It is well settled that legal malpractice claims are not usually assignable to non-clients as a matter of public policy. This reflects the fact that the attorney-client relationship is viewed as a highly personal fiduciary relationship. The general rule against assignability protects the sanctity of the attorney-client relationship.

Indeed, permitting the broad assignment of legal malpractice claims could negatively impact an attorney’s effort to meet the duty of loyalty to their client for fear that they could be sued by virtually anyone that claims to be a beneficiary of the attorney’s services to the client.

Another public policy concern underpinning this general rule is that, if malpractice claims were generally assignable, that could be used as an unfair pressure point to settle claims or to pursue malpractice claims solely as a revenue-generating purpose (and not based on the participation of an actually aggrieved party).

Although non-assignability is the general rule in most jurisdictions, some states have permitted assignment in limited circumstances.

Public Policy Does Not Favor Assignability

The U.S. Court of Appeals for the Eighth Circuit in St. Louis recently addressed this issue and affirmed the general rule against assignability. In that case, an out-of-state defense counsel erred by failing to obtain pro hac vice admission before signing an answer, leading to a default judgment being entered against the defendant.

The plaintiff received an assignment of the malpractice claim and pursued it. The Eighth Circuit confirmed that, similar to the assignment of personal injury claims, the assignment of legal malpractice claims “would disturb the peace of society, lead to corrupt practices, and prevent the remedial process of law.”

Where states recognize exceptions to this general rule against assignability, those exceptions are typically driven by other public policy concerns that are viewed to be greater than or more impactful than the public policy concerns that otherwise would preclude assignment.

For example, where a lawyer inadvertently omits an intended beneficiary from a client’s will, the decedent’s malpractice claim may be assignable to heirs. In such cases, it is recognized that the mistake is typically not discovered until after the client has passed away.

Nonetheless, exceptions to the general rule against assignability are limited.

Commercial Transaction Exception

One exception to the general rule can arise in commercial transactions or bankruptcy proceedings. For example, if Company A buys Company B, along with its business assets and liabilities, does Company A have recourse against a lawyer that represented Company B before the commercial transaction took place? Some jurisdictions answer this in the affirmative.

Courts that approve this sort of purchase and assignment have noted that this scenario does not implicate attorney-client relationship issues in the same way that an assignment to a litigation adversary could. This is because the assignment is part of the transfer of all the other assets and liabilities that were at issue in the underlying transaction.

The “surviving” party is hardly disinterested in the predecessor’s legal rights, contrary to the public policy concern against assigning legal malpractice claims to parties that are total strangers to the relationship.

Indeed, businesses involved in commercial transactions can consider whether to address this issue in relevant contract provisions. The transferring party can elect to carve out and keep their potential legal malpractice claims (and any attendant privilege), or can value and sell any claim against its counsel as part of the transaction.

Insurance and Third-Party Defense

Although not strictly an issue of assignment, related issues can arise in the context of the tripartite attorney-client-and insurance company relationship. Similar to how the tripartite relationship affects the typical rules of confidentiality, courts in various states do not always agree on who owns a legal malpractice claim when a lawyer is retained by an insurance company to defend an insured.

Some courts suggest that the client alone owns the claim arising from any alleged malpractice during the course of the representation. Other states suggest that the insurance company owns the legal malpractice claim as either the payor of services or as the party who suffers the “harm” upon any alleged malpractice (by, for example, being responsible to pay a large judgment on behalf of the insured as a result of counsel’s errors at trial).

Thus, there are no hard and fast national rules when it comes to the assignability of legal malpractice claims in the insurance defense tripartite relationship. Although the primary obligation is typically to the client, lawyers and law firms can consider whether they believe there is a conflict of interest that may otherwise impede their ability to take a representation.

By being aware of the general prohibition of assignability—and the limited exceptions to that rule—lawyers and firms can take steps to ensure that they do not face claims from strangers to the attorney- client relationship and can help reduce risk.