Defense counsel hired by liability insurer to defend claim against insured represents insured. In the absence of a conflict of interest between insured and insurer, defense counsel may represent both insured and insurer if insured consents after consultation.
When defense counsel's client brings legal malpractice claim against defense counsel, non-client insurer may not bring legal malpractice claim against defense counsel under doctrine of equitable subrogation.
The opinion of the court was delivered by: Page, Justice.
Heard, considered, and decided by the court en banc.
This case presents issues concerning the tripartite relationship between a liability insurer, an insured, and defense counsel hired by the insurer to defend a claim against the insured. The insurer in this case, appellant Farmland Mutual Insurance Company (Farmland), brought a legal malpractice action against defense counsel, respondents Erstad & Riemer, P.A., and attorneys Lawrence J. Skoglund and John R. Thomas (collectively, Erstad & Riemer), arguing that Erstad & Riemer represented both the insured, appellant Pine Island Farmers Coop (Pine Island), and Farmland in an action brought by Duane Windhorst against Pine Island. The district court concluded that Erstad & Riemer did not represent Farmland, and that Farmland therefore could not maintain a legal malpractice action on its own behalf against Erstad & Riemer. The district court went on to conclude that Farmland, however, could maintain such an action on behalf of Pine Island under the doctrine of equitable subrogation.*fn1
On appeal, the court of appeals affirmed the district court's conclusion that Erstad & Riemer did not represent Farmland, holding that "the insured is the sole client of the defense attorneys hired by the insurer." The court of appeals reversed the district court with respect to the issue of whether Farmland could maintain a legal malpractice action under the doctrine of equitable subrogation. The court of appeals held that the district court's conclusion on this point was inconsistent with Minnesota law, and that, in any event, Farmland had unclean hands and was therefore barred from seeking recourse in equity. We affirm, although on somewhat different grounds.
This case stems from an action brought by Windhorst against Pine Island as a result of Pine Island's sale and installation of a milk metering system on Windhorst's dairy farm in 1994. In 1996, Windhorst commenced an action against Pine Island for breach of contract, negligence, and breach of express warranties, alleging that, as a result of Pine Island's failure to properly install the milk metering system, a number of his dairy cows became contaminated with bacteria. Pine Island tendered defense of Windhorst's claim to its liability insurer, Farmland, who retained Erstad & Riemer to represent Pine Island.
Windhorst's claim was tried to a jury in 1998. The jury found that both Pine Island and Windhorst were negligent, that their negligence was a direct cause of Windhorst's damages, and that Pine Island was 90% at fault. Based on this verdict, the district court entered judgment against Pine Island for $1,145,925, which represented 90% of Windhorst's damages as found by the jury. The district court denied Pine Island's post-trial motions seeking a new trial, remittitur, or judgment notwithstanding the verdict. Pine Island appealed the district court's order denying its post-trial motions to the court of appeals. In 1999, while Pine Island's appeal was pending, Windhorst and Farmland settled Windorst's claim for $1,050,000. As a result of the settlement, Pine Island's appeal was withdrawn.
Farmland and Pine Island commenced the present action against Erstad & Riemer for legal malpractice and breach of contract in 2000. The complaint alleged that both Farmland and Pine Island had an attorney-client relationship with Erstad & Riemer. In its answer to the complaint, Erstad & Riemer denied having an attorney-client relationship with Farmland. In addition, Erstad & Riemer, asserted a counterclaim against Farmland for unpaid legal fees.
The district court granted summary judgment for Erstad & Riemer with respect to Pine Island's claims, except for its claim that Erstad & Riemer committed legal malpractice by failing to commence a third-party action against the manufacturer of the milk metering system, which was reserved for trial. The district court granted summary judgment for Erstad & Riemer with respect to all of Farmland's claims on the ground that Erstad & Riemer and Farmland did not have an attorney-client relationship and, thus, there was no basis for the claims. The district court noted that, under Minnesota law, attorney-client relationships can be created by contract, either express or implied, or through tort theory. Based on its analysis of the communications and interactions between Erstad & Riemer and Farmland, the district court concluded that Pine Island was Erstad & Riemer's sole client. The district court went on to conclude that, despite the lack of an attorney-client relationship between Erstad & Riemer and Farmland, Farmland could maintain an action for legal malpractice against Erstad & Riemer under the doctrine of equitable subrogation. After acknowledging that "there is no Minnesota law on this issue," the district court relied exclusively on Atlanta International Insurance Co. v. Bell, 475 N.W.2d 294 (Mich. 1991), in which the Michigan Supreme Court applied the doctrine of equitable subrogation to allow a non-client insurer to bring a legal malpractice claim against attorneys hired by the insurer to defend an action against the insured.
Rather than proceeding to trial, the parties stipulated that the efficient administration of justice would be aided by an immediate appeal of the issues decided by the district court. Pursuant to the parties' stipulation, the district court entered an appealable order dismissing with prejudice all of Farmland's claims*fn2 and all of Pine Island's claims except for Pine Island's legal malpractice claim that had been reserved for trial. The order stayed that claim and the counterclaim brought by Erstad & Riemer.
Farmland and Pine Island appealed the district court's order. The court of appeals affirmed the district court's conclusion that Erstad & Riemer and Farmland did not have an attorney-client relationship, holding that "the insured is the sole client of the defense attorneys hired by the insurer." Pine Island Farmers Coop v. Erstad & Riemer, P.A., 636 N.W.2d 604, 609 (Minn. App. 2001). The court of appeals observed that this principle, although not "firmly established" in Minnesota law, was consistent with Minnesota case law and the Minnesota Rules of Professional Conduct. Pine Island, 636 N.W.2d at 608-09.
The court of appeals reversed the district court on the equitable subrogation issue, stating that the Michigan case relied on by the district court "was decided by a divided court and limited to the facts of that case."*fn3 Id. at 610. The court of appeals also noted that "the dissenting opinion is more consistent with prevailing Minnesota law prohibiting an assignment of legal malpractice claims." Id. Finally, the court of appeals explained that, because Farmland settled with Windhorst while Pine Island's appeal was pending ...