NY: Underlying Insurance Case.
Facts: Plaintiffs sued defendant Hiscock attorneys and the insurance company (American Transit Insurance Company, or “American”) for assigning the defendant to plaintiffs underlying case. American commenced a third-party action, alleging that the damages which plaintiffs wanted to recover from American were actually caused by the negligence of the Hiscock attorneys. The Hiscock Attorneys moved to dismissed American’s third-party complaint in the New York Supreme Court and were granted this motion. On appeal, the Court decided that the Supreme Court erred in granting the motion to dismiss American’s third-party complaint.
Issue: Whether the principle of ethical subrogation, whereby an insurer, having paid losses of its insured, is placed in the position of its insured so that it may recover from the third party legally responsible for the loss, establishes privity between the Hiscock attorneys and American?
Ruling: Even though American has not yet paid the loss of its insured, the Court ruled that equitable subrogation would apply. Moreover, the loss incurred by the plaintiff (and American, by extension), was due to the malpractice of the Hiscock attorneys, specifically their failure to appear and defend the insured. The Court therefore ruled that the complaint withstood the motion to dismiss.
Lesson: An insurer may establish privity and sue the attorney which it assigned to its insured for malpractice through equitable subrogation. Moreover, it may do so even when the insurer has not yet paid out losses.