An Arch Insurance Group Ltd. unit can pursue a malpractice action against a law firm it hired to represent its policyholder because of its subrogation rights, the Florida Supreme Court ruled Thursday, in overturning two lower court rulings.

Arch Insurance Co. issued a professional liability policy to Fort Lauderdale, Florida-based Spear Safer CPAs and Advisors, which had performed audits for Mutual Benefits Corp., a company in the viatical and life settlement business.

Mutual Benefit was subject to a U.S. Securities and Exchange Commission action, according to Thursday’s ruling in Arch Insurance Co. vs. Kubicki Draper LLP.

Mutual Benefit settled with the SEC and, through a receiver, then sued Spear Safer for alleged accounting malpractice, according to the ruling. This lawsuit resulted in a claim under Spear Safer’s policy with Arch.

In accordance with its policy terms, Arch retained Miami-based Kubicki Draper to defend Spear Safer.  Just before trial, the underlying litigation was settled within policy limits for $3.5 million, the ruling said.

Arch then filed a legal malpractice suit against Kubicki alleging that the litigation against the accounting firm was barred by the applicable statute of limitations and the law firm’s failure to raise the issue on a timely basis significantly increased the settlement costs.

Kubicki filed a motion for summary judgment, arguing that Arch did not have standing to sue the law firm.  Two lower state courts ruled in the law firm’s favor.

The Florida Supreme Court, however, unanimously overturned those rulings, based on the insurer’s subrogation rights.

“Where an insurer has a duty to defend and counsel breaches the duty owed to the client insured, contractual subrogation permits the insurer, who – on behalf of the insured – pays the damage, to step into the shoes of its insured and pursue the same claim the insured could have pursued,” the ruling said.

“In accordance with the terms of the insurance policy, Arch retained Kubicki to defend Spear Safer and paid the $3.5 million settlement against its insured.

“Accordingly, we conclude that Arch has standing through contractual subrogation to maintain a malpractice action against counsel hired to represent its insured,” the ruling said, in remanding the case for further proceedings.

Arch attorneys had no comment, while Kubicki Draper’s attorneys did not respond to a request for comment.

In April, the Nebraska Supreme Court unanimously upheld a ruling in a Chubb Ltd. unit’s favor over the issue of whether it had appropriately notified the city of Omaha of a subrogation claim involving a bus accident.