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FL Supreme Court: Insurer can sue the law firm it hired to represent its insured for malpractice

by | Sep 18, 2021 | Attorney-Client Relationship, Legal Malpractice |

We have written about the requirement of an attorney-client relationship for a legal malpractice claim to succeed. In addition, we previously described a narrowly defined group of third-party beneficiaries of attorney-client relationships with standing to sue a lawyer for negligence or breach of fiduciary duty.

In June 2021, the Florida Supreme Court in the case Arch Insurance Company v. Kubicki Draper, LLP, held that a legal relationship created through contractual subrogation gave an insurer standing to sue the law firm it had hired to represent an accounting firm client that had purchased a professional liability policy.

Unraveling a web of legal relationships

This Supreme Court holding adds another class of potential plaintiffs to the small club of third parties with standing to sue in legal malpractice when the attorney-client relationship was with another party. We will explore the complicated circumstances that led the court to this conclusion.

The accounting firm Spear Safer CPAs and Advisors purchased a professional liability insurance policy from Arch Insurance Company. The Securities and Exchange Commission (SEC) accused one of Spear Safer’s clients, Mutual Benefits Corporation (MBC), of violating securities regulations. After the SEC and MBC settled, MBC (via a receiver) sued Spear Safer, alleging it had committed accounting malpractice when auditing MBC and that this professional negligence had resulted in the SEC charges to MBC’s detriment.

Because Spear Safer’s policy with Arch required the insurer to defend Spear Safer in professional liability lawsuits, Arch hired the law firm Kubicki Draper, LLP, for that purpose. While Kubicki represented it, Spear Safer settled the accounting malpractice suit with MBC for $3.5 million, which Arch paid on behalf of Spear Safer according to the terms of the policy.

Arch then sued Kubicki for legal malpractice, alleging the law firm had failed to raise the statute of limitation defense in MBC’s lawsuit against Arch’s insured customer Spear Safer. Arch claimed that MBC’s receiver had missed the lawsuit filing deadline and filed it late. If Kubicki had raised the statute of limitations defense, the suit should have been barred, argued Arch. The case would not have had to settle, Spear Safer would not have owed the $3.5 million and Arch would not have had to pay the amount on Spear Safer’s behalf, asserted the insurer.

Subrogation rights

Kubicki argued in response that Arch had no standing to sue for malpractice because Arch had no attorney-client relationship or privity of contract (a concept also discussed in the linked-to blog above) with Kubicki.

Arch argued – and the Supreme Court agreed – that their insurance contract with Spear Safer granted subrogation rights to Arch. The court quoted the policy, “To the extent of any payment under this Policy, we [Arch] shall be subrogated to all your [Spear Safer] rights of recovery therefor against any person, organization, or entity …”

Subrogation is a concept whereby one party stands in the shoes of another as far as having the same legal rights. Here, the terms of the insurance contract gave the insurer Arch the right through subrogation to bring the legal malpractice lawsuit that Spear Safer had the right to file because the agreement to subrogate allowed Arch to exercise Spear Safer’s right to sue, explained the Florida Supreme Court.

This case is an important development in Florida’s legal malpractice jurisprudence, expanding the small pool of third parties who can sue an attorney for legal negligence even though that third party was not the actual client of that lawyer. We will monitor future decisions with interest as Florida courts continue to develop the law to see if judges will expand the holding of this case to other types of subrogation relationships.