A Washington appellate ruling has narrowed how liability insurers can respond when defense counsel errors increase claim costs. In this case, Great American E & S Insurance Company funded a $5 million settlement tied to a climbing gym injury after discovery violations and conflicts of interest undermined the defense. The insurer then attempted to recover losses by pursuing malpractice claims assigned from its insured, C3 Manufacturing.
The court rejected that approach, holding that public policy bars insurers from using assigned malpractice claims against defense counsel when a reservation of rights creates a potential conflict. The decision reinforces a core principle that defense attorneys owe exclusive loyalty to the insured, not the insurer that hires them. Allowing insurers to later sue those attorneys, the court said, would pressure counsel to balance competing interests, which Washington law aims to avoid.
For adjusters, the ruling underscores the financial exposure tied to defense missteps. Discovery failures, undisclosed site visits, and conflicts of interest led to sanctions and increased settlement leverage for the claimant. The outcome shows how quickly a case can exceed policy limits when defense strategy breaks down, especially under scrutiny from opposing counsel.
The decision also limits a recovery tool some insurers have used to offset losses caused by defense counsel negligence. Adjusters and claims managers can no longer rely on post-settlement malpractice assignments in Washington when defending under reservation of rights. Instead, risk control must occur earlier in the claim lifecycle through careful panel counsel selection, active litigation monitoring, and timely intervention when issues arise.
The court left a narrow opening for assignments only where no conflict ever existed, but that scenario will be rare in practice. For most claims involving reservation of rights, insurers must assume that defense counsel errors may not be recoverable through malpractice claims, increasing the importance of proactive oversight and documentation.
