South Carolina joins 24 other states in monumental ruling
A divided South Carolina Supreme Court recently ruled that an insurance company may directly pursue a legal malpractice claim against counsel retained to defend its policyholder. The decision in Sentry Select Insurance Co. v. Maybank Law Firm LLC et al., No. 27806 (S.C. May 30, 2018), changes roughly 200 years of South Carolina common law which had previously barred a non-client from suing a lawyer.
In September 2010, a vehicle driven by Wanda Rivers rear-ended a stationary tractor-trailer rig operated by Herman Shaw, a driver for Wall Street Systems Inc. and its Madison Intermodal LLC subsidiary. Rivers suffered serious injuries in the collision, and she proceeded to sue Shaw, Wall Street, and Madison, claiming that the tractor-trailer rig had been improperly stopped in the roadway. Sentry Select Insurance Co. hired Charleston, South Carolina-based Maybank Law Firm LLC to defend Shaw and the two companies.
According to court documents, Maybank failed to timely respond to River’s request for admissions, which asked the defendants to admit a series of statements acknowledging responsibility for the crash and River’s injuries. The court overseeing the case consequently deemed River’s requests admitted, thereby establishing that Shaw and the two companies were liable for the accident and the resulting damages. Maybank made a belated request for an extension of time to reply to the request for admissions, but the court declined pending the completion of mediation.
Sentry agreed to pay $900,000 to settle River’s claims, which was significantly more than the $75,000 to $125,000 settlement range that Maybank had once estimated. Shaw, Wall Street, and Madison assigned their legal malpractice claims against Maybank to Sentry. In December 2015, Sentry proceeded to sue Maybank in South Carolina federal court, wielding both the assigned claims and its own direct claims. Maybank filed a motion to dismiss based on the arguments that South Carolina law neither permits Sentry to bring a direct malpractice claim nor authorizes a client of an attorney to assign a malpractice claim to a third party responsible for paying its legal fees. Lacking controlling precedent on either issue, U.S. District Judge J. Michelle Childs sought the South Carolina Supreme Court’s guidance in June 2016.
Supreme Court Decision
In a 3-2 majority opinion, the South Carolina Supreme Court held that an insurer in Sentry’s position may bring a direct malpractice action against the counsel it hired to represent its insured. The Court pointed out that 24 other states already permit such an action. Additionally, the majority stated that its holding is consistent with the reasoning of the Court’s 2014 decision in Fabian v. Lindsay, 410 S.C. 475, 765 S.E.2d 132 (2014), which held that an attorney may be liable for a breach of his or her professional duty that results in damages to a third party. Based on its holding on the direct claim issue, the Court declined to further decide whether malpractice claims can be assigned to a third party.
The Sentry opinion, however, contains an important limitation: an insurance company may recover damages for an attorney’s breach of his or her duty to an insured client only if the insurance company can prove that its damages were proximately caused by the breach. Further, the Court emphasized that its decision should not be interpreted to allow an improper division of an attorney’s loyalty between the insurance company and its insured. Instead, the majority’s opinion stated that courts can assess on a case-by-case basis whether the interests of the insurer diverge from those of the insured in order to prevent the attorney’s duty to the client from being affected by the interests of the insurance company. Here, the Court stated that the facts in Sentry’s case did not support a finding of Maybank’s loyalties being divided.
This decision allows South Carolina insurance companies whose policies include a defense duty to maintain a direct malpractice action against counsel retained on an insured’s behalf. As the 25th state to allow such an action, the country is now equally divided on the issue.
Do you practice in a state where this ruling has already passed? Refer to the 24 states we have listed for your convenience. If you have further questions regarding this decision or need reliable defense counsel for fraudulent claims, contact the experienced insurance fraud attorneys at Parker, LLP Attorneys at Law today.