Kumar v. American Transit Insurance Co., 49 A.D.3d 1353 (2008), bears on two interesting subjects: ability of insurers to sue defense counsel for botching the defense of their insureds and whether the insurer is a co-client of the defense counsel it hires for the insured.* As Doug Richmond has pointed out, the insurer that hires defense counsel is generally allowed to sue for alleged mishandling of the insured’s defense. Doug Richmond on Defense Lawyers' Malpractice Liability to Excess Insurers, 2007 Emerging Issues 130.  In most jurisdictions that follows from the fact that the insurer is deemed a co-client with the insured. Even where not regarded as a co-client, the insurer may be able to sue as the equitable subrogee of the insured, after paying the (allegedly inflated) judgment said to have been caused by defense counsel’s malpractice. But, as Doug’s commentary also points out, equitable subrogation is often disallowed on the ground that it is simply an assignment by operation of law, and legal malpractice claims are not assignable.

*Click here to access Kumar opinion.

In Kumar, a divided court allowed an insurer to sue as equitable subrogee. As in many New York cases, the opinion is very cryptic, and it is not entirely clear what happens. But the insurer is being sued on an assigned claim for bad faith, so there apparently was an excess judgment. The lawyers allegedly failed “to appeear and defend the insured.” Id. at 1355. So, I infer that the insurer turned down a pre-suit demand within limits and the lawyers then allowed the insured to suffer a default judgment, which exceeded policy limits.

The court agrees with the lawyers that the insurer “was not in privity with them,” but does not explain why this was so. While that would ordinarily bar any legal malpractice claim, the majority allows one based on equitable subrogation. Id.

A lone dissenter agrees there was no privity and says there was also no “relationship of near privity,” because the claim is not based on negligent misrepresentation. Id. at 1356 (dissenting op.). The dissent would not allow equitable subrogation, because the insurer was being sued for its own misconduct, not that of the lawyers. Indeed, the insurer could not be held vicariously liable for the lawyers mishandling of the case. Feliberty v. Damon, 72 N.Y.2d 112, 117-20 1988 N.Y. LEXIS 1657 (1988).

There is something to the dissent. If a proper defense would likely have defeated the claim or held it within limits, the insurer presumably would not have been liable at all. See Pavia v. State Farm Mutual Automobile Insurance Co., 82 N.Y.2d 445, 1993 N.Y. LEXIS 3925 (1993) (insurer liable for excess judgment only where is acted in “gross disregard” of insured’s interests). On the other hand, both insurer an insured would have been injured if the lawyers allowed a default judgment that was (as default judgments usually are) larger than would have resulted from a proper defense. On that basis, the equitable subrogation claim appears proper.

But why was the insurer relegated to an equitable subrogation claim. If there had been a conflict of interests entitling the insured to independent counsel, New York law usually allows the insured to select its own counsel. Prashker v. United States Guar. Co., 1 N.Y.2d 584, 593, 1956 N.Y. LEXIS 760 (N.Y. 1956). Because the insurer hired these lawyers, one presumes there was no conflict.

It is frequently said that New York does not recognize an insurer as a co-client. E.g., N.Y. State Bar Ass’n Comm. Prof. Ethics, Op. 716 (“[w]hen a lawyer defends a policyholder in civil litigation, the client is the policyholder, not the insurance company. This is true even though the insurance company has retained the lawyer pursuant to its contractual duty to defend the policyholder”). This is said to follow from Feliberty. That case held that an insurer is not vicariously liable for defense counsel’s misconduct because it did not have the ability to control the details of the defense lawyer’s performance, as a master would have with a servant. Feliberty, 72 N.Y.2d at 117-18. But that need not mean that the insurer is a co-client. California follows the same rule on vicarious liability, even though it clearly recognizes the insurer as a co-client. Merritt v. Reserve Ins. Co., 34 Cal. App. 3d 858, 1973 Cal. App. LEXIS 855 (1973) (no vicarious liability); Gulf Ins. Co. v. Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone, 79 Cal. App. 4th 114, 2000 Cal. App. LEXIS 196 (2000) (as co-client, insurer may sue counsel for negligence in the defense of its insured). And Merritt was the very case Feliberty relied on.

The only appellate decisions in New York to directly address the co-client question where the insurer had hired the lawyer and there was no conflict of interest are divided. Goldberg v. American Home Assurance Co., 80 A.D.2d 409, 1981 N.Y. App. Div. LEXIS 10106 (1981) (co-client); Woodson v. American Transit Insurance Co., 280 A.D.2d 328, 2001 N.Y. App. Div. LEXIS 1400 (2001) (not co-client).

It is puzzling that the misreading of Feliberty as foreclosing co-client status has been so widely accepted, without the issue ever being litigated. Insurer counsel in New York, especially those pursuing malpractice claims against former defense counsel might wish to rethink and challenge that misreading.

William T. Barker
Sonnenschein Nath & Rosenthal, LLP