A US perspective: An excess layer insurer’s right to sue negligent defence counsel retained by a primary layer insurer

Despite growth in the excess insurance sector, the rights of excess layer insurers are yet to be fully canvassed by Australian courts.

One particular issue receiving judicial attention in the United States of America is the ability of an excess layer insurer to sue negligent defence counsel retained by the primary layer insurer. The subject has been hotly contested, however the Full Court of the Court of Appeals of the State of Mississippi has recently provided some clarity to the issue in its decision, Great American E & S Insurance Company v Quintairos, Prieto, Wood & Boyer PA 2012 (No 2009-CA-01063-COA).

The Shady decision

Shady Lawn Nursing Home (Shady) held a primary policy of insurance with Royal Indemnity Company (primary layer insurer), and an excess policy with Great American E & S Insurance Company (excess layer insurer).

A series of complaints caused Shady to make a claim on the primary policy. In response, the primary layer insurer retained law firm, Quintairos, Prieto, Wood & Boyer PA (Quintairos) to act as defence counsel.

The complaints against Shady resulted in a settlement that exceeded the limit of the primary policy, forcing the excess layer insurer to contribute to the settlement sum.

In response to the settlement, the excess layer insurer commenced proceedings against Quintairos, alleging the law firm’s handling of the matter resulted in an unnecessarily large settlement against Shady, which enlivened the excess policy. The excess layer insurer alleged legal malpractice, negligence, gross negligence, negligent misrepresentation and negligent supervision.

The matter was appealed to the Full Court of the Court of Appeals of the State of Mississippi. In its judgment handed down earlier this year, the court considered whether an excess layer insurer could pursue a legal malpractice claim against a lawyer retained by the primary layer insurer, either directly, or through the doctrine of equitable subrogation.

The doctrine of equitable subrogation places an excess layer insurer in the insured’s position and enables it to maintain any action that the insured may have against the defence counsel for legal malpractice.

Justice Griffis, who wrote the leading judgment, held that the excess layer insurer could pursue the claim against Quintairos both directly and pursuant to the doctrine of equitable subrogation.

His Honour held that the excess layer insurer was able to pursue the claim against Quintairos directly because the excess policy was an extension of the insured. Neither a direct attorney-client relationship, nor privity of contract, needed to be established in order to pursue the claim. This was because the excess layer insurer’s and Shady’s interests in the litigation were coordinate, as both parties sought to ensure Shady’s competent representation.

Justice Griffis also noted that Shady had no incentive to pursue a claim against Quintairos, even if it believed the law firm was negligent, because it had insurance in place to pay the settlement sum. Similarly, the primary layer insurer had no incentive to pursue the claim if it believed the appropriate settlement sum was at or near the policy limit, regardless of alleged malpractice.

The court also stated that the orderly defence of an insured often, if not always, required defence counsel to be singularly focused on an insured’s interests. Allowing or expecting excess layer insurers to enter an appearance in defence of an insured, and have their own interests in mind, would not lead to the orderly and efficient resolution of cases with the required focus on the insured’s interest.

Application in Australia

The Shady decision provides recent recognition of the ability of excess layer insurers to hold defence lawyers retained by the primary insurer accountable for their actions, and seek redress for excessive settlements over which they have no control.

While this area of law is yet to fully develop in Australia, the American jurisprudence reminds us of the need for coherent and constant judicial guidance in this complicated and contradictory area.

For excess layer insurers in Australia, the Shady decision provides some insight as to the potential scope for development in this area. It also highlights the types of rights and obligations owed by primary and excess layer insurers, which should be kept in mind whenever handling claims involving multi-layer coverage.

If you would like further information on these issues, please contact our team on +61 7 3231 2444.