Century Prop. & Cas. Ins. Corp. v McManus & Richter 2024 NY Slip Op 00799
Decided on February 15, 2024 Appellate Division, First Department
KAPNICK, J. is a decision with great implications for insurers regarding how defense attorneys might be liable to the carrier for mistakes made during the defense of cases. The question of privity, near-privity and equitable subrogation are all taken up in great detail. The reader should go to the full decision for the well-reasoned discussion of in stari decisis, equitable subrogation, privity and many other core doctrinal issues.

“The instant action arises out of an underlying personal injury matter entitled Palaguachi v The Battery Park City Authority, New York County,index No. 157779/2015, in which defendants were retained by WFP Tower B, L.P. (Tower B) and its insurers, through their claims representatives, to represent Tower B and its affiliates.^[FN1] In the underlying action, Ramon Palaguachi, an employee of Rite-Way Internal Removal, Inc. (Rite-Way), sustained injuries when he fell off an unsecured ladder while performing demolition work at a site owned by Tower B, which had contracted with Rite-Way to perform the demolition work. Palaguachi filed the underlying action against Tower B and its affiliates alleging they were vicariously liable for his injuries pursuant to Labor Law § 240 (1) as the owners and general contractors of the site.”

“As alleged in plaintiff’s amended complaint, the claims against Tower B in the underlying action were covered by a $3 million primary insurance policy issued to Tower B by ACE American Insurance Company which was reinsured by ACE INA Overseas Insurance Company Limited (ACE INA). Plaintiff and ACE INA then entered into the retrocessional agreement, pursuant to which plaintiff accepted a 100% pro rata quota share reinsurance (retrocession) of ACE INA’s interest and liabilities with respect to certain insurance policies, including the Tower B policy. Therefore, any loss under the Tower B policy was ultimately to fall upon plaintiff. According to plaintiff, as the retrocessional insurer for Tower B, it “was contractually obligated to fund” a portion of the settlement in the underlying action on Tower B’s behalf. This contractual obligation forms the basis of plaintiff’s instant claims of legal malpractice against defendants. In its amended complaint, plaintiff alleges that defendants were negligent in voluntarily withdrawing the motion and discontinuing the third-party action against Rite-Way; had they not done so, Tower B would have received complete indemnification from Rite-Way. Instead, because defendants withdrew the claims against Rite-Way, Tower B was left with exposure of approximately $2.8 million, which plaintiff ultimately paid.”

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“[A]bsent fraud, collusion, malicious acts or other special circumstances, an attorney is not liable for professional negligence to third parties not in privity” (Block v Brecher, Fishman, Feit, Heller, Rubin & Tannenbaum, 301 AD2d 400, 401 [1st Dept 2003], lv denied 100 NY2d 509 [2003]). However, in cases where the elements of negligent misrepresentation are present, a relationship of “near privity” may be sufficient to sustain a legal malpractice claim (see Prudential Ins. Co. of Am. v Dewey, Ballantine, Bushby, Palmer & Wood, 80 NY2d 377, 382-385 [1992] [attorney may be held liable to third parties for submitting a false opinion letter upon which a third party relied]). In this case, Supreme Court correctly rejected plaintiff’s argument that it had standing to assert a direct legal malpractice claim against defendants based on the doctrine of “near privity.” To establish such a claim, the third party must allege “(1) an awareness by the maker of the statement that it is to be used for a particular purpose; (2) reliance by a known party on the statement in furtherance of that purpose; [*4]and (3) some conduct by the maker of the statement linking it to the relying party and evincing its understanding of that reliance” (id. at384; see also Federal Ins. Co., 47 AD3d at 61). Although this doctrine may allow a nonclient to sue for legal malpractice, plaintiff here was not in “near privity” with defendants, as it has not pleaded that it relied upon a negligent misrepresentation made by defendants.

A third party may still have standing to bring a claim for legal malpractice where, through contractual or equitable subrogation, it brings the claim on behalf of the attorney’s client by stepping into their shoes legally (see Allianz Underwriters Ins. Co. v Landmark Ins. Co., 13 AD3d 172, 174 [1st Dept 2004]; Great Atl. Ins. Co. v Weinstein, 125 AD2d 214, 215 [1st Dept 1986]; Hartford Acc. & Indem. Co. v Michigan Mut. Ins. Co., 93 AD2d 337, 341 [1st Dept 1983], affd 61 NY2d 569 [1984]; see also Kumar v American Tr. Ins. Co., 49 AD3d 1353, 1355 [4th Dept 2008]). Plaintiff makes a persuasive argument that the decision of the motion court contradicts itself regarding plaintiff’s claims based in contractual and equitable subrogation on behalf of Tower B. The motion court determined that plaintiff was not entitled to bring its claims based in equitable subrogation because the payment it made as retrocessionaire on behalf of Tower B was actually a payment by the primary insurer, ACE American. However, the motion court then simultaneously held that plaintiff was not entitled to contractual subrogation because, despite the formal assignment by ACE American to plaintiff of its rights to all claims that it had against defendants arising from their representation of Tower B in the underlying Palaguachi action, ACE American did not actually have any claims to assign because it never made a payment. Clearly these positions are mutually exclusive.

As an equitable doctrine, subrogation is “designed to promote justice, and thus, is dependent upon the particular relationship of the parties and the nature of the controversy in each case” (Hamlet at Willow Cr. Dev. Co., LLC v Northeast Land Dev. Corp., 64 AD3d 85, 106 [2d Dept 2009], lv dismissed 13 NY3d 900 [2009], citing Matter of Costello v Geiser, 85 NY2d 103, 109 [1995]). The doctrine of equitable subrogation “is broad enough to include every instance in which one party pays a debt for which another is primarily answerable and which in equity and good conscience should have been discharged by the latter, so long as the payment was made either under compulsion or for the protection of some interest of the party making the payment, and in discharge of an existing liability” (Gerseta Corp. v Equitable Trust Co. of NY, 241 NY 418, 425-426 [1926]).”

“Recently, in Innovative Risk Mgt., Inc. v Morris Duffy Alonso & Faley (204 AD3d 518 [1st Dept 2022]),this Court found that plaintiff, the third-party administrator for the primary insurer, lacked standing to pursue a legal malpractice claim as equitable subrogee “because it did not insure the insureds; more specifically, the complaint [did] not allege, and the evidence [did] not show, that plaintiff had a contractual obligation to pay the claims in the underlying action” (id. at 518-519). In this case however, plaintiff specifically alleged that it was contractually obligated to pay, and did in fact pay, the remaining amount of the settlement on behalf of Tower B as retrocessionaire to Tower B’s primary insurer’s reinsurer, thus distinguishing the facts here from the facts in Innovative, where the plaintiff was a third-party administrator and not an insurer [*6]or reinsurer obligated to make a payment on behalf of the insured.”

“Where a reinsurer, or retrocessionaire, has paid a claim on behalf of an insured, equitable principles demand that the reinsurer be entitled to equitable subrogation on behalf of the insured. Having pleaded that it was contractually obligated to, and did, pay the majority of Tower B’s settlement amount in the underlying personal injury action, and that it brings the instant action for legal malpractice as subrogee of Tower B, plaintiff can proceed with this action under the theory of equitable subrogation.

Any rights plaintiff has as equitable subrogee accrued to it independently of any contractual provision upon payment of the loss under the Tower B policy. Therefore, “if we hold that plaintiff may properly make a claim as . . . equitable subrogee, as we do, it becomes unnecessary to determine whether plaintiff also has a valid claim as contractual subrogee. . . .” (see Federal Ins. Co., 75 NY2d at 371).”