(Article from Insurance Law Alert, February 2024)
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Holding
A New York appellate court ruled that a retrocessionaire is entitled to pursue a legal malpractice action against insured’s counsel pursuant to the equitable subrogation doctrine. Century Prop. & Cas. Ins. Corp. v. McManus & Richter, 2024 N.Y. App. Div. LEXIS 880 (App. Div. 1st Dep’t Feb. 15, 2024).
Background
The dispute arose out of a personal injury matter, in which the defendant attorneys were retained to represent Tower B, the owner of a work site, and its insurers. The injured party was an employee of Rite-Way, a subcontractor hired by Tower B. Counsel for Tower B filed a third-party complaint against Rite-Way, alleging breach of contract for failure to procure the contractually required insurance, and for common law and contractual indemnification and contribution, among other claims. During the pendency of that case, counsel discontinued the third-party action against Rite-Way without authorization from Tower B or its insurers. The court ultimately rendered a finding of liability against Tower B. Before the damages portion of the trial commenced, Tower B settled the suit for $4.6 million.
Tower B was insured under a primary policy, which was reinsured by ACE INA. Century and ACE INA then entered into a retrocessional agreement, pursuant to which Century accepted 100% pro rata quota share reinsurance (retrocession) of ACE INA’s interest and liabilities with respect to certain insurance policies, including the Tower B policy. As a result of this arrangement, Century was contractually obligated to fund a portion of the settlement on behalf of Tower B.
Century paid $2.8 million of the settlement and then filed a legal malpractice suit as equitable and contractual subrogee of Tower B. Century argued that counsel was negligent in voluntarily discontinuing the third-party action. Counsel moved to dismiss the suit, arguing that Century lacked standing to assert claims on behalf of Tower B and could not assert direct claims because it lacked privity with counsel. A trial court granted the motion for lack of standing. The appellate court affirmed in part and reversed in part.
Decision
The appellate court held that the trial court properly concluded that Century lacked standing to assert a direct malpractice claim based on the absence of privity or “near privity” (a doctrine that recognizes a type of limited privity based on specific statements or conduct for a particular purpose). However, the appellate court explained that even without privity, a party may have standing to sue under contractual or equitable subrogation.
The court concluded that the malpractice claim could proceed based on equitable subrogation, noting that New York law recognizes “the fairness of the proposition that an insurer who has been compelled by his contract to pay to or on behalf of the insured claims for damages ought to be reimbursed by the party whose fault has caused such damages. . . .”
The court distinguished a New York appellate decision holding that a third-party administrator for a primary insurer lacked standing to assert a legal malpractice claim as equitable subrogee. In that case, the third-party administrator did not have any contractual obligation to indemnify the underlying claims, whereas here, Century alleged that it was contractually obligated to pay (and did pay) a portion of the settlement on behalf of Tower B.
Comments
In addressing this matter of first impression, the court noted that New York appellate courts have allowed an excess insurer, as equitable subrogee of the insured, to file suit against an insured’s attorney for malpractice.
Further, the court expressly rejected the reasoning of another New York appellate decision, Reliance Ins. Co. v. Aerodyne Engrs., 204 A.D.2d 944 (App. Div. 3d Dep’t 1994). In Reliance, the court held that because a reinsurer had no contractual obligation directly to the insured, it had no subrogation rights. The Century court explained that in Reliance, the Third Department relied on statements derived from a New York trial court decision that did not involve subrogation rights, and that in any event the holding in Reliance “goes against long established New York law that ‘[t]he right of subrogation is founded upon principles of equity and not in contract’ and ‘does not depend upon privity.’”