Court Opinion

ID: 9706646
Source: CourtListenerOpinion
Date Created: 2023-08-26 01:48:31.574583+00
Date Added: 2024-06-11T18:22:24.151444
License: Public Domain

Cavanagh, C.J.
(dissenting). We accept the majority’s statement of facts and limit our analysis to the three arguments of Atlanta.1 Since the majority permits Atlanta to proceed under a theory of equitable subrogation, we dissent.
i
Atlanta’s first argument is that there is an attorney-client relationship between the insurer and the attorney for the insured when the interest of the insurer and the insured do not conflict. Atlanta’s second argument is that even if there is not an attorney-client relationship, this Court should extend legal malpractice liability to all foreseeable parties. Atlanta’s third argument is that this Court should find the defendants liable under a theory of equitable subrogation. We will address Atlanta’s arguments seriatim.
A
Atlanta asserts that when an attorney is hired *526by the insurance company to represent its insured an attorney-client relationship exists with both the insured and the insurer. Atlanta recognizes that conflicts between the insurer and the insured can arise involving reservation of rights, defense of alternative claims, coverage, policy limits, and defense of multiple clients. If a conflict arises, the primary obligation of the attorney is to the insured. In this case, however, no conflict of interest arose. According to Atlanta, the interests of the insured and the insurer throughout the entire underlying lawsuit were exactly the same — to limit their exposure as much as possible. Since there was no conflict of interest between the insured and the insurer, a concurrent attorney-client relationship existed between the attorney and the insured and the insurer.
Atlanta relies on the model code promulgated by the American Bar Association and the Michigan Rules of Professional Responsibility.2 Specifically, the American Bar Association Formal Opinion No. 282, issued in 1950, p 622, provides:
From an analysis of their respective undertakings it is evident at the outset that a community of interest exists between the company and the insured growing out of the contract of insurance with respect to any action brought by a third person against the insured within the policy limitations. The company and the insured are virtually one in their common interest.
Plaintiff also cites EC 5-17 of the American Bar *527Association Model Code3 and Michigan Rule of Professional Responsibility, DR 5-105(C).4 According to Atlanta, these rules contemplate the existence of an attorney-client relationship between the attorney and the insured and the insurer, contrary to the decision of the Court of Appeals.5
*528We agree that a special relationship exists between the attorney and the insured and the insurer. The relationship, however, does not exist by the unilateral acts of either the attorney or the insurer. The special relationship results from the consent of the insured. When the insured enters into a contract for insurance, the insured by consent waives certain rights normally provided by the Rules of Professional Responsibility. For instance, the attorney for the insured is required to disclose to the insurer offers of settlement. Normally, disclosure of an offer of settlement by the attorney to a third party would be a violation of the attorney’s duty of confidentiality to the client.6 *529The reason, however, for allowing the attorney to make disclosures to the insurance carrier is not that there is an attorney-client relationship between the insurer and the attorney, but that the client waives this confidentiality with regard to the insurance carrier and agrees to cooperate in the defense of a claim upon signing the contract of insurance.7 Thus, it is the insurance contract that creates a special relationship between the attorney, the insured, and the insurer. This unique relationship, however, does not rise to the status of an attorney-client relationship. We agree with the Court of Appeals when it stated:
Indeed, the insurance company’s relationship is, in reality, with its insured; that is, the insurance company is obligated to pay the attorney fee incurred by its insured in defending litigation covered by an applicable insurance policy. The fact that an insurance company may directly pay the attorney fee rather than merely reimbursing its insured does not affect the nature of the attorney-client relationship nor does it change the fact that the attorney represents the insured client and *530only owes a duty to that insured client. [Id., pp 274-275.][8]
B
This Court is next urged to extend malpractice liability to all foreseeable parties. Relying on Moiling v Alfono, 400 Mich 425; 254 NW2d 759 (1977), Atlanta argues that a cause of action should arise for every injured person in the class of persons likely to be injured and states:
In this circumstance, it can hardly be argued that the insurance carrier who will have to pay any judgment is not within the foreseeable class of persons who will be harmed by the negligent acts of counsel in defense of the insured. Clearly, the entity most likely to be harmed in this circumstance is the insurance carrier. While it is true that the insured also is a person who may be harmed by the malpractice, in this case, and in most other similar cases, it is the insurance company who will suffer the most if not all of the harm.
In Moning at 438-439, this Court stated that "[d]uty is essentially a question of whether the relationship between the actor and the injured person gives rise to any legal obligation on the actor’s part for the benefit of the injured person.” The relationship that gives rise to the duty in a legal malpractice case is the attorney-client rela*531tionship. This general requirement of an attorney-client relationship in a legal malpractice claim was articulated over one hundred years ago in Savings Bank v Ward, 100 US 195, 200; 25 L Ed 621 (1879).
Beyond all doubt, the general rule is that the obligation of the attorney is to his client and not to a third party, and unless there is something in the circumstances of this case to take it out of that general rule, it seems clear that the proposition of the defendant must be sustained. . . . [A]n attorney is not liable to an action for negligence, at the suit of one between whom and himself the relation of attorney and client does not exist, for giving, in answer to a casual inquiry, erroneous information as to the contents of the deed.
This Court addressed an attorney’s duty to a third party in Friedman v Dozorc, 412 Mich 1; 312 NW2d 585 (1981), holding that an attorney owed no legal duty to an adversary.9 Atlanta attempts to distinguish this case from Friedman on the ground that in this case the insurer and the insured were not adversaries, and in fact had identical interests in disposing of the case.10 We find, however, that this is a distinction without a difference.
*532Conflicts of interest are matters of degree.11 In every case where an attorney is hired by an insurer to represent the insured, the attorney embarks down a road laden with potential conflict.12 According to Canon 5, a lawyer is required to "exercise independent professional judgment on behalf of a client.” To recognize a separate duty to the insurer might significantly interfere with the attorney’s ability to choose the most appropriate course of action for the insured.13 We, therefore decline to extend an attorney’s duty to the insurer.
*533c
Atlanta’s third argument, and the crossroad between the majority and this dissent, is that it should be allowed to recover under a theory of equitable subrogation. Relying on Smith v Sprague, 244 Mich 577; 222 NW 207 (1928), Atlanta argues that "[t]he doctrine of equitable subrogation is properly applied where no legal [principles] exist upon which to grant Plaintiff relief, but justice requires that some form of recovery be permitted.”14 In essence, Atlanta claims that as a *534matter of equity, since Security Services has chosen not to sue the defendants, it should be allowed to stand in Security Services’ shoes to prosecute this malpractice claim. Agreeing with Atlanta, the majority reasons that "the attorney-client relationship, the interests of the client, the interests] of the insurer, and ultimately the public, which otherwise would absorb the costs of the malpractice, all benefit from exposure to suit.” Ante, p 523. We disagree that it is in the best interest of the attorney-client relationship to expose the attorney to liability to the insurer, and, simply stated, we believe that the "shoes” of Security Services do not fit Atlanta.
As stated by the majority, subrogation has two forms: conventional (arising out of contract), and legal (arising out of equity). See Machined Parts Corp v Schneider, 289 Mich 567, 574; 286 NW 831 (1939).15
Applying equitable subrogation requires this Court to balance the public policy concerns associated with the attorney-client relationship against the liability of the attorney to an insurer for negligence. Balancing the policy concerns, we disagree with the majority and would find that the policy reasons in favor of the former outweigh the latter. In so finding, we agree with the majority that the cornerstone of the attorney-client relationship is an attorney’s duty of loyalty to the client. Ante, p 519. The majority, however, meddles in this relationship by allowing the insurer to indirectly recover a contractual debt. Although the majority attempts to limit its holding to the facts *535of this case, we dissent from this view because we believe that a prophylactic rule is required to guide the attorney down a road laden with potential conflicts. To hold an attorney, whose sole loyalty runs to the client, liable to the insurer either directly, on the basis of negligence, or indirectly, on the basis of equitable subrogation, could substantially impair an attorney’s ability to make decisions that require a choice between the best interests of the insurer and the best interests of the insured.
ii
Although this case involves the unique relationship between an insurer, an insured, and an attorney hired to represent the insured, a standard principle applies: Those to whom the negligent party owes a duty may maintain a cause of action. In the context of this case, unlike the majority, we find that the cause of action rests with the insured and not the insurer. For all the above reasons, we dissent.
Levin and Mallett, JJ., concurred with Cavanagh, C.J.

 For purposes of convenience, all arguments, whether made by Atlanta or supporting amici curiae, will be referred to as having been made by "Atlanta.”

 We note that the Code of Professional Responsibility, adopted by this Court on October 4, 1971, was superseded by the Michigan Rules of Professional Conduct on October 1, 1988. The Code of Professional Responsibility, however, governs conduct occurring before October 1, 1988.

 EC 5-17 provides:
Typically recurring situations involving potentially differing interests are those in which a lawyer is asked to represent co-defendants in a criminal case, co-plaintiffs in a personal injury case, an insured and his insurer, and beneficiaries of the estate of a decedent. Whether a lawyer can fairly and adequately protect the interest of multiple clients in these and similar situations depends upon an analysis of each case.

 DR 5-105(0 provides:
In the situations covered by DR 5-105(A) and (B), a lawyer may represent multiple clients if it is obvious that he can adequately represent the interest of each and if each consents to the representation after full disclosure of the possible effect of such representation on the exercise of his independent professional judgment on behalf of each.

 See also Informal Ethics Opinion CI-1146 which provides:
It is of social value and ethically permissible for an attorney employed by an insurance company to also represent the insured, provided that the interests of the insurer and the insured do not conflict. If improper influences are exerted by the employer-insurer, which interfere with the independent judgment of the employee-attorney which, if complied with, would result in an attorney having to violate the Code of Professional Responsibility, the attorney must withdraw as counsel for the insured.
In addition, MRPC 1.7, which was adopted after this suit was initiated, provides:
Conflict of Interest: General Rule
(a) A lawyer shall not represent a client if the representation of that client will be directly adverse to another client, unless:
(1) the lawyer reasonably believes the representation will not adversely affect the relationship with the other client; and
(2) each client consents after consultation.
(b) A lawyer shall not represent a client if the representation *528of that client may be materially limited by the lawyer’s responsibilities to another client or to a third person, or by the lawyer’s own interests, unless:
(1) the lawyer reasonably believes the representation will not be adversely affected; and
(2) the client consents after consultation. When representation of multiple clients in a single matter is undertaken, the consultation shall include explanation of the implications of the common representation and the advantages and risks involved.

 Canon 4, DR 4-101 of the Michigan Rules of Professional Responsibility (now MRPC 1.6) provided:
(A) "Confidence” refers to information protected by the attorney-client privilege under applicable law, and "secret” refers to other information gained in the professional relationship that the client has requested be held inviolate or the disclosure of which would be embarrassing or would be likely to be detrimental to the client.
(B) Except when permitted under DR 4-10KC), a lawyer shall not knowingly:
(1) Reveal a confidence or secret of his client.
(2) Use a confidence or secret of his client to the disadvantage of the client.
(3) Use a confidence or secret of his client for the advantage of himself or of a third person, unless the client consents after full disclosure.
(C) A lawyer may reveal:
(1) Confidences or secrets with the consent of the client or clients affected, but only after a full disclosure to them.
(2) Confidences or secrets when permitted under Disciplinary Rules or required by law or court order.
*529(3) The intention of his client to commit a crime and the information necessary to prevent the crime.
(4) Confidences or secrets necessary to establish or collect his fee or to defend himself or his employees or associates against an accusation of wrongful conduct.
(D) A lawyer shall exercise reasonable care to prevent his employees, associates, and others whose services are utilized by him from disclosing or using confidences or secrets of a client, except that a lawyer may reveal the information allowed by DR 4-101(0 through an employee.

 Under this policy, Atlanta and the insured agreed as follows:
[T]he company shall have the right and duty to defend any suit against the insured seeking damages on account of such bodily injury or property damage, even if any of the allegations of the suit are groundless, false or fraudulent, and may make such investigation and settlement of any claim or suit as it deems expedient ....

 See Continental Casualty Co v Pullman, Comley, Bradley & Reeves, 929 F2d 103, 108 (CA 2, 1991).
Even though trial counsel is selected by and looks to an insurer for compensation, and although he keeps the insurer "informed about the progress of the case, we do not find those factors to be conclusive. 'An attorney’s allegiance is to his client, not to the person who happens to be paying for his services.’ ” [Citations omitted.]

 We recognize that in Rosenberg v Cyrowski, 227 Mich 508, 513; 198 NW 905 (1924), this Court held that " '[a]n attorney’s liability does not end with being answerable to his client. He is also liable to third persons who have suffered injury or loss in consequence of fraudulent or tortious conduct on his part.’ ” Citing 1 Thornton, Attorneys at Law, § 295, p 523. We distinguish Rosenberg on the ground that in Rosenberg the plaintiffs were alleging that the attorney’s conduct amounted to fraud. In this case, however, it is undisputed that the attorney’s action amounted to no more than mere negligence.

 See also American Employers’ Ins Co v Medical Protective Co, 165 Mich App 657, 660; 419 NW2d 447 (1988), in which the Court stated:
Although the plaintiff excess insurer may be characterized as an equitable subrogee of the insured physician, it may not sue the insured’s defense attorney for legal malpractice. To hold *532otherwise would in our judgment acknowledge a direct duty owed by the insured’s attorney to the excess insurer' and would be tantamount to saying that insurance defense attorneys do not owe their duty of loyalty and zealous representation to the insured client alone. Such a holding would contradict the personal nature of the attorney-client relationship, which permits a legal malpractice action to accrue only to the attorney’s client.

 We stated in Friedman, p 24, n 10:
"Most if not all questions of conflict of interest are questions of degree. As noted above, minor and inevitable conflicts inherent in client-lawyer relationships necessarily must be tolerated. On the other hand, a conflict of interest may be so sharp as to preclude the lawyer from representing a particular client. For example, under no circumstances could a lawyer properly represent both the plaintiff and the defendant in contested litigation, or represent parties to a negotiation whose interests are fundamentally antagonistic to each other. When it is plain that prejudice to the client’s interests is likely to result, the lawyer should not undertake the representation even with the consent of the client. A client’s consent does not legitimate a lawyer’s abuse of professional office.”

 MRPC 5.4(c) provides:
A lawyer shall not permit a person who recommends, employs, or pays the lawyer to render legal services for another to direct or regulate the lawyer’s professional judgment in rendering such legal services.

 We note that the State Bar of Michigan has twice addressed this issue in informal ethics opinions CI-866 and CI-876.
Informal Ethics Opinion CI-866 provides:
The obligation of the attorney runs to the insured party *533rather than the insurer in such case as the attorney has appeared for and represents the insured in pending litigation, notwithstanding that the insurer is paying for such representation.
If the interest of the insurer and insured in such case are in conflict, the attorney must advocate and represent the interest of the insured in accordance with the Code of Professional Responsibility or withdraw. Canon 7 of the Code of Professional Responsibility; DR 5-105; Informal Ethics Opinion CI-309; and Ethical Consideration, EC-17. (2-10-83)
In addition, Informal Ethics Opinion CI-876 states:
An attorney retained by an insurance company to defend a legal claim under a policy of insurance has an attorney-client relationship with the insured, and is ethically obligated to promptly communicate any significant settlement offer to the insured and otherwise keep the client reasonably informed concerning the progress of the matter. (6-9-83)

 See Commercial Union Ins Co v Medical Protective Co, 426 Mich 109, 117; 393 NW2d 479 (1986), where we stated:
Equitable subrogation is a legal fiction through which a person who pays a debt for which another is primarily responsible is substituted or subrogated to all the rights and remedies of the other. It is well-established that the subrogee acquires no greater rights than those possessed by the subrogor, and that the subrogee may not be a "mere volunteer.” [Citing Foremost Life Ins Co v Waters, 88 Mich App 599, 603; 278 NW2d 688 (1979), rev’d on other grounds 415 Mich 303; 329 NW2d 688 (1982); Smith v Sprague, supra, pp 579-580.]

 Conventional subrogation, or what otherwise might be termed an assignment of a cause of action (in this case a legal malpractice claim), although never addressed by this Court, has been found to be against public policy by the Court of Appeals. See Joos v Drillock, 127 Mich App 99, 104; 338 NW2d 736 (1983). See also Goodley v Wank & Wank, Inc, 62 Cal App 3d 389; 133 Cal Rptr 83 (1976).