Court of Appeals Rules Attorney Malpractice Claim Assignable in Insurance Case
There is a general rule in California barring assignment of legal malpractice claims. The issue was recently revisited by the California Court of Appeals for the Third District, which carved out a narrow exception to the rule in limited cases.
The case under consideration was White Mountains Reinsurance Company of America v. Borton Petrini, LLP. There, Modern Service Insurance Company issued an automobile insurance policy to Flora Cuison, who caused an automobile accident that seriously injured Karen Johnson. Johnson thereafter filed a complaint against Cuison, who was served with the complaint and a 30-day offer to compromise for the policy limits. Modern Service thereafter requested the defendant, Borton Petrini, LLP accept defense of the action. Borton agreed, however, it allowed the offer to compromise to lapse without any response. Shortly thereafter, Mutual Service Casualty Insurance Company entered into a stock repurchase agreement for the purchase of FolksAmerica Reinsurance Company’s stock. Before completed, Modern Service entered into an assumption reinsurance and administration agreement with Mutual Service, in which Mutual Service agreed to take on all Modern Service’s obligations, liabilities, and rights. The agreement included the Cuison policy. The stock purchase agreement was then completed and Mutual Service became Stockbridge Insurance Company.
During this time period, Mutual Service paid Borton for defense, and later Stockbridge. A year later, Stockbridge transferred its liabilities to FolksAmerica, who then paid Borton’s invoices. The following year, FolksAmerica changed its name to White Mountains.
After several years of litigation, Cuison’s case was settled under different counsel, and White Mountains paid out $1.86 million. White Mountains then commenced action against Borton, as successor-in-interest to Modern Service, for Borton’s failure to respond to the offer in compromise and exposing the insurer to liability in excess of the policy limits.
Borton moved for summary judgment on the basis that legal malpractice actions cannot be assigned. The trial court agreed and entered judgment for Borton. White Mountains appealed.
The Court of Appeals conducted a lengthy review of California precedent and the controlling case, Goodley v. Wank & Wank, Inc. In Goodley, the court found legal malpractice actions were not assignable due to the “uniquely personal nature of legal services” and the fact that such assignment would “relegate the legal malpractice action to the market place and convert it to a commodity to be exploited”. The Court then continued an in-depth review of out-of-state case law and found it to be persuasive authority for finding an exception to the general rule. The Court of Appeals ruled that there does exist a narrow exception to California’s general rule that a legal malpractice action cannot be assigned where: 1) the assignment of the legal malpractice claim is incidental to a larger commercial transfer; 2) the larger transfer does not treat the claim as a distinct commodity; 3) the transfer is not to a former adversary; 4) the claim arose under circumstances where the original client insurance company retained the attorney to represent and defend the insured; and 5) the communications between the attorney and original insurance company were conducted via a third party claims administrator. The Court held that when all of these conditions exist, the public policy concerns that weigh against such an assignment do not arise.
In applying the five factors to the White Mountains case, the Court of Appeals ruled the trial court erred in finding the legal malpractice claim could not be transferred. Due to the nature of the transactions and the fact that the legal malpractice claim’s assignment was merely incidental to larger commercial transactions, the Court found this case to fit the narrow exception when such an assignment of a legal malpractice claim is acceptable.