Indiana Court of Appeals Determines That Liability Insurer Is Not Responsible for Alleged Malpractice of Defense Attorney Hired to Defend Its Insured

Michael R. Giordano

Smith v. Progressive Southeastern Ins. Co., 2020 WL 3067807 (Ind. Ct. App. 2020)

This case has a long appellate history to which the Indiana Court of Appeals recently added a new chapter.  Smith and Clayton were co-workers who attended a company party at a restaurant.  After consuming alcohol, Smith gave permission to Clayton to drive Smith’s vehicle to transport both of them home.  Clayton lost control of the vehicle resulting in an accident that rendered Smith a quadriplegic.  As a result, Smith filed a personal injury lawsuit against Clayton.

Smith’s auto insurer, Progressive, provided defense counsel to Clayton under a reservation of rights and filed a declaratory judgment action contending that it did not owe liability insurance coverage to Clayton for Smith’s lawsuit.  The court action proceeded and resulted in a verdict where Smith’s net recovery was approximately $21 million.

The declaratory judgment also proceeded and resulted in a determination that Progressive had no duty to defend or indemnify Clayton for the accident.  Clayton assigned to Smith all rights to pursue any and all claims against the defense attorney and Progressive, including any legal malpractice actions.

Smith eventually filed separate lawsuits involving a legal malpractice action against the defense attorney and claims against Progressive.  The claims against Progressive included claims for bad faith and vicarious liability for the alleged malpractice of the defense attorney.  The trial court dismissed the lawsuit against Progressive because Indiana law prohibits the assignment of legal malpractice claims.

On appeal, the main issue focused upon the trial court’s dismissal of Smith’s claim against Progressive.  Smith contended that the claims against Progressive were not true attorney malpractice claims, but were claims for vicarious liability for the defense attorney acts or omissions, breach of a duty to defend and bad faith.

The Court of Appeals rejected Smith’s claim that Progressive was vicariously responsible for the defense attorney’s actions.  Under Indiana law, legal malpractice claims cannot be assigned.  Thus, the Court found that Smith’s vicarious liability claim against Progressive flowed from the defense attorney’s alleged malpractice, such that it was simply a prohibited legal malpractice assigned claim.

As to the alleged breach of the duty to defend, the Court also rejected that contention.  Because Progressive had no duty to defend Clayton, Progressive was not responsible for how Clayton was defended by the defense attorney.

Finally, the Court also rejected Smith’s claim that Progressive engaged in bad faith.  Reaffirming Indiana’s law regarding the requirements to assert a bad faith claim, the Court found that Smith did not allege any facts in his Complaint to support that Progressive acted in bad faith with respect to its handling of the claim.

This decision is helpful in establishing that a liability insurer is not responsible for an attempted assignment of an alleged malpractice claim against the defense attorney to a third party.  It remains unclear if Smith has any remedy to collect the large verdict as it does not appear that Progressive bears any responsibility to Smith.