How to Avoid Ethics Violations as Insurer-Selected Defense Counsel

By Vivi Gorman

If you have been selected by an insurance company to defend an insured party, dotting all of your “I”s and crossing all of your “T”s is the key to successfully avoiding violations of ethics and professional rules. This means identifying conflicts and risks early and communicating thoroughly with the client.

Which party is your “client?” Figuring out your ethical duties as an insurer-appointed defense lawyer starts with knowing who your client is, the insured or the insurer or both — and this varies by state, according to Arden Olson, an attorney with Harrang Long Gary Rudnick P.C. in Portland, Oregon.

In Mr. Olson’s 30 years as a lawyer he has practiced in five jurisdictions and is well versed on how rules regarding the tripartite relationship vary by state, if they exist at all. He shared his advice in HB Litigation Conferences’ June 23, 2009, teleconference Handling Insurance Defense Representations Ethically.

The complete recording and materials are now available from HB for just $149.  Click HERE for details.

Some states hold that only the insured is defense counsel’s client, while other states, approximately 20 to 34, hold that both insurer and insured are the client. And some states have not articulated a clear rule. Lawyers who don’t know who their client is lose their way, he said.

Mr. Olson was an expert witness in the famous Cumis case — San Diego Navy Federal Credit Union vs. Cumis Insurance Society (162 Cal. App. 3rd 358 [1984]) — which held that when a conflict arises between insurer and insured, the insured is entitled to independent counsel that represents only the insured and not insurer. This decision, issued in 1984, gave rise to an entire line of so-called Cumis cases in various states that hold that the defense attorney has a relationship with both insurer and insured, which has generated problems with ethical issues.

“One-client” states typically give rise to a personal interest conflict, Mr. Olson said, while “two-client” states generate an ethical problem that falls under rules of professional conduct. Identifying which problem is key at outset. The best measure is to make sure there’s a clear understanding among all three parties as to what the lawyer’s duties are to avoid ethics issues.

Teleconference co-speaker Beth A. Alston of Alston Law Firm LLC in Covington, Louisiana, which is a direct action state and has brought a different light to these issues, said many of these issues can be dealt with in advance. Ms. Alston specializes in legal and judicial ethics and discipline as a counselor, litigator and expert witness. She offered examples of form letters she has used for the insurer that suggest that the scope of representation be limited to defense of the case so that if coverage questions arise counsel does not represent either party in that situation.

Risk prevention is an important tool that is underutilized, she said. She also recommends sending correspondence to the insured stating that the scope of representation is limited to the defense of the claim so no adverse actions by defense counsel can be taken against either the insured or insurer.

Laying it all out is the best approach, Alston says.

Tell the insured it is being provided representation pursuant to terms of the insurance policy and that it has the option to reject selection of counsel and obtain its own counsel at its own expense. Explain the benefits and risks of representation in the particular case rather then letting the insured wonder if the duty of loyalty is compromised, in which case the insured could and should consult another attorney to make an informed decision. Also, disclose to the insured if the policy contains a cap on defense costs.

Keep the confidences of the insured and only disclose any evaluation of the case to the insured, not insurer, she said. Another good idea is when submitting bills to the insurer, redact descriptions that might reveal information that could undermine legal duties to the insured.

When is there a conflict?

Should a conflict between the interests of the insured and insurer arise, the insured may be entitled to independent counsel and action must be taken immediately. There are numerous instances in which a conflict can arise.

Under common law, attorney-client privilege can be violated by disclosure to third parties. If the insurer is not the client, disclosure of information could pose a risk not just for attorney-client privilege but also under the confidentiality rule, Mr. Olson said.

If you’re the defense attorney, you have a problem when the insurer would be positively served if an impaired defense of the insured was provided, Olson explained. A variety of circumstances give rise to that phenomenon.

One of the reactions to the Cumis decision was a new California statute, California Civil Code 2860, limiting the right the insured has to independent counsel. The statute authorizes express waiver of the right to independent counsel and defines situations that constitute a conflict of interest and situations that do not. The statute provides that a conflict exists if an insurer reserves rights on an issue and the outcome of the coverage issue can be controlled by the original counsel. It denies the right to independent counsel with respect to allegations or facts in the litigation for which the insurer denies coverage.

The complete recording and materials are now available from HB for just $149.  Click HERE for details.

Another situation that generates a conflict of interest is when punitive damages are alleged in the claim against the insured and the insurer has less of an interest in defending this claim if the insurance policy excludes coverage for punitive damages. A major issue arises when an insured is sued for an amount in excess of coverage limits (the California statute negates this as a basis for independent counsel, Mr. Olson said). Alaska courts adopted statute similar to California’s statute, he said.

Other scenarios include when defense costs deplete coverage limits, which puts the insured and insurer in different positions; where the attorney’s defense activity generates information suggesting a coverage defense, which is a situation most confusing as to what counsel’s obligation is and disclosing information; and when the insurer attempts to limit discovery to reduce expenses.

When only the insurer’s money is at risk, there typically is no conflict, but if the insured’s money is at risk a conflict can exist, Mr. Olson said.

Keep in mind that the scope of defense is to represent the insured in defending a claim, not advance counterclaims, which are the insured’s expense.

George Ripplinger of Ripplinger & Zimmer in Belleville, Ill, who is primarily a plaintiff’s lawyer, also participating in the teleconference, said that when liability in excess of policy limits is looming in a case, independent counsel for the insured is highly recommended to protect the insured as well as defense counsel.

Ultimately, the attorney wants to try to settle the case within policy limits. Should an excess verdict get handed down against the insured, tell the insured you and the insurer will do everything possible post-trial to protect the insured from personal liability, he suggested.

Precarious situations arise, Ripplinger explained, when somewhat related parties sue and you as the attorney must represent one.

For example, divergence in the interest between the insured and insurer can arise if a spouse sues his or her spouse following a car accident, or in litigation between business associates, owner and customer, etc., where both may stand to gain if a verdict or settlement is not minimized and collusion is a risk. Other prickly issues arise in litigation between professionals where ego or other reasons drive a stubborn resistance to settlement, he said. Similar conundrums arise in cases involving co-insureds.

In Writing

If divergence of interests is suspected, counsel must keep clients informed, communicating first with the insured … ALWAYS in writing, he recommended. And correspondence must be complete as to the nature of the conflict and adverse consequences and risks.

Disclosing limits of the policy is a good idea. Identifying other coverage the insured may have is not really defense counsel’s duty, but sometimes other coverage exists and some state’s allow insureds to select which policies will respond to the claim — in this case counsel cannot disclose this information to the insurer without the consent of the insured, Mr. Ripplinger said.

He warned that counsel may not inform the insurer of the likelihood of the insured accepting a settlement less than the policy limits — this poses a malpractice risk. If the insured ends up not taking less than the policy limits and a subsequent verdict is more than the limits, there will be problems, he said. There are even bad faith risks if a case isn’t settled and counsel could be involved, he said.

So, representing an insured at the behest of an insurer is not entering uncharted waters but requires extra diligence in terms of duties and disclosure of information. According to the experts, staying on top of what is expected in the scope of representation by first knowing which party or parties you serve and then communicating all parameters and conflicts will keep you out of any ethical quagmires.

Vivi GormanVivi Gorman is a freelance writer living in Philadelphia.  She is former editor of Mealey’s Litigation Report: Insurance, published by LexisNexis.