Supreme Court of Washington Holds Carrier Cannot Sue Defense Counsel

In its recent decision in Stewart Title Guar. Co. v. Sterling Sav. Bank, 2013 Wash. LEXIS 769 (Wash. Oct. 3, 2013), the Supreme Court of Washington had occasion to consider whether an insurer can pursue a malpractice action against counsel in connection with its defense of an insured.

Stewart Title Guaranty Company, a title insurer, retained the law firm of Witherspoon, Kelley, Davenport & Toole PS to represent its insured, Sterling Savings Bank, in connection with an underlying lien priority action.  The matter was decided against Sterling Savings. Stewart Title later filed a malpractice action against the Witherspoon firm for its failure to have asserted the affirmative defense of equitable subrogation.  Weatherspoon argued, on motion for summary judgment, that Sterling Savings – rather than Stewart Title – was its client, and that as such, it owed no duty to Stewart Title that would permit such a malpractice claim.  Witherspoon argued in the alternative that even if Stewart Title could bring such a claim, it did not commit malpractice since the equitable subrogation theory would have been unsuccessful.  The trial court held that Witherspoon did, in fact, owe a professional duty to Stewart Title, but it nevertheless held in Witherspoon’s favor on the issue of whether it breached the duty by failing to assert the equitable subrogation defense.

On appeal, the Supreme Court of Washington affirmed the grant of summary judgment in Witherspoon’s favor, but on a different rationale than applied by the trial court.  Specifically, the court reasoned that Witherspoon owed no professional duty to Stewart Title in the first instance.  While the court acknowledged the issue of whether an insurer can sue defense counsel for malpractice was one of first impression, it found guidance on the issue from its prior decision in Trask v. Butler, 872 P.2d 1080 (1994).  In Trask, the court set forth several factors to be considered in whether an attorney may be liable for malpractice to a nonclient, the most significant factor being “[t]he extent to which the transaction was intended to benefit the plaintiff [that is, the third party suing the attorney].” 

The trial court had concluded that Stewart Title was the intended beneficiary of Witherspoon’s legal services on two grounds: (1) an alignment of interests between Stewart Title and Sterling Savings in having the underlying claim dismissed and (2) a contractual duty existed in favor of Stewart Title as a result of Witherspoon’s obligation to provide reporting on the underlying litigation.  The Supreme Court of Washington, however, rejected the notion that either factor was determinative of this issue.  While the court agreed that both Stewart Title and its insured had a shared interest in the outcome of the underlying litigation, this was not sufficient to demonstrate that Stewart Title was the clear intended beneficiary of Witherspoon’s representation.   The court further rejected the notion that Witherspoon’s reporting obligations evidenced Stewart Title’s role as the intended beneficiary, explaining that:

An attorney hired to represent a client by a third party payor may generally, as part of the terms of the retention, have a duty to keep the payor informed (within the bounds of the attorney-client privilege and the duty of confidentiality). But such a limited duty to inform the nonclient third party payor does not give rise to a broad duty of care that would support a malpractice claim by the third party payor. It does not create that separate duty of care for the same reasons that the client's and nonclient payor's alignment of interests does not create such a separate duty: first, because acceptance of a duty to inform a nonclient third party payor does not show that the attorney's representation was intended to benefit the third party payor, as Trask requires; and second, because an attorney cannot contract away his or her professional duty to "not permit a person who . . . pays the lawyer to render legal services for another to direct or regulate the lawyer's professional judgment in rendering such legal services." RPC 5.4(c).

Thus, while the court acknowledged that other jurisdictions, such as California and Michigan, permit insurers to bring malpractice claims against defense counsel, the Supreme Court of Washington concluded that such a claim is not cognizable under Washington law.