South Carolina Supreme Court: Insurer May Sue Defense Counsel in Malpractice

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Last week, the South Carolina Supreme Court handed down a monumental opinion; one which, in the words of appellant’s counsel, changes 200 years of common law.

In a 3-2 decision, the court, all the while indicating its desire not to do so, potentially changed the way practitioners and insurers alike have traditionally defined the attorney-client relationship. Sentry Select Insurance Company v. Maybank Law Firm, LLC 2018 WL 2423694.

Sentry retained the services of Maybank to defend Sentry’s insured, a trucking company, in a personal injury lawsuit filed in state court. Maybank apparently failed to timely respond to requests to admit served on behalf of Plaintiff in the underlying suit. Several months later, Maybank filed a motion seeking additional time in which to respond to those requests. The court took the motion under advisement, pending mediation. Although Maybank had previously estimated the settlement range of the case as $75,000-$125,000, Sentry settled the case for $900,000, pointing to the likelihood the court would deem the requests admitted, presumably thereby establishing liability on behalf of Sentry’s insured. Sentry then filed the present action in the United States District Court alleging a legal malpractice claim against Maybank. The District Court certified two questions to the SC Supreme Court:

                        1)  May an insurer maintain a direct malpractice action against counsel hired to represent its insured where the insurer has a duty to defend; and

                        2)  May a legal malpractice claim be assigned to a third party responsible for payment of legal fees and any judgment as a result of the litigation in which the alleged malpractice occurred.

Declining to answer the second question, the court responded positively to the first, resulting in confusion and unanswered questions, at least to this writer.

A critical analysis of this opinion must begin with the understanding that South Carolina has long equated privity with standing. Additionally, privity sufficient to maintain a legal malpractice action has traditionally been established by an attorney-client relationship. Against this backdrop, the court, in its examination of the first certified question, was swift to reiterate the established law that when an insurer hires an attorney to represent its insured, an attorney-client relationship is established between counsel and the insured. As a result, the attorney owes a fiduciary duty to the client – the insured – but not to the insurer. The court was equally swift in emphasizing Maybank should not be interpreted as allowing “even the slightest intrusion into the sanctity of the attorney-client relationship” nor should it be construed as diminishing the duty the attorney owes to his client. What, then, is the reasoning behind allowing an insurer, clearly not the client, to sue an attorney for malpractice? When dissecting this opinion in order to glean the basis of the attorney’s purported duty to the insurer, there is little upon which to rely except the court’s description of the insurer’s position as unique.

Ordinarily, an insurer has the duty to defend and indemnify its insured pursuant to a policy it has issued for the insured’s protection. It follows that insurers frequently hire counsel to represent the interests of their insureds. Inherent in insurance policies is the duty of the insurer to act reasonably and in good faith in protecting its insured from liability in excess of the policy limits. It is this unique position of the insurance carrier upon which the court relied in finding it may maintain a malpractice action against counsel.

Without distinguishing any fact specific exclusion from the requirement for privity, the court found that an insurer may seek recovery from the attorney it hired to represent its insured, but only for the attorney’s breach of duty to his client and only if the insurer proves the breach is the proximate cause of the insurer’s damages. The court found Maybank consistent with Fabian v. Lindsay^[i]. In Fabian, the court recognized an attorney who drafts a will or other documents does so in accordance with his client’s intent for distribution of assets upon the client’s death. Generally, whether the documents successfully accomplish the client’s wishes will not be determined until after the client’s death. If there is an error in the documents that defeats or changes the client’s intent, a challenge can be made only by those who are or were intended to be beneficiaries. Consequently, under such circumstances, the court recognized a cause of action in both tort and contract, limited to those who are named or otherwise identified in a will or other document, who seek the effectuation of the client’s wishes. Fabian demonstrates a narrow exception to the privity historically required in order to pursue a malpractice action. 

Here, however, while clarifying the cause of action recognized in Maybank is based solely on the attorney’s duty to the client, not to the insurer to whom no separate duty is owed, the court failed to articulate its basis for excusing the privity requirement. The court likewise failed to identify a theory of recovery by the insurer, characterizing such failure as deliberate, and designed to preserve the attorney’s fiduciary allegiance to his client, free from any interference by the insurer. Thus, we are left wondering if the insurer may seek remedy pursuant to tort, contract or perhaps some equitable theory.

In response to Maybank’s seemingly well-placed concerns, the court offered repeated assurances that it will not allow this opinion to serve as the basis for any interference with the attorney’s duty to his client by the insurer, nor will it allow it to support any division of an attorney’s loyalties between his client and an insurer. Neither will this opinion support infringement upon any privilege between an attorney the insurer hires and his client, the insured. Further, the court proclaimed this opinion does not change the time-challenged principle that there can be no interference with the attorney’s independent professional judgment or with the attorney-client relationship by an insurer, even though the insurer is responsible for compensating the attorney for the representation of his client. 

In establishing what the court believes to be sufficient limitations upon the breadth of this opinion, it holds that an insurer must prove its case by clear and convincing evidence and further expressly limits the scope of the opinion so that it does not exceed what it expressly states. This begs the question – exactly what does the opinion state?

Without question, an attorney has the duty to timely respond to requests to admit. While the court spoke of the apparent breach of that duty in Maybank, it did not articulate the harm, if any, suffered by the client as a result. In fact, the case was settled, consistent with the insurer’s conditional duty to resolve litigation without exposing the insured to liability. The court reasoned, however, that an insurer may incur financial loss from the failure to timely respond to requests to admit directed to its insured, and allowing the insurer to sue the attorney responsible for such loss upon settlement of the underlying case does not affect the attorney’s duty to his client. Respectfully, such reasoning appears insensitive to well established legal principles requiring some duty, whether in tort, contract or equity, as the basis of any recovery. Further, it cannot be ignored that the insurer made the conscious decision to settle the case, and that settlement was apparently within the limits of the policy it issued – a reasoned business decision undertaken by Sentry, concomitant to its contractual obligations.

This writer takes no shame in admitting to experiencing more questions than answers resulting from this opinion, as has been done in the past. And, while the court strenuously emphasizes that it intends no harm to the attorney-client relationship and just as zealously speaks of its refusal to allow an insurer to interfere therewith, this opinion seems to blur lines and raise questions as to the application of established law. I look forward to other and likely more scholarly, debate of this opinion.