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Ethical Handling of Insurance Defense Representations
By
William T. Barker Sonnenschein Nath & Rosenthal LLP
233 South Wacker Drive Suite 7800
Chicago, IL 60606 Ph: (312) 876-8000 Fax: (312) 876-7935
Prepared for:
Mealey’s Ethics Teleconference: Conflict of Interest
May 22, 2008
Table of Contents Page
I. WHO IS THE CLIENT? ..............................................................................2
A. Analysis under the Restatement ............................................................3
1) How Is Client Status Determined?............................................. 3
2) Intent in Insurance Representations ........................................... 5
3) Is There a Need for a Special Informed Consent? ..................... 6
4) Prof. Hazard Interprets the Restatement .................................... 9
B. Cases Precluding or Limiting Dual Representation............................10
C. Summary .............................................................................................15
II. WHEN IS THERE A CONFLICT OF INTEREST?...............................15
A. Coverage Related Conflicts.................................................................18
1) General Principles and Examples ............................................ 18
2) Armstrong Cleaners: Applying Traditional Principles To Environmental Claims ............................................................. 21
B. Cross-Insureds or UM/UIM Claims....................................................27
C. Procedures for Determining Whether Independent Counsel is Required.........................................................................................................29
D. Davalos: Possible Conflicts Regarding an Insured's Affirmative Claim 34
E. Questionable Cases on Contested Scope and Course of Employment 38
F. Conflicts of Interest Resulting from Other Representations Involving the Same Insured............................................................................................42
1) Current Representation Conflicts............................................. 43
2) Former Representation Conflicts ............................................. 43
i
III. WHAT SHOULD THE INSURED BE TOLD AT THE OUTSET OF THE REPRESENTATION?.................................................................................47
A. Disclosure of Counsel’s Relationship with the Insurer.......................48
B. Acceptance of Direction......................................................................49
1) ABA Opinion 96-403............................................................... 50
2) Direction on Subjects Other Than Settlement ......................... 56
C. Lack of Representation on Affirmative Claims ..................................56
D. Sharing of Information ........................................................................59
E. Existence and Implications of Excess or Noncovered Exposure........60
F. The Florida and Ohio Statement of Insured Client’s Rights...............61
G. Minnesota’s Requirements ..................................................................63
IV. CONFIDENTIALITY AND SHARING OF INFORMATION ..............64
A. Confidentiality Generally and Implied Authorization To Disclose....64
B. General Rule for Joint Representations: No Secrets on Matters Relating to Defense........................................................................................66
C. Corollary: No Sharing of Information on Other Subjects..................68
D. Special Rules Where Information May Affect Both Defense and Coverage ........................................................................................................69
1) ABA Opinion 08-450............................................................... 72
2) Critique of ABA Opinion 08-450 ............................................ 78
E. Maintaining Confidentiality Against Third-Parties ............................87
V. EVEN IF THE INSURER IS NOT A CO-CLIENT, ITS COMMUNICATIONS WITH DEFENSE COUNSEL SHOULD BE PRIVILEGED ........................................................................................................88
VI. WORKING WITH THE CLAIM REPRESENTATIVE ........................90
A. Routine Communications and Status Reports.....................................90
ii
iii
B. Consultation with Claim Representative About Investigation, Case Planning, Strategy, Tactics, and Expenditures (e.g. for Expert Witnesses)..91
C. Involvement of the Claim Representative Neither Interferes With Counsel’s Independent Judgment Nor Relieves Counsel of the Obligation To Exercise That Judgment.................................................................................99
VII. WATCHING FOR AND REACTING TO INDICATIONS OF POSSIBLE DIVERGENCE BETWEEN INTERESTS OF INSURED AND INSURER OR BETWEEN CO-CLIENT INSUREDS ................................... 100
A. Typical Indications of Divergence ................................................... 101
B. Consultations with Insured About Possible Divergence.................. 102
C. Memorializing Waivers.................................................................... 106
D. Dealing With Excess Exposure ........................................................ 107
1) Potential Conflicts Affecting Defense ................................... 107
2) Discretionary Settlement Authority ....................................... 108
3) Disclosing Limits ................................................................... 108
4) Finding Other Coverage......................................................... 109
5) Keeping Insured Informed ..................................................... 110
6) Case Evaluation...................................................................... 111
7) Set-Ups................................................................................... 114
8) Communicating During Trial................................................. 114
9) If an Excess Verdict Occurs................................................... 115
E. Dealing With Insured’s Consent or Resistance To Settlement ........ 115
Letters at the Outset of Representation ............................................ 127
Letters Upon Receipt of First Within Limits Demand in Excess Exposure Case........................................................................ 142
Ethical Handling of Insurance Defense Representations
William T. Barker1
Insurance defense relationships have long been the subject of much stress
and heated debate. Among the questions raised have been: (1) Who is the client?
(2) When is there a conflict of interest? (3) What should lawyers tell insured clients
about the representation? (4) How should lawyers handle confidentiality issues in
the representation? (5) How should lawyers react to insurer guidelines and
direction? (6) How should lawyers react when actual or potential conflicts between
insurer and insured arise during the representation? In discussing these questions,
1 William T. Barker is a partner in the Chicago office of Sonnenschein Nath & Rosenthal, with a complex litigation practice concentrating in insurance law. He is a member of the American Law Institute and was active in the debates over the Restatement (Third) of the Law Governing Lawyers, especially the provisions affecting insurance defense lawyers. The International Association of Defense Counsel (“IADC”) awarded him a special certificate of achievement for those efforts. He has published over 100 articles and speaks frequently on insurance and litigation subjects. He has been described as the leading lawyer-commentator on the connections between procedure and insurance. See Charles Silver & Kent Syverud, The Professional Responsibilities of Insurance Defense Lawyers, 45 Duke L.J. 255, 257 n.4 (1995), a comment based on work including Mr. Barker’s writings on insurance defense issues. Mr. Barker was a member of the Editorial Advisory Board of the ABA/BNA Lawyers’ Manual on Professional Conduct from 2004-2007; is a member of the ABA Center on Professional Responsibility and (since 2007) of its Policy Implementation Committee; is a member of the Association of Professional Responsibility Lawyers (“APRL”); is a member of the ethics committees of the IADC, the Chicago Bar Association, the Chicago Council of Lawyers (past chair) and the ABA Section of Litigation; and was a member of the Ethics and Professionalism Committee of the ABA Tort, Trial & Insurance Practice Section (“TIPS”). He is APRL’s liason to the ABA Standing Committee on Professionalism. He was Chair of the IADC Ad Hoc Committee on Interstate Practice, an invited participant in the ABA Working Symposium on Multijurisdictional Practice, a member of the Advisory Council of the ABA Ethics 2000 Commission, and a member of the IADC and TIPS Task Forces on Multidisciplinary Practice.
Mr. Barker is a Sonnenschein partner, with a nationwide practice representing insurers in complex litigation, including matters relating to coverage, claims handling, sales practices, risk classification and selection, agent relationships, and regulatory matters. He also provides expert testimony.
this article assumes that the lawyer has been retained by the insurer to represent the
insured pursuant to a liability insurance policy which at least may provide
coverage for the claims asserted against the insured.
I. Who Is the Client?
The lawyer has been retained to defend the insured and, in order to do so,
must file an appearance for the insured. So, there can be no doubt that the insured
is a client. But there are divergent views on whether the insurer is also a client.
Because that issue affects almost all of the issues discussed here, it will be
considered first.
If there is a conflict of interest between the insured and the insurer regarding
the handling of the defense,2 then the lawyer cannot (without informed consent
from both) represent both insurer and insured. But such conflicts are relatively
infrequent in most types of insurance defense matters, and most jurisdictions hold
that the insurer is ordinarily a client when no conflict of interest precludes that.3
Rather than simply rely on authoritative precedents (which do not exist in all
jurisdictions), we shall consider first principles (as set forth in the Restatement)
and then examine cases that deviate from those principles.
2 Determination of whether such a conflict exists is discussed at 15-47, infra.
2
3 See Exhibit A: Jurisdictions Recognizing Dual-Client Status in the Tripartite Relationship.
A. Analysis under the Restatement
1) How Is Client Status Determined?
The most concise and authoritative statement of the relevant general
principles is found in the RESTATEMENT (THIRD) OF THE LAW GOVERNING
LAWYERS (“RESTATEMENT”).4 It says that it is a question of fact whether the
lawyer appointed by the insurer to defend the insured in a given case also
represents the insurer:
It is clear . . . that the lawyer designated to defend the insured has a client-lawyer relationship with the insured. The insurer is not, simply by the fact that it designates the lawyer, a client of the lawyer. Whether a client-lawyer relationship also exists between the lawyer and the insurer is determined under § 14.5
Section 14, in turn, prescribes the following test:
A relationship of client and lawyer arises when:
(1) a person manifests to a lawyer the person’s intent that the lawyer provide legal services for the person; and either
(a) the lawyer manifests to the person consent to do so; or
(b) the lawyer fails to manifest lack of consent to do so, and the lawyer knows or reasonably should know that the person reasonably relies on the lawyer to provide the services.6
4 RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS (“RESTATEMENT”) (Perm. Vol. 2000). 5 Id. § 134, cmt. f.
3
6 Id. § 14.
These principles were first applied to the dual-client issue in insurance
defense by Professor Charles Silver; he concluded that, in the absence of a conflict
of interest:
an insurance company can be a client without qualification. A company may retain defense counsel to represent its interests generally and without restriction in connection with a matter involving an insured. However, a company may also be less than a client simpliciter. Like anyone else, an insurance company can limit the scope and objectives of a representation, and when a company does so, a lawyer's obligations are more limited than they otherwise would be. An insurance company can also refrain entirely from becoming a client. A company can hire counsel solely to defend an insured, in which event the insured is counsel's only client.7
The Texas Supreme Court adopted Professor Silver’s conclusion in
Unauthorized Practice of Law Committee v. American Home Assurance Co.8:
[W]e have never held that an insurance defense lawyer cannot represent both insurer and insured, only that the lawyer must represent the insured and protect his interests from compromise by the insurer…. Rule 1.06 of the Texas Disciplinary Rules of Professional Conduct allows a lawyer to represent more than one client in a matter if not precluded by conflicts between them. Whether defense counsel represents the insurer is a matter of contract between them.9
7 Charles Silver, Does Insurance Defense Counsel Represent the Company or the Insured?, 72 TEX. L. REV. 1583, 1603-04 (1994). 8 Unauthorized Practice of Law Comm. v. American Home Assur. Co., 51 Tex. Sup. Ct. J. 590, 2008 WL 821034 (Tex. Mar. 28, 2008). Mr. Barker was one of the lawyers for The Travelers Indemnity Company in that case.
4
9 Id. at *12 (emphasis added, footnotes omitted; relying on the quoted passage in Professor Silver’s article).
2) Intent in Insurance Representations
In the normal course of events, the attorney-client relationships are formed
as a result of the insured tendering the defense to the insurer and the insurer
retaining counsel pursuant to that tender. The insured’s tender authorizes the
insurer to retain counsel on behalf of the insured.10 Of course, the insurer could
ask the lawyer to provide legal services only for the insured, in which case it would
not be a client. But the insurer’s own interests are at stake in litigation of a claim
where it may be called upon to indemnify, so it has reason to want the lawyer to
perform legal services for itself as well. Insurers whose policies entitle them to
control the defense generally wish to exercise that right, and that exercise is
facilitated if the insurer is also a client. In particular, there would at least be a
question whether communications between insurer and attorney would be
privileged if the insurer were not a client, while there would be no doubt if the
insurer were a client.
When an insurer with these interests calls upon a lawyer to defend an
insured, one would expect that the insurer desires legal services for itself as well as
for the insured. Doubts as to the existence of an attorney-client relationship are
generally construed against the attorney, who bears the burden of clarifying
5
10 Charles Silver & Kent Syverud, The Professional Responsibilities of Insurance Defense Lawyers, 45 DUKE L.J. 255, 280-83 (1995); Charles Silver, supra, 72 TEX. L. REV. at 1594-95; Countryman v. Breen, 263 N.Y.S. 603, 605-08 (N.Y. Sup. Ct. 1933), rev’d on other points, 271 N.Y.S. 744 (N.Y. App. Div. 1934), aff’d 198 N.E. 536 (N.Y. 1935); Moritz v. Medical Protective Co., 428 F. Supp. 865, 871-72 (W.D. Wis. 1977); ABA Comm. on Prof’l Ethics & Formal Op. 282 (1950).
ambiguity (as illustrated by subdivision (1)(b) of RESTATEMENT § 14). So even if
it is not explicit that the insurer intends to be a client, that should be the result
unless either the insurer or the lawyer specifically indicates otherwise.
3) Is There a Need for a Special Informed Consent?
The contrary argument is that the lawyer may not undertake a joint
representation without first having the informed consent of both clients. Neither
the insurance policy nor the tender of the defense assures that the insured has
consented to a joint representation or that any such consent is informed. Moreover,
it is suggested, once properly informed, the insured ought normally to refuse
consent, thereby preventing the insurer from being a co-client.11
I offer a two-step response.12 First, I challenge the proposition that informed
consent is required before commencement of the representation. Suppose an
insured tenders defense of a claim to an insurer on the eve of a potential default.
The insurer calls a lawyer seeking to have an appearance entered to prevent a
default. The lawyer sees a potential for conflict which would arise upon filing an
answer. But there is no conflict as to the filing of the appearance itself. I suggest
that the lawyer could properly undertake a joint representation of insurer and
insured (if that were requested), so long as the insurer were advised of the problem
11 This argument is developed in Stephen L. Pepper, Applying the Fundamentals of Lawyers’ Ethics to Insurance Defense Practice, 4 CONN. INS. L.J. 27 (1997-98).
6
12 This response is developed at length in William T. Barker, Insurance Defense Ethics and the Liability Insurance Bargain, 4 CONN. INS. L.J. 75 (1997-98), prepared as a commentary on Prof. Pepper’s article.
and of the potential need for substitution of other counsel if the conflict problem is
not resolved prior to the time at which an answer must be filed.13 After the
appearance is filed, the problem could be explored and, if it proved genuine, both
clients could be consulted about any necessary consent (if consent were otherwise
appropriate). If consent were necessary and not available, the joint representation
could be terminated and new counsel obtained.
Second, I challenge the proposition that (absent a conflict of interest) the
insured is free (once consultation about the risks of joint representation does occur)
to refuse that consent, except at the cost of jeopardizing the right to
indemnification. The insurer’s promise of indemnification is based on the
insured’s cession of the right to control the defense and agreement to cooperate
with that defense. Joint representation facilitates the insurer’s exercise of these
rights. At least unless joint representation endangers some interest of the insured
which the insured has not agreed to forego, I would argue that refusal of consent
breaches both the express terms of the contract and the insured’s duty of good
faith, not to gratuitously render the insurer’s performance more difficult or
expensive.
7
13 In the example given, joint representation is probably unnecessary in terms of either protecting the insured or minimizing claim costs. But if professional responsibility rules do not forbid such representation, it should not matter that it is not strictly necessary. Besides, the example is deliberately unrealistic, and more complicated examples could be constructed where (initial) joint representation would serve claim cost minimization purposes.
On the latter point, the RESTATEMENT takes no position. It properly points
out that it addresses only the law governing a lawyer representing an insured
person, not the law governing the relationship between insurer and insured.14 Of
equal importance, that is not an issue on which counsel representing the insured
could take a position adverse to the insured’s possible interest in withholding the
consent, if one were required.
But the RESTATEMENT does say:
The lawyer’s acceptance of direction from the insurer is considered in [other provisions]. With respect to client consent . . . in insurance representations, when there appears to be no substantial risk that a claim against a client-insured will not be fully covered by an insurance policy pursuant to which the lawyer is appointed and to be paid, consent in the form of acquiescence of the client-insured to an informative letter to the client-insured at the outset of the representation should be all that is required. The lawyer should either withdraw or consult with the client-insured when a substantial risk that the client-insured will not be fully covered becomes apparent.15
The requirement for consent concerns the insurer’s exercise (or potential
exercise) of control. So it does not apply to the mere formation of the attorney-
client relationship, which necessarily occurs before any such exercise. The 14 RESTATEMENT, § 134, cmts. a, f. I regard this point as an important one. I have previously argued that many of the problems in dealing with the tripartite relationship stem from an misconceived effort to protect insureds against all forms of mishandling of the defense of claims against them through the law of professional responsibility, when many of those problems are better handled by insurance law. William T. Barker, The Tripartite Relationship and Protection of the Insured: Beyond Professional Responsibility, 18 INS. LITIG. RPTR. 528 (1996). And, as explained in the preceding paragraph, insurance law may solve some of those problems by obliging the insured to give some of the consents required by the law of professional responsibility.
8
15 RESTATEMENT, § 134, cmt. f. (cross-references omitted)
reference to acquiescence in an informative letter was designed to codify one
aspect of ABA Formal Opinion 96-403. Early drafts of the RESTATEMENT had
problematic language stating that the insured’s informed consent is a
“precondition” to the representation. With the removal of this language, I think the
Restatement analysis is now fully consistent with mine on this point.
4) Prof. Hazard Interprets the Restatement
Prof. Geoffrey C. Hazard, Jr., Director of the American Law Institute when
the Restatement was adopted and Reporter of the Model Rules of Professional
Conduct, provided an expert opinion analyzing the effect of the RESTATEMENT:
The Restatement takes the position that the insurer may or may not be a client, depending on the facts surrounding the creation of the attorney-client relationship. Given the facts [of the typical insurance representation], in my opinion the Restatement standard would produce the same result as current Montana law [which treated the insurer as a client].16
16 Opinion of Geoffrey C. Hazard, Jr., 11-12, In re Rules of Prof. Cond., 2 P.3d 806 (Mont. 2000) (footnote omitted). In the omitted footnote, Professor Hazard cites “RESTATEMENT
(THIRD) OF THE LAW GOVERNING LAWYERS § 215, cmt. f (Prop. Final Dr. No. 2 1998). Section 215 of the draft [was] amended before being approved [and renumbered as § 134], but the amendment did not affect this point.” Id. n.6.
9
The (former) Montana law referenced by Prof. Hazard is Palmer v. Farmers Ins. Exch., 261 Mont. 91, 108, 861 P.2d 895, 905 (1992) (insurer “employs the attorney to represent the interests of both the insured and the insurer”); State ex rel. United States Fid. & Guar. Co. v. Montana Second Jud. Dist. Ct., 240 Mont. 5, 10, 783 P.2d 911, 914 (1989) (“Absent a conflict of interest, the attorney hired by the insurance company to defend its insured, represents both”); Safeco Ins. Co. v. Ellinghouse, 223 Mont. 239, 252-53, 725 P.2d 217, 226 (1986) (same). Those principles are still the law in most jurisdictions, even though the Montana Supreme Court repudiated them in the case where Prof. Hazard gave his opinion.
B. Cases Precluding or Limiting Dual Representation
The Montana Supreme Court has held, in In re Rules of Professional
Conduct,17 that a defense lawyer appointed by an insurer never represents the
insurer. It based this holding on a misuse of the Rules of Professional Conduct and
on an unsupported (and unsupportable) assertion that conflicts are so pervasive that
the usual case-by-case methods of addressing such conflicts are inadequate.
Preexisting Montana law held that the insurer is a co-client, and one with an
absolute right of control.18 The court nevertheless dismissed the prior law for its
failure to consider whether an insurer is a client “under the Rules of Professional
Conduct.”19 Ironically, Montana previously had adopted the Model Rules, which
expressly refrain from addressing that particular issue. Instead, the Scope
statement to the Model Rules declared that “for purposes of determining a lawyer’s
authority and responsibility, principles of substantive law external to these Rules
determine whether a lawyer-client relationship exists. … Whether a client-lawyer
relationship exists for any specific purpose can depend on circumstances and may
be a question of fact.”20 Thus, the Rules of Professional Conduct could not
17 In re Rules of Prof. Cond., 2 P.3d 806 (Mont. 2000). Mr. Barker was one of the lawyers for Allstate Insurance Co., Zurich American Insurance Co., and Universal Underwriters Insurance Company in that case. The Montana Supreme Court provides vendor-neutral citations (in this case, 2000 MT 110) by numbering the paragraphs of its opinions. This article will cite to the paragraph numbers (“Mont Op. ¶ __”) instead of the page numbers. 18 See cases purportedly distinguished in Mont. Op. ¶¶ 24-33. 19 Id. ¶ 23.
10
20 AMERICAN BAR ASS’N, ANNOTATED MODEL RULES OF PROFESSIONAL CONDUCT, xvii (3d ed. 1995). This language has been adopted in Texas, as paragraph 12 of the Preamble to the Texas Disciplinary Rules of Professional Conduct.
provide any basis, in the absence of a conflict of interest, for rejecting insurer
clienthood and right to control. Montana did not adopt the Scope Statement, but it
did adopt the text of the Rules, which were drafted not to address when an
attorney-client relat
ionship exists.
The Montana court also necessarily rejected the normal rifle-shot, case-by-
case handling of conflicts in favor of a blunderbuss prohibition on insurer direction
even when there was no conflict and only the insurer’s money was at stake. The
Montana court sought to justify this by asserting that insurer/insured relationships
are so “permeated with potential conflicts” that case-by-case solutions are
inadequate.21 The supposed pervasiveness of conflicts is a factual statement. This,
however, was an original proceeding responding to a question unilaterally framed
by the lawyers who sought the court’s intervention. There was no factual record
and the court refused the respondent insurance companies the opportunity to
present evidence on issues including the infrequency of conflicts and the
nonexistence of harm to insureds resulting from such conflicts.22 Anyone familiar
with insurance defense practice knows that conflicts are both far less common and
far more easily managed than the Montana court assumed. Other courts ought not
to follow the Montana opinion, and certainly not without allowing presentation of
evidence on the factual assertion which is the necessary premise for that decision.
21 Id. ¶ 37.
11
22 Similar statements were made, also without the benefit of any factual record, in another advisory opinion. American Ins. Ass’n v. Kentucky State Bar, 917 S.W.2d 568 (Ky. 1996).
The Montana court’s approach to this issue contrasts sharply with the recent
decision of the Texas Supreme Court in Unauthorized Practice of Law Committee
v. American Home Assurance Co.23 That case approved the propriety of insurers’
use of lawyer employees, known as “staff counsel,” to defend their insureds.
Among the arguments against permitting this were claims that the employment
relationship between an insurer and staff counsel increases and exacerbates any
conflicts between insurer and insured, because staff counsel were supposedly more
susceptible to pressures and loyalties that could lead them to deviate from
undivided loyalty to their insured clients. While the Montana court relied on
speculated about possible dangers to insureds, the Texas Supreme Court noted that
“neither the [Unauthorized Practice of Law] Committee nor amici has been able to
cite any empirical evidence—any actual instance—of injury to a private or public
interest caused by a staff attorney’s representation of any insured.”24
The Texas court found this quite significant:
Given that insurers have used staff attorneys across the country for decades, the lack of evidence of harm is an important consideration. There is no question, of course, that conflicts arise in the tripartite insurer-insured-defense attorney relationship, but there is nothing to indicate that staff attorneys do not resolve them as they would be resolved in any other representation or withdraw, just as private attorneys would.25
23 Unauthorized Practice of Law Comm. v. American Home Assur. Co., 51 Tex. Sup. Ct. J. 590, 2008 WL 821034 (Tex. Mar. 28, 2008). 24 Id. at *10.
12
25 Id.
In the absence of any evidence showing a need for a categorical prohibition on use
of staff counsel, the court relied on staff counsel to refrain from handling cases
where particular facts create a conflict. 26
The Montana single-client rule has been rejected by the only court to
consider whether to follow it. In Paradigm Insurance Co. v. Langerman Law
Offices,27 the Arizona Supreme Court followed the RESTATEMENT analysis and
held that an insurer can be a co-client with the insured unless the risk of a conflict
in the particular case is so great that joint representation is precluded:
the potential for conflict between insurer and insured exists in every case; but we note that the interests of insurer and insured frequently coincide. For instance, both insurer and insured often share a common interest in developing and presenting a strong defense to a claim that they both believe is unfounded as to liability, damages or both…. Thus, by serving the insured’s interests the lawyer can also serve the insurer’s, and if no question arises regarding the existence and adequacy of coverage, the potential for conflict may never become substantial. In such cases, we see no reason why the lawyer cannot represent both insurer and insured.28
26 Id. at *10-12. Should staff counsel handle a case where a conflict existed, the insured would have remedies for any harm that might result, just as in cases where an outside lawyer retained by the insurer improperly handled such a case. E.g., State Farm Mut. Auto. Ins. Co. v. Traver, 980 S.W.2d 625, 629 (Tex. 1998) (remanding for factual development of such a claim); Employers Cas. Co. v. Tilley, 496 S.W.2d 552 (Tex. 1973) (defense counsel’s exploitation of relationship with insured to surreptitiously develop late notice defense estopped insurer to assert that defense). 27 Paradigm Ins. Co. v. Langerman Law Offices, 24 P.3d 593 (Ariz. 2001).
13
28 Id. at 598 (emphasis added). The court went on to say that “in the unique situation where the lawyer actually represents two clients, he must give primary allegiance to the one (the insured) to whom the other (the insurer) owes a duty of providing not only protection, but of doing so fairly and in good faith.” Id. There is no reason here to inquire whether other states would or should follow this aspect of the Arizona rule, or whether there are any actual
The Minnesota Supreme Court has imposed requirements that must be
satisfied before defense counsel can treat the insurer as a co-client with the
insured.29 The court recognized that under the usual rules governing formation of
attorney-client relationships, the insurer would almost always be a co-client, absent
a conflict of interest precluding joint representation of insurer and insured.30 It
also recognized that a few courts have held that an insurer may never be a co-cl
with the insured.
ient
31 The court declined to adopt so extreme a rule.32 But it did
conclude that the risks of conflicts of interest posed by dual representation were so
great as to justify imposing special requirements of consultation and consent.33 So,
to permit dual representation, it held that there must be both an absence of conflict
and an express consent by the insured after consultation with counsel.34
This requirement is misguided. The basis of the court’s concern is not any
perception that conflicts are common, and conflicts are actually uncommon. The
concern is that, were a conflict to arise, the temptation to favor the insurer would
circumstances in which an insured would derive any protection from that rule not already provided by the lawyer’s duty of undivided loyalty. The Arizona court also appeared to perceive (or fear) conflicts in a wider range of circumstances than suggested here. Id. at 597 & n.1, 598. Again, there is no need to debate this here. If there is a sufficient risk of conflict, as that may be defined under local law, joint representation will be precluded under the analysis here. If there is not such a risk, this analysis and the Arizona Court agree that a joint representation would be proper. 29 Pine Island Farmers Coop v. Erstand & Riemer, 649 N.W.2d 444 (Minn. 2002). 30 Id. at 451. See Charles Silver, Does Insurance Defense Counsel Represent the Company or the Insured, 72 TEX. L. REV. 1583 (1994). 31 649 N.W.2d at 449. 32 Id. 33 Id. at 450-51.
14
34 Id. at 451.
be strong.35 But the temptation to favor one client is likely to be present in many
conflicts. That is why the law requires a lawyer, absent informed consent to a
conflict, to decline a conflicted dual representation and to withdraw from dual
representation if an unexpected conflict arises. That requirement should prevent
defense counsel from ever having any opportunity to favor one client at the
expense of the other. The court offers no reason for thinking that insurance
defense counsel are any more likely than other lawyers to disobey this rule. Yet, if
they comply, there is no special risk to support the special requirement for an
express consent.
C. Summary
The majority rule is that defense counsel retained by an insurer is presumed
to represent both the insured and the insurer unless there is a conflict of interest
precluding joint representation. No satisfactory reason has been identified for
deviating from that rule. Of course, the lawyer must follow the law in the lawyer’s
own jurisdiction and, to do so, must decide what that law is. But, if that law is
unclear, the foregoing analysis may be useful in determining that issue.
II. When Is There a Conflict of Interest?
The first question that any lawyer must answer when asked to undertake a
representation is whether that representation will involve a conflict of interest. If
representing the insured and the insurer jointly would create a conflict of interest,
15
35 Id. at 450-51.
then counsel cannot be assigned a joint representation. Independent counsel,
representing only the insured, would have to be paid by the insurer to discharge its
duty to defend.
Under the Model Rules, the primary standard for determining whether there
is a conflict is Rule 1.7(a):
(a) Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exist if:
`(1) the representation of one client will be directly adverse to another client; or
(2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client, a former client or a third person or by a personal interest of the lawyer.
A material limitation (as that term is used in paragraph (a)(2) of the rule)
exists when “there is a significant risk that a lawyer’s ability to consider,
recommend or carry out an appropriate course of action for the client will be
materially limited because of the lawyer’s other responsibilities or interests.”36 In
applying this standard to insurance representations, courts have demanded special
sensitivity to any situation where the choices made by defense counsel could
benefit the insurer at the insured’s expense.
16
36 AMERICAN BAR ASSOCIATION, MODEL RULES OF PROFESSIONAL CONDUCT, RULE 1.7, cmt. [8] (2007).
The lawyer retained by the insurer could have incentives to favor the insurer
in such circumstances. It is the insurer who selected counsel and pays the fee,
thereby earning a measure of gratitude not shared by the insured. More
importantly, it is to the insurer, rather than the insured, that counsel looks for future
referrals: “[t]he attorney’s relationship with the insurer is usually ongoing,
supported by a financial interest in future assignments, and, like other long-term
relationships, sometimes strengthened by the real friendship.”37 Thus, it is all too
easy for defense counsel to wish to protect the insurer from fraud or lack of
cooperation by the insured or even to aid it in coverage disputes with the insured,
forgetting the loyalty owed to the insured. As a result, many cases have found it
necessary to condemn such acts of disloyalty and to impose appropriate remedies
against counsel or the insurer whose interests counsel sought to advance against
the client insured.38
Where the existence of divergent interests in the conduct of the defense is
inherent in the case, the conflict of interest rules require that the representation be
declined, unless all affected clients give informed consent. The primary example
37 See 4 RONALD E. MALLEN & JEFFREY M. SMITH, LEGAL MALPRACTICE, §§ 30.3, at 215 (2008 ed.).
17
38 See, e.g., Betts v. Allstate Ins. Co., 201 Cal. Rptr. 528 (Cal. Ct. App. 1984) (defense counsel encouraged insured to adopt “no-settlement” position which improperly exposed insured to serious risk of personal liability); Parsons v. Continental Nat’l American Group, 550 P.2d 94 (Ariz. 1976) (disclosure to insurer of confidential information indicating that insured’s actions were intentional rather than negligent); Employers Cas. Co. v. Tilley, 496 S.W.2d 552 (Tex. 1973) (exploitation of position as defense counsel to develop late notice defense on behalf of insurer); Fidelity & Cas. Co. v. McConnaughy, 179 A.2d 117, 121-24 (Md. 1962) (taking deposition to establish lack of cooperation); and cases cited therein.
in insurance representations occurs when some factual issue bearing on the
insured’s liability also bears on existence of coverage. A fact of this sort has been
described as a “pivotal fact,”39 whose existence is the most common source of
conflicts requiring independent counsel.
A. Coverage Related Conflicts
1) General Principles and Examples
For example, if the insured is sued on alternative theories of negligence and
battery, the former will typically be covered but the latter will not. Of course, the
insurer and the insured share an interest in defeating the suit entirely and in
minimizing any judgment. But if liability is found, the insured would prefer that it
be based on (covered) negligence, while the insurer’s interest would be served if it
were based on (noncovered) battery. Because the way in which the case is
defended has a real possibility of affecting the basis on which any liability would
be found, this divergence of interest creates a conflict of interest for any defense
counsel seeking to advance the insurer’s interest as well as that of the insured.40
But the mere existence of some question as to coverage does not create a
conflict. Only if the way in which the insured’s defense is handled would affect
39 The term is that of Ronald Mallen. See Ronald E. Mallen, A New Definition of Insurance Defense Counsel, 53 INS. COUN. J. 108, 114-15 (1986).
18
40 E.g., San Diego Federal Credit Union v. Cumis Ins. Soc’y, 208 Cal. Rptr. 494 (Cal. Ct. App. 1984) (suit for both negligent and intentional injuries); Brohawn v. Transamerica Insurance Co., 347 A.2d 842 (Md. 1975) ( same); Maryland Casualty Co. v. Peppers, 355 N.E.2d 24 (Ill. 1976) (same).
the determination of coverage does a conflict exist,41 and many coverage questions
are unrelated to the matters at issue in the tort action.
Example 1: Assigned counsel is asked to defend a case involving an auto accident in which the insured’s cousin was injured when the car operated by the insured ran into a tree. The cousin had been living with the insured while attending a nearby school for a semester, but has returned to his parents’ home after being released from the hospital. The claim representative assumes the insured’s defense, but reserves the right to deny coverage under the policy’s exclusion for injuries to relatives residing in the insured’s household. Coverage counsel brings a declaratory judgment action to resolve that issue. Because the resident relative issue does not overlap with the issues in the tort action, it does not create any conflict of interest, and assigned counsel may undertake the defense.42 Because the insured’s residence is irrelevant to the tort action, counsel should not disclose information on that subject to the claim representative.
Example 2: Policyholder is a roofing subcontractor. After completion of a building, owner sues the general contractor and the subcontractor, claiming that defects in the workmanship of the roof have caused the roof to deteriorate, resulting in leaks that damaged the floor below the roof and the contents of the building. Claim representative assumes the defense, but reserves the right, under the work/product exclusions, to deny coverage for repair or replacement of the roof itself. Assigned counsel may undertake the defense, because the handling of the defense cannot shift liability between covered and noncovered grounds.43 The cost of repairing the roof will be a readily determinable amount and tort liability
41 RESTATEMENT § 123, cmt. c(iii) (general antagonism between clients not conflict, so long as conflicting interests not implicated in particular representation). 42 McGee v. Superior Ct., 221 Cal. Rptr. 421 (Cal. Ct. App. 1985).
19
43 See Blanchard v. State Farm Fire & Cas. Co., 2 Cal. Rptr. 2d 884 (Cal. Ct. App. 1991); Dynamic Concepts, Inc. v. Truck Ins. Exch., 71 Cal. Rptr. 2d 882, 887-88 (Cal. Ct. App. 1998).
for both covered and noncovered damages will be a single issue.
The defense may affect a coverage determination if the same facts are
implicated both in fixing liability and in determining coverage. Even where that is
so, the impact of any conflict may be avoidable if the common issue need not be
determined in the litigation to be defended by shared counsel or if that
determination will not impact on later disposition of the coverage issue.44
But if the case involves a “pivotal fact,” and if the conflict on that issue
cannot reliably be avoided by procedural means, then there will be an
irreconcilable conflict. Counsel must advocate a position regarding the pivotal fact
and any position will be contrary to the interests of one client or the other. By
shaping the defense, counsel could thus shift liabilities found by the court between
covered and non-covered status. Where the coverage issues present such an
opportunity, the insured is entitled to independent counsel unless the insured gives
informed consent to the conflict.
In addition to the alternative allegations of negligent and intentional conduct
already noted, such conflict-creating issues have been found in a number of other
situations. Examples include whether the insured complied with applicable safety
20
44 See Gray v. Zurich Ins. Co., 54 Cal. Rptr. 104, 114, 419 P.2d 168, 178 (Cal. 1966); Ferguson v. Birmingham Fire Ins. Co., 460 P.2d 342, 348-49 (Or. 1969).
regulations relied upon in defining coverage45 and whether products liability
results from a design defect or a manufacturing error.46
Another example of a case where a conflict may be predicated on the
insurer’s potential ability to manipulate the defense for its own benefit is one
where the complaint alleges multiple acts of malpractice, one of which was during
the insurer’s policy period and the others of which occurred while the defendant
hospital was self-insured.47 Thus, control of the defense might allow the insurer to
shape the case so that any liability found for injuries relating to a single course of
treatment would be based on acts subsequent to (rather than those prior to)
expiration of its policy, thus potentially converting a covered loss into a
non-covered one.
2) Armstrong Cleaners: Applying Traditional Principles To Environmental Claims
In Armstrong Cleaners, Inc. v. Erie Insurance Exchange,48 the Indiana
Department of Environmental Management determined that a dry cleaning
operation was a potential source of cleaning solvents in groundwater. The facility
was owned by Mary Ivey, who had leased it to Richard and Betty Armstrong and
45 See, e.g., Executive Aviation, Inc. v. National Ins. Underwriters, 94 Cal. Rptr. 347 (Cal. Ct. App. 1971); Prashker v. United States Guar. Co., 154 N.Y.S.2d 910, 136 N.E.2d 871 (N.Y. 1956). 46 See, e.g., United States Fid.& Guar.Co. v. Louis A. Roser Co., 585 F.2d 932 (8th Cir. 1978) (Utah law). 47 Illinois Masonic Med. Center v. Turegum Ins. Co., 522 N.E.2d 611 (Ill. App. Ct.. 1988).
21
48 Armstrong Cleaners, Inc. v. Erie Insurance Exchange, 364 F. Supp. 2d 797 (S.D. Indiana 2005).
their corporation from 1989 to 1996 and had leased it to Ronald and Carolyn Ray
both before and after the lease to the Armstrongs. Erie Insurance Company had
insured the Armstrongs during their tenure as lessees.49
The Department notified Ivey and the Rays that they were potentially
responsible parties (“PRP’s”) for cleaning up the pollution. Ivey sued her insurer,
State Farm for coverage, and State Farm sued the Rays, the Armstrongs, and their
insurers. Erie assumed the defense, while reserving its right to deny coverage if it
were determined (1) that the contamination were not an “occurrence” (that is, an
“accident”) or (2) if the Armstrongs expected or intended the contamination. Erie
also reserved its rights under its pollution exclusion.50 When Erie refused to pay
the Armstrongs’ independent counsel, they brought this action to establish their
right to independent counsel and recover fees they had incurred for such counsel.
a) Basic Conflict Standard
In addressing this issue, the court recognized that whether the insured is
entitled to independent counsel “is governed at its core by the Rules of
Professional Conduct that address conflicts of interest where an attorney has
multiple clients or where a third party is paying the attorney to represent a client
(such as the insured).”51 “In cases where the handling of the underlying litigation
may affect whether the claim is covered or not covered, the conflict of interests 49 Armstrong Cleaners, 364 F. Supp. at 802-03. 50 Id. Erie admitted that the pollution exclusion is unenforceable under current Indiana case law. E.g., American States Ins. Co. v. Kiger, 662 N.E.2d 945 (Ind. 1996).
22
51 Armstrong Cleaners, 364 F. Supp. at 807.
may be sufficiently clear and immediate that one attorney cannot represent the
interests of both the insurer and the insured.”52
But applying this standard requires case-by-case, fact-specific analysis:
Under this standard, parties and courts cannot resort to easy rules of thumb. "There is no talismanic rule that allows a facile determination of whether a disqualifying conflict exists. Instead, '[t]he potential for conflict requires a careful analysis of the parties respective interests to determine whether they can be reconciled … or whether an actual conflict of interest precludes insurer-appointed defense counsel from presenting a quality defense for the insured.'"
Whether the potential conflict of interest is sufficient to require the insured's consent is a question of degree that requires some predictions about the course of the representation. If there is a reasonable possibility that the manner in which the insured is defended could affect the outcome of the insurer's coverage dispute, then the conflict may be sufficient to require the insurer to pay for counsel of the insured's choice. Evaluating that risk requires close attention to the details of the underlying litigation. The court must then make a reasonable judgment about whether there is a significant risk that the attorney selected by the insurance company will have the representation of the insureds significantly impaired by the attorney's relationship with the insurer.53
b) Relationship of the Coverage Issues To Those In the Underlying Action
Under the standard thus articulated, the court agreed that the reservation
under the pollution exclusion did not create any conflict, nor did a generic
reservation of the right to deny coverage if some new facts implicated a coverage
52 Id. at 806.
23
53 Id at. 808 (emphasis added, citations omitted).
defense.54 The prospect of unknown facts turning up did not pose a "significant
risk" to the representation and the pollution exclusion was both unenforceable and
unrelated to the issues presented in the defense of the case.
The "occurrence" requirement and the "expected/intended" exclusion raised
essentially the same questions for purposes of conflict analysis. Liability issues in
the underlying action did not pose any conflict, because they turned only on
whether the Armstrongs "caused or contributed to" the release of a hazardous
substance. Culpability, even to the extent of negligence, is not an issue in the
underlying action, so there would be no overlap with the coverage issues.55
But the court's analysis did not stop with the liability issues. When it came
to allocation of liability among those contributing to the contamination, issues of
culpability and degree of care would be at issue. Thus, State Farm and the Rays,
would have "powerful incentives" to show culpability by the Armstrongs in order
to maximize the Armstrongs' share of the total liability.56 The law on allocation
"invite[s] evidence" on "the Armstrongs' knowledge, intent and degree of care."57
Moreover, findings of fact and explanations of decisions about allocation might
well address issues of knowledge and intent.58
54 Id at. 809-10. 55 Id. at 811. 56 Id. at 811-12. 57 Id. at 812.
24
58 Id. at 813-14.
c) Risks Posed By the Coverage Issues To the Representation in the Underlying Action
"The question under Rule of Professional Conduct 1.7(a)(2) is whether there
is a 'significant risk' that an attorney selected by the insurer and subject to its
direction would be 'materially limited' in representing the Armstrongs by a
relationship with the insurer …."59 If the Armstrongs were found to be
contributors to the contamination, Erie's interests might be served by a "less than
vigorous defense" on the allocation issues if findings of culpability might aid its
coverage defense.60 Moreover, defense counsel would need to investigate facts
and conduct discovery on the remedial issues and would need to advise Erie on the
results of that investigation and discovery so that Erie could take it into account in
making decisions about settlement or defense strategy.61
"Such information could easily work to the detriment of the Armstrongs in
the coverage dispute with Erie."62 Moreover,
Erie apparently felt it had sufficient information about the situation at the Tillotson location to reserve its rights based on the 'expected or intended' exclusion and the definition of occurrence. The prominence of those same factual and legal issues in the remedial portion of the underlying litigation, together with the specific terms of Erie's reservation of rights, means that the undisputed facts show a significant risk that attorneys selected by the
59 Id. at 814. 60 Id. 815-16. 61 Id. at 814.
25
62 Id. at 815-16
insurer would be materially limited in their representation of the Armstrongs.63
The court emphasized that it was not "adopt[ing] … a per se rule."64 Rule
1.7(a)(2) "requires a close look at the conflicting interests, the issues in the
underlying litigation, and the risk that that the attorney's relationship with the
insurer will materially limit his representation of the insured."65
While Erie had divided the claim file, with different adjusters for defense
and coverage, that did not obviate the conflict. To the extent that the concern was
disclosure or use of the insured's confidential information, supervisors with
responsibility for both files could make use of such information. Moreover, the
defense adjuster knew the terms of the reservation of rights and would therefore be
able to identify aspects of the case where Erie's coverage interests would be
implicated by defense decisions the adjuster would make.66
d) Implications
Armstrong Cleaners calls attention to the need to consider aspects of the
likely litigation beyond simply the elements of the plaintiff’s claim. Conflicts may
arise from litigation with co-defendants, so the issues which might arise with the
co-defendants must be considered in deciding whether there is a conflict requiring
independent counsel. If a reservation has been asserted, defense counsel should
63 Id. at 816. 64 Id. 65 Id.
26
66 Id. at 817.
assume that there is a significant risk that some evidence might support that
reservation. If that would create a conflict, it may be necessary for the insured to
have independent counsel, unless the insurer will withdraw the reservation.
B. Cross-Insureds or UM/UIM Claims
Some courts have concluded that conflicts of this sort can also arise in auto
accidents where the insured has a claim that the other party is (1) at fault and (2)
either uninsured or underinsured. Because the UM or UIM claim could give the
insurer an interest in establishing the insured’s contributory or comparative fault,
there could be an incentive to defend the claim against the insured less
vigorously.67 Similar problems can arise in situations where two of the insurer’s
insureds assert covered claims against one another based on the same incident68 or
where two insured defendants have inconsistent defenses.69 The facts in each case
must be carefully analyzed to determine whether there is any substantial basis for
concluding that the insurer has an interest that could be served by an impaired
defense. If so, independent counsel should be provided.
Example 3: Insured was in an accident with a Uninsured Driver. There is considerable evidence of fault on each side. Uninsured Driver suffered modest injuries, probably valued at less than $25,000, while Insured suffered serious injuries, probably valued in excess of $100,000. Insured has $50,000 per person UM limits. Because the amount at stake on the UM claim exceeds
67 Nationwide Mut. Ins. Co. v. Webb, 436 A.2d 465, 476-77 (Md. 1981). 68 O’Morrow v. Borad, 167 P.2d 483 (Cal. 1946).
27
69 Murphy v. Urso, 430 N.E.2d 1079, 1083-84 (Ill. 1981)
that on the claim against the insured and comparative fault will be a critical issue on both claims, there is a conflict of interest and the insured is entitled to independent counsel.
Example 4: Insured was in an accident with Uninsured Motorist and clearly had considerable fault. There is some evidence of fault on the part of Uninsured Motorist, but much less than that of Insured. Insured suffered modest medical bills and a little lost wages. Uninsured Motorist suffered only soft tissue injuries, but claims severe pain. Medical evidence on those injuries is very equivocal. Insured has a $250,000 per person liability limit. Because the major issue in Uninsured Motorist’s suit will be damages and the amount at stake is considerably greater than on Insured’s (weak) UM claim, the Insurer has no interest that could plausibly be served by an impaired defense. Independent counsel is unnecessary.
As these examples illustrate, it may be unclear at the outset whether a UM
claim or a cross-claim by another insured creates a conflict of interest, because the
analysis may turn on as yet unknown information about liability and damages.
Ordinarily, such a case may be undertaken by assigned counsel, pending prompt
development of the information necessary to determine whether a conflict exists. If
a conflict is found or if, after initial factual development, it remains unclear
whether there will be a conflict, counsel should consult with both the insured and
the claim representative. Until it is determined that there is no conflict, counsel
should refrain from making strategic or tactical choices that will irreversibly
shape the defense and limit the options of any successor counsel.
28
C. Procedures for Determining Whether Independent Counsel is Required
To permit identification of conflicts, it is desirable that assigned counsel
ascertain whether there is a reservation of rights and, if so, the nature of the
coverage issue. The insurer can be asked to provide any reservation of rights or
excess exposure letter to defense counsel. Assigned counsel should make a
uniform practice of requesting the insured to provide copies of all correspondence
from the insurer and of requesting the claim representative to provide any
reservation of rights or excess letters sent to the insured. Assigned counsel should
not request such letters only where a coverage issue is suspected, because that
could alert the claim representative to look for a previously unnoticed problem.
Alerting the claim representative in that way could (unintentionally) violate
counsel’s duty of loyalty to the insured.
Example 5: Jones was a passenger in a car driven by Stone and they got into a fight. After they got out of the car, the fight continued, ending when Stone stabbed Jones. Jones sues, alleging intentional and negligent injury. Stone claims that he pulled the knife in self-defense and that he never intended to stab Jones, but only to fend him off. According to Stone, Jones impaled himself on the knife while lunging at Stone. The claim representative assumes the defense but reserves rights to deny coverage on the ground that the injury did not arise out of use of the car and for any intentional injury. The issue about use of the car does not overlap with the issues in the tort case, so it does not create any conflict. But the alternative allegations of intentional and negligent injury create a conflict and a right to independent counsel.
29
Example 6: The policyholder’s employee had an auto accident, after leaving work for the day but was carrying a package he intended to drop off at the post office for mailing to a customer. The plaintiff sues both the policyholder and the employee, alleging that the employee was in the scope and course of employment. If so, the employee is covered. There is no problem with assigned counsel representing only the policyholder, regardless of whether the scope and course issue is contested: the policyholder will not be liable unless the employee was in the scope and course and will be covered if liable. The interests of the insurer and the employer are fully consistent. If the scope and course issue is not contested, there is no conflict at all and assigned counsel may represent both employer and employee. If the scope and course issue is contested, the coverage issue for the employee overlaps with the tort action, creating a conflict of interest and entitling the employee to independent counsel.70 In addition, the dispute about scope and course may cause the interests of the employer and employee to conflict, preventing a single lawyer from representing both.
Example 7: Policyholder has an accident while driving his own car. Plaintiff alleges that Policyholder was acting in scope and course of employment, and sues employer as well. Employer demands a defense because the auto policy provides coverage for anyone responsible for the acts of an insured. The claim representative agrees to provide a defense, but reserves the right to contend that employer’s own policy is primary. Assigned counsel may defend the policyholder, because the scope and course issue makes no difference to the policyholder. Because neither policyholder nor the insurer have any interest in having employer held liable, the scope and course issue creates no conflict precluding joint representation. Because the issue of which policy is primary does not overlap with the issues in the tort action, it creates no conflict of interest.
30
70 See J.W. Hill & Sons, Inc. v. Wilson, 399 S.W.2d 152 (Tex. Ct. Civ. App. 1966).
Example 8: Driver is using policyholder’s car with permission, and has an accident. Victim sues both, alleging that policyholder negligently maintained the car and driver negligently operated it. Driver and policyholder would have a conflict if there were a substantial risk of liability in excess or policy limits, as each would wish to maximize the other’s responsibility and minimize his own. But, so long as the damages appear clearly within limits, the fact that any settlement or judgment would be covered would ordinarily eliminate any conflict between them and permit assigned counsel to defend both.
Example 9: Insured is sued on covered grounds, but the complaint alleges damages in excess of the policy limit. The insurer has no interest in increasing the insured’s liability beyond limits, so there is no conflict of interest regarding the defense.
Careful attention is required whenever a suit involves two defendants, one of
whom is alleged to be responsible for the acts of the other. Vehicle owners are
often liable for permissive users. Permissive users may seek to deflect liability onto
owners by alleging that the accident resulted from improper maintenance.
Commercial landlords and tenants have various divisions of responsibility for
maintenance of premises and often have agreements in which one indemnifies
and/or promises to insure the other. Each set of facts must be analyzed to
determine whether the defendants’ interests conflict and whether either of the
defendants has interests in conflict with those of the insurer on any issue involved
in the tort case.
31
One special concern can be local case law allowing an insured to reject the
insurer’s selection of counsel whenever there is a reservation of rights, even if the
coverage issue does not overlap with the liability issues and, so, does not create
any ethical conflict.71 Only a few jurisdictions take that position, but lawyers in
such jurisdictions must take that into account in consulting with the insured at the
outset of the representation.72
Even if the facts initially appear to present no conflict, counsel must be alert
to changes that may create conflicts.
Example 10: Same facts as Example 6. Policyholder initially agrees that employee was in scope and course, so assigned counsel assumed the defense of both. Policyholder later determines that letter employee was supposedly mailing did not exist, and that employee had used it as an excuse to leave the office early. Scope and course is now an issue and conflicts must be reassessed. Once having represented employee, assigned counsel may now be precluded from continuing representation of policyholder, even though counsel could have represented it at outset. It may be necessary to withdraw from representation of both clients.
71 E.g., Boise Motor Car Co. v. St. Paul Mercury Indem. Co., 112 P.2d 1011, 1016 (Idaho 1941); Medical Protective Co. v. Davis, 581 S.W.2d 25, 26 (Ky. Ct. App. 1979). Some states follow modified versions of this rule. FLA. STAT. ANN. § 627.426 (West 1996) (requiring that insurer and insured agree upon counsel if insurer reserves rights); Continental Ins. Co. v. City of Miami Beach, 521 So. 2d 232, 233 (Fla. Dist. Ct. App. 1988) (mere acquiescence of insured in insurer’s selection of counsel does not constitute agreement to that counsel); Continental Ins. Co. v. Bayless & Roberts, Inc., 608 P.2d 281, 288-91 (Alaska 1980) (adopting above rule where insurer asserts policy defense -- such as lack of cooperation -- to indemnification of claim within policy’s coverage while keeping open possibility that insurer asserting a coverage defense might be entitled to defend under reservation).
32
72 See Ellen S. Pryor & Charles Silver, Defense Lawyers' Professional Responsibilities: Part Ii-Contested Coverage Cases, 15 GEO. J. LEGAL ETHICS 29, 72-73 (2001).
Example 11: Same facts as Example 10, but Policyholder only suspects that employee had fabricated the story about the letter. Policyholder asks assigned counsel to investigate this suspicion. Assigned counsel may not do this, because doing so would be disloyal to the interests of the co-client employee. This indication that scope and course may be an issue also requires reassessment of conflicts and new consultations with both insured clients about the implications of that issue.
Example 12: Assigned counsel is defending a professional malpractice claim. Shortly before trial, plaintiff moves to amend the complaint to add claims of fraud and civil conspiracy. If these claims are allowed, they will create a conflict and require retention of independent counsel. But if leave to amend is denied, there will be no conflict.73 Assigned counsel should inform the insured and may continue to represent the insured to oppose leave to amend. The claim representative should be advised to consider steps to select or have the insured select independent counsel before the motion is decided, to be ready if the motion is granted.
If a reservation of rights creates a conflict that would entitle the insured to
independent counsel, asssigned counsel should so inform the claim representative.
Claim representatives sometimes choose to withdraw reservations in order to avoid
the expense of independent counsel. If the claim representative chooses to do this,
the insured benefits by obtaining an assurance of indemnification regardless of the
withdrawn coverage defense. But this is an issue where the interests of the insured
and the insurer can diverge, so assigned counsel should not advise the claim
representative whether to withdraw a reservation.
33
73 Britamco Underwriters, Inc. v. Nishi, 20 F. Supp. 2d 73 (D.D.C. 1998);
D. Davalos: Possible Conflicts Regarding an Insured's Affirmative Claim
In Northern Country Mutual Insurance Co. v. Davalos,74 the Texas Supreme
Court rejected a claim that a dispute between insurer and insured about venue
created a conflict requiring independent counsel. But, in some circumstances,
some other courts might reach a different conclusion. So the case is worth some
attention.
Davalos, a resident of Matagorda County, had an accident in Dallas County.
He sued the other driver in Matagorda County. The other driver sued Davalos in
Dallas County. Davalos had his Matagorda County counsel (personal counsel)
appear in the Dallas County action and move to transfer to Matagorda County.
Davalos then tendered the defense of the action against him to Northern. Northern
offered to provide defense counsel, with the expectation that such counsel would
withdraw the motion to transfer. Personal counsel responded that Davalos was
entitled to pursue the transfer motion and Northern's position created a conflict,
precluding Northern from directing the defense or selecting counsel.
Even though Northern was not permitted to take control, the Dallas case was
not transferred. Instead, on the motion of another party, the Matagorda County
case was transferred to Dallas. Northern then settled the claim against Davalos, at
no cost to him. Davalos sued Northern for breach of contract and bad faith. The
34
74 Northern Country Mut. Ins. Co. v. Davalos, 140 S.W.3d 685 (Texas 2004).
trial court granted summary judgment for Davalos on liability and the parties
stipulated to the amount of damages (presumably the defense costs paid by
Davalos). The court of appeals affirmed, holding that Northern had breached its
duty to defend.75 The Texas Supreme Court granted review and reversed.
Davalos asserted that Northern had imposed an improper condition on its
offer of a defense. The supreme court disagreed. In general, an insurer's "right to
conduct the defense includes the authority to select the attorney who will defend
the claim and to make other decisions that would normally be vested in the insured
as named party to the case."76 In some circumstances, an insurer is prevented from
insisting on its right to control the defense, but that right would be illusory if any
disagreement with the insured about the handling of the case were deemed to
create a conflict entitling the insured to take control.77 Usually, a conflict arises
from an insurer's reservation of the right to deny coverage based on asserted facts
that will also be at issue in the case against the insured.78 Additionally, "the
insured may rightfully refuse an inadequate defense and may also refuse any
defense conditioned on an unreasonable, extracontractual demand that the
threatens the insured's independent legal rights."79 So, for example, Northern
75 Northern Country Mut. Ins. Co. v. Davalos, 84 S.W.3d 314 (Tex. Ct. App. 2002), rev'd, 140 S.W.3d 685 (Texas 2004). 76 140 S.W.3d at 688. 77 Id. at 689. 78 Id.
35
79 Id.
could not properly have demanded Davalos dismiss his own action before he could
receive a defense of the action against him.80
Davalos contended that Northern had asserted an intent to interfere with
defense of the action by instructing defense counsel to withdraw the motion to
transfer. But it was Davalos, not Northern, who prevented the defense counsel
selected by Northern from exercising independent judgment about the venue
motion, because Davalos refused to arrange transfer of the defense to that counsel.
Had he done so, he could have submitted that issue to the counsel, who would have
had an unqualified duty of loyalty to Davalos and would have been bound to
protect his interests.81 Moreover, in the court's view, venue would rarely, if ever,
"amount to a disqualifying conflict":
The county where the claim should be defended is a strategic litigation decision that should be made in conducting the insured's defense. The choice of venue should ordinarily have no impact on the insured's legitimate interests under the policy.82
While Davalos had the right to reject Northern's tender of defense, because
he did not want the case defended in Dallas County, he had no right to have
Northern pay for personal counsel to defend.83
The Texas court chose to treat venue as solely an issue of convenience: how
close would the courthouse be to the insured. But Davalos had a basis for arguing 80 Id. 81 Id. at 689-90. 82 Id. at 690.
36
83 Id.
that there was more involved. It was likely that the two cases would be
consolidated, as they ultimately were. Matagorda County is widely regarded as an
especially favorable venue for plaintiffs, while Dallas County is regarded as a
favorable venue for defendants. On that basis, while consolidation of the cases in
Dallas County might be good for the defense of the case against Davalos, it might
be equally bad for Davalos's case as a plaintiff. Accordingly, Davalos could argue
that his interests as a plaintiff would be harmed by withdrawal of the motion to
transfer.
Some courts might accept such an argument in at least some cases where the
insured has an affirmative claim. Moreover, there may be other circumstances
where decisions advantageous to defense of the claim against the insured might
have some adverse impact on the insured's affirmative claim. How ought such
matters to be handled?
The insured does not need to give up or compromise an affirmative claim in
order to maintain its rights under an insurance policy. The defense lawyer should
make strategy decisions consistent with the insured’s overall interest in the
litigation, which would mean taking into account the effect of a defense decision
on the insured’s affirmative claim. The defense counsel should defend the claim
against the insured in cooperation with the insured’s personal counsel who is
handling the affirmative claim, and personal counsel can be relied upon to call
37
attention to any risk of impact on the affirmative claim. Accordingly, there is no
need to deny the insurer the right to select defense counsel.
In the vast majority of the cases, the defense lawyer and the lawyer hired on
the affirmative claim would work together to reach a mutually beneficial result.
(Of course, the insurer has a right to be involved in the decision-making process.)
In the extraordinary case in which the insured and the insurer cannot agree on an
important tactical decision about how the defense should be conducted and the
tactical choice may adversely affect the affirmative claim, defense counsel will
have to withdraw unless the insurer will defer to the insured on such matters.
E. Questionable Cases on Contested Scope and Course of Employment
Contested scope and course of employment can create conflicts, either
between the employee and employer or between the employee and the insurer.84
Two Illinois cases (one old, one new) suggest the existence of a conflict in
circumstances where analysis suggests none is present. Both cases actually
involved conflicts (on other grounds), so they are arguably distinguishable from
one presenting only the questionable conflict they assert. Nonetheless, their
questionable conflict proposition may now be the law of Illinois, and insureds in
other states may rely on those cases to argue for independent counsel.
38
84 William T. Barker, Laying The Foundations for Staff Counsel Representation of Insureds, 39 TORT, TRIAL & INS. L.J. 897, 927-28 (2004). Portions of this paper are revised versions of material in that article.
The cases in question say that there is a conflict of interest when
(1) plaintiff sues an allegedly negligent employee and asserts that the employer is
vicariously liable and (2) the employer denies that the employee was acting in the
scope and course of employment. The more recent case is the Appellate Court’s
decision in Williams v. American Country Ins. Co.85 Williams was a cabbie. A
police officer, Davila, was leaning in the passenger door of Williams' cab to
reprimand him for blowing his horn. Williams drove off, injuring Davila. Davila
sued both Williams and Yellow Cab, alleging agency. Williams was a permissive
user, even if an independent contractor, so he was clearly an insured. American
Country, an insurer affiliated with Yellow Cab, reserved the right to deny coverage
for intentional injury. It also appointed joint defense counsel for Williams and
Yellow, who filed an answer (and, later, discovery responses) denying agency. At
some point, Williams was convicted of misdemeanor battery.
Williams demanded independent counsel and sued to get it. The insurer
counterclaimed for a declaration of no coverage, based on the criminal conviction
establishing intentional acts. In due course, the Appellate Court agreed, but
remanded for a determination whether there was a conflict of interest entitling
Williams to independent counsel and, if so, whether Williams had suffered
prejudice estopping the insurer from denying coverage. The circuit court found
that there was coverage, that there had been prejudice, and that the insurer had
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85 Williams v. American Country Ins. Co., 359 Ill.App.3d 128, 833 N.E.2d 971 (2005).
vexatiously denied benefits, awarding $125,000 in attorneys fees and a penalty of
$25,000. The Appellate Court affirmed.
The Appellate Court reasoned that the denial of agency would harm
Williams by preventing him from "spreading" the loss to Yellow. It relied on
Murphy v. Urso,86 where the Illinois Supreme Court said the same thing.
Viewed purely as a matter of conflicts logic, Williams had no interest in the
agency issue. A finding of agency permits the plaintiff to collect from the cab
company, but does not "spread" the liability between the driver and the company.
If the company is vicariously liable, the driver will be obliged to indemnify it. As
a matter of tort law and as between the company and the driver, the entire liability
should fall on the driver if the driver's conduct is the basis for liability. The driver
will be liable, regardless of agency, so agency really makes no difference in the
driver's liability. In particular, there was no question that Williams was a
permissive user of the cab and, so, an insured. Agency was not a coverage issue as
to Williams, bearing only on the company’s liability.
But there actually was a conflict, of a different sort. There were (seemingly
insubstantial) allegations that the cab had defective brakes and steering. If liability
were found on that ground, Yellow would be directly liable and obliged to
indemnify the driver. Consequently, the ground of liability makes a difference
between the two insureds and defending both is a conflict of interest. Even if the
40
86 Murphy v. Urso, 81 Ill. 2d 444, 430 N.E.2d 1079 (1981)
insurer were not affiliated with Yellow (which it is), that would entitle the driver to
independent counsel.
(The same logic also shows that Yellow was entitled to independent counsel,
if it wanted that (unlikely, in these circumstances). Additionally, the agency issue
was a conflict for the cab company. If the driver were an agent and if his intent
were imputed to Yellow, there would be no coverage. So the insurer could have an
incentive to pull its punches in defending the agency claim, were it not an affiliate
of Yellow.)
Moreover, the intentional acts reservation ordinarily creates the paradigmatic
insurance defense conflict. The insurer here says that didn't matter, because
intentionality was not an issue in the tort suit. The court did not address that issue,
and doing so is unnecessary under either this analysis or the court's. In ordinary
circumstances, it likely would create a conflict, despite the narrower issues in the
tort action: litigation of the negligence issue would necessarily involve exposure of
defense counsel to otherwise confidential information bearing on intentionality.
But the early criminal conviction in Williams probably takes all of that out of the
analysis (and probably limits the issues in the tort case to damages, as to which
there is no conflict). That might have eliminated the conflict on that issue, but one
would need to know more facts (e.g., when did the conviction occur).
In the end, the conflicts result in Williams is right, even though the reasoning
seems wrong. The same is true of Murphy (which similarly made the mistaken
41
assertion that a finding of agency would have permitted spreading of the loss to the
vehicle owner). In Murphy, the owner denied both agency and permission to drive,
claiming it had fired Murphy. Permissive use was a coverage defense and an
agency finding would have established permissive use. So Murphy did have an
interest in the agency issue, despite the indemnity obligation to his employer that
would have accompanied that finding. Accordingly, there was a pivotal issue,
creating a conflict.
While both Williams and Murphy could and should be decided the same
way, regardless of whether the agency issue itself created a conflict regarding the
driver’s defense, future Illinois courts may treat as binding their statement that the
agency issue created a conflict. Risk management suggests treating it that way
unless the issue can be litigated before independent counsel is denied.
In other states, the question will be whether the local courts are likely to
duplicate the analytic mistake of the Illinois courts. One hopes most courts would
not, at least if the error were pointed out.
F. Conflicts of Interest Resulting from Other Representations Involving the Same Insured
The requirement of independent counsel arises from conflicts involving the
same incident as the suit tendered for defense. But other conflicts may be created
by prior or current representations involving other matters, requiring the insurer to
42
select some other counsel to represent the insured. To avoid such conflicts, all new
matters must be checked through an appropriate conflict-checking system.
1) Current Representation Conflicts
In general, a lawyer representing a client in one matter may not act adversely
to that client in another matter, even if totally unrelated. This prohibition is
embodied in Model Rule 1.7(a).87 Accordingly, assigned counsel cannot (without
informed consents) defend an insured if the firm is currently adverse to that insured
in any matter, whether litigation or transactional. Nor may the firm take on
defense of a new case prosecuted by a current client. Whenever new parties are
added in any case, conflicts must be rechecked.
2) Former Representation Conflicts
Model Rule 1.9 forbids handling a case adverse to a former client of the
office, if the new case is “substantially related” to the former representation. The
Model Rules adopted this prohibition from case law that primarily protected the
interest of former clients in the continued confidentiality of their communications
with their former lawyers.
As the Seventh Circuit explained the rule:
For rather obvious reasons a lawyer is prohibited from using confidential information that he has obtained from a client against that client on behalf of another one. But this prohibition has not seemed enough by itself to make
43
87 Model Rule 1.7, comment [3]. In a unique variation, Texas has amended its version of Rule 1.7 to relax this prohibition. TEX. DIS. R. PROF. COND. 1.06 (limiting prohibition to substantially related matters).
clients feel secure about reposing confidences in lawyers, so a further prohibition has evolved: a lawyer may not represent an adversary of his former client if the subject matter of the two representations is ““substantially related,” which means: if the lawyer could have obtained confidential information in the first representation that would have been relevant in the second. It is irrelevant whether he actually obtained such information and used it against his former client, or whether – if the lawyer is a firm – different people in the firm handed the two matters and scrupulously avoided discussing them.88
This rule protects the former client by avoiding any need to reveal the
secrets disclosed to the lawyer in order to prevent the lawyer from using them. To
determine whether there is a substantial relationship, one asks “whether it could
reasonably be said that during the former representation [the former] attorney
might have acquired information related to the subject matter of the subsequent
representation.”89 “If so, then the relationship is sufficiently close to bring the
latter representation within the prohibition.”90
There is a presumption that confidential information imparted to one lawyer
in a firm has been shared with all lawyers in that firm. But once a lawyer has left
the firm that represents (or formerly represented) a client, that lawyer and the
lawyer’s new firm will be permitted to rebut the presumption that the lawyer had
access to the client’s information. If they can do so, then neither the lawyer nor the
88 Analytica, Inc. v. NPD Research, Inc., 708 F.2d 1263, 1266 (7th Cir. 1983) (citations omitted). 89 Westinghouse Electric Corp. v. Gulf Oil Corp., 588 F.2d 221, 225 (7th Cir. 1978); RESTATEMENT § 213, cmt. d(iii) (Prop. Final Dr. No. 1 1996).
44
90 588 F.2d at 225, quoting T.C. Theatre Corp. v. Warner Bros. Pictures, Inc., 113 F. Supp. 256, 269 (S.D.N.Y. 1953).
new firm is disqualified from representations substantially related to the one
conducted by the lawyer’s former firm.91
A few jurisdictions permit a lawyer disqualified by actual or presumptive
exposure to confidential information at a former law firm to be screened from
related matters undertaken by the lawyer’s new firm, freeing the other lawyers in
the firm from imputation of the new lawyer’s personal disqualification.92 Unless
the local rules permit this, the scope of a prospective lawyer’s conflicts arising
from former affiliations must be carefully considered in making hiring decisions.
Example 13: Assigned Counsel have defended Manufacturer in a series of product defect actions focusing on alleged errors in its manufacturing processes. Manufacturer has now sued Designer alleging that certain machinery was improperly designed, causing defects in products not involved in the prior actions. Despite the differences in products, there is considerable overlap in the manufacturing processes. In addition to asserting that its machines were properly designed, Designer hopes to show that the problems with the product at issue now are largely or primarily the result of aspects of Manufacturer’s processes other than Designer’s machine. Assigned Counsel will be presumed to have had access, in defending Manufacturer, to confidential information about Manufacturer’s processes that now might be useful
91 RESTATEMENT § 124, cmt. c(ii). Leading cases refining this rule include Silver Chrysler Plymouth v. Chrysler Motors Corp., 518 F.2d 751 (2nd Cir. 1975); Novo Terapeutisk Laboratorium A/S v. Baxter Travenol Laboratories, Inc., 607 F.2d 186 (7th Cir. 1979), and Freeman v. Chicago Musical Instrument Co., 689 F.2d 715 (7th Cir. 1982). See also Kassis v. Teachers Ins. & Annuity Ass’n, 695 N.Y.S. 2d 515, 717 N.E.2d 674 (N.Y. 1999).
45
92 E.g., Schiessle v. Stephens, 717 F.2d 417 (7th Cir. 1983). The Restatement would allow this only in limited circumstances. RESTATEMENT § 124(2) (only where confidential information actually or presumptively received by departing lawyer unlikely to be significant in the subsequent matter).
in defending Designer against Manufacturer, and this information will be presumed to have been shared among all lawyers in the office. Consequently, Designer’s defense is substantially related to the prior representation of Manufacturer. Assigned Counsel cannot undertake Designer’s defense.
Example 14: Same facts as Example 13, except that Manufacturer was formerly defended by a team headed Lawyer at Big Firm. Lawyer has now joined assigned counsel’s firm. Unless the jurisdiction permits imputation to be avoided by screening Lawyer from involvement in the matter, Lawyer’s individual disqualification will be imputed to the entire office. If the jurisdiction does permit screening, the screening mechanism must be in place before the representation of Designer is commenced.
Example 15: Same facts as Example 14, except that Lawyer has not joined assigned counsel’s firm. However, Associate has done so, and Associate worked at Big Firm while Manufacturer’s defense was being handled. If it can be clearly established that Associate had little or no involvement in the matter and no access to confidential information about the sorts of matters relevant to Designer’s defense, neither Associate nor others in the office are precluded from undertaking Designer’s defense.
As noted above, changing circumstances may indicate referral to other
counsel, even where that did not initially seem appropriate. Assigned counsel
should report any developments that might warrant consideration of such referral.
Example 16: Counsel represents a general contractor sued for defective construction. Investigation reveals a basis for seeking indemnity or contribution from a subcontractor. Counsel’s firm has previously represented the subcontractor in a case involving a similar alleged error. Counsel determines that the claim against the subcontractor would be substantially related to the prior
46
representation of the subcontractor. Because counsel cannot pursue the claim against the subcontractor, that claim will need to be referred to other counsel. Usually, it will be more efficient to refer the entire case to other counsel.
III. What Should the Insured Be Told At the Outset of the Representation?
While defense counsel has many important duties to the insured, including
loyalty and confidentiality, those rarely create problems. Compliance with those
duties is natural and automatic in all but the most unusual circumstances. A duty
that is not so natural and automatic is the duty to communicate with the insured.
Yet this duty may be the most important of all from the standpoint of the
insured. Most insureds are completely unfamiliar with litigation. Many are
anxious about it, even if there is no reason why they should be. They look to their
lawyer for reliable information about the process. Providing them with the
information they want (and information they need, but don’t know to want) is a
critical part of the relationship. It builds trust, thereby facilitating an effective
defense. Moreover, a good defense relationship builds goodwill for the insurer.
Communication is also an ethical duty.
Model Rule 1.4 requires that:
(a) A lawyer shall:
(1) promptly inform the client of any decision or circumstance with respect to which the client’s informed consent, as defined in Rule 1.0(e), is required by these Rules;
47
(2) reasonably consult with the client about the means by which the client’s objectives are to be accomplished;
(3) keep the client reasonably informed about the status of the matter;
(4) promptly comply with reasonable requests for information;……
(b) A lawyer shall explain a matter to the extent reasonably necessary to permit a client to make informed decisions regarding the representation.
Finally, communication is critical for counsel to learn of situations in which
the interests of the insured may diverge from those of the insurer. Detection of
such situations is the necessary first step in addressing them in ways that protect
the interests of all concerned.
A. Disclosure of Counsel’s Relationship with the Insurer
A particularly important time for communication is at the outset of the
representation, when the insured does not know what to expect. Model Rule 1.8(f)
provides that “[a] lawyer shall not accept compensation for representing a client
from one other than the client unless … (1) the client gives informed consent.”
The insurer compensates defense counsel for representation of the insured. Of
course, when requesting a defense from the insurer, the insured probably expected
that the lawyer would be paid by the insurer. Even so, the fact of payment should
be disclosed to the insured, because the lawyer bears the burden of assuring that
the consent is informed. If, as is usually the case, the lawyer or firm is regularly
48
retained by the insurer to defend insureds, that fact should also be disclosed, to
avoid any risk that failure to disclose might be said to render the consent
inadequately informed.
Model Rule 1.8(f) also requires that the payment of fees by one other than
the client must result in no “interference with the lawyer’s independence of
professional judgment.” Model Rule 5.4(c) similarly provides that:
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.
Whether or not the insurer is deemed a client, its retention and payment of
defense counsel (and right to change counsel) gives it various rights and powers
with respect to defense counsel, though these need not and should not impair
counsel’s independence of judgment. Even so, the insured is entitled to know of
the relationship at the time the insured decides to proceed with the representation
initiated by the tender of defense and the insurer’s assignment of counsel. The
initial letter should disclose the relationship with the insurer, and this fact should
be discussed in the initial consultation.
B. Acceptance of Direction
Counsel typically works closely with the claim representative in handling a
suit, and the claim representative may give directions on certain issues (e.g, to
settle the case within limits or to limit the expense incurred for expert witnesses).
49
Such directions are authorized by the insurance policy, but the insured may not
realize what role the claim representative will play in defense decisionmaking. An
advisory opinion of the ABA Standing Committee on Ethics and Professional
Responsibility has pointed out the need to inform the insured on this subject.93
1) ABA Opinion 96-403
The opinion assumes that an insurer has issued a policy which authorizes it
to settle claims against the insured in its sole discretion and without consulting the
insured. It inquires whether counsel designated by the insurer to defend the
insured may follow the insurer’s instructions to settle without first consulting the
insured. What disclosures to the insured are required if the lawyer expects to
follow such instructions? How should counsel respond if the insurer proposes to
settle but the insured objects?94
a) Defining the Objectives of the Representation
The opinion treats the question of settlement authority as one of defining the
objectives of the representation.95 That is, is the attorney employed simply to seek
resolution of the matter at the least cost (as the insurer presumably desires) or is the
attorney also to consider reputational and other interests of the insured which
might be injured by what the insured might consider an improvident settlement. If
93 ABA STANDING COMMITTEE ON ETHICS AND PROFESSIONAL RESPONSIBILITY, FORMAL
OP. 96-403 (1996). 94 OP. 96-403, at 1-2.
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95 Id. at 3-4.
only the monetary stakes are to be considered, that is a representation whose
objectives are limited.
Model Rule 1.2(a) requires a lawyer to follow client decisions about the
objectives of the representation, including acceptance of settlements. Model Rule
1.2(c) allows the objectives of the representation to be limited, but only if “the
limitation is reasonable under the circumstances and the client gives informed
consent.”
(1) Manner of Required Disclosure
So, “[i]f the lawyer is to proceed with the representation of the insured at the
direction of the insurer, the lawyer must make appropriate disclosure sufficient to
apprise the insured of the limited nature of his representation as well as the
insurer’s right to control the defense . . . ."96 Even though the insurer’s rights to
control the defense and settle at its discretion are set forth in the insurance policy,
the opinion found that the lawyer cannot “assume that the insured understands or
remembers, if he ever read, the insurance policy, or that the insured understands
that his lawyer will be acting on his behalf, but at the direction of the insurer
without further consultation with the insured."97 Accordingly, these points must be
covered in the lawyer’s consultation with the insured.
96 OP. 96-403, at 3.
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97 Id. at 4.
The opinion expressed the view that this disclosure need not be unduly
formal, presumably because it thought that “in the vast majority of cases the
insured will have no objection to proceeding in accordance with the terms of his
insurance contract."98 Specifically, it concluded that oral communication was
unnecessary and the necessary information could be communicated in a short
letter.99 In its view, “[t]he insured manifests consent to the limited representation
by accepting the defense offered by the insurer after being advised of the terms of
the representation offered."100
(2) Content of Required Disclosure
The letter contemplated by the opinion would state “that the lawyer intends
to proceed at the direction of the insurer in accordance with the terms of the
insurance contract and what this means to the insured."101 All that is necessary is
“that the insured be clearly apprised of the limitations of the representation offered
by the insurer and that the lawyer intends to proceed in accordance with the
directions of the insurer."102
(3) Timing of Required Disclosure
“A prudent lawyer hired by an insurer to defend an insured will
communicate with the insured concerning the limits of the representation at the
98 Id. 99 Id. 100 Id. 101 Id.
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102 Id.
earliest practicable time."103 The opinion suggests that some of this information
“reasonably could be incorporated as part of any routine notice to the insured from
the lawyer advising the insured that the lawyer has been retained to represent
him."104 But, so long as it is done reasonably promptly, “the lawyer may wait until
there is some other reason for communicating with the insured in connection with
the claim, such as developing relevant facts, answering a complaint, responding to
interrogatories, or scheduling a deposition."105
But, as the opinion notes, delay in providing this information and obtaining
the insured’s consent to the terms of the representation is dangerous:
Failure to make the appropriate disclosures near the outset of the representation may generate wholly unnecessary, but difficult, problems for the insured, the insurer, and the lawyer. Thus, if the lawyer fails to advise the insured of the limited nature of the representation and his intention to proceed in accordance with the directions of the insurer early in the representation, the lawyer may find himself trying to advise the insured of a proposed settlement at the last minute under short time constraints, when the insured will have little practical opportunity to reject the defense offered by the insurer and assume responsibility for his own defense.106
The opinion does not point out, but might have, that these problems may be
especially difficult for the lawyer. The lawyer may have duties to the insurer (e.g.,
to disclose information concerning the representation) which cannot be carried out 103 Id. 104 Id. at 4-5. 105 Id. at 5.
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106 Id.
without violating duties to the insured. Had the insured been properly advised
earlier, then either consent could have been obtained or the insured’s refusal to
consent would have triggered a dispute between insurer and insured, with the
representation placed on hold pending resolution of that dispute. Consequently,
early disclosure to the insured is a critical means of keeping defense counsel from
being caught in the middle of such disputes when there is no longer a way to obtain
timely resolution.
To avoid such risks, it is a good idea that all known essential information
about the nature and scope of the representation be included in correspondence at
the outset of the representation.
b) Effect of Later Disagreement
“[I]n the vast majority of cases, an insured doubtless will be delighted at the
prospect of resolving litigation against him, provided only that the proposed
settlement is within policy limits."107 So long as the insured has properly
consented at the outset, the lawyer may act on the insurer’s instructions to settle
without consulting the insured.
But the insured’s informed consent at the outset does not mean that the
insured may not later object to a settlement which the insurer proposes to make.
The ABA opinion concludes that, if counsel learns that the two disagree as to
“whether a proposed settlement is acceptable and, moreover, who has the right to
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107 Id. at 6.
decide that question, the lawyer may consult with his client or clients as to the
likely consequences of a proposed course of conduct."108 The consultation should
not address the specific dispute, for that would be outside the scope of a purely
defense representation and would also entail a conflict if both insurer and insured
were clients. Rather, the consultation would concern the lawyer’s evaluation of
what would occur if the settlement were refused.
But the ABA opinion (incorrectly, in my view) contemplates the lawyer
“remind[ing] the insured that the policy gives the insurer the right to control the
defense and settle the claim without the consent of the insured or that rejecting a
proposed settlement might result in a forfeiture of his rights under the policy."109
Again, this is beyond the scope of a defense representation and involves a conflict
if the insurer is a client. Fortunately, as before, the error is easily corrected.
Instead of advising the insured what rights the policy gives the insurer, the lawyer
could state that the insurer takes the position that the policy gives it such rights and
that, if the insurer is correct, the insured might forfeit coverage by rejecting the
settlement. The insured could then be advised that it might be useful to retain
personal counsel to advise on whether the insurer’s position is correct.
108 Id. at 5.
55
109 Id.
In any event, if the insured, after being properly advised, insists upon
rejecting the settlement, counsel cannot act to effectuate it.110 As a result, the
lawyer may be obliged to withdraw from representation of both insurer and insured
(if both were clients). Of course, that would not prevent the insurer from using
some other agent to implement the settlement.111
2) Direction on Subjects Other Than Settlement
The Restatement has generalized the requirements of Opinion 96-403,
conditioning counsel’s acceptance of insurer direction on virtually any subject on
the acquiesence after receiving a short informative letter explaining the
relationship.112
C. Lack of Representation on Affirmative Claims
The only role the insurer has retained counsel to play in the lawsuit is to
defend the insured against the plaintiff’s claims. But the insured may have
affirmative claims that can only be prosecuted at the insured’s expense. In theory,
defense counsel could accept a separate retainer from the insured to prosecute such
claims, though this would require billing judgments allocating activities between
defense and prosecution, and that might require consent by the insurer to the
prosecution retention. Alternatively, prosecution could be handled by other
110 Id. 111 Id. at 6.
56
112 RESTATEMENT § 134, cmt. f.
counsel (or by the insured pro se). Most jurisdictions will treat affirmative claims
as compulsory counterclaims and bar them if not asserted in the original action.
Unless the insured is told that defense counsel will do nothing to present
affirmative claims (absent a separate retainer, if such a retainer is agreeable and
would create no conflict), the insured might rely on defense counsel to do so. If
such a claim is then lost, either to the statute of limitations or by dismissal of the
original action, the insured may have a malpractice action against defense counsel
(and, possibly, the insurer). To protect the insured’s rights, defense counsel must
explain the need to join related claims in the original action, the existence of time
limits for doing so, and the fact that (absent a separate retainer) counsel will not be
representing the insured with respect to such claims.113 This should be explained
in every case where there is any substantial possibility that the insured may have
suffered an injury, regardless of apparent liability. Counsel should not be making
the decision whether to assert a claim that even might be viable.
The limitations period applicable to any affirmative claims is not a subject
pertinent to the defense of the claims made against the insured. Accordingly, it is
outside the scope of counsel’s representation of the insured, and counsel ought not
to advise the insured on what the applicable period is. But it is appropriate (and
sometimes necessary) to warn the insured that the period may be about to expire
or of a date by which it might expire, so that the insured appreciates the need to act
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113 See Prevratil v. Mohr, 678 A.2d 243 (N.J. 1996).
promptly in retaining other counsel if the insured desires to pursue affirmative
claims. Such a warning is especially necessary if expiration of limitations may be
imminent when counsel receives the suit against the insured.
Once counsel has explained the limits of the defense representation, there
should be no duty (absent a separate prosecution retainer) to explore possible
affirmative claims that the insured might have. But, if counsel notices reasons to
believe that the insured might have a claim worth asserting but has neither asserted
it nor retained personal counsel, it is good practice for counsel to remind the
insured of the possible utility of seeking personal counsel. In addition to being
counsel’s client, the insured is the insurer’s customer, and pointing this out is good
customer service.
Occasionally, an insured may be involved in criminal or quasicriminal
proceedings based on the same incident as the suit (e.g. a traffic ticket). If such
proceedings are pending when the insurance defense representation begins or are
brought later, counsel should consult with the claim representative, who may wish
to offer representation in such proceedings to avoid possible prejudice to the
defense of the suit. If the claim representative does not wish to make such an
offer, counsel must inform the insured that counsel will not represent the insured in
those proceedings (absent a separate retainer by the insured, if agreeable and if it
creates no conflict). (This warning is not necessary if the insured already has
counsel for those proceedings, unless the insured requests counsel to assume that
58
defense.) If doing so will assist in defending the action against the insured, and if
the insurer is agreeable, counsel may work with other counsel or with the insured,
appearing pro se, in connection with such collateral proceedings.
D. Sharing of Information
In a representation with only one client, all information concerning the
representation is presumptively confidential, while a joint representation of two
clients normally entails full sharing with both clients of all information received by
the lawyer concerning the representation. Of course, even confidential information
may be disclosed “when impliedly authorized in order to carry out the
representation.”114 But sharing among joint clients may extend beyond that
authorization. So the insured must be informed of this deviation from the rule
applicable to sole representation.115
This point may be even more important when considering joint
representation of two insureds. For example, where the defendants are employer
and employee, the insurance may protect both from liability. But the employer
might use information derived from the lawsuit as a basis for discipline of the
employee. The employee must be advised of this possibility, so the employee can
decide whether to proceed with a joint representation and what the employee will
tell counsel.
114 Model Rule 1.6(a).
59
115 Model Rule 1.7, cmts. [30]-[31].RESTATEMENT § 122, cmt. c(i).
E. Existence and Implications of Excess or Noncovered Exposure
Any allegation of liability in excess of policy limits or outside of policy
coverage, even if factually insubstantial, must be discussed with the insured, so the
insured can decide whether to retain personal counsel, watch the case more closely,
or take some other action with respect to that exposure. Indeed, the insured is
likely to inquire in many cases as to the meaning and implications of any
reservation of rights letter or excess letter received from the claim representative.
In such discussions, it is appropriate to explain that the insurer is obliged
(and that counsel personally is committed) to provide a full defense appropriate to
the liabilities asserted, regardless of whether those liabilities are covered. It is also
appropriate, where true, to note the apparent lack of factual basis for the allegations
of excess or noncovered liability or the limited prospects for such liability to be
proven. But it must also be noted that new evidence can always turn up to bolster
what first seem unsupported allegations. Counsel should take care not to
understate the risks facing the insured.
The insured must be told that personal counsel can be useful in advising the
insured on settlement issues or even in bringing further insights to the defense.
Defense counsel should not advise an insured against retaining personal counsel,
and should emphasize that this is a decision the insured must make, in light of the
insured’s own weighing of the costs and benefits.
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Even if the insured initially decides not to retain personal counsel, the
insured must be informed of any new indications that the risks of excess or
noncovered exposure are greater than they seemed before. This allows the insured
to reconsider any actions to respond to those risks. In making the decision whether
to retain personal counsel at the outset, the insured should be assured that any new
information will be called to the insured’s attention.
F. The Florida and Ohio Statement of Insured Client’s Rights
The Florida Supreme Court has adopted a rule requiring insurance defense
lawyers to provide insured clients with a specified Statement of Insured Client’s
Rights.116 The Ohio Supreme Court has imposed a similar requirement.117
Even in the absence of such a rule, providing information of this sort is
probably necessary as an ethical matter. But even if it were not necessary, it would
still be highly desirable. It is obviously good customer service to insureds. And it
is useful in defending the insurance defense relationship. Attacks on that
relationship are based on unfounded suspicions of clandestine betrayal of insureds
by counsel and overreaching by insurers. Such suspicions are harder to support
when it can be shown that the insured is fully aware of the insurer’s role and has
consented to (or at least acquiesced in) that role.
116 FLA. SUP. CT. RULES, Rule 4-1.8(j). (A copy is attached in Exhibit B.)
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117 OHIO R. PROF. COND., Rule 1.8(f)(4).
The Florida and Ohio Statements are not necessarily what one would draft if
preparing an unregulated letter. Other examples have been provided by Professors
Pryor and Silver.118 An example of my own is in the Appendix of Sample Letters.
More recently, the Florida court added a new subsection (e) to Rule 4-1.7
providing as follows:
(e) Representation of Insureds. Upon undertaking the representation of an insured client at the expense of the insurer, a lawyer has the duty to ascertain whether the lawyer will be representing both the insurer and the insured as clients, or only the insured, and to inform both the insured and the insurer regarding the scope of the representation. All other Rules Regulating the Florida Bar related to conflicts of interest apply to the representation as they would in any other situation.
Lawyers generally will usually have standing understandings on these points
with insurers who regularly retain them. If the insurer expects to be a client, as
most will where the law so permits, the lawyer can include a statement to that
effect in initial communications, as with other information concerning the
representation. Having an explicit understanding with both the employer and with
insured clients is a good idea in all jurisdictions, even if it may not be mandatory
outside Florida.
62
118 Ellen S. Pryor & Charles Silver, Defense Lawyers’ Professional Responsibilities: Part I--Excess Exposure Cases, 78 TEX. L. REV. 599, 673-78 (2000) (Appendix of form letters).
G. Minnesota’s Requirements
Minnesota has impose a requirement that, to permit dual representation,
there must be both an absence of conflict and an express consent by the insured
after consultation with counsel.119
There is no reason to believe that getting an express consent should be
difficult. In most cases where there is no conflict evident at the outset, there will
be very little risk that an unexpected conflict will arise. Counsel can explain that
to the insured. Counsel can also provide assurance that counsel will always be
alert to any possible conflict that might arise and will promptly bring that to the
insured’s attention if it occurs. If any conflict cannot be satisfactorily resolved,
then it will be eliminated by withdrawal of counsel form the dual representation.
Most insureds are unlikely to see much of a problem with dual representation and
will likely give the consent if it is requested. But to make that consent informed, it
will be necessary to address many or most of the subjects discussed above.
Sending a letter of the sort described is a good way to lay the groundwork
for the discussion necessary to obtain a consent.
63
119 See discussion at notes __, supra.
IV. Confidentiality And Sharing Of Information
A. Confidentiality Generally and Implied Authorization To Disclose
One of the fundamental duties of attorneys is to maintain the confidentiality
of information they acquire in connection with representation of clients. Model
Rule 1.6(a) states this duty as follows:
A lawyer shall not reveal information relating to representation of a client unless the client gives informed consent, the disclosure is impliedly authorized in order to carry out the representation, or the disclosure is permitted by paragraph (b) [whose terms are not relevant here].
Model Rule 1.8(b) supplements this prohibition on disclosure of information
by prohibiting its use “to the disadvantage of the client unless the client gives
informed consent, [with exceptions not relevant here].”
It is important to remember that these limits on use or disclosure of
confidential information are not limited to the types of information protected from
compelled disclosure by the attorney client privilege. They broadly limit voluntary
use or disclosure of any nonpublic information derived from the representation for
purposes other than carrying out the representation.
While the Model Rule states the duty of nondisclosure broadly and
absolutely, interpretation has qualified it slightly. The Restatement limits the rule
to prohibiting disclosures “if there is a reasonable prospect that [disclosure] will
adversely affect a material interest of the client.”120 As the Restatement explains:
64
120 RESTATEMENT, § 60(1)(a).
The duty of confidentiality is defined in terms of the risk of harm…. Although the lawyer codes do not express this limitation, such is the accepted interpretation. For example, under a literal reading of Model Rule 1.6(a), a lawyer would commit a disciplinary violation by telling an unassociated lawyer in casual conversation the identity of a firm client, even if mention of the client’s identity creates no possible risk of harm. Such a strict interpretation goes beyond the proper interpretation of the rule.121
In particular, this permits (1) disclosures to personnel (secretaries,
paralegals, etc.) assisting the lawyer in representing the client and (2) disclosures
to facilitate operation of the law practice (e.g. to clerical personnel keeping time
records or supervisors outside the staff counsel office), so long as there is no
reasonable prospect of harm to the client and reasonable safeguards are employed
to prevent further disclosure.122 While disclosures to facilitate the lawyer’s
practice do not directly advance the client’s objectives, they do assist in “carry[ing]
out the representation” in a broader sense.
The authorization for disclosures “impliedly authorized in order to carry out
the representation” most obviously permits disclosure “when the lawyer reasonably
believes doing so will advance the interests of the client in the representation.”123
The insured has contractually commited management of the defense to the insurer,
a commitment confirmed when the insured acquiesces in counsel’s explanation of
the way in which the representation is to be conducted. Moreover, the insurer 121 Id., cmt c(i). 122 Id., cmts f, g.
65
123 Id. § 61.
needs full information about the progress and prospects for the case to perform its
duties to the insured regarding settlement. On this basis, disclosure to the claim
representative of most information regarding the defense is impliedly authorized.
Implied authorization (by the insured) for such disclosure normally would
not exist, however, if counsel knows of a reasonable prospect that disclosure could
be injurious to the insured or if the insured requested that the information not be
disclosed.
B. General Rule for Joint Representations: No Secrets on Matters Relating to Defense
Because most jurisdictions regard the insurer as a co-client with the insured
(absent a conflict requiring independent counsel), this implied authorization
analysis is supplemented by special rules governing joint representations. Every
client has a right to full information about the representation.124 Where there are
two clients represented jointly, this right is inconsistent with a duty to one client to
refrain from disclosures to the other. Thus, the normal rule is that (unless the
clients agree otherwise) all information may be shared with both clients.125 This
corresponds with the rule that communications of either client with the attorney are
not privileged against the other in any subsequent dispute between the two.126 This
124 Model Rule 1.4. 125 RESTATEMENT § 60, cmt. l.
66
126 Id. § 76(2).
limitation on confidentiality is something that the insured must be told near the
outset of the representation.127
In general, this permits disclosure of anything received from the plaintiff or
other third parties and anything disclosed to them, in discovery, pleadings or
otherwise. Such information is no longer truly confidential, and it necessarily
affects the insurer’s decisions on handling of the claim.
This is so even though, in unusual circumstances, disclosure of such
information to the claim representative might adversely affect the insured. For
example, the insured’s deposition testimony about prior accidents might disclose a
misrepresentation of loss history that could be a ground for seeking rescission.
The lawyer would usually have no reason to know the contents of the application,
so there would be no reason to withhold this information in reporting on the
deposition.
But, if the lawyer knew of the potential adverse impact on the insured,
consultation with the insured should precede any such report. If the insured
provides confidential information (directly or by providing consent for a third
party, such as a doctor, to disclose it) and disclosure to the claim representative of
that information could adversely affect the insured (or the insured requests
secrecy), that is a matter of even greater delicacy than when such information
67
127 See discussion at 59-60, supra.
comes from a third party or has been rendered nonconfidential by disclosure to the
plaintiff or others.
Problems of this sort are rare, but they must be handled with extreme care.
Doubts should be resolved in favor of protecting the insured by withholding
information from the claim representative. But withholding information may
create a conflict and require withdrawal from further representation, requiring
reassignment of the case to other counsel or even permitting the insured to retain
independent counsel.
Similar problems can be posed where information received from one insured
client (e.g. an employee) could adversely affect that client’s relationship with
another insured co-client (here the employer). But they are usually less delicate,
because the insurer would not benefit from disclosure.
C. Corollary: No Sharing of Information on Other Subjects
Any disclosure based on implied authorization or on the joint representation
rule depends on the information disclosed being pertinent to the subject matter of
the representation. Because staff counsel is concerned only with defending the suit
against the insured(s), information not relevant to the defense need not and should
not be disclosed if there is any reasonable possibility it could adversely affect an
insured. In particular, information bearing on coverage but not relevant to liability
or damages in the underlying action should not be disclosed to the claim
representative.
68
Example 17: Insured was not sued until long after the injury (because the victim was a minor against whom limitations do not run). No notice of the occurrence was given to the Company until the suit was filed. In preparation for deposition, the insured informs staff counsel of facts indicating notice of the occurrence long before the complaint was filed. Notice of the occurrence is irrelevant to liability or damages in the underlying action, so this should not be disclosed to the claim representative.
Example 18: Staff counsel is asked to defend a case involving an auto accident in which the insured’s cousin was injured when the car operated by the insured ran into a tree. In interviewing the insured, staff counsel learns that the cousin had been living with the insured while attending a nearby school for a semester, but had returned to his parents’ home before making the claim. This might provide grounds for denying coverage under the policy’s exclusion for relatives residing in the insured’s household, but the claim representative does not appear to realize where the cousin was living at the time of the accident. Staff counsel should not reveal this fact, which has nothing to do with defending the case, to the claim representative.
D. Special Rules Where Information May Affect Both Defense and Coverage
As explained in section B, supra, the usual rule in joint representations
(absent contrary agreement by the clients), is that all information received by the
lawyer may be shared with both clients. Even in non-insurance representations,
where that rule is fully applicable, one client may still ask the lawyer to keep
something secret from the other or may make a disclosure that is manifestly
intended to be kept secret. For example, an employee sued along with her
employer might reveal that the accident may have been caused by another
69
employee's disregard of the employer’s safety procedures. But the client employee
may wish to keep this information from the employer to protect the other employee
from discipline. An instruction (express or implied) to keep something secret from
a co-client can create a conflict, if the information is something the lawyer would
otherwise be obliged to disclose to the other client. The conflict exists because the
lawyer can neither disclose nor proceed without disclosure.
If unresolved, such a conflict will require the lawyer to withdraw. In such
circumstances, the Restatement concludes that, in withdrawing, the lawyer has
discretion to warn the other client that “a matter seriously and adversely affecting
that person’s interests has come to light, which the other client refuses to permit
the lawyer to disclose."128 The lawyer even has discretion to disclose the specific
communication “if, in the lawyer’s reasonable judgment, the immediacy and
magnitude of the risk to the affected co-client outweigh the interest of the
communicating client in continued secrecy."129 So, if a lawyer represents an
employer and employee and learns from the employee that the purported accident
was staged, the lawyer might have discretion to disclose that fact if the lawyer
knew the employer was about to settle the case.
The Restatement offers a modified rule for insurance defense
representations:
128 Id. § 60, cmt. l.
70
129 Id.
With respect to events or information that creates a conflict of interest between insured and insurer, the lawyer must proceed in the best interests of the insured, consistent with the lawyer’s duty not to assist client fraud and, if applicable, consistent with the lawyer’s duties to the insurer as co-client. If the designated lawyer finds it impossible to so proceed, the lawyer must withdraw from the representation of both clients ….130
Because the quoted passage from § 134, Comment f, partially adopts and
partially overrides § 60, Comment l, it is important to see in what respects it does
the latter. It appears that the points on which § 60 may be overridden are those (1)
presumptively permitting disclosure of information concerning the representation
which is (a) adverse to the insured’s coverage interests but (b) was received from a
source other than the insured and (2) conferring discretion to disclose, in
connection with withdrawal, adverse information derived from the insured if the
insurer’s need for disclosure outweighed the insured’s need for continued secrecy.
If counsel has properly advised the insured that the representation is
premised on full sharing of information, the insured’s acceptance on that basis
probably permits disclosure to the claim representative of information received
from third parties. Arguably, that might even be true of information received from
the insured. If the duty of cooperation requires disclosure, the insured’s refusal to
permit disclosure could be a form of fraud.
71
130 RESTATEMENT § 134, cmt. f.
In consulting with the insured about disclosure of such information, counsel
should explain what will happen if the insured refuses to permit disclosure.
Counsel will then have to withdraw, stating that an undescribed conflict has arisen.
If the information whose disclosure is at issue has already become part of the
record in the case (e.g. deposition testimony), the claim representative will likely
obtain it even if counsel does not disclose. If the claim representative believes or
suspects that withdrawal indicates a lack of cooperation, coverage may be
disputed. Should that occur, the information would not be privileged in any
coverage litigation. On the other hand, the claim representative may not dispute
coverage, in which case the information may never come to light.131
1) ABA Opinion 08-450
This issue has just been addressed by an ABA ethics opinion that seems, on
some points, contrary to the RESTATEMENT and otherwise questionable. But any
insurance defense lawyer considering confidentiality issues must take that opinion
into account.
ABA Formal Opinion 08-450132 considers the duties of a lawyer who
represents multiple clients in the same or related matters and learns information
whose disclosure to one client would be damaging to the interests of another client.
The Opinion analyzes the following hypothetical:
131 See Charles Silver & Kent Syverud, supra note 10, 45 Duke L.J. at 360.
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132 ABA STANDING COMMITTEE ON ETHICS AND PROFESSIONAL RESPONSIBILITY, FORMAL
OP. 08-450 (APRIL 9, 2008).
A lawyer is retained by an insurance company to defend both an insured employer and an employee of the insured whose conduct is at issue and for which the employer may vicariously be liable. In the course of a conversation with the lawyer, the employee relates facts to the lawyer indicating that the employee may have acted outside the scope of his employment and that, under the terms of the insurance contract, the employee may not be entitled to the protection of the employer's insurance. The employee made the disclosures in the reasonable belief that he was doing so in a lawyer-client relationship, and without understanding the implications of the facts. The lawyer learned similar information when interviewing another witness. The lawyer believes that the insurance company may have a contractual right to deny protection to the employee based on these facts. It also is possible that the employer could invoke scope-of-employment principles to defend against its own liability to the plaintiff.133
The opinion points out that the handling of confidential information must be
addressed at the outset of the multiple representation.134 Whether or not the insurer
is a client will depend on the law of the relevant jurisdiction. 135 But the Opinion
concludes that this does not matter for the issue before it. “The same analysis
applies whenever the lawyer is placed in the position of representing multiple
clients, or of having duties under contracts such as an insurance policy to an
indemnitor with rights affecting the lawyer's provision of a defense to a litigation
client.”136
133 Id. at __. 134 Id. at __. See discussion at 59-60, supra. 135 Id. at __. See discussion at 2-15, supra.
73
136 Id. at. __.
In particular, the limited scope of an insurance defense representation must
be explained to the insured at the outset of the representation:
In the situation of insurer-engaged counsel, the scope of the representation normally is understood by the insurer to be limited to defending the action under the policy, and not to include representing the carrier or the insured in any coverage or other dispute between the two. Insureds may not fully understand those limitations, so counsel retained by an insurer or other third party should ensure that the client(s) are fully informed at the inception of the relationship, preferably in writing, of any limitation inherent in the representation and any area of potential conflict. To the extent the clients' informed consent to any conflicts of interest may be required under Rules 1.7 through 1.9, both clients' expectations related to confidentiality need to be addressed in order for the waiver to be valid. 137
The lawyer’s duty of confidentiality must also be addressed when the lawyer
learns information whose disclosure to one client the lawyer recognizes would be
adverse to the interests of another client. In the hypothetical, “the insured may not
understand the reasons the information may defeat coverage, but the lawyer knows.
Resolving what the lawyer should do requires balancing the lawyer's obligations
under Rules 1.6 and 1.4(b).”138 The Opinion notes that there is no privilege as
137 Id. at. __ (footnotes omitted). The Opinion suggests that it might be appropriate for either the insurer or the employer to give an advance waiver permitting continued representation of the employee without disclosure of any information adverse to the employee that counsel might learn. Id. Of course, advance waivers re more likely to be enforceable if the party giving the waiver is an experienced user of legal services. Id. at __ n.10, relying on ABA STANDING
COMMITTEE ON ETHICS AND PROFESSIONAL RESPONSIBILITY, FORMAL OP. 05-436 (May 11, 2005).
74
138 Id. at __ (footnote omitted). Rule 1.4(b) requires a lawyer “explain a matter to the extent reasonably necessary to permit a client to make informed decisions regarding the representation.”
between co-clients but points out that the confidentiality obligation is broader than
the privilege.139 Implied authority to disclose is precluded by the risk of harm to
the employee’s interests.140
The Opinion concludes that disclosure to either the insurer or the employer
is ordinarily forbidden:
Absent an express agreement among the lawyer and the clients that satisfies the “informed consent” standard of Rule 1.6(a), the Committee believes that whenever information related to the representation of a client may be harmful to the client in the hands of another client or a third person, the lawyer is prohibited by Rule 1.6 from revealing that information to any person, including the other client and the third person, unless disclosure is permitted under an exception to Rule 1.6. Whether any agreement made before the lawyer understands the facts giving rise to the conflict may satisfy “informed consent” (which presumes appreciation of “adequate information” about those facts) is highly doubtful. In the event the lawyer is prohibited from revealing the information, and withholding the information from the other client would cause the lawyer to violate Rule 1.4(b), the lawyer must withdraw from representing the other client under Rule 1.16(a)(1).
The lawyer may not reveal the information gained by the lawyer from either the employee or the witness, or use it to the benefit of the insurance company, when the revelation might result in denial of insurance protection to the employee. Under the circumstances described in the hypothetical, there has been no “informed consent” and it would be difficult to envision either that a lawyer could recommend or that the client would freely authorize disclosure once given an “explanation about the
139 Id. at __ & n.14.
75
140 Id. at. __.
material risks of and reasonably available alternatives to the proposed course of conduct.” None of the exceptions of Rule 1.6(b) apply. The only question, therefore, is whether anything about the multiple representation warrants a conclusion that the lawyer has impliedly been authorized to make the disclosure.141
This is indeed the key question. The opinion uncontroversially notes that
when a lawyer represents multiple clients in different matters, the lawyer may not
share one client’s information with another client. 142 But, “when the lawyer
represents multiple clients on the same … matter … lawyer has a duty to
communicate with all of the clients about that matter.” 143 Nonetheless, the
Opinion asserts that, even in a multiple representation, “[e]ach client is entitled to
the benefit of Rule 1.6 with respect to information relating to that client's
representation, and a lawyer whose representation of multiple clients is not
prohibited by Rule 1.7 is bound to protect the information of each client from
disclosure, whether to other clients or otherwise.”144 If the latter point is correct,
then it necessarily follows that the lawyer may not facts that would adversely affect
the employee’s interests.
But, what of the lawyer’s duties to communicate with the co-client employer
and (if it is a client) the insurer? Those duties, of course, depend on the scope of
141 Id. at __ (emphasis added, footnotes omitted). One omitted footnote emphasizes that the need for “informed consent” does not apply in the absence of some apparent risk to the interests of one client, as the disclosure is then impliedly authorized. 142 Id. at __. 143 Id. at __.
76
144 Id. at __.
the representation, and if the lawyer cannot communicate on an issue within the
scope of the representation, that constitutes a conflict, requiring the lawyer to
withdraw. 145 As to the insurer, the Opinion reasons that “[o]rdinarily, when a
lawyer is engaged by an insurer to represent the insured, the substantive law
precludes the lawyer from acting contrary to the interests of the insured. In that
situation, the lawyer has no obligation under Rule 1.4 to communicate to the
insurer information contrary to the interests of the insured, but on the contrary, is
obliged by Rule 1.6 not to do so.”146
While recognizing that “the insured is required, as a condition of the
insurance protection, to cooperate and assist in the defense and, implicitly, to
reveal to the lawyer all pertinent information known to the insured,” the Opinion
concludes that these obligations do not limit in any way the insured’s right to have
the lawyer preserve from disclosure to the insurer any and all information relating
to the representation that is damaging to the insured’s interests.147
As to the co-client employer, the Opinion concludes that the lawyer would
be unable to pursue a scope of employment defense while representing the
employee. While the employer might be willing to forego that defense, the lawyer
could not disclose the facts necessary to raise the issue without the employee’s
145 Id. at __. 146 Id. at __ (footnote omitted).
77
147 Id. at __.
informed consent.148 Moreover, because the parties’ interests on waiver differ, the
lawyer cannot advise any of them on that issue. 149
Given the inability to disclose to either the insurer or the employer, the
lawyer must consider whether withdrawal is required under Rule 1.16(a):
If the continued representation of any client would cause the lawyer to violate a Rule, including participation in any fraud, withdrawal from that representation will be required. The lawyer may be able to continue representing the insured, the “primary” client in most jurisdictions, depending in part on whether that topic has been clarified in advance. If the lawyer cannot continue to represent the insured, she should recommend to the insurance company that separate counsel be retained to represent the insured's interest only.150
2) Critique of ABA Opinion 08-450
Before questioning some aspects of the Opinion, I want to note that the
problem addressed depends on the precise three-party scenario. If only the
employee were sued, and the insurer were defending, the information on scope and
course would be irrelevant to the defense and, so, outside the scope of the
representation.151 There would be no obligation to disclose. Alternatively, if there
148 Id. at __. 149 Id. at __. 150 Id. at __ (footnote omitted). The omitted footnote quotes Model Rule 1.7, cmt. 31 “[t]he lawyer should, at the outset of the common representation … , advise each client that information will be shared and that the lawyer will have to withdraw if one client decides that some matter material to the representation should be kept from the other.”
78
151 See discussion at 68-69, supra.
were no insurance (or if coverage did not depend on scope and course), the
employer’s scope and course defense would create no conflict.152
a) Conflict with the RESTATEMENT
The Opinion construes Model Rule 1.6 to impose on a lawyer engaged in a
joint representation a duty to keep any information detrimental to any client from
all other clients. It does this regardless of whether the source of the information is
the client whose interests are at risk or some other source (such as the witness in
the hypo) and even if the lawyer has followed the guidance of comment [31] to
Model Rule 1.7 to advise “advise each client that information will be shared.”
That rule is contrary to the RESTATEMENT’s view of confidentiality in joint
representations:
Sharing of information among the co-clients with respect to the matter involved in the representation is normal and typically expected. As between the co-clients, in many such relationships each co-client is under a fiduciary duty to share all information material to the co-clients' joint enterprise. Such is the law, for example, with respect to members of a partnership. Limitation of the attorney-client privilege as applied to communications of co-clients is based on an assumption that each intends that his or her communications with the lawyer will be shared with the other co-clients but otherwise kept in confidence. Moreover, the common lawyer is required to keep each of the co-clients informed of all information reasonably necessary for the co-client to make decisions in connection with the matter. The lawyer's duty extends to communicating information to other co-clients that is adverse to a co-client, whether
79
152 See discussion at 40, supra.
learned from the lawyer's own investigation or learned in confidence from that co-client.153
In the hypo, the employee is a fiduciary of the employer under the law of
agency, obliged to inform the employer of all pertinent facts regarding the
employment. Nor is the joint representation of employer and employee subject to
the special limitations that may apply to joint representations of insurers and
insureds.154 So, the premise of the RESTATEMENT rule seems fully applicable.
It might be argued, contrary to the RESTATEMENT, that the employee’s own
disclosure to the lawyer of facts that the employee did not recognize as harmful to
insurance coverage should not be regarded as a waiver of the presumptive
confidentiality of the attorney-client relationship, even if the employee has been
told there will be no secrets. However that might be, there is no similar argument
that the facts the lawyer learned from the witness should be kept from the
employer. The witness interview that developed those facts was as much a part of
the employer’s representation as of the employee’s. The same facts would
presumably have been given to the lawyer if the employee were represented by
someone else. The risk that joint counsel will discover facts favorable to one client
at the expense of the other is an inherent risk of joint representation and
(ordinarily) makes the client unfavorably affected no worse off than had there been
separate representation. There is no good reason to make the client benefited by
153 RESTATEMENT, § 60, cmt. l (emphasis added).
80
154 See discussion at 70-71, supra.
such information start over with new counsel (who should be able to find the same
third-party information).
b) Incomplete Consideration of Prospective Waiver
Moreover, the Opinion’s almost irrebutable presumption against the efficacy
of an advance waiver is contrary to case law that the Opinion does not appear to
have considered. In Zador Corp. v. Kwan,155 Zador, owned by the Young family,
purchased the Platt Property from a partnership composed of Claitor and Bolton.
Kwan was an agent for the Young family in passing title to Zador. Bolton claimed
that he was supposed to have wound up with a 15% interest and sued Zador, Kwan,
and Claitor. Zador retained Heller to represent it. Kwan sought indemnification
from Zador.
Zador offered to allow Heller to also defend Kwan. A letter consenting to
multiple representation disclosed the lack of confidentiality, and provided consent
to Heller’s continued representation of Zador in the event of any dispute or
conflict.156 In revealing documents produced by Bolton, Heller found evidence of
possible improper payments to Kwan. It withdrew from representing Kwan, and
who reaffirmed his consent to Heller’s continued representation of Zador.157
155 Zador Corp. v. Kwan, 37 Cal. Rptr. 2d 754 (Cal. Ct. App. 1995). 156 The letter is quoted at length in the opinion.
81
157 While the consent was reaffirmed, the case upheld the original, prospective consent, rather than relying on the reaffirmation. Visa U.S.A., Inc. v. First Data Corp., 241 F. Supp. 1100, 1106 (N.D. Cal. 2003) (no second consent required unless original consent inadequately informed; construing Zador).
Ultimately, Heller represented Zador in filing suit against Kwan. Kwan’s motion
to disqualify was denied.
But, if one assumes that a prospective waiver was necessary for disclosure
and that none was given, the suggestion that the lawyer might be able to continue
representing the employee, after withdrawing from representation of the employer,
seems incorrect, unless a specific consent to such a continuing representation had
been obtained from the employer at the outset. If the employer asserts the scope
and course of employment defense, the employee will have an adverse position (to
try to preserve coverage), but continued representation of the employee would be
substantially related to the former representation of the employer. A consent to
sharing of information (which I assume both the employer and employee to have
given) does not equate to a consent to future adverse representation in the same
matter. So, if the lawyer cannot make sufficient disclosures to seek the employer’s
informed consent to continued representation of the employee, the lawyer will
presumably have to withdraw from further representation of anyone in this matter.
c) Necessity of Fraud Analysis
Another question that lurks in the background of the hypo is what the
employee has said about the scope and course issue. Because that issue is so
obvious and so important (both in terms of the employer’s liability and in terms of
coverage), it is hard to imagine that the employee would not have been asked about
it by either the employer or the insurer before a defense was provided. If the
82
employee lied, it would appear that a fraud was perpetrated to get the defense and
is being perpetrated in seeking to obtain indemnity. As the Opinion recognizes, a
lawyer cannot assist in a fraud. At a minimum, this would require the lawyer to
withdraw. Because the lawyer’s services had been employed in furtherance of the
effort to get indemnity, Model Rule 1.6(b)(2) would authorize disclosure if the
fraud were “reasonably certain to result in substantial injury to the financial
interests … of another.” Even if the necessary reasonable certainty were not
present when the lawyer withdrew, it would eventually become present if the fraud
were not otherwise discovered and neared success.
Moreover, even if the employee never lied, there would appear to be a
fiduciary duty to tell the employer of facts regarding the employment that would
provide the employer with a defense. And the Opinion assumes that the duty to
cooperate requires the employee to tell the insurer any facts relevant to the defense.
Or the employee may have innocently made misrepresentations whose falsehood
was later discovered, creating a duty to correct. Failure to speak, when there is a
duty to do so, is as much a form of fraud as active misrepresentation.158 This
would be an alternate basis for allowing the lawyer to disclose, even if the
employee never lied.
Here the fraud threatens injury to one who was the lawyer’s client (as the
employer was and the insurer may have been) or to whom the lawyer owed a duty
83
158 RESTATEMENT (SECOND) OF TORTS § 577 (1977).
of care (as the lawyer probably owed the insurer, even if it were not a client) while
the fraud was being perpetrated with the assistance of the lawyer’s services. In
those circumstances, tort law might impose a duty to disclose, even though the
Model Rules do not do so.
The point of this analysis of the lawyer’s possible discretion (or even
obligation) to disclose is this: the Opinion’s construction of Model Rule 1.6 may
not, in the end, produce a much different result than the RESTATEMENT rule, but
requires a great deal of extra complexity for all concerned. Even assuming that the
employee’s own statement should be protected from disclosure (and the fraud
analysis may not allow even that), there seems no good public policy reason for
protecting the witness statement. Because Rule 1.6 is at least equally susceptible
of the RESTATEMENT construction, the construction adopted by the Opinion seems
questionable, and lawyers who rely on it risk having a court follow the
RESTATEMENT.
d) Failure To Consider Better Analysis of Duties to Insurer
The foregoing analysis has focused primarily on the relationship between
employer and employee. As regards the insurer, the analysis is simpler, though not
necessarily for the reasons the Opinion offers. Once the lawyer learns of the issue
as to scope and course, it becomes apparent that the way in which the employer is
defended could impact the employee’s coverage. At a minimum (and even if the
insurer is not a client), this requires the lawyer to withdraw from representation of
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the employer (whether or not the issue is disclosed to the employer).159 If the
lawyer also withdraws from representation of the employee, then any
representation of the insurer would also cease (and there would be no more duty to
disclose to the insurer than to the employer).
This analysis is preferable to the Opinion’s reliance on the proposition that
insurance law makes the insured defense counsel’s “primary client” vis-à-vis the
insurer. While there are statements to that effect in a number of cases, I believe
that those statements are generally (perhaps universally) dicta. So long as the
lawyer can avoid any actual conflict between insurer and insured, there is never
any need to consider whether one client is “primary.” Ordinarily, that can be
accomplished by declining representations where a conflict is apparent or
withdrawing when one becomes apparent. While it is possible to construct
hypothetical cases (like the one addressed by the Opinion) where an unexpected
conflict is created by discovery of new facts and those are facts relevant to the
defense representation, there are simply no decided cases in the whole of American
jurisprudence actually dealing with such a situation.160
In the absence of such cases, there has been no occasion to determine what
limitations insurance law would place on defense counsel’s conduct. Certainly,
159 See discussion at 18-19, supra.
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160 Parsons v. Continental Nat’l American Group, 550 P.2d 94 (Ariz. 1976), is often thought to be such a case. But it involved a question of intentional injury that would now be recognized as creating a conflict from the outset and entitling the insured to independent counsel. See discussion at 18-19, supra.
there is no established rule that can be assumed to prevail everywhere and provide
a proper basis for the Opinion’s casual dismissal of lawyer duties to an insurer
assumed to be a client.161
Because the circumstances that can require consideration of a possible
“primary client” rule are so rare, and because fraud analysis will often permit or
require disclosure even if that rule is adopted, it may not matter greatly whether it
is adopted in those narrow circumstances. But the assumption of a background
“primary client” rule may improperly divert attention from the effort to assure that
the lawyer can give undivided loyalty to every client, even an insurance company.
Whenever that can be accomplished, without relying on a “primary client rule,” it
should be.
e) Implications of Critique for Defense Counsel
In light of the conflict between the Opinion and the RESTATEMENT, defense
counsel can have no assurance that a court will agree with the Opinion. So, to the
extent possible, counsel ought to look for a course of action that does not depend
on whether the Opinion is correct on the issues where it conflicts with the
RESTATEMENT. Moreover, even if the Opinion is correct on those issues, counsel
still needs to engage in a fraud analysis, which the Opinion recognizes as necessary
but does not attempt to conduct.
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161 This is so even if one assumes that Parsons authoritatively adopted the “primary client” rule as the law of Arizona, despite the lack of any need to do so on the facts there.
E. Maintaining Confidentiality Against Third-Parties
The duty of confidentiality is not limited to refraining from unauthorized use
or disclosure of information concerning the representation. It also includes a duty
to “take steps reasonable in the circumstances to protect confidential client
information against impermissible use or disclosure by the lawyer’s associates or
agents.”162 Such steps include “devising and enforcing appropriate policies and
practices concerning confidentiality and supervising such personnel in performing
those duties.”163 Reputable independent contractors may be relied upon to
supervise their own personnel, either pursuant to an express confidentiality
agreement or in accordance with established custom.164 The duty to safeguard
continues after the conclusion of the representation.165
If disclosure is demanded pursuant to legal process, counsel must interpose
all appropriate objections, including those based on attorney-client privilege or
work product protection. The scope of the latter doctrines varies from jurisdiction
to jurisdiction. It is the responsibility of the lawyer to determine the applicable
law.
162 RESTATEMENT § 60(1)(b). 163 Id. cmt. d. 164 Id.
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165 Id. cmt. e.
V. Even If the Insurer Is Not a Co-Client, Its Communications With Defense Counsel Should Be Privileged
Minnesota contemplates that an insurer will not be a co-client with the
insured unless special consent is obtained. Some other states preclude the insurer
from being a client.166 Even in cases or jurisdictions where the insure is not a co-
client, communications with the adjuster are still privileged.
One formulation of the scope of the protection is provided by proposed
federal rule of evidence 503 on attorney-client privilege. Though never effective,
federal courts commonly look to it as a succinct statement of the common law that
Rule 501 of the Federal Rules of Evidence makes authoritative in cases where
federal law provides the rules of decision. Proposed rule 503(b) provided a
privilege for communications among a client, the client’s lawyer(s) and
representatives of either. Similarly, the Restatement privileges qualifying
communications “made between privileged persons.” “Privileged persons” are
defined to be “the client …, the client’s lawyer, and agents of either.”
For privilege purposes, the Restatement defines an agent as one whose
involvement on behalf of the client is reasonably necessary and whom the client
reasonably expects to maintain confidentiality. One type of agent a client may
utilize is one who manages the matter on the client’s behalf. The Restatement
recognizes an insurer as such an agent. Thus, it states that “a client need not
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166 E.g., In re Rules of Professional Conduct, 2 P.3d 806 (Mont. 2000).
personally seek legal assistance, but may appoint a third person to do so as the
client’s agent (e.g. § 134, Comment f).” The referenced comment states, in
pertinent part:
It is clear in an insurance situation that a lawyer designated to defend an insured has a lawyer-client relationship with the insured. The insurer is not, simply by the fact that it designates the lawyer, a client of the lawyer. Whether a client-lawyer relationship also exists between the lawyer and the insurer is determined under § 14. Whether or not such a relationship exists, communications between the lawyer and representatives of the insurer concerning such matters as progress reports, case evaluations, and settlement should be regarded as privileged and otherwise immune from discovery by the claimant or another party to the proceeding.167
Moreover, as used in the RESTATEMENT, “agents ... who facilitate
communication” include not only true agents of lawyer or client, but also
persons who hire the lawyer as an incident of the lawyer’s engagement. Thus, the privilege covers communications by a client insured to an insurance company investigator who is to convey the facts to the client’s lawyer designated by the insurer, as well as communications from the lawyer for the insured to the insurer in providing a progress report or discussing litigation strategy.168
These specific statements are reinforced by broad rules permitting sharing of
information among co-clients and among other parties of common interest.169 The
167 Id. § 134, cmt. f (emphasis added). 168 Id. (emphasis added).
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169 Id. §§ 75, 76.
relevant interest is one in the “matter” that is the subject of the representation.170
But their interests in the matter “need not be entirely congruent”171 Joint
representation or common interest sharing is is permissible for joint defense or
prosecution of a lawsuit, even if the parties may have divergent interests in
allocating any resulting recovery or liability.172
So an insurer who hires the lawyer pursuant to a standard liability insurance
policy is a privileged party. This is so regardless of whether it be regarded as a co-
client, the insured’s agent for managing the representation, or simply a
contractually interested third party.
VI. Working with the Claim Representative
A. Routine Communications and Status Reports
Counsel should work with the insurer to establish routine procedures for
reporting, providing copies of pleadings and discovery documents, etc. These
procedures may vary according to the type of case, the amount at stake, or other
criteria affecting the insurer’s need for information. Counsel should respond
promptly to all requests for information about the progress and prospects of the
case.
170 Id. § 76. 171 Id. cmt e.
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172 See FDIC v. Ogden Corp, 202 F.3d 454 (1st Cir. 2000) (parties had joint attorney-client relationship for prosecution of insurance claim, despite potential disputes about allocation of proceeds among themselves); information shared was confidential against outsiders, but usable in dispute inter se).
B. Consultation with Claim Representative About Investigation, Case Planning, Strategy, Tactics, and Expenditures (e.g. for Expert Witnesses)
Counsel should consult with the claim representative about any investigation
that appears necessary or desirable. Consultation may cover investigation already
done or in progress, the timing of further investigation, whether the investigation
should be conducted by the insurer or outside investigators, and any expense to be
incurred. This topic should be addressed as soon as practicable after assignment of
the case.
Counsel should consult with the claim representative about strategy and
tactics, including pleadings, discovery, and motion practice. Consultation may
cover timing of various actions (e.g. possible deferral of depositions pending
efforts to settle) and the expense to be incurred (e.g. for travel or expert witnesses).
After advising the claim representative on counsel’s recommendations and
the pros and cons of various courses, counsel may defer to the claim
representative’s preferences, so long as doing so does not appear to involve any
substantial risk to any interest of the insured. The Restatement considers this sort
of situation as follows:
Insurer, a liability insurance company, has issued a policy to Policyholder under which Insurer is to provide a defense and otherwise insure Policyholder against claims covered under the insurance policy. A suit filed against Policyholder alleges that Policyholder is liable for a covered act and for an amount within the policy’s monetary limits. Pursuant to the policy’s terms, Insurer
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designates Lawyer to defend Policyholder. Lawyer believes doubling the number of depositions taken, at a cost of $5000, would somewhat increase Policyholder’s chances of prevailing and Lawyer so informs Insurer and Policyholder. If the insurance contract confers authority on Insurer to make such decisions about the expense of defense, and Lawyer reasonably believes that the additional depositions can be foregone without violating the duty of competent representation owed by Lawyer to Policyholder, Lawyer may comply with Insurer’s direction that taking the depositions would not be worth the cost.173
If the course preferred by the claim representative creates no substantial risk
to any interest of the insured, following that course cannot violate the duty of
competent representation owed to the insured. If counsel concludes that such a
risk would result, counsel should so advise the claim representative, and elaborate
the reasons for counsel’s recommendation and the reasons why the claim
representative’s preference would create a substantial risk for the insured.
If the claim representative adheres to the preference that appears to pose
such a threat, the insured must be promptly advised of that risk and consulted
about its effect. The insurer is not obliged to approve all recommendations of
defense counsel, even where disapproval may entail some risk to the insured.
Insurance law and insurance contract interpretation determine the extent to which
the insurer is obliged to protect the insured’s interests (by settling or commiting
extra funds in support of the defense, e.g., by hiring experts). Authority to commit
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173 RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 134 cmt. f, Illus. 5 (Main vol. 2000).
the insurer’s funds does not rest with counsel. If claims personnel decide that the
protection of the insured recommended by defense counsel is not due, then the
insured must be notified and allowed to make informed decisions about the
representation.
A lawyer’s duties in dealing with insurer guidelines requiring the insurer’s
approval for various litigation activities were in American Bar Association ethics
Opinion 01-421. That opinion assumes that the insurer has directed the lawyer to
proceed in a particular way, rather than merely declining to pay for services the
lawyer has recommended.
First, in an elaboration of Opinion 96-403, the ABA Opinion concluded that
the insurer and insured must be advised about how the representation will be
conducted. Counsel must tell the insurer that counsel may not be able to follow
insurer directions if they would harm the interests of the insured. Counsel must
also tell the insured about the insurer’s normal practices in directing
representations:
If the lawyer is hired to defend an insured pursuant to an insurance policy that authorizes the insurer to control the defense and, in its sole discretion, to settle within policy limits, the lawyer must communicate these limitations on his representation of the insured to the insured, preferably early in the representation. The lawyer should "make appropriate disclosures sufficient to apprise the insured of the limited nature of his representation as well as the insurer's right to control the defense in accordance with the terms of the insurance contract.... No formal acceptance or written consent is necessary. The insured
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manifests consent to the limited representation by accepting the defense offered by the insurer after being advised of the terms of the representation being offered.”174
The Tennessee Bar offered similar advice on the initial consultation with the
insured:
It is not proper to call upon the insured to make a decision about the directives in question (to always appeal adverse general sessions verdicts, to never agree to mediation and to never waive the right to a jury) at the outset of the representation, at a time when it is unclear that any of these situations are likely to occur and at a time when the insured cannot readily assess what interests she might have that could be affected by those decisions. Rather, the insured should be informed at the outset that the insurer ordinarily issues such directions. Counsel may further explain that, in light of the insurance policy and the insured’s tender of defense, counsel assumes that such directions should be followed unless counsel identifies some reasonable probability that following the directive might differ from an interest of the insured (such as by exposing her to or increasing her exposure to liability in excess of limits). But if counsel identifies a reasonable possibility of an interest being advanced that differs from that of the insured, counsel will consult with the insured about the decision at the time it is to be made and in light of all the circumstances then prevailing.175
Counsel may then proceed so long as there appears to be no threat to the
insured’s interests from any direction the insurer gives. This ordinarily means that
ethical problems cannot arise unless there is some question as to coverage or the
174 ABA 01-421, at 3.
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175 Tenn. Bd. of Prof. Resp., Formal Ethics Op. 2000-F-145, at __.
suit presents a genuine possibility of liability in excess of policy limits.176 If
counsel believes that some insurer decision poses a substantial risk to the insured,
counsel should point that out to the insurer and request reconsideration.177 If the
insurer will not reconsider, then counsel must inform the insured, fully describe the
risks and benefits, and inquire whether the insured will consent to having counsel
proceed on the basis the insurer requests. The Tenneesee Bar describes such a
consultation as follows:
Counsel should describe the decision and its risks and benefits from the standpoint of the insured. Of course, these will include whatever risks to the insured that counsel believes might result from the compliance. But objection to the insurer’s directive would also have risks and therefore, where appropriate, counsel should point out that the insurer might take the position that any unjustified refusal to permit counsel to follow its direction would breach the insurance contract. If the insurer were correct in so contending an objection would endanger the insured’s coverage. On the other hand, if the insured permits counsel to follow the insurer’s directive, the insured could also reserve the right to hold the insurer responsible for any resulting damage to the insured. (The insurer would be liable if the directive were found to breach its duties under the insurance policy.) The insured should be advised of the utility of obtaining independent counsel, at the insured’s own
176 In some special circumstances, as with a doctor sued for malpractice, the insured may have reputational or other collateral interests beyond avoiding any personal payment. Where such interests are implicated, the lawyer would treat them in the same way as the more common financial interests, by implementing the procedures described here.
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177 The procedures approved in ABA Opinion 01-421 for handling particular conflicts in insurance defense representations appear to have been first recommended in Ellen S. Pryor & Charles Silver, Defense Lawyers’ Professional Responsibilities: Part I—Excess Exposure Cases, 78 TEX. L. REV. 599, 644 (2000). But those procedures are logically implied by the conflicts rules applicable to all representations involving duties to multiple persons.
expense, in considering whether to acquiesce in the insurer’s directive (perhaps under protest). If the insured acquiesces, after being properly advised, counsel may comply with the insurer’s directive.178
If the insured refuses to consent, then counsel cannot proceed in the way the
insurer requests. If the insurer will not rescind the disputed decision, counsel must
then withdraw.179
The ABA Opinion reached a similar conclusion:
If the lawyer reasonably believes her representation of the insured will be impaired materially by the insurer’s guidelines or if the insured objects to the defense provided by a lawyer working under insurance company guidelines, the lawyer must consult with both the insured and the insurer concerning the means by which the objectives of the representation are being pursued. "If the lawyer is to proceed with the representation of the insured at the direction of the insurer, the lawyer must make appropriate disclosure sufficient to apprise the insured of the limited nature of his representation as well as the insurer's right to control the defense in accordance with the terms of the insurance contract."180 If the insurer does not withdraw or modify the limitation on the lawyer’s representation and the insured refuses to consent to the limited representation, the resulting conflict implicates Rule 1.7(b) and unless the lawyer is willing to represent the insured without compensation from the insurer, requires the lawyer to terminate the representation of both clients.181
178 Tenn. Bd. of Prof. Resp., Formal Ethics Op. 2000-F-145, at __. 179 A request to withdraw will necessarily involve the court, which may resolve any dispute between insurer and insured. 180 Id. See also Rule 1.8(f)(2); Board of Professional Responsibility of the Supreme Court of Tennessee Ethics Op. 2000-F-145, 2000 WL 1687507 (Sept. 8, 1999).
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181 ABA Op. 01-421, at 4.
This procedure fully protects insureds in the infrequent cases where insurer
guidelines or direction might create problems, while allowing such guidelines and
direction to operate in the multitude of cases where they do not cause problems.182
That procedure was subsequently approved by the Pennsylvania Bar
Association.183 It is also approved by an opinion of Professor Geoffrey C. Hazard,
Jr., the Reporter for the Model Rules and a leading academic authority on
professional responsibility.184 Bar opinions questioning the propriety of prior
approval requirements have not addressed this means of reconciling such
requirements with the lawyer’s ethical duties to the client insured.
Those objecting to insurer direction usually rely on the lawyer’s duty to
exercise independent judgment on behalf of each client, and in particular on behalf
of the insured. This ignores the protections provided by the conflict rules, as just
described. If the lawyer consults with the insured about a decision that presents
risks to him or her, the claim representative’s directions cannot control counsel’s
actions unless the insured gives informed consent. If the insured does give
182 The ABA had previously reached similar conclusions regarding defense counsel’s acceptance of insurer instructions regarding settlement. AMERICAN BAR ASS’N STANDING
COMMITTEE ON ETHICS & PROFESSIONAL RESPONSIBILITY, FORMAL OPINION 96-403 (1996)
(defense counsel may accept insurer instructions regarding settlement so long as insured acquiesces in insurer direction). 183 Pennsylvania Bar Ass’n Comm. on Legal Ethics and Prof. Resp., Formal Op. 2001-200.
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184 Opinion of Geoffrey C. Hazard, Jr.,, at 4-5 &13-23, In re Rules of Prof. Cond., 2 P.3d 806, 2000 MT 110 (Mont. 2000). Prof. Hazard did not analyze the full set of preliminary steps that attempt to resolve the conflict, as described in ABA Opinion 01-421. He simply approved the adequacy of the means available to the lawyer to comply with ethical duties if the conflict could not be resolved: either perform the services and seek payment later or, to avoid the risk of nonpayment, withdraw. Dean Syverud concurs. Kent D. Syverud, The Ethics of Insurer Litigation Management Guidelines and Legal Audits, 21 INS. LITIG. RPTR. 180, 188 (1999)
informed consent,185 defense counsel can treat the direction as coming from the
insured. If the insured objects, then either the insurer’s acquiescence in the
insured’s wishes or counsel’s withdrawal will likewise prevent the insurer from
controlling the insured’s representation.
Of course, the insured does not have total freedom to withhold consent to the
insurer’s instructions. The insured has a duty under standard insurance policies to
cooperate with the insurer’s defense of claims against the insured. While there
would be no duty to cooperate with a defense that itself breached the insurer’s
obligations under the policy, the insured would have to consider the possibility that
the insurer might be within its rights. If so, refusal to consent to the direction
could breach the duty of cooperation and put the insured’s coverage at risk. A
lawyer representing both insurer and insured would have a conflict of interest
precluding provision of advice on that subject, in which they have adverse
interests. It is also outside the scope of any defense representation that the insurer
has undertaken to pay for, even if the insurer is not a client. Certainly, the lawyer
cannot adjudicate any such dispute between insurer and insured. So, the insured
should be advised that there is some risk and to consult personal counsel if
evaluation of that risk is desired.186
185 An insured giving such consent may, of course, reserve the right to hold the insurer responsible if the insurer directive leads to a bad result for the insured. This option is one the insured would consider in deciding whether to consent.
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186 See Massachusetts Bar Op. 2000-4 (Use of Outside Legal Auditors); Tenn. Formal Ethics Op. 2000-A-145.
C. Involvement of the Claim Representative Neither Interferes With Counsel’s Independent Judgment Nor Relieves Counsel of the Obligation To Exercise That Judgment
Model Rule 5.4(a) provides that “[a] lawyer shall not permit a person who
recommends employment or pays the lawyer to render legal services for another to
direct or regulate the lawyer’s professional judgment in rendering such service.”
Model Rule 1.8(f) has similar terms.
A lawyer defending lawsuits exercises independent judgment by advising
clients of options they have and of the advantages and disadvantages of each
option. The lawyer exercises independent judgment by making recommendations
of the options the lawyer sees as best serving the objectives the lawyer has been
retained to advance. But, especially where the options involve expenditure of
additional money, the lawyer cannot decide to spend clients’ funds if the clients
choose to reserve those funds for other purposes.
The distinction here is one between freedom of judgment, which lawyers
must always preserve, and freedom of action. “Budgetary decisions constrain
lawyers’ actions. They do not prevent lawyers from considering options or
recommending them. Consequently, they do not interfere with lawyers’ ability to
give independent advice.”187 The lawyer’s “duty to exercise independent judgment
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187 Ellen S. Pryor & Charles Silver, Defense Lawyers’ Professional Responsibilities: Part I—Excess Exposure Cases, 78 TEX. L. REV. 599, 647 (2000).
does not limit a client’s freedom to decide which of a lawyer’s recommendations to
fund.”188
The protection for an insured is not some power of counsel to decide what
insurance contract requires the insurer to do. Rather, that protection is the
obligation of counsel to alert the insured of any decision by the claim
representative that creates some substantial risk to the insured’s interests. If the
insured then wishes to dispute the propriety of the decision, the insured may retain
other counsel for that purpose or may discharge counsel and assume the defense
personally (perhaps reserving the right to hold the insurer responsible for the cost).
VII. Watching For and Reacting To Indications of Possible Divergence Between Interests of Insured and Insurer or Between Co-Client Insureds
One reason defense representations usually present few problems is that the
interests of the insurer and of the insured are usually fully aligned with one
another. Either the insured shares the insurer’s desire for expeditious and
economical resolution, or the insured is indifferent to how the case is defended, so
long as the insurer will pay any settlement or judgment in its entirety. When it
exists, this alignment of interests avoids any need to deal with conflict problems,
because there are no conflicts. But counsel must be alert for divergent interests of
the insured, so that any conflicts that might be created by those interests can be
properly addressed.
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188 Id. at 648.
A. Typical Indications of Divergence
The most obvious source of potentially divergent interests is an allegation or
prospect of liability in excess of the policy limits or outside the coverage of the
policy. The prospect of personal liability may lead the insured to desire counsel
and the claim representative to mount a more vigorous and expensive defense
effort than the amount at stake would warrant were the insurer alone responsible
for the entire claim. It usually leads the insured to desire that the insurer protect
the insured against excess or noncovered exposure by settling the entire claim at its
own expense.
Another common source of potentially divergent interests is a preexisting
relationship between the insured and the plaintiff. If the plaintiff is a family
member, friend, or valued customer, the insured may wish to have the injury
swiftly and generously compensated by the Insurer, even if the insured is not or
may not be liable for it. As a result, the insured might prefer a less than vigorous
defense.
Insureds, especially professionals, may have reputational concerns about the
case. Manufacturers may be concerned about the implications of the defense
strategy for future cases involving the same product. Insureds may face related
collateral proceedings (e.g. criminal charges, license revocations, etc.). Any of
these sorts of concerns may lead to a desire for a defense or settlement strategy
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different from that appropriate simply to trying to minimize the total cost (defense
plus settlement or judgment) of the current claim.
In a case involving representation of two co-insureds (e.g. owner and driver
of the insured car or employer and employee) each could have opportunities to
improve its own position at the expense of the other, and favoring one could
sometimes benefit the Insurer.
In addition to these recurring situations, there may be unique sources of
divergent interests. An insured may have personal reasons to avoid disclosure of
certain facts likely to come out in litigation of the case, as when the passenger in
the insured’s car at the time of the accident is a person with whom the insured was
then conducting an extramarital affair. An insured may be reluctant to cooperate
for other reasons.
The point for counsel to remember is that any indication that the insured
may have divergent interests from those of the insurer must be explored. At a
minimum, any such divergence calls for consultation with the insured. If there is a
conflict, it must be identified and addressed.
B. Consultations with Insured About Possible Divergence
As soon as counsel becomes aware that there is a genuine possibility of
divergent interests in a particular case, counsel should take steps to consult with
the insured about that possibility. Ordinarily, consultation with the insured should
occur before any communication with the claim representative on the subject.
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Suppose that counsel informs the insured that, unless the case settles, the insured
will likely be deposed and may also be called as a witness at trial. The insured
responds that he fears having to testify, lest his wife learn that he was with another
woman and seek a divorce.189 The insured’s desire not to testify, when the insurer
may want to have his testimony, means that there is a potential conflict of interest.
If counsel concluded that no reasonable insured would, after being fully
informed, consent to the potential conflict, counsel would have to withdraw. But,
like most potential conflicts, this is one an insured could reasonably consent to. It
may never be necessary to testify, and it will be valuable to have the insurer
continue handling the case until a decision on that must be made. Besides, if the
plaintiff seeks his testimony, independent counsel may be no more able to avoid it
than assigned counsel. So counsel can seek consent, after adequately informing
the insured of the relevant considerations
Counsel can assure the insured that counsel cannot call him to testify if the
insured instructs otherwise. But the giving of such an instruction, if the testimony
would be in the insurer’s interests, would (if the insurer is a client) create a conflict
and force counsel to withdraw. (Even if the insurer is not a client, it would be
reasonably relying on counsel to defend the case in a way that minimizes costs, and
would presumably need to be told of the decision not to use the insured’s helpful
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189 This example is taken from Charles Silver & Kent Syverud, supra note 10, 45 Duke L.J. at 327-30.
testimony.) The claim representative might regard the insured’s unwillingness to
testify as a breach of the duty of cooperation, and that might threaten the insured’s
coverage. To the extent possible without sacrificing the insurer’s interests, counsel
can postpone the problem by trying to put off any deposition and try to settle or
dispose of the case before it occurs. But there is a real possibility that, if counsel
continues to defend the case, counsel may need to ask the insured to testify. When
and if that day comes, the insured may have a tough decision to make. Until then,
counsel can continue the defense if the insured is willing.
Defense counsel cannot advise the insured on any issue (such as whether to
waive a conflict) which is outside counsel’s assignment to minimize the cost of the
liability case against the insured. Counsel can only provide the information
necessary for the insured to make a decision, point out the possible utility of
seeking independent legal advice and, if indicated, offer referrals to counsel who
might provide such advice.
Two leading authorities have offered the following general procedure for
advising an insured regarding a potential conflicts:
Explain the nature of the potential conflict.
Identify defense counsel’s obligation to the company to defend the liability suit in a manner that will minimize the loss.
Identify defense counsel’s duty to the insured not to act in disregard of the insured’s express desires.
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Explain that the joint representation can continue, despite the [potential] conflict, because the conflict is unlikely [at least for the immediate future] to prevent defense counsel from satisfying his obligations to [both] the company and the insured.
Explain the costs and benefits to the insured of waiving the conflict.
Explain that a time may come when defense counsel’s responsibilities to the company and to the insured will actually conflict. When that happens, the insured will have to decide whether to protect the identified interest or to compromise that interest and allow counsel to proceed with a defense that is calculated to minimize the loss on the liability claim.
Explain that defense counsel will respect the insured’s decision, but may withdraw if the insured decides to do otherwise than as required to defend the liability claim effectively.
Explain that the decision facing the insured involves coverage or other questions … on which defense counsel cannot advise the insured but concerning which the insured may [wish to] obtain advice from independent counsel retained and paid for by the insured.190
While the need for such discussions is infrequent, defense counsel must see
that any potential conflict is addressed promptly after it becomes apparent. If the
insured consents, that consent should be memorialized,. If the potential conflict
becomes actual, the insured must again be consulted, and any further waiver
memorialized. If the insured declines to waive, counsel may (with the insured’s
consent) ask whether the claim representative will allow counsel to proceed as the
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190 Id. at 331
insured wishes. If the insured refuses to allow that request or the claim
representative declines it, counsel must withdraw.
Example 17: A Husband/driver and Wife/passenger bring suit for the wife’s injuries sustained in an auto accident. H has a derivative claim for loss of services. The other driver counterclaims against H for contribution. Counsel represents H as a defendant on the counterclaim. W’s claim does not meet the no-fault threshold. If raised, this defense will defeat H’s derivative claim. While a motion to dismiss based on the threshold would defeat the counterclaim, counsel may not, without H’s informed consent, make such a motion because doing so would adversely affect H. In consulting with H about whether he will give such consent, counsel may point out (1) that the other driver will likely make such a motion even if H does not and (2) that the claim representative might regard failure to allow such a motion as a breach of the insured’s duties under the policy and might seek to deny or limit coverage on that basis. But if H refuses to consent, staff counsel should refrain from making the motion and leave the claim representative to whether remedies might be utilized for the insured’s alleged breach of duty.
C. Memorializing Waivers
Some states require that all conflict waivers be in writing or, at least,
confirmed in writing. Even where that is not required, it is highly desirable that all
waivers be memorialized in writing. In the event of later dispute, the burden will
be on counsel to prove that the waiver was given.
In memorializing a waiver, it is not enough to state what the insured
consents to. One must record the disclosures which make the insured’s decision to
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give the waiver informed. Only by doing so can one later prove that those
disclosures were made.
Ideally, one would like to have an insured sign the waiver. But that is not
always practical and, unless local law requires a signed waiver, it is sufficient to
send a contemporaneous letter setting forth the disclosures and the insured’s
agreement. (This will satisfy any applicable requirement that the waiver be
confirmed in writing.)
D. Dealing With Excess Exposure
One of the most common situations where the insured and the insurer may
have different interests is where the claim against the insured exceeds policy limits.
Fortunately, the divergent interests in such cases primarily concern settlement
decisions that are the province of the claim representative, rather than of defense
counsel. Ordinarily, the interests of both the insurer and the insured are equally
served by a vigorous defense, seeking to defeat or minimize the claim. But
counsel still must know how to handle the problems that do come up.
1) Potential Conflicts Affecting Defense
The differing interests of the insurer and the insured would affect the
conduct of the defense only if some defense strategy could increase the odds of
success, but at the price of magnifying the damage exposure upon failure. (Even
there, the conflict is probably more theoretical than real, because selection of such
a strategy would likely require the insurer to pay any increase in the judgment
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resulting from that strategy.191) The insured should be warned of this potential
conflict if the facts of the case suggest that it is a genuine one, as opposed to a
mere theoretical possibility.
2) Discretionary Settlement Authority
Another potential pitfall is discretionary settlement authority. In full
coverage cases, claim representatives often give lawyers discretion to offer any
amount up to a specified limit, in the hope that the lawyer will be able to settle for
less. In an excess exposure case, any offer of less than the full amount authorized
is likely to increase the risk of negotiations breaking down, causing the case to go
to trial and exposing the insured to excess liability. This could easily be construed
as preferring the insurer’s interest in trying to settle for less to the insured’s interest
in minimizing the risk of excess liability.192 In excess exposure cases, counsel
should always offer the full amount authorized and the claim representative should
be informed that counsel will not attempt to settle for less.
3) Disclosing Limits
Claim representatives sometimes resist disclosing policy limits on claims
that seem clearly within those limits. Some say that disclosure just sets a target for 191 Transport Ins. Co. v. Post Express Co., 138 F.3d 1189, 1192-93 (7th Cir. 1998); Detenber v. Universal Ins. Co., 372 F.2d 50 (6th Cir. 1967) (decision to defend on ground that insured’s intoxication so obvious that plaintiffs assumed the risk by riding in his car).
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192 See Mid-America Bank & Trust Co. v. Commercial Union Ins. Co., 587 N.E.2d 81 (Ill. App. Ct. 1992) (lawyer liable for excess liability flowing from breakdown of negotiations after lawyer offered less than full amount authorized); Lysick v. Walcom, 65 Cal. Rptr. 406, 416-17 (Cal. Ct. Ap. 1968) (lawyer’s failure to exercise discretionary authority to offer full policy limit breached duty of loyalty to insured as a matter of law); Ellen S. Pryor & Charles Silver, supra note 118, 78 TEX. L. REV. at 658-60
plaintiffs who can’t or won’t evaluate their own cases. But withholding of this
information seldom helps an insured and may hurt, if it delays or prevents
negotiations. Besides, the limits will quickly come out in discovery anyhow, and
local law may require its disclosure even prior to discovery. If the case involves a
genuine possibility of excess exposure, counsel should ordinarily disclose this
information unless the insured instructs otherwise or counsel believes that
withholding it is in the insured’s interest.
4) Finding Other Coverage
In an excess exposure situation, the interests of the insured usually will be
well served by identification of other coverage. Counsel should always inquire
about that and pursue any leads that develop during the case. But information
about other coverage should not be disclosed to the claim representative without
the insured’s approval. Sometimes insureds prefer to select only one policy to
respond to the loss (though that would be unusual in an excess exposure situation).
Locating other insurance is not strictly part of the defense of the case, so disclosure
to the claim representative is not impliedly authorized. Even if local law does not
permit an insured to select one policy to the exclusion of other applicable policies,
it is not the job of counsel to help the claim representative prevent it.
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If, for any reason, counsel will not be investigating the availability of other
coverage, the insured should be so informed, in writing, to negate any possible
reliance on counsel with respect to that task.193
5) Keeping Insured Informed
The insured should be kept informed of all settlement demands and offers.
This can be particularly important if the demand is in excess of limits and would
require a contribution from the insured to accept.
In Yeomans v. Allstate Insurance Co.,194 the insured defendant was not
informed until the eve of trial that the carrier had decided to offer its policy limit of
$25,000 in settlement. Defense counsel then requested his client to contribute an
additional $10,000 to a potential settlement, but the client was not prepared to do
so. The case was tried, and a verdict was returned for $77,000. Allstate was held
liable for the entire amount of the verdict for failing to give the insured advanced
notice of her precarious legal position so that she could have a meaningful
opportunity to arrange to contribute to a potential settlement. The court went on to
193 See Shaya B. Pacific, LLC v. Wilson, Elser, Moskowitz, Edelman & Dicker, LLP., 827 N.Y.S.2d 231 (N.Y. App. Div. 2006) (whether defense counsel has duty to advise on coverage depends on agreed scope of representation, which was a question of fact). Other cases involving claims of that defense counsel had a duty to investigate coverage include Jordache Enterprises, Inc. v. Brobeck, Phleger & Harrison, 56 Cal. Rptr. 2d 661 (Cal. Ct. App. 1996), rev’d, 958 P.2d 1062 (Cal. 1998) (insured sued defense counsel it had selected for allegedly negligent failure to investigate existence of insurance; issue before these courts was only statute of limitations); Larochelle v. Cyr, 707 A.2d 799 (Me. 1998) (affirming verdict that failure to investigate insurance was not negligent, without passing on whether there was a duty to investigate); and Darby & Darby, P.C. v. VSI International, Inc., 739 N.E.2d 744 (N.Y. 2000) (failure to advise seeking coverage not negligent where relevant states had rejected coverage, even though novel theory was later accepted); .
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194 Yeomans v. Allstate Insurance Co., 324 A.2d 906 (N.J. App. Div. 1974).
say that the carrier, and by implication defense counsel, had a duty to continue to
negotiate to settle the case even after the policy limits were committed.195
While an insured always has the right to contribute to a settlement if the
insurer is unwilling to meet the plaintiff’s demand, the insured is entitled to look to
the insurer to contribute its limits on any claim worth the limit or more. So staff
counsel should never suggest a contribution by the insured unless the insurer has
tendered its limit. Only if the insured raises the issue should it be discussed
without such a tender.
At the first opportunity for a within-limits settlement, counsel should point
out the possible utility of personal counsel if the insured has not already retained
such counsel. (See Appendix of Sample Letters) In connection with that
consultation, counsel should advise the insured of the risks of personal exposure
presented by the case, including an indication of the possible magnitude of that
exposure.
6) Case Evaluation
The insurer and the insured usually will have divergent interests in acting on
within-limits settlement demands or in considering possible offers. The insured
typically wants the case settled within limits whenever there is any possibility of an
excess judgment, while the claim representative wishes to limit any such
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195 See also Miller v. Byrne, 916 P.2d 566 (Colo. Ct. App. 1995) (attorneys breached duty to inform insured of policy limits settlement demand and insurer’s maximum offer of $5,000 less than limit).
settlement to the smallest amount possible. Insurance law has responded to this
divergence by imposing certain duties to settle in excess exposure cases.196 But
these duties typically do not require the insurer to settle if the amount demanded by
the plaintiff is unduly high.
Claim representatives commonly look to defense counsel for settlement
recommendations. As with discretionary settlement authority, counsel’s
obligations to the insured place some limits on the role counsel may play.
Counsel may still evaluate the prospects of the action against the insured: the
likelihood that liability will be found, the range of damages likely if liability is
found, etc.197 (All such evaluations should also be provided to the insured at about
the same time they are given to the claim representative.)198 Such an evaluation
should represent counsel’s best judgment, unaffected by the interest of either the
insured or the insurer in whether to settle.
But the desirability of settlement depends on many other factors, most
notably the likelihood that the plaintiff can be induced to settle for even less and
the bad faith risks if the case is not settled. In an excess exposure case, counsel
may not advise the claim representative on any of these other considerations.
196 See, e.g., STEPHEN S. ASHLEY, BAD FAITH ACTIONS: LIABILITY & DAMAGES, §§ 3:01 et seq. (2d ed. 1997) (supplemented to 1999). 197 Hartford Acc. & Indem. Co. v. Foster, 528 So.2d 255, 273-76 (Miss. 1988); Ellen S. Pryor & Charles Silver, supra note, 78 TEX. L. REV. at 652-54.
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198 Carrier Express, Inc. v. Home Indemn. Co., 860 F.Supp. 1465, 1481-82 (N.D. Ala. 1994) (counsel acted disloyally to insured by providing settlement evaluations to insurer but not to insured)
Evaluating the bad faith risk is not part of the defense and is a subject on which the
insured and the Insurer have conflicting interests. Evaluation of the settlement
approaches commonly taken by the plaintiff’s lawyer and his likely bottom line
would normally be provided in a full coverage case, but is another subject which
the divergent interests of the insured and the insurer require be avoided in an
excess exposure case. Advice to delay making a settlement offer for tactical
reasons looking to minimize the cost of the case could harm the insured.199
Because of the conflict between the insurer and the insured on settlement, it
would ordinarily be improper for counsel to advocate any particular settlement
position. In particular, it would be fraudulent for counsel to recommend a course
of action that does not reflect counsel’s actual opinion, even if such a
recommendation is in the insured’s interest. Nonetheless, it would usually be in
the insurer’s interest to have counsel inform the claim representative of all factors
(e.g. maximum exposure, the insured’s otherwise precarious financial situation, the
insured’s emotional sensitivity, etc.) which indicate on the insured’s vulnerability
should an excess judgment result. By assuring full consideration of the reasons
why the insured wants to have the case settled, counsel both protects the insured
and improves the insurer’s decisional process.
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199 Id. (counsel acted disloyally to the insured by advising insurer to defer acting on time-limit settlement demand in a high damage case in the hope that a pending summary judgment motion might resolve liability favorably).
7) Set-Ups
Assigned counsel may not participate in any effort to “set up” the insurer for
excess liability. If the insurer is a client, doing so creates a conflict; if the insurer
is not a client, that is still outside the scope of the defense reprsentation. But if the
plaintiff proposes such a “set up,” that proposal should be relayed to the insured,
who should also be told that counsel cannot be involved in such an effort but that
the insured might wish to retain personal counsel for that purpose. Even if plaintiff
does not propose a “set up,” the insured should be advised that personal counsel
can be useful in trying to pressure the insurer or otherwise avoid personal liability.
Whenever a case involves a potential for excess exposure, counsel should
send a letter like Exhibit __. Counsel should also consult orally with the insured
about the potential conflicts and options available to the insured in such a case. Of
course, any such consultation should avoid arousing exaggerated fears beyond the
risks actually presented by the case.
8) Communicating During Trial
If a case has any potential of excess exposure and the policy limits have not
already been offered, it may be necessary to make fast settlement decisions during
trial, when trial counsel and the claim representative may have difficulty reaching
one another. Such problems can be reduced if a lawyer not involved in the trial is
briefed about the case and kept up to date, so that lawyer can take responsibility for
communicating with the adjuster as needed.
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9) If an Excess Verdict Occurs
Even where a claim seemed to have no prospect of an excess judgment, a
jury may return a verdict in excess of limits. Counsel should assure the insured (1)
that counsel and the insurer will make every defensive effort in post-trial
proceedings to protect the insured from personal liability and (2) that the insurer
will give immediate and intense consideration to settlement efforts. But counsel
should also inform the insured that the insured (1) may have claims against counsel
or the insurer as a result of the verdict, (2) may have options to avoid personal
liability, and (3) needs the assistance of independent counsel to evaluate all such
matters. One or more competent counsel should be suggested.
Counsel should not give the insured any advice discouraging cooperation
with the plaintiff (e.g. by assignment of rights against the company) or suggesting
that the insured give consideration or protection to any interest other than the
insured’s own interest in escaping personal liability.200
E. Dealing With Insured’s Consent or Resistance To Settlement
Most settlement disputes arise when the insured wants the case settled and
the claim representative declines to do so. But sometimes it is the insured who
resists settlement, usually to protect reputational interests. Because counsel will
have explained that the claim representative ordinarily makes settlement decisions
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200 Betts v. Allstate Ins. Co., 154 Cal. App. 3d 688 (Cal. Ct. App. 1984) (bad faith and malpractice liability where, after suffering excess verdict, lawyers advised insured not to consider assignment to plaintiff, suggested bankruptcy as preferable alternative, and discouraged consultation with independent counsel).
(see ___, supra), the insured should have indicated such concerns if they exist, and
counsel should then have kept the insured informed of any settlement
consideration.
If the claim representative wants to make a settlement offer and the insured
objects, counsel cannot assist in pursuing the settlement, even if the insurer has the
contractual right to settle.201 In theory, an objection by the insured in such
circumstances breaches the cooperation clause and the insured’s duty of good faith
(by obstructing exercise of the insurer’s rights). But there is no need to make an
issue of this. Counsel can simply inform the claim representative that the insured
objects, and that the claim representative will need to deal directly with plaintiff’s
counsel. Plaintiff’s counsel should then be advised that it is permissible to deal
directly with the claim representative. Once the case is settled, counsel can act to
protect the insured by seeing that a proper judgment or dismissal is entered.
If the insured does have the right to veto settlement, counsel must keep the
insured fully informed of all developments bearing on the exercise of that right.202
201 E.g., Rogers v. Robson, Masters, Ryan, Brummand, & Belom, 407 N.E.2d 47 (Ill. 1980) (settlement over insured’s objection breached counsel’s duty to insured).
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202 Garris v. Severson, Merson, Berke & Melchiur, 252 Cal. Rptr. 204 (Cal. Ct. App. 1988) (attorney may have breached duty to insured by failing to adequately advise of mounting evidence favoring plaintiff).
EXHIBIT A
Jurisdictions Recognizing Dual-Client Status in the Tripartite Relationship
Alabama Mitchum v. Hudgens, 533 So. 2d 194 (Ala. 1988) (when insurance company
retains attorney to defend action against insured, attorney represents insured as well as insurer in furthering the interests of each other).
Alaska Home Indem. Co. v. Lane Powell Moss & Miller, 43 F.3d 1322 (9th Cir. 1995) (insured and insurer are both represented by the attorney as long as there is no conflict of interest).
Arizona Paradigm Ins. Co. v. Langerman Law Offices, 24 P.3d 593, 597 (Ariz. 2001) (defense counsel can represent both insurer and insured unless there is an actual conflict or the potential for conflict in the particular case is great).
California Gulf Ins. Co. v. Berger, Kahn, Shafton, Moss, Figler, Simon, & Gladstone, 93 Cal. Rptr. 2d 534 (Ct. App. 2000) (“Attorney has two clients: the insured and insurer.”).
Delaware Hoechst Celanese Corp. v. Nation Union Fire Ins. Co., 623 A.2d 1118 (Del. Super. Ct. 199)2 (discussing the relationship among different defendants to determine whether documents were privileged; court suggests attorney may represent both the insurer and insured).
District of Columbia
National Union Fire Ins. Co. v. Aetna Cas. & Sur. Co., 384 F.2d 316 (D.C. Circuit 1967) (attorney acted as insurer’s representative while defending insured).
Florida
In re Rules Governing Conduct of Attorneys in Florida, 220 So. 2d 6 (Fla. 1969) (both salaried and non-salaried insurance attorneys may represent insurer and insured if there is no conflict).
Georgia
Coscia v. Cunningham, 299 S.E.2d 880 (Ga. 1983) (recognizing an attorney represents both the insured and insurer).
Hawaii Finley v. Home Ins. Co., 975 P.2d 1145 (Haw. 1998) (attorney can not represent both insurer and insured when there is a conflict, and citing authority that attorney represents them both when there is no conflict).
Idaho Pendlebury v. Western Cas. & Sur. Co., 406 P.2d 129 (Idaho 1965) (attorney may represent both; when there is a conflict, the attorney may be in an awkward situation, and cannot take a position adverse to the interest of his client).
Illinois Waste Management, Inc. v. International Surplus Lines Ins. Co., 579 N.E.2d 322, 329 (Ill. 1991) (“[W]hen insurer retains attorney to defend insured, attorney represents both insured and insurer in furthering the interests of each.”).
Indiana Cincinnati Ins. Co. v. Wills, 717 N.E.2d 151 (Ind. 1999) (attorney represents both the insured and insurer; dual representation permissible even when the attorney was in-house counsel for the insurer, because their interests are aligned).
Iowa Henke v. Iowa Home Mut. Cas. Co., 87 N.W.2d 920 (Iowa 1958) (attorney represented both the insured and insurer, and the fact that another selects and pays for the attorney does not control the attorney-client relationship), cited
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approvingly in Squealer Feeds v. Pickering, 530 N.W.2d 678 (Iowa 1995). Kansas Glenn v. Fleming, 781 P.2d 1107 (Kan. Ct. App. 1989) (insured’s attorney
represented insurer as well, and insurer had a right to control and direct the litigation), aff’d in part & rev’d in part, 799 P.2d 79 (Kan. 1990).
Louisiana Hodges v. Southern Farm Bureau Cas. Ins. Co., 433 So. 2d (La. 1983) (attorney represented both the insurer and insured); Brasseaux v. Girouard, 214 So. 2d 401 (La. Ct. App. 1968) (an attorney may simultaneously represent the insured and insurer).
Maryland Fidelity & Cas. Co. v. McConnaughy, 179 A.2d 117 (Md. 1962) (attorney can represent insured and insurer unless a conflict develops).
Massachusetts McCourt Co. v. FPC Properties, Inc., 434 N.E.2d 1234 (Mass. 1982) (“The law firm is attorney for the insured as well as the insurer.”).
Minnesota Pine Island Farmers Coop v. Erstand & Riemer, 649 N.W.2d 444 (Minn. 2002) (law firm may represent both insurer and insured if insured gives informed consent).
Mississippi Moeller v. American Guar. & Liab. Ins. Co., 707 So. 2d 1062 (Miss. 1996) (attorney has two separate and distinct clients, the insured and the insurer); Hartford Accident & Indem. Co. v. Foster, 528 So. 2d 255 (Miss. 1988) (recognizing attorney may represent the insured and insurer, but insured’s interests are paramount if a conflict arises).
Missouri In re Allstate Ins. Co., 722 S.W.2d 947 (Mo. 1987) (attorney may represent the insured and the insurer).
Nebraska Hawkeye Cas. Co. v. Stoker, 48 N.W.2d 623 (Neb. 1951) (stating attorney can not represent both insurer and insured when their interests conflict); Shahan v. Hilker, 488 N.W.2d 577, 581 (Neb. 1992) (“‘[C]ommunication made by an insured to his liability insurance company, concerning an event which may be made the basis of a claim against him covered by the policy, is a privileged communication, as being between attorney and client, if the policy requires the company to defend him through its attorney, and communication is intended for the information or assistance of the attorney in so defending him.’”).
Nevada Nevada Yellow Cab Corp. v. Eighth Jud. Dist. Court, 152 P.3d 737, 742 (Nev. 2007) (“In the absence of a conflict, counsel represents both the insured and the insurer.”).
New Hampshire Dumas v. State Farm Mut. Auto. Ins. Co., 111 N.H 43, 274 A.2d 781 (N.H. 1971) (communications between insurer and insured and the attorney were not privileged as between them because they were both clients of the attorney in the previous action).
New Jersey
Lieberman v. Employers Ins., 419 A.2d 417 (N.J. 1980) (recognizing attorney has two clients, the insured and insurer unless a conflict arises, then the attorney may not continue to represent both); Gray v. Commercial Union Ins. Co., 468 A.2d 721 (N.J. Super. Ct. 1983).
Ohio
Netzley v. Nationwide Mut. Ins. Co., 296 N.E.2d 550 (Ohio Ct. App. 1971) (“We hold that both Nationwide [the insurer] as well as . . . its insured, were clients of the legal counsel retained by Nationwide.”).
Oregon In re Conduct of O’Neal, 683 P.2d 1352 (Or. 1984) (referencing dual
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representation of insurer and insured as example of situations where attorney can represent multiple clients if it is obvious the lawyer can represent the interests of each client without conflict).
Pennsylvania
Sweldoff v. Philadelphia Transp. Co., 187 A.2d 152 (Pa. 1963) (referring to the insurance company and the insured as clients of the attorney); Molitoris v. Woods, 618 A.2d 985 (Pa. Super. Ct. 1992) (recognizing attorney can represent both an insured and insurer’s subrogation interest).
Rhode Island Employers’ Fire Ins. Co. v. Beals, 240 A.2d 397 (R.I. 1968) (if there is no conflict, or the insured consents, attorney may represent both the insured and the insurer), abrogated on other grounds by Peerless Ins. Co. v. Viegas, 667 A.2d 785 (R.I. 1995).
South Carolina Chitty v. State Farm Mut. Auto. Ins. Co., 36 F.R.D 37 (E.D.S.C. 1964) (recognizing attorney represented insurer and insured, therefore, communications were not privileged).
Texas Unauthorized Practice of Law Comm. v. American Home Assur. Co., 51 Tex. Sup. Ct. J. 590, 2008 WL 821034 (Tex. Mar. 28, 2008) (“Whether defense counsel represents the insurer is a matter of contract between them”).
Vermont In re Illuzzi, 632 A.2d 346 (Vt. 1993) (plaintiff’s attorney violated ethics rules by speaking directly to insurer instead of communicating through the attorney hired to defend insured; dissent as to sanction affirms that, at the beginning of the litigation, an attorney may represent both an insured and insurer, but if a conflict arises, he may only represent the insured).
Virginia State Farm Mut. Auto. Ins. Co. v. Floyd, 366 S.E.2d 93, 97 (Va. 1988) (“During their representation of both insurer and insured, attorneys have the duty to convey settlement offers to the insured . . . .”); Norman v. Insurance Co. of N. Am., 239 S.E.2d 902 907 (Va. 1978) (“[A]n insurer’s attorney, employed to represent an insured, is bound by the same high standards . . . .”).
Washington Barry v. USAA, 989 P.2d 1172 (Wash. Ct. App. 1999) (normally an attorney operates on behalf of two clients, the insurer and the insured).
Wisconsin Roeske v. Deifenbach, 226 N.W.2d 666 (Wis. 1975) (recognizing the attorney represented both the insured and insurer, but on appeal this was not appropriate because there was a conflict of interest).
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EXHIBIT B
WEST'S FLORIDA STATUTES ANNOTATED RULES REGULATING THE FLORIDA BAR
CHAPTER 4. RULES OF PROFESSIONAL CONDUCT 4-1. CLIENT-LAWYER RELATIONSHIP
Copr. © West Group 2002. All rights reserved. Current with Amendments received through 06/01/02. Rule 4-1.8. Conflict of interest; prohibited and other transactions (j) Representation of Insureds. When a lawyer undertakes the defense of an insured other than a governmental entity, at the expense of an insurance company, in regard to an action or claim for personal injury or for property damages, or for death or loss of services resulting from personal injuries based upon tortious conduct, including product liability claims, the Statement of Insured Client's Rights shall be provided to the insured at the commencement of the representation. The lawyer shall sign the statement certifying the date on which the statement was provided to the insured. The lawyer shall keep a copy of the signed statement in the client's file and shall retain a copy of the signed statement for 6 years after the representation is completed. The statement shall be available for inspection at reasonable times by the insured, or by the appropriate disciplinary agency. Nothing in the Statement of Insured Client's Rights shall be deemed to augment or detract from any substantive or ethical duty of a lawyer or affect the extradisciplinary consequences of violating an existing substantive legal or ethical duty; nor shall any matter set forth in the Statement of Insured Client's Rights give rise to an independent cause of action or create any presumption that an existing legal or ethical duty has been breached.
STATEMENT OF INSURED CLIENT'S RIGHTS An insurance company has selected a lawyer to defend a lawsuit or claim against you. This Statement of Insured Client's Rights is being given to you to assure that you are aware of your rights regarding your legal representation. This disclosure statement highlights many, but not all, of your rights when your legal representation is being provided by the insurance company. 1. Your Lawyer. If you have questions concerning the selection of the lawyer by the insurance company, you should discuss the matter with the insurance company and the lawyer. As a client, you have the right to know about the lawyer's education, training, and experience. If you ask, the lawyer should tell you specifically about the lawyer's actual experience dealing with cases similar to yours and give you this information in writing, if you request it. Your lawyer is
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responsible for keeping you reasonably informed regarding the case and promptly complying with your reasonable requests for information. You are entitled to be informed of the final disposition of your case within a reasonable time. 2. Fees and Costs. Usually the insurance company pays all of the fees and costs of defending the claim. If you are responsible for directly paying the lawyer for any fees or costs, your lawyer must promptly inform you of that. 3. Directing the Lawyer. If your policy, like most insurance policies, provides for the insurance company to control the defense of the lawsuit, the lawyer will be taking instructions from the insurance company. Under such policies, the lawyer cannot act solely on your instructions, and at the same time, cannot act contrary to your interests. Your preferences should be communicated to the lawyer. 4. Litigation Guidelines. Many insurance companies establish guidelines governing how lawyers are to proceed in defending a claim. Sometimes those guidelines affect the range of actions the lawyer can take and may require authorization of the insurance company before certain actions are undertaken. You are entitled to know the guidelines affecting the extent and level of legal services being provided to you. Upon request, the lawyer or the insurance company should either explain the guidelines to you or provide you with a copy. If the lawyer is denied authorization to provide a service or undertake an action the lawyer believes necessary to your defense, you are entitled to be informed that the insurance company has declined authorization for the service or action. 5. Confidentiality. Lawyers have a general duty to keep secret the confidential information a client provides, subject to limited exceptions. However, the lawyer chosen to represent you also may have a duty to share with the insurance company information relating to the defense or settlement of the claim. If the lawyer learns of information indicating that the insurance company is not obligated under the policy to cover the claim or provide a defense, the lawyer's duty is to maintain that information in confidence. If the lawyer cannot do so, the lawyer may be required to withdraw from the representation without disclosing to the insurance company the nature of the conflict of interest which has arisen. Whenever a waiver of the lawyer-client confidentiality privilege is needed, your lawyer has a duty to consult with you and obtain your informed consent. Some insurance companies retain auditing companies to review the billings and files of the lawyers they hire to represent policyholders. If the lawyer believes a bill review or other action releases information in a manner that is contrary to your interests, the lawyer should advise you regarding the matter. 6. Conflicts of Interest. Most insurance policies state that the insurance company will provide a lawyer to represent your interests as well as those of the insurance company. The lawyer is responsible for identifying conflicts of interest and advising you of them. If at any time you believe the lawyer provided by the insurance company cannot fairly represent you because of conflicts of interest
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between you and the company (such as whether there is insurance coverage for the claim against you), you should discuss this with the lawyer and explain why you believe there is a conflict. If an actual conflict of interest arises that cannot be resolved, the insurance company may be required to provide you with another lawyer. 7. Settlement. Many policies state that the insurance company alone may make a final decision regarding settlement of a claim, but under some policies your agreement is required. If you want to object to or encourage a settlement within policy limits, you should discuss your concerns with your lawyer to learn your rights and possible consequences. No settlement of the case requiring you to pay money in excess of your policy limits can be reached without your agreement, following full disclosure. 8. Your Risk. If you lose the case, there might be a judgment entered against you for more than the amount of your insurance, and you might have to pay it. Your lawyer has a duty to advise you about this risk and other reasonably foreseeable adverse results. 9. Hiring Your Own Lawyer. The lawyer provided by the insurance company is representing you only to defend the lawsuit. If you desire to pursue a claim against the other side, or desire legal services not directly related to the defense of the lawsuit against you, you will need to make your own arrangements with this or another lawyer. You also may hire another lawyer, at your own expense, to monitor the defense being provided by the insurance company. If there is a reasonable risk that the claim made against you exceeds the amount of coverage under your policy, you should consider consulting another lawyer. 10. Reporting Violations. If at any time you believe that your lawyer has acted in violation of your rights, you have the right to report the matter to The Florida Bar, the agency that oversees the practice and behavior of all lawyers in Florida. For information on how to reach The Florida Bar call (850) 561-5839 or you may access the Bar at www.FlaBar.org. IF YOU HAVE ANY QUESTIONS ABOUT YOUR RIGHTS, PLEASE ASK
FOR AN EXPLANATION. CERTIFICATE
The undersigned hereby certifies that this Statement of Insured Client's Rights has been provided to (name of insured/client(s)) by (mail/hand delivery) at (address of insured/ client(s) to which mailed or delivered, on (date) ________________________________________________________________ [Signature of Attorney] ________________________________________________________________ [Print/Type Name]
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________________________________________________________________ Florida Bar No.:_____________________________________________________________
CREDIT(S) 1994 Main Volume
Amended July 23, 1992, effective Jan. 1, 1993 (605 So.2d 252). 2002 Electronic Update
Amended effective April 25, 2002 (___ So.2d ___). <General Materials (GM) - References, Annotations, or Tables>
COMMENT 2002 Electronic Update
Representation of insureds As with any representation of a client when another person or client is paying for the representation, the representation of an insured client at the request of the insurer creates a special need for the lawyer to be cognizant of the potential for ethical risks. The nature of the relationship between a lawyer and a client can lead to the insured or the insurer having expectations inconsistent with the duty of the lawyer to maintain confidences, avoid conflicts of interest, and otherwise comply with professional standards. When a lawyer undertakes the representation of an insured client at the expense of the insurer, the lawyer should ascertain whether the lawyer will be representing both the insured and the insurer, or only the insured. Communication with both the insured and the insurer promotes their mutual understanding of the role of the lawyer in the particular representation. The Statement of Insured Client's Rights has been developed to facilitate the lawyer's performance of ethical responsibilities. The highly variable nature of insurance and the responsiveness of the insurance industry in developing new types of coverages for risks arising in the dynamic American economy render it impractical to establish a statement of rights applicable to all forms of insurance. The Statement of Insured Client's Rights is intended to apply to personal injury and property damage tort cases. It is not intended to apply to workers' compensation cases. Even in that relatively narrow area of insurance coverage, there is variability among policies. For that reason, the statement is necessarily broad. It is the responsibility of the lawyer to explain the statement to the insured. In
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particular cases, the lawyer may need to provide additional information to the insured. Because the purpose of the statement is to assist laypersons in understanding their basic rights as clients, it is necessarily abbreviated. Although brevity promotes the purpose for which the statement was developed, it also necessitates incompleteness. For these reasons, it is specifically provided that the statement shall not serve to establish any legal rights or duties, nor create any presumption that an existing legal or ethical duty has been breached. As a result, the statement and its contents should not be invoked by opposing parties as grounds for disqualification of a lawyer or for procedural purposes. The purpose of the statement would be subverted if it could be used in such a manner. The statement is to be signed by the lawyer to establish that it was timely provided to the insured, but the insured client is not required to sign it. It is in the best interests of the lawyer to have the insured client sign the statement to avoid future questions, but it is considered impractical to require the lawyer to obtain the insured client's signature in all instances. Establishment of the statement and the duty to provide it to an insured in tort cases involving personal injury or property damage should not be construed as lessening the duty of the lawyer to inform clients of their rights in other circumstances. When other types of insurance are involved, when there are other third-party payors of fees, or when multiple clients are represented, similar needs for fully informing clientsexist, as recognized in rules 4-1.7(c) and 4-1.8(f).
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APPENDIX OF SAMPLE LETTERS
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Letters at the Outset of Representation
As described in Section VII. A., some important things need to be communicated to the insured at the outset of any representation. One way to handle this is to cover all the key points in the initial representation letter, with the expectation that these subjects will later be discussed at the initial conference. Another way to handle it is to send a more abbreviated initial letter, discuss the same things at the initial consultation, and then confirm that conversation by a follow-up letter.
This Appendix includes a long-form initial letter for cases where there is no known personal exposure to the insured and a short-form initial letter and confirming follow-up for the same situation. If the long-form initial letter is used, a confirmation letter should still be provided if appropriate to address any of the concerns or issues noted as possible bases for modification in the confirmation letter designed for use with the short-form letter
It then provides inserts to the long-form letters or confirmation letters, as the case may be, for cases (1) involving joint representation of multiple insureds, (2) with excess exposure and (3) with noncovered exposure. If the excess exposure or noncovered exposure comes to light after the initial letter or confirmation, these inserts can be used as the basis for independent letters.
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Letter to Claim Representative
Dear _____:
I have been assigned to defend the above-captioned lawsuit referred to this office.
Please send copies of any letters to [insured] (including reservation of rights letters or excess letters) as soon as you send them. If you have already sent any such letters, please send them to me now. Knowing of any such letters will assist me in assuring that [insured] is properly represented, thereby protecting both [insured] and [Company].
I look forward to working with you.
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Letter to Insured: No Known Personal Exposure
Long Form Initial Representation Letter
Dear _____:
[Company] has asked me to defend you in the above-captioned lawsuit that you recently sent to it. I regularly defend insureds on behalf of [Company]. In defending you, it is my job to try to win the lawsuit against you or minimize the amount that the plaintiff would win at trial. Of course, by defending you, I also protect [Company]’s interest in not having to pay unjustified or inflated claims against you.
To do my job well, I will need your assistance in defending the suit against you. I will need information about the facts and other witnesses to the events on which the lawsuit is based. You may be required to answer oral and written questions from the plaintiff and to provide documents to the plaintiff. Please call my office to schedule a meeting at which we can discuss the facts of the case, what you will be required to do, and how I can best help you.
This letter describes some important things about the way I will be handling your defense. Please read it carefully. If you have any questions about this letter or my representation or other concerns about this lawsuit, we can discuss them at our first meeting. Of course, you can call at any time about such matters, either before or after this meeting.
If you get any letters from [Company’s] claim representative, please send copies to me as soon as you get them. If you have already gotten any such letters, please send them to me now.
The Claim Representative’s Role in the Case
In handling the case against you, I will talk regularly with [Company’s] claim representative about the case, how it should be defended, and whether and for what amount it could or should be settled. While I will provide all the legal services appropriate to your case at no cost to you, only the claim representative can authorize me to spend [Company’s] money on other defense expenses or on settlement.
I am told that your insurance policy says that [Company] can settle the claim against you, at its own expense, whenever it wishes. So, if the claim representative asks me to make an offer to or accept a demand from [plaintiff], I expect to do that. Unless you want to be consulted about such settlements, I will simply do what the
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claim representative asks. The claim representative may give me directions on other subjects, and I expect to follow those instructions, unless I think doing so would pose some risk to you.
Whether on settlement or other matters, I cannot act contrary to your interests. I assume that your primary interest is simply avoiding any personal financial obligation, and that assumption will guide the defense unless you tell me that you have some other concern about the lawsuit that you want me to take into account. Whatever your interests may be, if I know of them, I cannot act contrary to those interests without your consent.
Sharing of Information
I am your lawyer, so what you tell me about the case is ordinarily secret from the those not involved in representing you. But [Company] believes that it needs to know everything about the case relevant to the defense and settlement decisions your insurance policy requires it to make. Full information is necessary for it to properly protect both you and itself. [Company] expects you to provide necessary information because your insurance policy requires you to cooperate in the defense.
Because I represent both you and [Company] the law requires me to tell either of you anything you ask about the defense of the case and to tell either of you anything I think you need to know about the defense of the case. Everything either of you tell me is still secret from everyone else, but not from one another. Should you ever have a dispute with [Company] about the case, either of you could get a court order requiring me to testify about what was said by the other. [modify ¶ in single client states]
Unless ordered by a court, I will not tell [Company] anything you tell me that I think might hurt you unless you agree that I can. If there is something about the case that you do not want me to tell [Company], please let me know so we can decide how to deal with the issue. If you ask me not to tell something, I won’t tell [Company]. But that may create other problems, and we would need to discuss those before you make a final decision to keep something secret.
If You Want To Sue the Plaintiff
In representing you, my job is only to defeat or minimize the claim asserted by [plaintiff] against you. You may have a claim against [plaintiff] or someone else based on the incident which is the basis of the suit against you. If you want to pursue or consider such a claim, you may need to do that in this lawsuit and will need to do so within the time allowed by law. [insert special warning if
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remaining time to sue is short and speedy action required, especially before the likely date of any initial consultation]
But I will not be representing or advising you as to any claim you may have against [plaintiff] or anyone else. (Sometimes you may have claims against others that [Company] is entitled to have you pursue; if so, [Company] may ask me to do that for both of you, but I will tell you if that happens.)
If you want to assert a claim against [plaintiff] or someone else, you will need to hire another lawyer to do that. If you want me to, I can help you find another lawyer. But, as I understand [Company’s] position, it will not agree to pay for the services of any lawyer you might ask to help you with any such claim. So you would either have to make arrangements to pay such counsel yourself or, if you think [Company] is obliged to pay for such counsel, you will have to take that question up with [Company] yourself, possibly with the assistance of counsel you hire. [modify paragraph if offering to accept an individual retainer to prosecute affirmative claims]
If You Have a Dispute with [Company]
I will not represent or advise either you or [Company] as to any questions which may arise about either of your rights and duties under the insurance policy. So far as I know, no such questions have arisen so far. If and when any question arises where I think you might want assistance from a lawyer, I will point that question out to you. I will explain why the question may be important and, if not apparent, the reasons you might want a lawyer’s help. If you want me to, I will offer suggestions about who you might wish to consult.
As with claims against [plaintiff] or others, I believe that it is [Company’s] position, it will not agree to pay for the services of any lawyer you might consult about disputes with [Company]. Again, if you think [Company] is obliged to pay for such counsel, you will have to take that question up with [Company] yourself, possibly with the assistance of counsel you hire.
Keeping You Informed
I will keep you informed of anything about the case that I think you need to know. This includes anything that I think might create or significantly increase a real possibility of some personal risk to you. If you have things you want to know, I will tell you if I know what those things are. And I will always do my best to answer any questions you have about the case.
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Your Right To Hire Another Lawyer
I am personally committed to doing everything within my power to provide you with a full and appropriate defense in this lawsuit. But you have a right to use your own money to hire another lawyer to work with me or monitor my work. I will be happy to cooperate with any lawyer you choose to hire. And, as pointed out above, there are certain issues (related to the lawsuit, but not part of your defense), where I cannot help you. You would need to hire someone else if such issues arise and you want legal help with them.
In some circumstances, you and [Company] might have a conflict of interest about the way your case should be defended that would prevent one lawyer from representing both of you. At this time, I see no such conflict, but I will let you know if one arises. If you think that there is a conflict, please tell me right away, so we can address the issue. If there is a conflict, now or in the future, I will withdraw from the case, so that you may be represented by a lawyer with no conflict. [Company] may be required to pay for such a lawyer, if there is a conflict.
If You Have Questions or Concerns
As I have said above, you should let me know any questions or concerns you have about the case or my representation. You can do that when we meet, by calling me on the phone, or by writing to me. I will do my best to answer your questions and to address your concerns.
I look forward to working with you.
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Short Form Initial Representation Letter [To be followed by confirmation letter after initial meeting]
Dear _____:
[Company] has asked me to defend you in the above-captioned lawsuit that you recently sent to it. I regularly defend insureds on behalf of [Company]. In defending you, it is my job to try to win the lawsuit against you or minimize the amount that the plaintiff would win at trial. Of course, by defending you, I also protect [Company]’s interest in not having to pay unjustified or inflated claims against you.
To do my job well, I will need your assistance in defending the suit against you. I will need information about the facts and other witnesses to the events on which the lawsuit is based. You may be required to answer oral and written questions from the plaintiff and to provide documents to the plaintiff. Please call my office to schedule a meeting at which we can discuss the facts of the case, what you will be required to do, and how I can best help you. At that meeting, we will also discuss other things you should know about the case and your representation and you can raise any questions you may have.
If you get any letters from [Company’s] claim representative, please send copies to me as soon as you get them. If you have already gotten any such letters, please send them to me now.
I look forward to working with you.
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Confirmation Letter for Consultation After Use of Short Form Letter
Dear _____:
Thank you for meeting with me to discuss your defense in the above case. As we discussed, I will need your assistance in defending the suit against you. I will need information about the facts and other witnesses to the events on which the lawsuit is based. You may be required to answer oral and written questions from the plaintiff and to provide documents to the plaintiff. I will let you know what help I need as the case develops.
[Confirm any discussion about what will be done in the near future, any requests for the insured to provide information, any promises by you to the insured.]
As I have asked before, if you get any letters from [Company’s] claim representative, please send copies to me as soon as you get them. If you have already gotten any such letters, please send them to me now.
As you will recall, we discussed some important things about the way I will be handling your defense. This letter will confirm those discussions. If you have any questions about this letter or my representation or other concerns about this lawsuit that you did not raise in our discussion, you can call or write at any time about them.
The Claim Representative’s Role in the Case
In handling the case against you, I will talk regularly with [Company’s] claim representative about the case, how it should be defended, and whether and for what amount it could or should be settled. While I will provide all the legal services appropriate to your case at no cost to you, only the claim representative can authorize me to spend [Company’s] money on other defense expenses or on settlement.
I am told that your insurance policy says that [Company] can settle the claim against you, at its own expense, whenever it wishes. So, if the claim representative asks me to make an offer to or accept a demand from [plaintiff], I expect to do that. Unless you want to be consulted about such settlements, I will simply do what the claim representative asks. [If appropriate, substitute “Because you have told me I don’t need to consult you about such settlements, ….” or “Because you have told me you want to be consulted about such settlements if you are available, I will attempt to do so before acting on any instructions from the
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claim representative to settle.203] The claim representative may give me directions on other subjects, and I expect to follow those instructions, unless I think doing so would pose some risk to you.
Whether on settlement or other matters, I cannot act contrary to your interests. I assume that your primary interest is simply avoiding any personal financial obligation, and that assumption will guide the defense unless you tell me that you have some other concern about the lawsuit that you want me to take into account. [If appropriate, substitute “You have advised me that” for “I assume.” If the insured has disclosed other interests, note them without undue specificity (e.g. “You have indicated that you hope to avoid publicity for certain facts about the accident.”).] Whatever your interests may be, if I know of them, I cannot act contrary to those interests without your consent.
Sharing of Information
I am your lawyer, so what you tell me about the case is ordinarily secret from the those not involved in representing you. But [Company] believes that it needs to know everything about the case relevant to the defense and settlement decisions your insurance policy requires it to make. Full information is necessary for it to properly protect both you and itself. [Company] expects you to provide necessary information because your insurance policy requires you to cooperate in the defense.
Because I represent both you and [Company] the law requires me to tell either of you anything you ask about the defense of the case and to tell either of you anything I think you need to know about the defense of the case. Everything either of you tell me is still secret from everyone else, but not from one another. Should you ever have a dispute with [Company] about the case, either of you could get a court order requiring me to testify about what was said by the other. [modify ¶ in single client states]
Unless ordered by a court, I will not tell [Company] anything you tell me that I think might hurt you unless you agree that I can. If there is something about the case that you do not want me to tell [Company], please let me know so we can decide how to deal with the issue. If you ask me not to tell something, I won’t tell [Company]. But that may create other problems, and we would need to discuss those before you make a final decision to keep something secret. [If insured has identified anything that should not be disclosed to [Company], and you chose
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203 If the insured makes such a request, let the claim representative know of the request. If time is of the essence in responding to the settlement opportunity, the claim representative may wish to negotiate directly with the claimant to avoid the delays incident to informing the insured.
to continue the representation, modify this paragraph to reflect the insured’s request.]
If You Want To Sue the Plaintiff
In representing you, my job is only to defeat or minimize the claim asserted by [plaintiff] against you. You may have a claim against [plaintiff] or someone else based on the incident which is the basis of the suit against you. [Modify as indicated by facts of case as to possible claims against others.] If you want to pursue or consider such a claim, you may need to do that in this lawsuit and will need to do so within the time allowed by law. [insert special warning if remaining time to sue is short and speedy action required]
But I will not be representing or advising you as to any claim you may have against [plaintiff] or anyone else. (Sometimes you may have claims against others that [Company] is entitled to have you pursue. If so, [Company] may ask me to do that for both of you, but I will tell you if that happens.)
If you want to assert a claim against [plaintiff] or someone else, you will need to hire another lawyer to do that. If you want me to, I can help you find another lawyer. But, as I understand [Company’s] position, it will not agree to pay for the services of any lawyer you might ask to help you with any such claim. So you would either have to make arrangements to pay such counsel yourself or, if you think [Company] is obliged to pay for such counsel, you will have to take that question up with [Company] yourself, possibly with the assistance of counsel you hire. [modify paragraph in light of any actual discussion of this subject and/or if offering to accept an individual retainer to prosecute affirmative claims]
If You Have a Dispute with [Company]
I will not represent or advise either you or [Company] as to any questions which may arise about either of your rights and duties under the insurance policy. So far as I know, no such questions have arisen so far. If and when any question arises where I think you might want assistance from a lawyer, I will point that question out to you. I will explain why the question may be important and, if not apparent, the reasons you might want a lawyer’s help. If you want me to, I will offer suggestions about who you might wish to consult.
As with claims against [plaintiff] or others, I believe that it is [Company’s] position, it will not agree to pay for the services of any lawyer you might consult about disputes with [Company]. Again, if you think [Company] is obliged to pay
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for such counsel, you will have to take that question up with [Company] yourself, possibly with the assistance of counsel you hire.
Keeping You Informed
I will keep you informed of anything about the case that I think you need to know. This includes anything that I think might create or significantly increase a real possibility of some personal risk to you. If you have things you want to know, I will tell you if I know what those things are. And I will always do my best to answer any questions you have about the case.
Your Right To Hire Another Lawyer
I am personally committed to doing everything within my power to provide you with a full and appropriate defense in this lawsuit. But you have a right to use your own money to hire another lawyer to work with me or monitor my work. I will be happy to cooperate with any lawyer you choose to hire. And, as pointed out above, there are certain issues (related to the lawsuit, but not part of your defense), where I cannot help you. You would need to hire someone else if such issues arise and you want legal help with them.
In some circumstances, you and [Company] might have a conflict of interest about the way your case should be defended that would prevent one lawyer from representing both of you. At this time, I see no such conflict, but I will let you know if one arises. If you think that there is a conflict, please tell me right away, so we can address the issue. If there is a conflict, now or in the future, I will withdraw from the case, so that you may be represented by a lawyer with no conflict. [Company] may be required to pay for such a lawyer, if there is a conflict.
If You Have Questions or Concerns
As I have said above, you should let me know any questions or concerns you have about the case or my representation. You can do that when we meet, by calling me on the phone, or by writing to me. I will do my best to answer your questions and to address your concerns.
I look forward to working with you.
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Joint Representation of Multiple Insureds Insert
Multiple Defendant Clients
This lawsuit has been brought against both you and [co-insured], and [Company] has asked me to defend both of you. Just as I will share all information about the lawsuit with both you and [Company], I will also share that information with [co-insured]. If you and [co-insured] later have a dispute, either of you will be able to get a court order to require disclosure of what the other has told me. If there is something about this lawsuit or the underlying events that you would not want [co-insured] to know, please tell me. We can then determine whether the two of you should have different lawyers defend you.
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Excess Exposure Insert
Possible Liability in Excess of Policy Limits
The complaint against you seeks damages in excess of your policy limit. [If there is no ad damnum, substitute where appropriate: “The plaintiff has stated an intent to seek damages in excess of your policy limit.” or “If the lawsuit is tried, there is a chance that [plaintiff] could win a judgment for more than your policy limit.”]
Because the policy limit is ordinarily the largest amount [Company] would have to pay on any judgment for [plaintiff], you could be personally liable for any excess over the policy limit if plaintiff were to win a larger judgment. This makes it especially important for you to follow the lawsuit closely, to respond to my requests for information promptly and accurately, and to express any concerns you have about the defense or the way the case is developing.
Part of my job in defending this case is to evaluate the strengths and weaknesses of [plaintiff’s] lawsuit against you, including the liklihood that [plaintiff] will win and the amount of money that would be awarded if that happened. I will be providing such evaluations to [Company’s] claim representative as the case unfolds and will gladly share them with you .
One way [Company] may try to protect you from personal liability in this case is to seek or accept a settlement for an amount within your policy limits. Unless you tell me otherwise, I assume you would want the case settled. So I would expect to assist [Company] in any such settlement efforts. I will likely receive any settlement demands from [plaintiff], convey any settlement offers to [plaintiff], and I may identify times when settlement activity seems likely to be fruitful. As I have explained before [or above, if explanation is in same letter], only [Company’s] claim representative can authorize me to spend [Company’s] money on settlement. If you wish to express requests or opinions about settlement, you can tell me and I will relay them to the claim representative or you can communicate directly with the claim representative.
I will, of course, give you any information I have on settlement negotiations or opportunities and will share with you any advice or evaluations I provide [Company]. I will tell you about settlement opportunities and demands so you can decide how to proceed. Whenever you would like information about settlement, please ask.
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Partially Covered Exposure Insert (Omit Duplicative Material If Using as Part of Initial Long-Form Letter or Confirmation)
The lawsuit against you seeks damages for [excluded type of loss, e.g. damage to own work product]. The claim representative has taken the position that your policy does not cover such damages.
OR
The claim representative has taken the position that the alleged liability in this case may not be covered because [state reason, e.g., the policy may have expired, the car involved may not have been an insured auto, etc.]
Implications of Coverage Issue
If it turns out that the claim representative is right on that point (and it is not my position to decide or to advise you on whether the claim representative is right about that), you could be personally liable for some or all of the damages sought by plaintiff. This makes it especially important for you to follow the lawsuit closely, to respond to my requests for information promptly and accurately, and to express any concerns you have about the defense or the way the case is developing.
Your Right To Hire Another Lawyer
Regardless of whether the claim representative is right about coverage, it is my job, and I am personally committed to doing everything within my power to provide you with a full and appropriate defense in this lawsuit. Doing so is fully consistent with [Company’s] interests and in accordance with the obligations it assumed in the insurance contract or in accepting your tender of this case for defense. But you have a right to use your own money to hire another lawyer to work with me or monitor my work. I will be happy to cooperate with any lawyer you choose to hire. And, as pointed out above, there are certain issues (related to the lawsuit, but not part of your defense), where I cannot help you. You would need to hire someone else if such issues arise and you want legal help with them.
In some circumstances, you and [Company] might have a conflict of interest about the way your case should be defended that would prevent one lawyer from representing both of you. At this time, I see no such conflict, but I will let you know if one arises. If you think that there is a conflict, please tell me right away, so we can address the issue. If there is a conflict, now or in the future, I will withdraw from the case, so that you may be represented by a lawyer with no
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conflict. [Company] may be required to pay for such a lawyer, if there is a conflict.
Evaluations
Part of my job in defending this case is to evaluate the strengths and weaknesses of [plaintiff’s] lawsuit against you, including the liklihood that [plaintiff] will win and the amount of money that would be awarded if that happened. I will be providing such evaluations to [Company’s] claim representative as the case unfolds and will gladly share them with you . [In case where only some damages excluded, add “If either you or the claim representative ask me to do so, I will provide specific evaluations of the damages for which coverage is in question and those for which coverage is unquestioned.”]
Settlement
One way [Company] may try to protect you from personal liability in this case is to seek or accept a settlement for an amount that will settle the entire case, including any part for which coverage is in question. Unless you tell me otherwise, I assume you would want the case settled. So I would expect to assist [Company] in any such settlement efforts. I will likely receive any settlement demands from [plaintiff], convey any settlement offers to [plaintiff], and I may identify times when settlement activity seems likely to be fruitful. As I have explained before [or above, if explanation is in same letter], only [Company’s] claim representative can authorize me to spend [Company’s] money on settlement. If you wish to express requests or opinions about settlement, you can tell me and I will relay them to the claim representative or you can communicate directly with the claim representative.
It is possible that the claim representative may take the position that you should contribute to any settlement offer, in light of the coverage questions affecting the case. Should that happen, I cannot advise you on the coverage question or on whether you should contribute to the settlement or, if so, how much you should contribute. You may, of course, take into account any evaluations I provide in making that decision.
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Letters Upon Receipt of First Within Limits Demand in Excess Exposure Case
Joint Letter to Insured and Claim Representative
Dear [Insured] and [Claim Representative]:
As you know, I represent both [Insured] and [Company] in this lawsuit. I can do this because my representation is limited to matters where I am trying to make both better off, without sacrificing the interest of either. Thus, I have recommended actions in defending the lawsuit that I believe will avoid or minimize any recovery by [plaintiff]. I hope you are satisfied with the services I have provided.
As you also know, [plaintiff] seeks damages in excess of the policy limit [or there is a possibility that [plaintiff’s] recovery at trial might exceed the policy limit]. [Plaintiff] has now offered to settle the lawsuit for $_______, an amount within the policy limit. [If settlement demand is more complex, describe it. If demand is in writing, enclose a copy.] At this time the offer has neither been accepted nor rejected. A decision must be made shortly. [If demand has specific limit, specify that.]
Part of my job in defending this case is to evaluate the strengths and weaknesses of [plaintiff’s] lawsuit, including the likelihood that [plaintiff] will win and the amount of money that would be awarded if that happened. I will be providing [have provided] such an evaluations to both of you. That is one factor that each of you may consider in deciding what you think should be done about the settlement offer, though many other factors may affect any conclusion on that issue.
It is obviously in the interest of [insured] that the case be settled, to avoid any risk that [plaintiff] might recover an amount in excess of the policy limit, which [insured] would be obligated to pay. [Company], on the other hand, may feel that rejection of the offer could lead to a later settlement or judgment for a lower amount or to a verdict for the defense. Because you have different interests in this issue, I cannot advise either of you whether the settlement offer should be accepted, nor can I advocate any position on that issue.
Because I cannot advise or advocate on this issue, either or both of you may wish to seek, at your own expense, the assistance of another lawyer on this issue. If the case does not settle now, similar issues will recur every time there is another within limits settlement offer. I will keep both of you advised of such offers, but will not repeat the other information in this letter.
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If you have any questions about this development or about the case, please give me a call so we can discuss them.
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Additional Letter to Insured Only
Dear [Insured]:
As described in the enclosed letter, we have received an offer from [plaintiff] to settle the lawsuit against you within the limits of your insurance policy. As I have explained before, only [Company’s] claim representative can authorize me to spend [Company’s] money on settlement. But a settlement would protect you from any personal liability. The enclosed letter points out to the claim representative that it is in your interest that the claim be settled. If you wish to express your own views on that subject, please communicate directly with:
[name, address, phone, fax & e-mail (if any) of claim rep]
In some circumstances, it might be useful to you for a lawyer to try to persuade the claim representative to settle or to take other actions designed to press for settlement or to protect you if settlement does not occur. As explained in the enclosed letter, I could not do either of these things, nor can I advise you whether to do either. So, you might want to consult another lawyer about them. I would be happy to recommend such a lawyer if you wish to hire one, but whether to do so is your decision and you would have to pay any such lawyer yourself. While I cannot advise you whether to hire another lawyer, I would be happy to explain why such a lawyer might be useful and factors you might wish to consider in deciding whether to hire one.
If you want to discuss this situation, please call.
