Ethics in Brief

Ethics in Brief is designed to present ethical issues that practitioners might well face on a daily basis. It is a service of the Legal Ethics Committee of the San Diego County Bar Association for SDCBA members.

Recent Decision Provides for Assignment of Legal Malpractice Claims Exposing Attorneys to Liability Under Limited Circumstances

The court in White Mountains Reinsurance Co. of America v. Borton Petrini LLP (2013) 221 Cal. App. 4th 890, confirmed “[t]here is a general rule in California barring the assignment of a cause of action for legal malpractice.”  (Id. at p. 891.)  But, the court reversed a trial court’s grant of summary judgment recognizing the validity of an assignment under the following narrow circumstances:

  • “(1) the assignment of the legal malpractice claim is only a small, incidental part of a larger commercial transfer between insurance companies;
  • “(2) the larger transfer is of assets, rights, obligations, and liabilities and does not treat the legal malpractice claim as a distinct commodity;”
  • “(3) the transfer is not to a former adversary;”
  • “(4) the legal malpractice claim arose under circumstances where the original client insurance company retained the attorney to represent and defend an insured;”
  • “and (5) the communications between the attorney and the original client insurance company were conducted via a third party claims administrator.”

(Id.)   Modern Service Insurance Company (Modern Service) issued a car insurance policy to Flora Cuison covering the period from January 2003 to January 2004, with a $100,000 limit on bodily injury liability per person. In July 2003, Cuison caused an automobile accident that seriously injured Karen Johnson.

In June 2005, Johnson filed suit against Cuison. Cuison was purportedly served with the complaint in the action, along with an undated 30-day offer to compromise for the $100,000 policy limits around June 29.

On or about July 11, Country Insurance & Fidelity Services (Country), the claims administrator acting on behalf of Modern Service, faxed a letter to Law Firm asking the firm to accept the defense of Cuison. Law Firm took the case, representing Modern Service and Cuison, and allowed the offer to compromise to expire without a response.   Relevant to the analysis is the fact that upon retention by an insurance company of an insured, the attorney owes a “tripartite” relationship to both the insurance company and insured.   (Gulf Ins. Co. v. Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone (2000) 79 Cal.App.4th 114, 127 [“Counsel retained by an insurer to defend its insured has an attorney-client relationship with the insurer.”]; State Farm Mutual Automobile Ins. Co. v. Federal Ins. Co. (1999) 72 Cal.App.4th 1422, 1429 [“Between the attorney and the insurer who retained the attorney and paid for the defense, there exists a separate attorney-client relationship endowed with confidentiality.”])

“Modern Service entered into an assumption reinsurance and administration agreement with Mutual Service under which Mutual Service assumed the California liabilities of Modern Service. Specifically, under that agreement Modern Service ceded to Mutual Service all of its ‘gross direct obligations and liabilities and rights under and relating to’   ‘all insurance business written by [Modern Service] since its incorporation in respect of risks located in California.’”  That was because “Modern Service was ceasing to conduct business in California.”    The Cuison policy was one of the policies Mutual Service assumed in the deal.  (Id. at p. 893.)

After the Modern Service/Mutual Service deal closed, and Mutual Service changed its name to Stockbridge Insurance Company (Stockbridge).  In 2007, the Law Firm continued to report on the progress of the case and continued to submit invoices to Modern Service in care of Country, but the payments the Law Firm received in January and February were from Mutual Service. Between June and September, the payments were from Stockbridge.  (Id. at pp. 893-894.)  After removing the Law Firm from the case, “White Mountains paid $1.86 million to settle the case.”  (Id.)

The appellate court reviewed both California and non-California authorities regarding the general prohibition on the assignment of legal malpractice claims finding “the out-of-state cases set forth above to be persuasive authority. Although the general rule in California bars the assignment of a cause of action for legal malpractice, a narrow exception is appropriate on the particular facts here” because “White Mountains did not simply buy a malpractice claim, like buying a fraud claim without buying the money or property obtained by the fraud.”  (Id. at p. 909.)

Potentially significant to all insurance defense practitioners, the court found important that “the legal malpractice claim arose after Modern Service retained [Law Firm] to represent and defend Cuison, and the fact that the communications between [Law Firm] and Modern Service were conducted via a third party claims administrator. These circumstances are not like those in the other cases that involved a more personal attorney-client relationship.”  (Id. at p. 910.)

The proliferation of the use of third-party claims administrators has become common practice.   This distinction appears to contradict both the recognized tripartite relationship in relation to a third-party claims administrator being a “necessary” party to attorney client privilege thereby precluding any waiver.  (See, e.g., San Francisco v. Superior Court of San Francisco (1951) 37 Cal. 2d 227, 236 [“client's privilege” extends “to preclude examination of the attorney's secretary, stenographer, or clerk regarding information of communications between attorney and client acquired in such capacities, to rule out the possibility of their coming within the general rule that the privilege does not preclude the examination of a third person who overhears or otherwise has knowledge of communications between a client and his attorney.”])

The decision must be heeded by all attorneys and particularly attorney practicing in the insurance defense context given the frequent mergers and acquisitions of insurance companies and those companies’ use of third-party administrators in the defense of claims. 

– Andrew Servais

**No portion of this summary is intended to constitute legal advice. Be sure to perform independent research and analysis. Any views expressed are those of the author only and not of the SDCBA or its Legal Ethics Committee.**