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Appellate panel weighs whether insurers may step into insureds' shoes to sue defense lawyers for malpractice
Summary
In oral argument, Washington appellate judges pressed advocates on whether public policy bars insurers from pursuing malpractice claims assigned from insureds, focusing on reservation-of-rights conflicts, precedent like Stewart Title and Tank v. State Farm, and practical consequences for the tripartite insurer–insured–defense counsel relationship.
A three-judge panel heard competing arguments over whether an insurer that pays a covered judgment may pursue legal-malpractice claims against the insured's defense counsel by assignment or subrogation.
At argument, counsel for the appellants told the court that Washington has never allowed an insurer to assert malpractice claims against lawyers representing the insured and urged the court to protect the attorney–client relationship and the integrity of the tripartite relationship. "No Washington appellate authority has ever permitted an insurance company under any theory to assert legal malpractice claims against the lawyers who represent the insured," appellants' counsel said, framing the certified question as one of public policy.
Responding, James Ruggieri, counsel for Great American, said the court should treat the certified question as a legal issue on which the parties assume a nonadversarial posture and avoid resolving factual disputes. Ruggieri argued that where an insurer has paid a judgment and steps in to protect claimants, it should be able to pursue the same malpractice rights the policyholder would have "in the shoes" of the insured. He told the court that Great American paid the judgment in full and asserted that the insurer's rights mirror those of the policyholder after payment.
The panel repeatedly pressed both sides on the reservation-of-rights posture. One judge asked whether a reservation-of-rights letter was in the record; counsel agreed the record contained evidence of a reservation of rights, and the parties debated whether a reservation of rights creates the sort of adversity that would foreclose assignment. Appellants emphasized that a reservation-of-rights asserting potential coverage-defeating facts (for example, fraud allegations) presents a clear conflict between insurer and insured.
Both sides debated precedent. Appellants cited decisions (including Stewart Title and Meyer v. Dempsey) they say reflect Washington's reluctance to allow insurers to obtain malpractice recoveries that would effectively change the loyalties and duties of defense counsel. Ruggieri and other defense counsel countered that out-of-state authorities adopting insurer-benefiting theories do so while guarding against conflicts and that Washington cases such as Tank v. State Farm (discussed during argument) create separate bad-faith exposure that insurers already want to avoid by appointing competent counsel.
The court also questioned whether permitting assignment would create perverse incentives or expose defense counsel to baseless malpractice suits. Respondent counsel stressed that insurers pursuing assigned malpractice claims would still have to prove all elements of malpractice "in the shoes" of the insured, including causation and damages, and that mechanisms exist (contingency counsel, assignment to a nonadversary entity) to bring claims without distorting the tripartite relationship.
The argument also included factual disputes about the underlying litigation and whether defense counsel had opportunities to tender policy limits early (appellants said counsel failed to do so). Respondent counsel noted discovery sanctions imposed against the attorneys (arguing sanctions totaled $500,000 in connection with discovery misconduct) and that a likely verdict was large relative to policy limits (parties referenced a $4,000,000 figure tied to excess coverage). Appellants replied that some affirmative defenses were resolved in summary judgment and that the record posture complicates seeking a sweeping rule.
No decision was announced from the bench. The issues the court flagged at argument included how broadly to read the certified question, whether reservation-of-rights facts were adequately established in the record, and whether adopting an insurer-benefiting rule would undermine counsel's loyalty to insured clients.
The court is considering authorities the parties highlighted, including Stewart Title, Meyer v. Dempsey, and the Washington precedent discussed in Tank v. State Farm; it will resolve whether Washington public policy permits assignment or subrogation to a nonadversary insurer in this tripartite context.
