Cba Ethics Committee Opinion
| Publication year | 1993 |
| Pages | 497 |
1993, March, Pg. 497. CBA Ethics Committee Opinion
A lawyer retained by a liability insurance carrier to defend a claim against the company's insured must represent the insured with undivided fidelity. For purposes of this opinion, that retention does not create an attorney-client relationship between the lawyer and the carrier. See, CBA Ethics Opinion 43 (December 13, 1969), which is supplemented by this opinion. The lawyer cannot ethically take any position which is potentially disadvantageous to the insured (or contrary to the insured's wishes even though not disadvantageous to the insured), even though that position may be advantageous to the carrier, except in situations that might exist by virtue of the insurance contract which may give the insurance company the right to control the defense or disposition of a claim.
An attorney retained by an insurance company to represent its insured in the defense of a claim by a third party is typically paid by the insurance company. Nonetheless, the insured is the client to whom the lawyer's duty of loyalty is owed, regardless of the terms of any retention agreement the lawyer may have with the carrier.
The insurance company nevertheless requires from the attorney certain information about the insured and the facts of the case in order to exercise its decision-making powers in the handling of the defense. Thus, the attorney has an obligation to the carrier on behalf of the insured. This opinion does not address situations where the attorney is retained to represent the insurance company itself, except in those circumstances where the rights of an insured are involved.
The carrier controls the "purse-string" decisions, including what expenditures will be allowed for case preparation, settlement and cost of defense, including attorney fees. While the insured and the insurance company in general have a common interest, i.e., the successful defense of a third-party claim, there may be times when the interests of the carrier and the insured diverge. Such differing interests may be found, for example, with respect to certain settlement negotiations, when the insured is represented under a reservation of rights, when the insured has a counterclaim against the third party, when some claims against the insured are covered by insurance and others are not, or when damages are sought in excess of policy limits.
The attorney's ethical duty is to assure that the interests of the insured are protected, while at the same time fulfilling the insured's contractual obligations to the carrier against a backdrop where the insurance company, by virtue of financing the defense, may effectively control the result and may have its own interests at stake.
The ethical issues raised by this unique relationship become even more complex when the retained attorney has an ongoing relationship with the carrier, is employed by the insurance company, or has certain fee agreements with the carrier whereby the lawyer's profitability is affected by the effort expended on the case. The individual insured, in contrast, usually requires relatively short-term representation.
An insurance company which is contractually bound to provide its insured a defense to a claim typically retains the attorney of its choice to defend that claim. "By virtue of the insurance contract, the insurer retains the absolute right to control the defense of actions brought against the insured. . . ." Farmers Group, Inc. v. Trimble, 691 P.2d 1138, 1141 (Colo. 1984). Such a contractual provision has been construed as constituting consent by the insured for the carrier to select counsel for the defense. Houston General Insurance Co. v. Superior Court, 108 Cal.App.3d 958, 166 Cal.Rptr. 904 (1980). Notwithstanding these contractual rights of the carrier, the attorney's relationship to the insured is clear:
The intrusion of the insurance contract does not alter the fact that the relationship with the insured is that of attorney and client. Defense counsel owes the same unqualified loyalty as if he had been personally retained by the insured. . . . There is no diminishment in the ethical obligations and standard of care applicable to insurance defense counsel.
Mallen & Smith, Legal Malpractice (3d ed. 1989), § 23.3 at 365-367.
The nature of the relationship between the attorney and the insurance company is less clear. Some authorities hold there is no attorney-client relationship, while others hold that the carrier is a client of the attorney along with the insured. CBA Ethics Opinion 43 (December 13, 1969) makes clear that the insured is the client to whom the attorney's duty of loyalty is owed. The Colorado courts to date and the Colorado Rules of Professional Conduct ("the Rules") have not made clear whether the attorney represents both the insured and the carrier, or the insured alone. This Committee has concluded that in the context of this tripartite relationship, the better rule is that the lawyer's client is the insured and not the carrier.
ABA Informal Opinion 1476 (1981) asserts that "[w]hen a liability insurer retains a lawyer to defend an insured, the insured is the lawyer's client." On the other hand, ABA Formal Opinion 282 (1950) claims that both the insured and the insurance company are clients (i.e., the attorney is ethically obligated to represent the interests of each), but makes clear that the insured is the "primary" client. Under either analysis, if differing interests arise between the insurance company and the insured, the lawyer's ethical duty of undivided loyalty is owed only to the insured. See, B. Wunnicke, "The Eternal Triangle: Standards of Ethical Representation by the Insurance Defense Lawyer," For the Defense (Feb. 1989) at 9.
While there may be a split of authorities, under either approach the insured is unquestionably a client to whom the attorney owes the ethical duties owed to any client. The duties most significant to this opinion are the duty of loyalty, the duty to preserve the confidentiality of client information and the duty to advise the client concerning the client's legal interests.
Although the carrier is not a client simply by retaining the attorney to defend its insured, the lawyer has obligations to the insurance company on behalf of the insured arising out of the insurance contract and, where applicable, the Rules of Professional Conduct. The attorney may have a formal or informal retention agreement with the insurer. The attorney should honor the terms of that agreement to the extent it does not conflict with the attorney's ethical duties.
At the beginning of the representation, insurance defense counsel should make the nature and scope of the relationship clear (preferably in writing) to the carrier and the insured.
It is well recognized that as a part of the attorney-client relationship, the attorney must represent the insured with undivided loyalty.
Rule 1.7(b) states:
A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer's responsibilities to another client or to a third person, or by the lawyer's own interests, unless: (1) the lawyer reasonably believes the representation will not be adversely affected; and (2) the client consent's after consultation....
Rule 1.8(f) prohibits the lawyer from accepting compensation for legal services from anyone other than the client without the client's consent after full disclosure. Rule 1.8(f) also protects the insured's interests by requiring that a lawyer assure that the party paying the legal fees does not interfere with the lawyer's responsibility to exercise independent professional judgment or with the attorney-client relationship with the insured. Additionally, information relating to representation of the client must remain confidential as required by Rule 1.6.
Rule 5.4(c) provides that a lawyer shall not permit one who employs or pays the lawyer to represent another to "direct or regulate the lawyer's professional judgment in rendering such legal services."
The lawyer's duty of loyalty and duty to exercise independent professional judgment on behalf of the insured may compel defense counsel to disagree with the insurer regarding the strategy or procedures to be followed in the case, even though the insurer is paying defense costs.
1. Restrictions on Defense Costs.
The insurance company may attempt to restrict the amount of discovery conducted by the lawyer, refuse to authorize the retention of expert witnesses, or refuse to authorize other work in order to reduce litigation costs. If the attorney believes that some particular action is reasonably necessary to protect the interests of the insured, the attorney must so advise the insurer and request authority from the insurer to take the requested action and incur the related fees and costs. If the insurer declines, the attorney must advise the insured of the insurer's decision and why the action is necessary or recommended. If the insured nevertheless requests the attorney to take such action, the attorney may request payment of the legal fees and costs from the insured and should advise the insured to seek independent counsel. If the insured and the insurer are unwilling or unable to make satisfactory arrangements, the attorney should determine whether it is permissible or mandatory to withdraw.
States which seemingly adopt the view that the insured and the carrier are both clients may...
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