If you are a DRI member and are reading this, you’re probably a defense lawyer. And, as a defense lawyer, you probably receive the majority of your work from insurance carriers. The relationship between the insurer, insured, and defense attorney is a complicated one and is known by many names: the triad, the triadic or tripartite relationship, the eternal triangle, the Bermuda triangle—and even the eternal conundrum—to name just a few. This relationship has been called “deeply and unavoidably vexing” and understood to create problems that would “tax Socrates.” Silver, C., “Does the Insurance Defense Counsel Represent the Company or the Insured?” 72 Tex L. Rev. 1583, 1587 (1999); Harland v. Foster, 528 So. 2d 255, 273 (Miss. 1988).
Of course, this “deeply and unavoidably vexing” situation is rooted in the notion that “insurance defense counsel” represent and have obligations to two different clients. And, because of this, there is an “inevitable tension and a potential that the attorney’s representation of one may be rendered less effective because of his representation of the other.” Spindle v. Chubb/Pacific Indemnity Group, 152 Cal. Rptr. 776, 780-81 (Cal. Ct. App. 1979). This “inevitable tension” arises because most defense attorneys have established, ongoing relationships with the insurer that hires them, not the insured they are hired to represent.
Indeed, a large chunk of many practices (and marketing budgets) are devoted to creating and maintaining relationships with insurance carriers, and their adjusters and claims attorneys, in an effort to secure future business. On the other hand, very few defense attorneys enjoy similar relationships with the insureds – and therein lies the problem. It is the “strong and perpetual economic linkage between insurers and their regular counsel that most concerns courts and insureds.” Richmond, Douglas R., Lost in the Eternal Triangle of Insurance Defense Ethics, 9 Georgetown Journal of Legal Ethics 475, 482 (1996).
With that said, where should your loyalties lie and who is your actual client? Is it the insured who is the named defendant and is “represented” in court? Or is it the insurer who, more often than not, chose the attorney, pays the law firm, supervises the litigation, and has, by virtue of the insurance policy, the right to settle the case, even over the objections of the insured? Stempel, Jeffrey W., The Relationship Between Defense Counsel, Policyholders, and Insurers: Nevada Rides Yellow Cab Toward “Two-Client” Model of Tripartite Relationship. Are Cumis Counsel and Malpractice Claims by Insurers Next? (2007). Scholarly Works. Paper 183. The ABA Model Rules (or state equivalent) and the Restatement (Third) of the Law Governing Lawyers (“Restatement”) govern the ethical duties of attorneys in these relationships. Counsel should also consult individual state professional responsibility rules (most states have adopted the ABA Model Rules) and state ethics opinions.
Like most questions in the law, the answer varies by forum. The majority rule is that in the absence of a conflict, both the insurer and insured are considered clients of the insurance defense firm. See Nevada Yellow Cab Corporation v. The Eighth Judicial District Court 152 P.3d 737 (Nev. 2007). Obviously, this article is not a comprehensive review of all states’ positions on this matter, and not all states follow the majority rule, so you should refer to the appropriate state-specific rules and case law to be sure of your obligations.
The prominent two-client model provides that your “primary” client is the insured and the insurer is a “secondary client.” This means that if an insurer and insured’s interests conflict, you “may not betray the interests of the policyholder in favor of the insurer, no matter how steady a stream of business the insurer may provide.” Id. Practically, for example, in a status update to the carrier, you may not purposefully divulge an insured’s ethically privileged information that would cause the insurer to deny coverage. The conflict in this example is your duty of confidentiality owed to your client versus the carrier’s interest in limiting its expenditures related to your client’s policy. We all deal with small conflicts like this on a regular basis.
Larger conflicts of interests, however, are less likely but create particularly thorny situations for defense counsel. For instance, a carrier may choose to furnish a legal defense while at the same time reserving its right to deny coverage related to any judgments against its insured. The insurer and policy holder’s interests become adverse because the insured will aim to preserve indemnity whereas the insurer will work to establish a basis for non-coverage, and you will find yourself stuck in the middle. Various states, including California, Illinois, Texas, and New York, agree that a carrier’s reservation of rights can create a conflict of interest for the carrier retained defense counsel. Effectively, those states conclude that an insured’s “legal right to a conflict-free defense supersedes the carrier’s contractual right to select its panel counsel and control the litigation decisions.” Bolender, Jeffrey, Will Nevada Adopt the Cumis Requirement: History, Analysis, and Conflict Resolution (2013). Many forums hold that while the issuance of a reservation of rights letter can create a conflict of interest, it is not absolute and will be considered on a case by case basis.
The question then becomes whether the client can (or will) consent to representation by retained defense counsel despite the potential conflict, or whether the attorney must withdraw from representation of one or both clients. Sometimes the conflicting interests in these situations makes ethical representation of both clients difficult, if not impossible. Some of the unavoidable ethical considerations involve including retained counsel’s ability to manipulate trial strategy to benefit one client to the detriment of the other and retained counsel’s access to potentially damaging information through confidential communication with each client.
So, how are you supposed to know if you are presented with a disqualifying conflict of interest? Relevant case law reveals that only specific types of issues—often times called “steerable” issues—create a disqualifying conflict of interest for carrier retained defense counsel. Generally, steerable issues are malleable, fact-intensive questions. A common steerable issue example is when a carrier issues a reservation of rights based on a mental basis, such as an exclusion for intentionally caused losses. This is because “the same universe of facts can be used to demonstrate either intentional conduct or accidental conduct. Thus, the issue is relatively steerable, because a good lawyer could employ the same “bucket” of facts to show the policyholder’s liability-producing conduct was intentional (not covered) or accidental (covered).” Id.
Regardless, if a carrier issues a reservation of rights letter, at the very least, it should send up a red flag prompting you to explore the conflict of interest issue, because at the end of the day, no man can serve two masters.
Jessica A. Green is an attorney at Lipson Neilson P.C. working in the firm’s Las Vegas, Nevada office. Her practice focuses primarily on professional liability defense, employment law, bad faith insurance defense, and commercial litigation. Ms. Green has also practiced in the areas of construction law and real estate. She can be reached at JGreen@lipsonneilson.com.
Joseph Hainline is an attorney at Carr Maloney P.C. in Washington, D.C. He concentrates his practice in general liability, professional liability, and premises liability, as well as in complex civil litigation.