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Sentry Select Insurance Co. v. Maybank Law Firm, LLC

Supreme Court of South Carolina

May 30, 2018

Sentry Select Insurance Company, Plaintiff,
v.
Maybank Law Firm, LLC, and Roy P. Maybank, Defendants. Appellate Case No. 2016-001351

          Heard February 9, 2017

         CERTIFIED QUESTIONS

         J. Michelle Childs, United States District Court Judge

         FIRST QUESTION ANSWERED

          Daryl G. Hawkins, Law Office of Daryl G. Hawkins, LLC, of Columbia, for Plaintiff.

          David W. Overstreet, Michael B. McCall, and Steven R. Kropski; all of Earhart Overstreet, LLC; of Charleston; for Defendants.

          FEW JUSTICE

         Sentry Select Insurance Company brought a legal malpractice lawsuit in federal district court against the lawyer it hired to defend its insured in an automobile accident case. The district court requested that we answer the following questions:

(1) Whether an insurer may maintain a direct malpractice action against counsel hired to represent its insured where the insurance company has a duty to defend?
(2) Whether a legal malpractice claim may be assigned to a third-party who is responsible for payment of legal fees and any judgment incurred as a result of the litigation in which the alleged malpractice arose?

         The answer to question one is "yes, " under the limitations we will describe below. We decline to answer question two.

         I. Background

         Sentry Select hired Roy P. Maybank of the Maybank Law Firm to defend a trucking company Sentry Select insured in a personal injury lawsuit in state court. Maybank failed to timely answer requests to admit served by the plaintiff pursuant to Rule 36(a) of the South Carolina Rules of Civil Procedure. Seven months later, Maybank filed a motion seeking additional time to answer the requests, which the circuit court held under advisement until the parties completed mediation. Sentry Select claims that because of Maybank's failure to timely answer the requests, and the likelihood the circuit court would deem them admitted, [1] it settled the case for $900, 000, when Maybank had previously represented to Sentry Select it could settle in a range of $75, 000 to $125, 000.

         Sentry Select then filed this lawsuit in federal district court against Roy Maybank and Maybank Law Firm alleging a variety of theories, including negligence. The district court certified these two questions to us pursuant to Rule 244 of the South Carolina Appellate Court Rules.

         II. Analysis-Question One

         When an insurer hires an attorney to represent its insured, an attorney-client relationship arises between the attorney and the insured-his client. Pursuant to that relationship, the attorney owes the client-not the insurer-a fiduciary duty. See Spence v. Wingate, 395 S.C. 148, 158-59, 716 S.E.2d 920, 926 (2011) (stating "an attorney-client relationship is, by its very nature, a fiduciary relationship"). Nothing we say in this opinion should be construed as permitting even the slightest intrusion into the sanctity of the attorney-client relationship, nor to diminish to any degree the fiduciary responsibilities the attorney owes his client.

         However, an insurance company that hires an attorney to represent its insured is in a unique position in relation to the resulting attorney-client relationship. Pursuant to the insurance contract, the insurer has a duty to defend its insured, and must compensate the attorney for his time in defense of his client. If the insured settles or has judgment imposed against him, the insurance contract ordinarily requires the insurer to pay the settlement or judgment. Many insurance contracts provide the insurer has a right to investigate and settle claims as a representative of its insured. Finally, the insurer's right to settle must be exercised in good faith, and that duty of good faith requires the insurer to act reasonably in protecting the insured from liability in excess of the policy limits. Tiger River Pine Co. v. Maryland Cas. Co., 163 S.C. 229, 234-35, 161 S.E. 491, 493-94 (1931).

         Because of the insurance company's unique position, we hold the answer to question one is yes, an insurer may bring a direct malpractice action against counsel hired to represent its insured. However, we will not place an attorney in a conflict between his client's interests and the interests of the insurer. Thus, the insurer may recover only for the attorney's breach of his duty to his client, when the insurer proves the breach is the proximate cause of damages to the insurer. If the interests of the client are the slightest bit inconsistent with the insurer's interests, there can be no liability of the attorney to the insurer, for we will not permit the attorney's duty to the client to be affected by the interests of the insurance company. Whether there is any inconsistency between the client's and the insurer's interests in the circumstances of an individual case is a question of law to be answered by the trial court.

         Our decision is consistent with established policy. In Fabian v Lindsay, 410 S.C. 475, 491, 765 S.E.2d 132, 141 (2014), analyzing the individual circumstances of that case, we held an attorney can be liable for breach of duty resulting in damages to a third party We relied in part on our conclusion that not recognizing such liability "would improperly immunize this particular subset of attorneys from liability for their professional negligence" 410 S.C. at 490, 765 S.E.2d at 140; see also 410 S.C. at 493, 765 S.E.2d at 142 (Pleicones, J, concur ring in part and dissenting in part) (relying on "public policy considerations" to support his concurrence in the imposition of liability).

         The deterrent purpose of tort law is also served by our decision.

One reason for making a defendant liable in tort for injuries resulting from a breach of his duty is to prevent such injuries from occurring. Underlying this justification is the assumption that potential wrongdoers will avoid wrongful behavior if the benefits of that behavior are outweighed by the costs imposed by the payment of damages . . . .

F. Patrick Hubbard and Robert L. Felix, The South Carolina Law of Torts 7 (4th ed. 2011); see also Rule 1.8 cmt. 14, RPC, Rule 407, SCACR, (stating the reason an attorney cannot prospectively limit his liability to a client is because doing so is "likely to undermine competent and diligent representation").

         Our decision is also consistent with the rule adopted by the majority of states that have considered the issue. See generally Ronald E. Mallen, 4 Legal Malpractice § 30.39 (2018 ed.) (listing twenty-four states in which such an action is allowed under appropriate circumstances, and two states in which it is not allowed); William H. Black Jr. & Sean O. Mahoney, Legal Bases for Claims by Liability Insurers Against Defense Counsel for Malpractice, 35 The Brief 33, 33 (Winter 2006) ("Although the issue is relatively new to American jurisprudence, the majority of states permit a liability insurer to sue defense counsel for negligent representation in an underlying action."); General Sec. Ins. Co. v. Jordan, Coyne & Savits, LLP, 357 F.Supp.2d 951, 955-56 (E.D. Va. 2005) (stating "courts of other jurisdictions generally recognize such a cause of action"); see also 7A C.J.S. Attorney & Client § 386 (2015) ("When, pursuant to insurance policy obligations, an insurer hires and compensates counsel to defend an insured, provided that the interests of the insurer and insured are not in conflict, the retained attorney owes a duty of care to the insurer[2] which will support its independent right to bring a legal malpractice action against the attorney for negligent acts committed in the representation of the insured.").

         Maybank argues our decision will destroy the sanctity and integrity of the attorney-client relationship by: (1) dividing the loyalty of the attorney between the client and the insurer; (2) threatening the attorney-client privilege; (3) allowing the insurer to direct the litigation even though the insured is the client; and (4) opening the door to other non-clients to sue attorneys for legal malpractice. We have the additional concern of ensuring there can be no double-recovery against an attorney.

         In response to these concerns, we emphasize that the loyalties of the attorney may not be divided. See Fabian, 410 S.C. at 490, 765 S.E.2d at 140 ("It is the breach of the attorney's duty to the client that is the actionable conduct in these cases."). The duties an attorney owes his client are well-established according to law, and this opinion does nothing to change that. See generally Rule 407, SCACR (South Carolina Rules of Professional Conduct). The attorney owes no ...


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