Atlanta International Insurance v. Bell

475 N.W.2d 294, 438 Mich. 512

• Court: Michigan Supreme Court
• Decided: September 18, 1991
• Docket: Docket 87914; Calendar 6
• Status: Published

Opinions

Brickley, J.

This case presents an issue of first impression: whether defense counsel retained by an insurance company to defend its insured can be held answerable to the insurer for professional malpractice. The Court of Appeals held that defense counsel may not be sued by the insurer for malpractice.

We agree with the analysis of the dissent articulated in section (i)(b) that principles of common-law negligence do not generally require imposition of third-party liability in the malpractice context. We also agree with the dissent that something less than a plenary attorney-client relationship exists between a defense counsel and an insurer. However, we would reverse the decision of the Court of Appeals and would hold that in this case the doctrine of equitable subrogation permits a malpractice action against defense counsel under the facts presented.¹

This opinion contains three sections. Section i recites the facts and the procedural history of the case. Section ii demonstrates the inadequacy of denying liability purely because the relationship between the insurer and retained counsel for the insured comprises a mere contractual relationship rather than an attorney-client relationship. Section hi outlines the doctrine of equitable subrogation and explains why equitable subrogation particularly applies for policy reasons under these facts.

i

On August 31, 1977, Herbert H. Harvey went to work as a tilesetter at a construction site, now Lakeside Mall in Sterling Heights. At the construction site, Security Services, Inc., was employed to safeguard the premises. As Mr. Harvey entered the premises, he passed two departing Security Services’ employees, and, approximately 120 feet into the construction site, fell into a 20 X 20 foot hole. Mr. Harvey died from his injuries.

In September of 1980, the administrator of Mr. Harvey’s estate brought an action against numerous parties, including Security Services. The plaintiff, Atlanta International Insurance Company, insured Security Services. As part of Atlanta’s contractual obligation, Atlanta retained John W. Bell, David H. Hertler, and Bell & Hertler, P.C. (hereinafter defendants), to represent Security Services in the suit. Defendants answered the complaint, but failed to raise comparative negligence as a defense.² A judgment was subsequently entered against Security Services, which Atlanta, as Security Services’ primary insurer, was required to satisfy.

Atlanta then filed this suit, alleging that these defendants committed legal malpractice by failing to raise comparative negligence as a defense. After discovery, Atlanta filed a motion for partial summary disposition on the issue whether an attorney-client relationship existed between Atlanta and the defendants. Atlanta also filed a motion to amend its original complaint to add a breach of contract claim. The defendants countered with a motion for summary disposition, alleging that no attorney-client relationship existed between Atlanta and the defendants. The circuit court denied Atlanta’s motions and granted the defendants’ motion for summary disposition. Atlanta sought reversal in the Court of Appeals.

The Court of Appeals affirmed, stating: "No attorney-client relationship exists between an insurance company and the attorney representing the insurance company’s insured. . . . Rather, an attorney’s sole loyalty and duty is owed to the client alone, the client being the insured, not the insurance company.” 181 Mich App 272, 274; 448 NW2d 804 (1989). The Court of Appeals also affirmed the denial of Atlanta’s motion to amend its complaint.

n

The general rule of law implicated in this case dictates that "an attorney will be held liable for . . . negligence only to his client, and cannot, in the absence of special circumstances, be held liable to anyone else.”³ This Court flatly refused to extend malpractice liability against opposing counsel by a party-opponent in Friedman v Dozorc, 412 Mich 1, 24-25; 312 NW2d 585 (1981).

Friedman held:

[The] creation of a duty in favor of an adversary of the attorney’s client would create an unacceptable conflict of interest which would seriously hamper an attorney’s effectiveness as counsel for his client. Not only would the adversary’s interests interfere with the client’s interests, the attorney’s justifiable concern with being sued for negligence would detrimentally interfere with the attorney-client relationship.

Traditional legal doctrine thus mandates that only a person in the special privity of the attorney-client relationship may sue an attorney for malpractice. This rule exists to ensure the inviolability of the attorney’s duty of loyalty to the client. Allowing third-party liability generally would detract from the attorney’s duty to represent the client diligently and without reservation. The essential purpose of the general rule against malpractice liability from third parties is thus to prevent conflicts from derailing the attorney’s unswerving duty of loyalty of representation to the client.

However, the relationship between the insurer and the retained defense counsel, while less than a client-attorney relationship, unquestionably differs from the relationship between a defense counsel and a party-opponent. The relationship differs because "[liability insurance policies typically include provisions that both obligate the insurer to provide the insured with a defense and entitle the insurer to control the defense ...[;] the insurer has both a 'duty’ and a 'right’ in regard to the defense of the insured . . . .”⁴ It has been appropriately recognized that "[defense counsel] occupies a fiduciary relationship to the insured, as well as to the insurance company . . . [and] implicitly, if not explicitly, represents to the insured the ability to exercise professional competence and skill in conducting the insured’s defense.”⁵ Furthermore, because the insurance company, not the client, is required to satisfy a judgment arriving from a defense counsel’s malpractice, the client has no real incentive to sue defense counsel.

At the same time, courts and commentators recognize universally that the tripartite relationship between insured, insurer, and defense counsel contains rife possibility of conflict.⁶ The interest of the insured and the insurer frequently differ. Accordingly, courts have consistently held that the defense attorney’s primary duty of loyalty lies with the insured, and not the insurer.

The entire structure of the relationship between the insurance company, the insured, and the attorney rests on the twin pillars of duty of loyalty to the insured by defense counsel and conflict of interest prevention. The case at bar reveals the inadequacy of predicating the analysis of malpractice liability solely on the lack of an attorney-client relationship between the insurer and defense counsel. The instant case does not present a conflict between the interests of the insurer and the public policy of ensuring undiluted loyalty by counsel to the insured. The nature of the insurer-defense counsel relationship thus presents the special circumstances alluded to by the dissent that removes this case from the general rule against the imposition of third-party liability.⁷ For these reasons, the case is most efficiently and justly resolved by the principle of equitable subrogation.

The issue whether an attorney hired by an insurer to defend its insured may be liable for professional malpractice to the insurer cannot be adequately resolved without determining whether defense counsel should be held liable to the insurer and without vindicating public policy rationale that undergirds the attorney-client relationship in the insurance defense context.⁸

To hold that an attorney-client relationship exists between insurer and defense counsel could indeed work mischief, yet to hold that a mere commercial relationship exists would work obfuscation and injustice. The gap is best bridged by resort to the doctrine of equitable subrogation to allow recovery by the insurer. Equitable subrogation best vindicates the attorney-client relationship and the interests of the insured, properly imposing the social costs of malpractice where they belong. Allowing the insurer to stand in the shoes of the insured under the doctrine of equitable subrogation best serves the public policy underlying the attorney-client relationship.

in

Subrogation, simply defined, involves "the substitution of one person in the place of another with reference to a lawful claim or right.”⁹ Subrogation has been described by courts as flexible and elastic equitable doctrine, and hence "the mere fact that the doctrine of subrogation has not been previously invoked in a particular situation is not a prima facie bar to its applicability.”¹⁰ Two types of subrogation exist in the insurance context: "conventional [subrogation, the] product of an agreement by the parties [and legal subrogation,] the creation of the law (or more accurately of equity.)”¹¹

Equitable subrogation has been described as a "legal fiction” that permits one party to stand in the shoes of another.¹² The doctrine is eminently applicable under the facts of this case. A rule of law expanding the parameters of the attorney-client relationship in the defense counsel-insurer context might well detract from the attorney’s duty of loyalty to the client in a potentially conflict-ridden setting. Yet to completely absolve a negligent defense counsel from malpractice liability would not rationally advance the attorney-client relationship. Moreover, defense counsel’s immunity from suit by the insurer would place the loss for the attorney’s misconduct on the insurer. The only winner produced by an analysis precluding liability would be the malpracticing attorney. Equity cries out for application under such circumstances.¹³

The defense counsel-insurer relationship is unique. The insurer typically hires, pays, and consults with defense counsel. The possibility of conflict unquestionably runs against the insured, considering that defense counsel and the insurer frequently have a longstanding, if not collegial, relationship.

In a malpractice action against a defense counsel, however, the interests of the insurer and the insured generally merge. The client and the insurer both have an interest in not having the case dismissed because of attorney malpractice. Allowing recovery for the insurer on the basis , of the failure of defense counsel to adhere to basic norms of duty of care thus "would not "substantially impair an attorney’s ability to make decisions that require a choice between the best interests of the insurer and the best interests of the insured.” (Post, p 535.) The best interests of both insurer and insured converge in expectations of competent representation.¹⁴

Defense counsel is not being held accountable to the insurer for malpractice over perceived errors of trial strategy in which a different situation would be presented.¹⁵ However, this alleged conduct, if true, comprised serious professional malpractice. In such cases the attorney-client relationship, the interests of the client, the interest of the insurer, and ultimately the public, which otherwise would absorb the costs of the malpractice, all benefit from exposure to suit. The dissent erroneously asserts that no clear persuasive public policy reasons exist to support the right of subrogation for the insurer.¹⁶

For the foregoing reasons, we approve the remedy of equitable subrogation — a less sweeping, less rigid solution than creation of an attorney-client relationship between the insurer and defense counsel, but a more flexible, more equitable solution than absolution from liability for professional malpractice.¹⁷

Riley and Griffin, JJ., concurred with Brick-ley, J.

1 We pause here to stress that the application of equitable subrogation should and must proceed on the case-by-case analysis characteristic of equity jurisprudence. As we noted in Solo v Chrysler Corp (On Rehearing), 408 Mich 345, 353; 292 NW2d 438 (1980): "Whether a given case falls within equity jurisdiction is a question different from whether the case is one in which the relief peculiar to that jurisdiction should be granted.”

2 In defendant Bell’s deposition he stated:

Q. Based on your experience as an attorney since 1949, do you believe that you met the standard of care required of a practicing attorney in the Metropolitan Detroit area in failing to file a motion to plead comparative negligence prior to the motion in May of 1984?

A. I would have to admit that I did not conform to the standard of care that I should have.

3 7 Am Jur 2d, Attorneys at Law, § 232, p 274.

4 Keeton & Widiss, Insurance Law, p 822.

5 Id. at 835-836.

6 See, e.g., Mallen & Levit, Legal Malpractice, § 263, p 356, recognizing that "[tjhere is great temptation [for defense counsel] to favor [the insurance company] who pays the bills and will send further business, and where long-standing personal relations may exist . . . .” Keeton & Widiss, supra at 829-830: "An attorney employed by an insurer to represent an insured may be confronted with serious conflict of interests issues almost from the very outset of the relationship.”

7 Post, p 531, citing Savings Bank v Ward, 100 US 195, 200; 25 L Ed 621 (1879).

8 Friedman vindicated the public policy of maintaining "a vigorous adversary system [which] outweighs the asserted advantages of finding a duty of due care to an attorney’s legal opponent.” 412 Mich 25. Obviously, the unique tripartite insurance context presents an analytically different public policy.

9 73 Am Jur 2d, Subrogation, § 1, p 598.

10 Id., p 602. Thus, the reality that no case has applied the doctrine under dissimilar facts does not bar its application under these particular facts.

11 Kimball & Davis, The extension of insurance subrogation, 60 Mich L R 841 (1962).

12 Commercial Union Ins Co v Medical Protective Co, 426 Mich 109, 117; 393 NW2d 479 (1986). It has been noted that "[a] legal fiction may be benign in one context, and dangerous or brutal in another.” Harmon, Falling off the vine: Legal Actions and the doctrine of substituted judgment, 100 Yale L J 1, 61 (1990). In this case, the application of equitable subrogation is not only benign, but clearly beneficial compared to the mechanical application of the governing legal rule prohibiting liability absent a formal attorney-client relationship.

13 See, e.g., Keeton & Widiss, n 4 supra, pp 220-221:

Courts also tend to favor subrogation if it appears that a third party tortfeasor would be likely to escape financial responsibility if the insurer were not accorded a subrogation right. Thus, subrogation often is appropriately viewed as an important technique for serving the ends of justice by placing the economic responsibility for injuries on the party whose fault caused the loss ....

14 See Mallen & Levit, n 6 supra at 356-357: "The duty of the attorney is to defend the insured. A successful defense is the common goal of all and is consonant with the interests of [all] parties.”

15 Here courts must certainly recognize that "in some circumstances the conflicting interests [between insurance companies and defense counsel regarding tactical decisions] are so intense that no accommodation is possible between the views as to which of the possible tactics should be employed.” Keeton & Widiss, supra at 820-821. This case in no way presents such a circumstance.

16 The law of professional malpractice itself provides an inherent limitation on unwarranted lawsuits brought by an insurer to the extent that a showing of malpractice essentially requires a showing that but for the attorney’s error, the plaintiff would have prevailed in the action.

17 The application of equitable subrogation here thus represents the most principled use of the legal fiction: "[N]o fiction shall extend to work an injury; [its] proper operation being to prevent a mischief, or remedy an inconvenience, that might result from the general rule of law.” 3 Blackstone, Commentaries, ch 4, p 61.