In White Mountains Reinsurance Company of America v. Borton Petrini, LLP (11/26/2013 – No. C071365), the California Court of Appeal for the Third District ruled that, contrary to the general prohibition against assignment of legal malpractice claims, a narrow exception to that rule should exist where the claim was assigned as part of a larger, commercial transfer between insurance companies of assets and liabilities and thus was not treated as a distinct commodity. Other factors found by the court to warrant such an exception included the following: the transfer was not to a former adversary; the claim arose under circumstances where the original client-insurer had retained the attorney to represent and to defend its insured; and the relevant communications between the attorney and the original insurer were conducted via a third-party claims administrator. Under the circumstances, the court found that the trial court erred in dismissing a legal malpractice action commenced by White Mountains Reinsurance Company of America (White Mountains) against defendant law firm Borton Petrini, LLP (Borton) based on the argument that White Mountains lacked standing to assert such claims having acquired the right to pursue the cause of action via an assignment from the original insurer, and reversed the judgment against White Mountains.
In 2005, Borton had been retained by a third-party claims administrator, Country Insurance & Fidelity Services (Country), to defend Flora Cuison (Cuison), an insured of Modern Service Insurance Company (Modern) who had caused an automobile accident which seriously injured the eventual claimant, Karen Johnson (Johnson). Prior to Borton’s engagement, Cuison had purportedly been served with Johnson’s complaint along with an undated offer to compromise for the $100,000 policy limits. Approximately two weeks after service of the complaint and the “policy limits” settlement demand on Cuison, Borton undertook Cuison’s representation and reported on the case to Modern (via Country) and received payment of its invoices (also from Country). Borton apparently did not communicate about the “policy limits” settlement demand.
While the Johnson action was pending, Modern entered into a stock repurchase agreement and, later, an assumption reinsurance and administration agreement, with two companies, then known as Mutual Service Casualty Insurance Company (Mutual Service) and FolksAmerica Reinsurance Company (FolksAmerica). The policy issued to Cuison by Modern was one of the policies Mutual Service assumed in the transaction. Mutual Service later changed its name to Stockbridge Insurance Company (Stockbridge). FolksAmerica later changed its name to White Mountains when it received from Stockbridge an assignment of rights and liabilities, including liabilities associated with the Cuison policy.
Borton continued to report on the progress of the litigation over the next several years; it was substituted out as defense counsel in March 2009. In November 2009, White Mountains paid $1.86 million to settle the Johnson action. Two months later, White Mountains commenced a legal malpractice action against Borton, denominating itself “successor-in-interest” to Modern, alleging that Borton had committed malpractice by letting the initial “policy limits” demand expire, thus causing White Mountains to incur substantial attorney’s fees and costs in defending the action in addition to the significant over-limits settlement payment it had made.
The parties to the action stipulated to have the trial judge resolve the question of White Mountains’ standing based on a determination as to when the cause of action for legal malpractice had accrued. The trial court found that the claim accrued when Modern first incurred legal expenses it would not otherwise have had to incur if the case had been settled for policy limits near its inception. Thus, the court found that White Mountains could only have acquired the cause of action via the assignment from Stockbridge and, based on the general rule that legal malpractice causes of action are not assignable, ruled that White Mountains lacked standing to sue Borton. White Mountains appealed the adverse judgment.
The appellate court explained that the rule against assignability of legal malpractice claims originated in an earlier decision, Goodley v. Wank & Wank, Inc. (1976) 62 Cal.App.3d 389 (Goodley). That decision had carefully examined the public policy considerations against permitting such assignments and concluded that doing so would make it far more difficult for the public to engage attorneys who would, in the face of such prospective assignments, become undesirably selective in choosing as clients only those who might be less willing to assign their rights out of resentment or for monetary gain. Subsequent California decisions adhered to Goodley’s conclusions. The court examined four such California cases, spanning more than 20 years, none of which involved the same fact pattern presented in the present case, and a sequence of out-of-state cases which had permitted assignments of legal malpractice causes of action where the assignment was incidental to a larger commercial transaction which did not present the same public policy concerns articulated in Goodley.
The court concluded that because the legal malpractice claim against Borton was acquired only as part of a “global” assignment of Modern’s entire book of insurance business in California, including the Cuison policy from which the claim against Borton arose, it should not be subject to the general rule precluding such assignments. Moreover, because Borton’s alleged malpractice would have created a basis for Modern to assert such claims anyway, and its communications and relationship appeared to have been focused on the third-party claims administrator (Country) anyway, these facts mitigated against application of the general prohibition against assignment of such claims under the circumstances.
The White Mountains case represents the first time an appellate court has permitted the assignee of a legal malpractice cause of action to pursue such a claim. Although the exception established by the Third District is quite narrow, the multiplicity of factors considered may give rise to other, similar claimed exemptions in the future. It remains to be seen whether the California Supreme Court will be asked to weigh in on this issue.
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