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Under Special Circumstances, Legal Malpractice Case May Be Assigned

There is a new exception in California to a general public policy against assigning legal malpractice cases.

California appeals panel recognizes ‘narrow’ assignment of legal malpractice claim.

A three-judge appeals panel in California has ruled for the first time that a legal malpractice action may be assigned when it is a small, incidental part of a larger commercial transfer of assets and liabilities between insurance companies.

The decision represents a “narrow exception” to the state’s general public policy ban against assigning legal malpractice claims, the appeals court said in an opinion reversing a trial judge’s finding that an insurance company lacked standing to pursue the assigned claim.

(Westlaw users click here for more stories from Westlaw Journal Professional Liability).

The 3rd District Court of Appeal concluded that, under the circumstances here, the public policy against assigning what is generally considered a personal cause of action does not apply.

(Click here for the opinion on Westlaw.)

The policy

Flora Cuison had an auto insurance policy with Modern Service Insurance Co. when she caused a motor vehicle in accident in July 2003, the opinion said.

The driver of the other vehicle allegedly sustained serious injuries and sued Cuison in June 2005. The complaint came with a 30-day offer to compromise the claim for Cuison’s policy limit of $100,000, according to the opinion.

The claims administrator acting on behalf of Modern Service assigned Cuison’s defense to Borton Petrini LLP. The firm allegedly allowed the offer to expire without a response, the opinion said.

During the pendency of the litigation, Mutual Service Casualty Insurance Co. agreed to assume all insurance business written by Modern Service in California, including the Cuison policy, the opinion said.

Mutual Service later became White Mountains Reinsurance Company of America. In November 2009 White Mountains paid $1.86 million to settle the Cuison case, the opinion says.

The malpractice claim

White Mountains, as the successor to Modern Service, sued Borton Petrini in the Sacramento County Superior Court for malpractice, claiming the firm exposed White Mountains to liability in excess of the policy limits by letting the offer to compromise expire.

The trial court ruled last year that White Mountains lacked standing because a legal malpractice action may not lawfully be assigned in California.

The 3rd District reversed on the insurer’s appeal.

The panel acknowledged that public policy generally bars the assignment of a “uniquely personal” legal malpractice claim in California.

But the appeals court relied on decisions from other jurisdictions, including the U.S. District Court for the District of Columbia and state supreme courts in Idaho and Rhode Island, for the proposition that the rule should not apply when the assignment is incidental to a larger commercial transaction involving the transfer of other business assets and liabilities.

“[T]he public policy concerns that weigh against the assignment of legal malpractice claims do not arise in that context,” the appeals court said.

The panel held that the rule should not apply in this case because the transfer did not treat the malpractice claim as a commodity and White Mountains did not simply “buy” a malpractice claim.

Rather, the appeals court said, White Mountains acquired Modern Service’s entire book of insurance business in California, with one small part of the deal being the Cuison policy.

The panel also cited the following factors in support of the assignment:

• White Mountains was not a former adversary of Modern Service.

• White Mountains succeeded to all of Modern Service’s rights and obligations related to the Cuison policy.

• The legal malpractice claim arose under circumstances where the original insurance company retained the attorney to represent and defend the insured.

• The communications between the attorney and the original insurance company were conducted via a third-party claims administrator.

The panel said when all of these circumstances exist, assignment is permitted because they make the case different from others that involve a more personal attorney-client relationship.

The appeals court therefore reversed entry of judgment in favor of the law firm

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