The Tennessee Court of Appeals recently ruled that public policy did not prevent an insurance company from bringing a legal malpractice claim against its insured’s attorney as the subrogee of the insured.
In Westport Insurance Corporation v. Howard Tate Sowell Wilson Leathers & Johnson, PLCC, No. M2023-01168-COA-R3-CV (Tenn. Ct. App. Sept. 18, 2024), plaintiff was the insurance carrier for a company called Brands. A truck driver’s Kentucky-based employer hired Brands to perform a driver history report before hiring the driver. Brands pulled three years of driving records and reported that the record was clean. Had they pulled five years, however, they would have found the driver’s accident history. The driver was hired by the company and was later involved in a serious car accident in Tennessee.
Multiple lawsuits were filed in relation to this car accident, and Brands was named as a defendant. Plaintiff insurance company was Brands’ liability insurance carrier. Plaintiff hired defendant law firm to represent Brands in the underlying suits, and defendant agreed to abide by Plaintiff’s litigation guidelines. At one point an attorney from defendant firm performed initial research into the defense of lack of personal jurisdiction, but that research was abandoned, as the attorney believed it was not a viable defense. Defendant never discussed the personal jurisdiction defense with plaintiff or Brands. Defendant eventually filed a motion to dismiss based on lack of duty. Defendant advised Brands that if the motion was not granted, settlement was advised.
The motion to dismiss in the underlying suits was denied. Brands hired additional counsel, who advised that a personal jurisdiction defense should have been asserted, but that such defense was likely waived. At this point, defendant withdrew from representation of Brands. The personal jurisdiction motion was filed by the new attorney and was denied based on waiver. Brands ultimately settled the underlying lawsuits.
Based on defendant’s failure to assert the personal jurisdiction defense, plaintiff filed this suit against defendant law firm asserting four claims: (1) negligent misrepresentation; (2) a direct legal malpractice claim; (3) a legal malpractice claim as the contractual subrogee of Brands; and (4) a legal malpractice claim as the equitable subrogee of Brands. The trial court granted defendant summary judgment on all claims, but in a lengthy opinion, the Court of Appeals reversed summary judgment on the legal malpractice claim asserted as subrogee, as well as the negligent misrepresentation claim.
First, the Court of Appeals analyzed plaintiff’s direct legal malpractice claim. Noting that plaintiff was never a client of defendant, and there was therefore no attorney-client relationship, the Court affirmed summary judgment on the legal malpractice claim asserted by plaintiff directly.
Next, the Court examined whether plaintiff could assert a legal malpractice claim as the subrogee of Brands. The Court referred to the subrogation-based claims as insurance subrogation, and while the trial court viewed this as an assignment of Brands’ legal malpractice claim, the Court of Appeals disagreed. The Court noted that an insurance company can bring an action against a third party in its own name in other contexts once it has paid the insured for the loss, as the insurance company has become the real party in interest. Because plaintiff had fully paid Brands’ debts in the underlying suit, this attempted legal malpractice claim was based on insurance subrogation, not on an assignment of the claim.
The Tennessee Supreme Court has held that legal malpractice claims cannot be assigned, based largely on the public policy concern that “[t]he assignment of such claims could relegate the legal malpractice action to the market place and convert it to a commodity to be exploited and transferred to economic bidders who have never had a professional relationship with the attorney…” (internal citation omitted). Further, assignment of legal malpractice claims could lead to concerns about violating the “attorney-client duties of loyalty and confidentiality.” Because of the context of an insurance subrogation legal malpractice claim, however, the Court of Appeals reasoned that these concerns were inapplicable.
The Court noted that plaintiff insurance company was not a stranger to the underlying suit. In fact, plaintiff hired defendant law firm and was “an integral member of the ‘tripartite’ relationship between the three entities,” and strict confidentiality was already waived. While there is no clear majority position on this issue, other jurisdictions have found that not allowing an insurance subrogation legal malpractice claim “was not actually preserving the attorney-client relationship, but only insulating a negligent attorney from liability and shifting the loss onto the insurer.” (internal citation omitted).
The Court explained:
As previously discussed, the Tennessee Supreme Court has explicitly held that one primary purpose of subrogation in Tennessee is to prevent a windfall to a tortfeasor. To arbitrarily prohibit an insurance subrogee from prosecuting a legal malpractice action on behalf of its insured, however, would frustrate this purpose and instead allow allegedly negligent attorneys to shield themselves “from the consequences of legal malpractice.” The risk of immunizing negligent attorneys is particularly high in the insurance subrogation context, as an insurer only has a right of subrogation after fully paying an insured’s debt. Having been fully compensated for a loss, the insured has little incentive to sue for legal malpractice[.] To hold otherwise, would be to shift the burden of loss from the wrongdoer to an innocent insurance provider. Finally, immunizing only legal malpractice claims in this way could undermine public confidence in the legal profession “by creating the perception that the system provides attorneys with unjustified special protection.”
(internal citations and quotations omitted). The Court thus held that “public policy does not prohibit [plaintiff insurance company] from bringing a legal malpractice action against [defendant] as subrogee of Brands.”
Third, the Court considered the trial court’s ruling that summary judgment for the defendant law firm was alternatively appropriate because “a reasonable judge would not have granted a motion to dismiss for lack of personal jurisdiction in the underlying lawsuits.” A plaintiff claiming legal malpractice must show damages, meaning that he “must prove that he would have obtained relief in the underlying lawsuit, but for the attorney’s malpractice; consequently, the trial of a legal malpractice claim becomes, in effect, a ‘trial within a trial.’” (internal citation omitted).
The Court the undertook a lengthy analysis of whether Brands was subject to personal jurisdiction in Tennessee. Regarding specific jurisdiction, the Court found that Brands performing a driver history check outside of Tennessee for a non-Tennessee company was simply not enough to confer jurisdiction. Regarding general jurisdiction, although Brands did some business in Tennessee, the Court found that it could not be considered “essentially at home” in the state. Brands had no office here, had no senior management functions operating out of Tennessee, and derived “at most 3% of its revenue from its Tennessee customers.” Based on these facts, the Court found that a reasonable judge would have granted the motion to dismiss based on lack of personal jurisdiction, so summary judgment on the insurance subrogation legal malpractice claim was overturned and then entered summary judgment on the issue in favor of the plaintiff insurer.
Last, the Court considered plaintiff’s negligent misrepresentation claim. The trial court granted summary judgment on this claim, ruling that plaintiff “failed to establish that [defendant] misrepresented any past or present facts.” But the Court of Appeals noted that Tennessee has adopted the Restatement (Second) of Torts § 522 as a guide in negligent misrepresentation claims against professionals and business persons, and the comment to that section explains that it “applies not only to information given as to the existence of facts but also to an opinion given upon facts equally well known to both the supplier and the recipient.” This section has been used to allow “non-clients to recover against attorneys for erroneous information supplied to them even though the plaintiffs were not clients, because the advice was given for the guidance of the plaintiffs in the course of the transaction and reliance upon that advice was justifiable and foreseeable.” (internal citation omitted). The Court also pointed out that “a misrepresentation about a future event can the basis of a negligent misrepresentation claim if the misrepresentation about the future event is based on a present fact.” (internal citation omitted).
With that background, the Court explained:
[Plaintiff] asserts that the same is true in this case: that given the understanding that [defendant] would inform [plaintiff] of all strategy decisions, [the attorney’s] recommendation to pursue a motion to dismiss based on lack of duty, and not also or alternatively a motion to dismiss for lack of personal jurisdiction was faulty advice based on the facts as they existed at that time. We agree. Here, the facts surrounding Brands’ contact with Tennessee existed at the time that [the attorney] recommended that Brands pursue a motion to dismiss based solely on lack of duty. Although [the attorney] never made a specific affirmative statement that lack of personal jurisdiction was not a viable defense, the Tennessee Supreme Court has countenanced that silence when advice should have been given can give rise to a claim under Section 552. See Robinson, 952 S.W.2d at 427 (citing Stinson, 738 S.W.2d at 187); see also Just. v. Anderson Cnty., 955 S.W.2d 613, 616 (Tenn. Ct. App. 1997) (“Nondisclosure of a material fact may also give rise to a claim for fraudulent or negligent misrepresentation when the defendant has a duty to disclose and the matters not disclosed are material.”). Moreover, a reasonable reading of [defendant’s] advice, giving all reasonable inferences to [plaintiff], is that [the attorney] was stating that lack of duty was the sole defense that should have been raised at that stage of the litigation. As previously discussed, however, that advice may have been faulty, as a reasonable judge would have granted a motion to dismiss based on lack of personal jurisdiction. Accordingly, we must conclude that the trial court erred in granting summary judgment on the basis that [defendant] negated an essential element of [plaintiff’s] negligent misrepresentation claim.
(internal citation omitted).
Accordingly, summary judgment on the direct legal malpractice claim was affirmed, but all other rulings were reversed.
This case could have big implications for insurance companies who are displeased with the representation that their insured received in underlying litigation. It will be interesting to see whether the Tennessee Supreme Court reviews this issue.
This opinion was released four months after oral arguments.