Insurance Recover & Advisory counsel Benjamin Tievsky recently spoke with Law360 about two of the biggest general liability rulings of 2021.

In the first case, the Ninth Circuit said Starr Insurance Cos. could recoup the more than $2 million it paid to defend Adir International LLC and its CEO, Ron Azarkman, in a 2017 suit accusing them of violating California's Unfair Competition Law and False Advertising Law.

The panel said California law did not require Starr Indemnity and Liability Co. to defend the operator of the Curacao retail chain from allegations brought by the California attorney general. Therefore, Adir was obligated to reimburse Starr for the sum it shelled out to defend the retailer.

Tievsky said the Ninth Circuit may have gone too far by finding Starr had no duty to defend its insureds by operation of Section 533.5.

"I think the court's ruling attempts to enforce the literal language of the statute, but it seems fundamentally unfair that if you purchased a duty-to-defend policy, you don't even get a defense if the California attorney general asserts these as-yet unproven allegations against you and, not only that, any defense costs that had previously been paid have to be reimbursed," Tievsky told Law360.

The Ninth Circuit's finding that Section 533.5 does not violate Adir and Azarkman's right to counsel under the U.S. Constitution also intrigued Tievsky, who pointed out that the court's holding was based on a distinction between the broad right to counsel in criminal cases under the Sixth Amendment and a more limited right to counsel in civil cases under the Due Process Clause.

Tievsky said a civil proceeding initiated by a state attorney general or other enforcement authority may give rise to a parallel criminal investigation or proceeding, and so precluding defense coverage for this type of civil matter may also hinder the insured's defense of an ensuing criminal matter.

Tievsky noted that the court appeared to leave the door open for coverage for a defendant who could not independently afford counsel.

"I'm not sure if I agree with the Ninth Circuit that the distinction between the Sixth Amendment right to counsel in criminal cases versus the due process right to counsel in civil cases should be dispositive, because where you have a civil proceeding brought by an attorney general there often are potentially criminal implications," Tievsky elaborated.

In the second case, Florida's highest court ruled that Arch Insurance Co. could pursue legal malpractice claims against a law firm it had hired to represent its policyholder, accounting firm Spear Safer CPAs & Consultants LLC.

According to court records, investment sales company Mutual Benefits Corp. retained Spear Safer as an independent auditor. Mutual Benefits was later shut down by the SEC following accusations that it swindled investors out of about $1 billion. The SEC sent subpoenas to Spear Safer and the firm was sued by Mutual Benefits' receiver for alleged accounting malpractice.

Arch defended Spear Safer and retained Kubicki Draper LLP, which settled the suit for $3.5 million. The insurer brought a legal malpractice action against Kubicki in Florida state court, accusing the firm of dragging its feet when raising a statute of limitations argument on Spear Safer's behalf. The insurer complained that, had the firm raised the argument sooner, the settlement amount could have been smaller.

Kubicki Draper asked to have the case tossed, contending that Arch did not have grounds to bring the suit. The firm explained that it had no obligation to the insurer. A trial court agreed, ruling that there was no privity between the insurer and the law firm. A panel of Florida's Fourth District Court of Appeal upheld the decision.

Arch asked the Florida Supreme Court to overturn the rulings, arguing that a subrogation clause in its policy allowed the insurer to stand in the shoes of the policyholder. The Sunshine State's high court disagreed with the lower courts that the firm did not have standing because of a lack of contractual obligation.

Pillsbury's Tievsky found the ruling interesting, explaining that it appears to expand the doctrine of subrogation beyond its traditional application. The ruling could be detrimental to policyholders, he elaborated, if insurers attempt to use the decision as a backdoor to challenge defense costs and settlement amounts by threatening to utilize subrogation clauses in policies to sue defense counsel.

The finding that a subrogation clause can allow insurers to bring malpractice claims against defense counsel could also result in relitigating or perpetuating litigation of the claims in the underlying case, which could detrimentally affect policyholders in numerous ways, Tievsky said.

He added that the ruling could spur some policyholders to seek narrower subrogation language in their policies, limiting an insurer's subrogation rights to tortfeasors as opposed to defense counsel. However, Tievsky warned that may not always be possible because of the insurance industry's typical control over policy drafting

"The reality is that we're going to have to see how it plays out and see if this decision permits or incentivizes insurers to bring subrogation-malpractice actions against defense counsel," Tievsky said. "If the insurance industry uses this ruling abusively, then it will be bad for policyholders and a market correction of some kind will be called for."