Most jurisdictions, at least in theory, permit insureds to recover extra-contractual payments/judgments from their insurers under bad faith or negligence theories. Jurisdictions are less uniform on whether or under what theories an insurer can pursue other entities to recoup extra-contractual payments the insurer made on behalf of the insured.
On of these less uniform issues has been whether an insurer has the ability to pursue malpractice like theories against counsel it retained to defend an insured. A Washington trial court recently was presented with this issue and determined that with an assignment from the insured, the insurer would be permitted to pursue malpractice claims against retained counsel.
Great American E&S Insurance Company v. Gordon Rees Scully Mansukhani, LLP, et al., No. 23-2-16817-8 KNT (Superior Ct. Wash. Sept. 20, 2024)
Background
In August 2019, Michael Vandivere was attempting to climb a rock wall at a facility operated by Vertical World. Vandivere was utilizing an auto belay safety device that was manufactured by C3 Manufacturing, LLC. The auto belay allegedly failed causing Vandivere to fall 45 feet and sustain serious injuries.
At the time of Vandivere’s injuries, C3 was insured under a primary policy issued by Great American E&S Insurance Company with a $1 million policy limit. Additionally, C3 carried a $4 million excess policy issued by Houston Casualty Company.
The Vandivere family filed suit against C3 and others for Michael’s injuries. C3 tendered the lawsuit to Great American. Great American acknowledged its defense obligations and retained Scott Wood to defend C3. Mr. Wood entered an appearance for C3 and assumed responsibility for the defense.
Houston Casualty Denies Coverage
Roughly 18 months after the lawsuit was filed, Houston Casualty informed the president of C3 that Houston Casualty was rescinding the $4 million excess policy for misrepresentations made in the applications. This denial was reaffirmed 45 days later by attorneys at Gordon Rees Scully Mansukhani, LLP who had been hired to represent Houston Casualty on coverage issues.
C3’s retained counsel, Scott Wood, was informed of Houston Casualty’s decision to rescind the excess policy. However, he did not update discovery responses concerning insurance coverage in the Vandivere lawsuit or inform Great American of Houston Casualty’s decision. His apparent reason for failing to do either was that C3’s president had instructed him not to reveal the rescission.
Retained Counsel Joins Gordon Rees
A few months after Houston Casualty’s rescission of the excess policy, Mr. Wood left his previous law firm and joined Gordon Rees Scully & Mansukhani. Apparently still unaware that Houston Casualty had rescinded the excess policy and was represented by Gordon Rees Scully & Mansukhani, Great American elected to have Mr. Wood continue as retained counsel for C3 in the Vandivere lawsuit.
A few weeks later, Great American learned that Houston Casualty had rescinded the excess policy. Within days, Mr. Wood and Gordon Rees Scully & Mansukhani filed a Motion to Withdraw from representing C3 in the Vandivere lawsuit.
Sanctions in the Vandivere Lawsuit
In addition to failing to disclose Houston Casualty’s rescission of the excess policy, it was discovered that members of Mr. Wood’s prior law firm had made numerous visits to Vertical World after the Vandivere lawsuit was filed. On at least one of these visits, the attorney had tested the C3 auto belays at Vertical World. These visits were undertaken without notifying Vertical World (who was a defendant) or the Vandivere plaintiffs.
The Vandivere plaintiffs moved for sanctions based on these unapproved visits and the failure to disclose the rescission of the Houston Casualty excess policy. The trial court granted the motion for sanctions finding that compounding effects of the unapproved visits and misrepresentations on the status of the Houston Casualty excess policy had caused substantial prejudice. The trial court granted the request for adverse-inference instructions against C3 and ordered monetary sanctions of just over $500,000 to be paid by C3 and Mr. Woods prior firm.
Recognizing that the defense of C3 was compromised, Great American settled the claims against C3 for an amount in excess of the Great American Policy shortly after the sanctions order was entered. In exchange for Great American paying in excess of its policy limits, C3 assigned its extra-contractual claims against Houston Casualty and its legal malpractice claims against retained counsel to Great American up to the amount Great American had paid over its policy limits.
Legal Malpractice Claims-Great American v. Retained Counsel
Great American soon brought legal malpractice claims against Mr. Wood and his various law firms pursuant to the assignment given by C3. Mr. Wood and the various law firms disputed that legal malpractice claims could be assigned and moved to dismiss the claims as not cognizable.
The Court disagreed and held Great American could pursue the assigned legal malpractice claims. In doing so, the Court recognized that legal malpractice claims generally cannot be assigned to an adversary in previous litigation. However, Great American and C3 were not adversarial in the Vandivere litigation and there did not appear to be any conflict between Great American and C3. Instead, Great American and C3’s interests were aligned and this alignment of interests minimalized public policy concerns surrounding the assignment of legal malpractice claims.
It remains to be seen whether Great American will be successful in recouping its excess payments from counsel it retained to defend C3 or whether the trial court’s ruling on assignability will be upheld. However, Great American provides another example of courts permitting an insurer to recoup excess payments from retained counsel under a legal malpractice type of theory. Additionally, Great American highlights that future decisions on the assignability of malpractice claims against retained counsel may depend on and be determined by the facts of each case.
The trial court’s decision in Great American can be found here.
