February 4, 2025
Law firms as a subrogation target. Get ready because it’s a thing now so you may as well bone up on how it works. In pursuing subrogation cases against law firms for legal malpractice, understanding the framework and recent precedents is essential. As most of us in subroland know, subrogation allows insurers to “stand in the shoes” of their insured, enabling them to pursue claims against third parties responsible for the losses they covered. In legal malpractice contexts, subrogation means that an insurer could pursue a claim against a law firm if the firm negligently represents the insured, thereby increasing the insurer’s liability or settlement costs. Typically, subrogation operates under two types: equitable subrogation, based on fairness, and contractual subrogation, based on specific policy clauses. Equitable subrogation, often referred to as “legal subrogation,” applies broadly, while contractual subrogation, or “conventional subrogation,” applies when the insurance policy includes explicit subrogation rights. In legal malpractice cases, the court’s acceptance of these rights is often determined by the presence of a contractual provision granting them, as was affirmed in Arch Insurance Company v. Kubicki Draper LLP, 318 So. 3d 1249 (Fla. 2021).
The Arch case, decided by the Supreme Court of Florida in 2021, set a precedent for subrogation rights in legal malpractice cases. Here, the court ruled that an insurer could bring a malpractice claim against a law firm it hired to represent its insured, provided contractual subrogation was included in the policy. In this case, Arch had the standard “Transfer of Rights of Recovery Against Others To Us” in its policy which stated as follows:
To the extent of any payment under this Policy, we [Arch] shall be subrogated to all your [Spear Safer] rights of recovery therefor against any person, organization, or entity and you shall execute and deliver instruments and paper and do whatever else is necessary to secure such rights. You shall do nothing after any loss to prejudice such rights.
Using this language cited above, Arch sought damages from the defense firm it had retained to represent its insured for failing to raise a statute of limitations defense that ultimately raised the insured’s settlement costs.
This case illustrates a significant shift, showing that insurers can pursue legal malpractice claims under certain conditions. Notably, the court concluded that the presence of a contractual subrogation provision gave Arch standing to sue, even though no direct privity existed between Arch and the law firm. Furthermore, the court highlighted public policy considerations that favor accountability in professional services, which helps protect insurance premiums by allowing insurers to recoup expenses caused by negligent legal representation.
While the Arch case opens avenues for insurers to file malpractice claims against law firms, several challenges remain. One prominent issue is the general requirement for privity between the law firm and the party bringing the malpractice claim. Traditionally, courts have been reluctant to allow such claims in the absence of privity, as seen in various cases where strict privity was required. Additionally, there are public policy concerns that allowing subrogation in legal malpractice cases might commodify these claims, transforming malpractice claims into tradeable assets. This concern centers on the risk of creating a marketplace for malpractice claims, potentially undermining the professional standards of legal practice. The attorney-insurer relationship, especially in the context of insurance defense, adds another layer of complexity. Often, there is a tripartite relationship among the insurer, the insured, and the attorney, complicating the dynamics of subrogation as attorneys may owe a duty to both the insured and the insurer.
Given the precedent set by Arch, insurers may be encouraged to incorporate clear subrogation clauses in their policies to make the path for legal malpractice subrogation clearer. By explicitly defining legal malpractice subrogation rights in the policy instead of relying upon the standard subrogation language, insurers can position themselves to seek recovery for financial losses caused by the negligence of law firms hired to defend their insureds. Now whether an insurance carrier will actually pursue their defense firm for legal malpractice through subrogation is a different question altogether.
At the end of the day, the ruling in Arch is a pivotal development, offering insurers a legal basis to hold law firms accountable for malpractice through subrogation. This case may influence future litigation trends by encouraging insurers to pursue recovery for increased costs due to negligent representation. As insurers and law firms navigate these shifts, the Arch case serves as a guiding framework, underscoring the importance of clearly defined contractual relationships and strategic litigation approaches.