Arch involves a case where a company, Spear Safer CPAs (“Spear”) performed audits of financial statements for Mutual Benefits Corporation (“MBC”). MBC became the subject of an action by the Securities and Exchange Commission for alleged violations of certain federal regulations. The SEC and MBC settled the underlying matter; however, MBC filed a lawsuit against Spear for alleged accounting malpractice. Through its policy with Spear, Arch had a duty to defend Spear in the action. Pursuant to the Policy, Arch assigned the claim to Kubicki Draper who entered its notice of appearance and settled the matter just before trial.
Arch filed suit against Kubicki Draper alleging that that Kubicki failed to raise certain defenses which significantly increased the cost of settlement. Arch’s complaint included allegations of legal malpractice, breach of fiduciary duty, subrogation, assignment, third-party beneficiary and breach of contract claims. Kubicki filed a Motion for Summary Judgment based on their belief that Arch lacked standing, as there was no privity of contract or attorney-client relationship. Arch argued that privity existed and that it was an intended third-party beneficiary. Additionally, and most importantly, Arch argued that the subrogation provision of the policy provided it with the requisite standing to bring suit. The trial court entered summary judgment in favor of Kubicki, reasoning that because there was no privity of contract with Arch, it did not owe Arch a duty of care. The Fourth District Court of Appeal agreed with the trial court and affirmed the decision. However, in response to Arch’s public policy concerns that “law firms would be shielded from liability resulting from their malpractice” the Fourth District certified the above-cited question of great public importance.
In reviewing the case, the Florida Supreme Court articulated that it agreed with the decision of the trial court and the Fourth DCA in finding that Kubicki was in privity of contract with the insured and not with Arch. However, the Florida Supreme Court also found that “an insurer has standing to maintain a legal malpractice action against counsel hired to represent its insured where the insurer is contractually subrogated to the insured’s rights under the insurance policy.” Here, the policy issued by Arch includes the following subrogation provision:
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 and you shall execute and deliver instruments and papers and do whatever else is necessary to secure such rights. You shall do nothing after any loss to prejudice such rights.
The Florida Supreme Court goes on to provide a thorough analysis of subrogation rights and clarifies that the type of subrogation right at issue in the instant matter is one of contractual subrogation defined as “subrogation based on an agreement between the parties that the party paying the debt will be subrogated to the rights and remedies of the original creditor” (see E. Nat’l Bank v. Glendale Fed. Sav. & Loan Ass’n, 508 So. 2d 1323, 1325 (Fla. 3d DCA 1987).
The Florida Supreme Court recognized that the language of the subrogation provision in the Arch policy is clear, and that Arch is contractually subrogated to the rights of Spear, “which would include claims for legal malpractice against counsel retained to defend the insured.” Additionally, the Florida Supreme Court relied upon the holdings in Don Reid Ford, Inc. v. Feldman, 421 So. 2d 184, 185-86 (Fla. 5th DCA 1982) and Dantzler Lumber & Exp. Co. v. Columbia Cas. Co., 156 So. 116, 120-21 (Fla. 1934) as a premise for its decision and articulated further to say “where an insurer has a duty to defend and counsel breaches the duty owed to the client insured, contractual subrogation permits the insurer, who – on behalf of the insured – pays the damage, to step into the shoes of its insured and pursue the same claim the insured could have pursued.”
Further, in reviewing the decision of the Fourth District Court of Appeal, the Florida Supreme Court found that even though the Fourth DCA’s decision focused on privity of contract and did not address subrogation, the insured was in privity of contract with Kubicki, and Arch was allowed to step into the shoes of the insured pursuant to the principles of subrogation. See Underwriters at Lloyds v. City of Lauderdale Lakes, 382 So. 2d 702, 704 (Fla. 1980). As such, the Florida Supreme Court held that Arch had standing to pursue a legal malpractice claim against Kubicki.
Kubicki also argued that the Florida Supreme Court’s public policy considerations caused it to generally prohibit assignment of legal malpractice claims. Upon review of this argument, the Court articulated that the public policy concern did not exist in these circumstances and that “courts are mainly concerned about creating a market for legal malpractice claims.” See Cowan Liebowitz & Latman, P.C. v. Kaplan, 902 So. 2d 755, 760-61 (Fla. 2005) (the assignment of such claims could relegate the legal malpractice action to the marketplace and convert it to a commodity to be exploited and transferred to economic bidders who have never had a professional relationship with the attorney, and to whom the attorney has never owed a legal duty). However, the Florida Supreme Court noted that a lawyer is on notice of subrogation claims included in a policy, and Florida public policy does not support shielding law firms from accountability for professional malpractice, and that subrogation exists to hold premium rates down by allowing insurers to recover indemnification payments from tortfeasors.
Arch serves as good reminder that just because a defense attorney is not in privity of contract with an insurer, their actions have a direct impact upon the rights and finances of the insurer. As such, the insurer has subrogation rights, so long as a subrogation provision exists in the operative policy, and thereby has standing to bring a malpractice action against the retained attorney.
In closing, it is worth noting that the Florida Supreme Court did not consider any of the third-party beneficiary arguments raised by Arch, as it found that Arch had a direct subrogation claim through the operative insurance policy with Spear, and stated that a third-party beneficiary asserts rights through a contract between other parties.