SC Supreme Court Rules Insurer May Assert Malpractice Claim Against Attorney Hired to Defend Insured
In Sentry Select Ins. Co. v. Maybank Law Firm, LLC, and Roy P. Maybank, 2018 WL 2423694 (2018) (Op. No. 27806), decided May 30, 2018, the South Carolina Supreme Court held that an insurer may maintain a direct legal malpractice action against counsel hired to represent its insured where the insurance company has a duty to defend.
Here’s the background: Sentry filed a legal malpractice lawsuit in federal court against the lawyer it hired to defend its insured in an automobile accident case. Sentry alleged the lawyer’s failure to respond to Requests for Admission on time caused Sentry to settle the case for more than it was worth. The federal court certified the question of an insurer’s ability to maintain a malpractice case against an attorney hired to defend its insured to the South Carolina Supreme Court.
In answering that question in the affirmative, the Court first noted that an attorney owes only his client a fiduciary duty. The Court expressly stated that its opinion should not be read as “permitting even the slightest intrusion into the sanctity of the attorney-client relationship.” The Court noted, however, that the insurer is in a “unique position in relation to the . . . attorney-client relationship as it has a duty to defend the insured and, in most cases, pay any resulting judgment or settlement. It was for this reason that the Court held “an insurer may bring a direct malpractice action against counsel hired to represent its insured.”
Here are some take-aways from the Court’s opinion:
1. The Court placed several limitations on such a claim:
a. “the insurer may recover only for the attorney’s breach of his duty to his client, when the insurer proves the breach is the proximate cause of damages to the insurer;”
b. “[i]f the interests of the client are the slightest bit inconsistent with the insurer’s interests, there can be no liability of the attorney to the insurer [because] the attorney’s duty to the client [cannot] be affected by the interests of the insurance company; and
c. “the insurer must prove its case by clear and convincing evidence.
2. Unlike several other state courts that have recognized this claim on the basis of a dual attorney-client relationship, the Court reiterated that the attorney owes no separate duty to the insurer. Thus, recovery in favor of the insurer is based upon the attorney’s breach to his client, the insured, and the resulting monetary harm to the insurer.
3. The Court did not identify a specific theory of recovery (e.g., third party beneficiary theory or equitable subrogation), instead relying simply on the “unique nature” of the insurer’s position.
4. The Court left it to the trial courts to ensure that these claims do not result in double recovery and to address any concerns related to divided interests between the insured and the insurer.
The Sentry case represents a substantial shift in legal malpractice law in South Carolina and given the many questions the opinion leaves unanswered, we anticipate the years ahead will bring additional litigation concerning the breadth of a legal malpractice claim by an insurer against an attorney it hires to defend an insured. We’ll keep you posted.