Court limits insurer’s malpractice claim against defense lawyer

An insurer may not pursue a malpractice claim against appointed defense counsel based on the failure to assert defenses desired by the insurer, unless the insurer can show it was an intended beneficiary of the legal services, the Washington Supreme Court held in Stewart Title Guar. Co. v. Sterling Savings Bank, et al.,178 Wn.2d 561 (2013).

Sterling Savings Bank loaned a borrower money to purchase development property. As a condition for the loan, Sterling required a first priority security interest in the property. Sterling’s title insurer, Stewart Title Guaranty Company, failed to discover that Mountain West Construction had begun construction on the property and held a statutory lien superior to the bank’s security interest. A payment dispute ultimately arose and Mountain West initiated foreclosure proceedings.  In response, Stewart Title hired the Witherspoon Kelley law firm to defend Sterling in the foreclosure action.

Witherspoon did not raise an equitable subrogation defense in the foreclosure action, stipulating that Mountain West had first priority in an effort to obtain a swift settlement with the builder. Stewart Title fired Witherspoon over disagreements regarding the viability of an equitable subrogation defense. Stewart Title hired new counsel who argued differently than Witherspoon, but the trial court held that Sterling was bound by the stipulation, and refused to consider the newly asserted equitable subrogation claim.

Stewart Title then sued Witherspoon for legal malpractice based on the firm’s failure to raise equitable subrogation as a defense for Sterling. Witherspoon argued that: (1) its client was Sterling, not Stewart Title, and that its failure to raise defenses specified by Stewart Title would not serve as the basis for a legal malpractice lawsuit; and (2) an equitable subrogation defense would have failed under the facts of the case.

The trial court concluded that Stewart Title was an intended beneficiary of the representation based in part on finding a contractual duty to inform Stewart Title regarding the representation and in part on the alignment of interests between Witherspoon and Stewart Title.  However, the trial court granted summary judgment because it concluded an equitable subrogation defense would not have succeeded under the circumstances.  Stewart Title appealed and the Supreme Court accepted review of both the duty issue and the equitable subrogation issue.

Relying on the six factors described in Trask v. Butler, 123 Wn.2d 835 (1994), to evaluate the parties’ relationship, the Washington Supreme Court held that Witherspoon’s only client was Sterling, and that Stewart Title was a non-client, third-party payor. The Court emphasized that the “primary inquiry” in determining the existence of a duty of care “is whether the plaintiff is an intended beneficiary of the transaction to which the advice pertained,” and that “no further inquiry need be made unless such an intent exists.”

The Supreme Court disagreed with the trial court’s conclusion that Stewart Title was an intended beneficiary of Witherspoon’s representation of Sterling because: (1) finding a duty based merely on “aligning interests” would undermine the Trask holding and potentially create an ethical dilemma for appointed counsel. It rejected Stewart Title’s argument that a nonclient insurer is presumed to be an intended beneficiary unless there is an actual conflict of interest between an insurer and its insured.

The Court found the simple fact that some aligning interests existed between Stewart Title and its policyholder did not show that either Witherspoon or Sterling Bank intended Stewart Title to have the benefit of  Witherspoon’s  representation. It concluded this was demonstrated by Witherspoon’s strategy of seeking a speedy, yet just, settlement in contrast with Stewart Title’s desire to assert an equitable subrogation defense. The Court further held that a contrary conclusion could cause legal counsel to violate the ethical requirements of Rule of Professional Conduct 5.4(c).

The Supreme Court concluded that Witherspoon’s contractual duty to inform Stewart Title about its conduct of Sterling’s defense was  insufficient to establish a duty of care, because: (1) attorneys who accept a duty to inform a nonclient third-party payor about legal matters, do not presumptively intend to benefit that third party; and (2) attorneys cannot contract away, or have their professional legal judgment be directed or regulated by a third-party payor of these services.

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