Alabama Supreme Court Holds Insurer Not Liable for Malpractice of Retained Defense Counsel
In Lifestar Response of Alabama, Inc. v. Admiral Ins. Co., 2009 Ala. Lexis 39, Lifestar Response of Alabama, Inc. (“Lifestar”) brought a legal malpractice action against its defense lawyers and its insurer, Admiral Insurance Company (“Admiral”), for failing to have a default judgment set aside in the underlying action. Admiral had agreed to defend Lifestar under a reservation of rights. The primary question before the Court was whether Admiral could be held vicariously liable for the alleged negligence of defense counsel. Lifestar alleged Admiral had a duty to defend Lifestar in the underlying action and that Admiral retained defense counsel as Admiral’s agent to perform the defense obligation. (There was some dispute over whether Admiral first retained defense counsel or if Lifestar retained them and Admiral then agreed to pay their fees, but that did not appear relevant to the Court’s ultimate decision.) Lifestar essentially argued that Admiral breached its insurance contract by providing a substandard defense and that because defense counsel were agents of Admiral, defense counsel’s negligence and/or wantonness should be imputed to Admiral.
In making its decision, the Court noted that some jurisdictions have held that an insurer is not vicariously liable for the actions of insurer retained defense counsel, while other jurisdictions have held that the insurer is so liable. The Court then noted that where an insurer is defending under a reservation of rights, as here, the Court had previously adopted the enhanced good faith standard that the insurer and retained defense counsel must follow, as established by the Washington Supreme Court in Tank v. State Farm Fire & Casualty Co., 105 Wn.2d 381, 715 P.2d 1133 (1986). In this context, defense counsel represents only the insured, and not the insurer. Furthermore, Admiral would not control counsel’s professional judgment as that would be prevented by the attorney’s ethical obligation to the client, Lifestar. The Court further adopted the reasoning of Feliberty v. Damon, 72 N.Y.2d 112, 120, 527 N.E.2d 261, 265 (1988) that 1) the duty to defend is delegable by its very nature because insurers are not attorneys, 2) the paramount interest counsel represents is the insured’s, not the insurer’s, and 3) the insured’s remedy for defense counsel malpractice is an action against defense counsel. The Court then held that Admiral could not be vicariously liable for defense counsel’s alleged negligence or wantonness, further pointing out that “an insurance company is prohibited from practicing law and must rely on independent counsel to conduct litigation.”
