Despite growth in the excess insurance sector, the rights of
excess layer insurers are yet to be fully canvassed by Australian
One particular issue receiving judicial attention in the United
States of America is the ability of an excess layer insurer to sue
negligent defence counsel retained by the primary layer insurer.
The subject has been hotly contested, however the Full Court of the
Court of Appeals of the State of Mississippi has recently provided
some clarity to the issue in its decision, Great American E
& S Insurance Company v Quintairos, Prieto, Wood & Boyer
PA 2012 (No 2009-CA-01063-COA).
The Shady decision
Shady Lawn Nursing Home (Shady) held a primary
policy of insurance with Royal Indemnity Company (primary
layer insurer), and an excess policy with Great American E
& S Insurance Company (excess layer
A series of complaints caused Shady to make a claim on the
primary policy. In response, the primary layer insurer retained law
firm, Quintairos, Prieto, Wood & Boyer PA
(Quintairos) to act as defence counsel.
The complaints against Shady resulted in a settlement that
exceeded the limit of the primary policy, forcing the excess layer
insurer to contribute to the settlement sum.
In response to the settlement, the excess layer insurer
commenced proceedings against Quintairos, alleging the law
firm's handling of the matter resulted in an unnecessarily
large settlement against Shady, which enlivened the excess policy.
The excess layer insurer alleged legal malpractice, negligence,
gross negligence, negligent misrepresentation and negligent
The matter was appealed to the Full Court of the Court of
Appeals of the State of Mississippi. In its judgment handed down
earlier this year, the court considered whether an excess layer
insurer could pursue a legal malpractice claim against a lawyer
retained by the primary layer insurer, either directly, or through
the doctrine of equitable subrogation.
The doctrine of equitable subrogation places an excess layer
insurer in the insured's position and enables it to maintain
any action that the insured may have against the defence counsel
for legal malpractice.
Justice Griffis, who wrote the leading judgment, held that the
excess layer insurer could pursue the claim against Quintairos both
directly and pursuant to the doctrine of equitable subrogation.
His Honour held that the excess layer insurer was able to pursue
the claim against Quintairos directly because the excess policy was
an extension of the insured. Neither a direct attorney-client
relationship, nor privity of contract, needed to be established in
order to pursue the claim. This was because the excess layer
insurer's and Shady's interests in the litigation were
coordinate, as both parties sought to ensure Shady's competent
Justice Griffis also noted that Shady had no incentive to pursue
a claim against Quintairos, even if it believed the law firm was
negligent, because it had insurance in place to pay the settlement
sum. Similarly, the primary layer insurer had no incentive to
pursue the claim if it believed the appropriate settlement sum was
at or near the policy limit, regardless of alleged malpractice.
The court also stated that the orderly defence of an insured
often, if not always, required defence counsel to be singularly
focused on an insured's interests. Allowing or expecting excess
layer insurers to enter an appearance in defence of an insured, and
have their own interests in mind, would not lead to the orderly and
efficient resolution of cases with the required focus on the
Application in Australia
The Shady decision provides recent recognition of the
ability of excess layer insurers to hold defence lawyers retained
by the primary insurer accountable for their actions, and seek
redress for excessive settlements over which they have no
While this area of law is yet to fully develop in Australia, the
American jurisprudence reminds us of the need for coherent and
constant judicial guidance in this complicated and contradictory
For excess layer insurers in Australia, the Shady
decision provides some insight as to the potential scope for
development in this area. It also highlights the types of rights
and obligations owed by primary and excess layer insurers, which
should be kept in mind whenever handling claims involving
Winner - EOWA Employer of Choice for Women Citation 2009, 2010
Winner - Australasian Law Awards Gold Employer of Choice 2011
Finalist - ALB Australasian Law Awards 2008, 2010 and 2011 (Best
Winner - BRW Client Choice Awards 2009 and 2010 - Best Australian
Law Firm (revenue less than $50m)
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guide to the subject matter. Specialist advice should be sought
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The failure of a party to call a witness does not necessarily give rise to an adverse inference being drawn in accordance with Jones v Dunkel (1959) 101 CLR 298. An unfavourable inference is drawn only if evidence otherwise provides a basis on which that unfavourable inference can be drawn.
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