Atlanta Intern. Ins. Co. v. Bell
| Decision Date | 18 September 1991 |
| Docket Number | Docket No. 87914 |
| Citation | 475 N.W.2d 294,438 Mich. 512 |
| Parties | , 60 USLW 2225 ATLANTA INTERNATIONAL INSURANCE COMPANY, a New York Corporation, Plaintiff-Appellant, v. John W. BELL, David C. Hertler, Bell & Hertler, P.C., and Bell, Hertler & Winiemko, P.C., jointly and severally, Defendants-Appellees. |
| Court | Michigan Supreme Court |
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 III outlines the doctrine of equitable subrogation and explains why equitable subrogation particularly applies for policy reasons under these facts.
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: 181 Mich.App. 272, 274, 448 N.W.2d 804 (1989). The Court of Appeals also affirmed the denial of Atlanta's motion to amend its complaint.
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 N.W.2d 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 interest interfere with the client's interest, 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 differsfrom the relationship between a defense counsel and a party-opponent. The relationship differs because "[l]iability 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.
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 ...
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