship between Great American and defense counsel, only that one had been properly pled as a matter of law.
The court’s decision, too, seemed to turn on the provision of confidential information about the underlying case directly from defense counsel to Great American. The court’s decision, therefore, did not address the more typical case, in which claims professionals acting for the excess carrier receive information about the underlying case solely from their counterparts acting on behalf of the primary carrier. In that scenario, an excess insurer may find that it could assert an equitable subrogation claim, for example, on the theory that the excess carrier is simply standing in the shoes of its insured, who at least potentially could have been exposed to a judgment in excess of its primary insurance limits. The same insurer, however, might be barred from asserting a legal malpractice claim directly against defense counsel.