White Mountains Reinsurance Company of America v. Borton Petrini, LLP

(Insurer Which Received Assignment of Malpractice Claim As Part of Purchase of Another Insurer’s Assets Was Entitled To Maintain Such Claim Against Law Firm)

In White Mountains Reinsurance Co. of America v. Borton Petrini, LLP, ____ Cal.App.4th ___ (November 26, 2013), the California Third District Court of Appeal reversed the entry of judgment in favor of the law firm of Borton Petrini in connection with a professional malpractice lawsuit filed by White Mountains Reinsurance Company of America (“White Mountains”) as a successor in interest to insurer, Modern Service Insurance Company (“Modern Service”). The dispute arose out of an “assumption of reinsurance and administration agreement” between Modern Service and Mutual Service Casualty Insurance Company (“Mutual Service”). As part of the agreement, Mutual Service assumed the California liabilities of Modern Service, including all direct obligations and liabilities and rights under and relating to all insurance business written by Modern Service since its incorporation in respect of risks located in California. A few days after this agreement, Mutual Service entered into a stock transaction with FolksAmerica Reinsurance Company (“FolksAmerica”). As part of the transaction, FolksAmerica acquired all of the obligations, liabilities and rights under the policies issued by Modern Service in California. Ultimately, FolksAmerica changed its name to White Mountains Reinsurance Company of America.

The malpractice claim involving Borton Petrini arose out of Borton Petrini’s alleged failure to notify Modern Service of a 998 settlement demand of $100,000 to resolve a bodily injury lawsuit arising out of an automobile accident. Ultimately, the lawsuit involving the automobile accident was settled for $1.86 million. Thereafter, White Mountains filed a legal malpractice lawsuit against the Borton law firm. In response, the Borton firm filed a motion for summary judgment arguing that California law bars the assignment of causes of action for legal malpractice. The trial court agreed and entered summary judgment in favor of the Borton law firm.

In reversing the trial court’s entry of judgment, the Court of Appeal recognized a limited exception to the general rule barring the assignment of legal malpractice actions. The Court of Appeal held as follows:

There is a general rule in California barring the assignment of a cause of action for legal malpractice. In this case, we recognize a narrow exception to that rule. Specifically, a cause of action for legal malpractice is transferable when (as here): (1) the assignment of the legal malpractice claim is only a small, incidental part of a larger commercial transfer between insurance companies; (2) the larger transfer is of assets, rights, obligations, and liabilities and does not treat the legal malpractice claim as a distinct commodity; (3) the transfer is not to a former adversary; (4) the legal malpractice claim arose under circumstances where the original client insurance company retained the attorney to represent and defend an insured; and (5) the communications between the attorney and the original client insurance company were conducted via a third party claims administrator. Under the circumstances set forth above, the public policy concerns that have been determined in other cases to weigh against the assignment of legal malpractice claims do not arise. Thus, the trial court erred in deciding that plaintiff White Mountains Reinsurance Company of America (White Mountains) lacked standing to prosecute this legal malpractice action against defendant Borton Petrini LLP (Borton) because White Mountains acquired the cause of action through assignment from the original insurer. We will, therefore, reverse the judgment in favor of Borton.