Chapter Twenty

• Jurisdiction: New York

Chapter Twenty

Conflicts of Interest, the tripartite relationship and the Role and Obligations Of Defense Counsel

Stuart B. Shapiro, Esq.

I. INTRODUCTION

“No man can serve two masters.”²⁵⁵⁷ No man (or woman), that is, except, apparently, an insurance defense attorney. The evolving role of defense counsel has created a unique relationship under the law, whereby two “masters” with potentially differing views regularly rely upon one attorney to protect their interests.

The first “master” is the defendant/client. This client will have certain expectations about the course of the lawsuit and the interests to be protected. The second “master” is the insurance carrier/client. This client pays the bills and may have other interests and expectations that profoundly influence the manner in which the lawsuit is handled.

When an insured is sued, the insurance company has obligations under the insurance contract, which include appointment of defense counsel. New York courts have long recognized the fact that defense counsel acts in a dual capacity.²⁵⁵⁸

This tripartite relationship is one of the few situations in which the law recognizes and permits the involvement of an attorney in the representation of two clients with potentially divergent interests. Of course, this relationship is fraught with potential conflicts. Unfortunately, there has been very little guidance provided by the legal system to help defense counsel navigate their way through the dangerous situations that sometimes arise during the course of handling the litigation. Although such relationships have been around for a long time, the tripartite relationship has only recently been subject to some reinterpretation, as insurance companies and their insureds continue to tread the fine line of what is permissible in insurance defense.

This chapter examines the major pitfalls in the tripartite relationship and considers the various guidelines that, although designed to clarify the role and obligations of defense counsel, more often complicate, cloud and confuse practitioners and their dual clients as they walk the ethical tightrope through the process of litigation.

II. Existence of the Tripartite Relationship Under the Law

The term “tripartite” originally referred to an indenture situation in which one of the three parties acted as surety for the agreement between the other two. In the insurance context, however, the relationship is viewed as a “loose partnership, coalition, or alliance directed toward a common goal and sharing a common purpose.”²⁵⁵⁹ The common goal or purpose is, of course, defeating or resolving the claim against the insured. It is generally recognized that, at the outset, the insured and the insurer have a “community of interest”—to win the lawsuit. Provided that the three parties share a basic understanding of how to respond to the claim and how the litigation is going to be handled, the common interest is, in most cases, managed to the satisfaction of all those involved in the tripartite relationship.

III. Counsel and the Insured

Without exception, the courts in New York recognize that counsel’s first duty is to the insured and not the insurance company. As the court noted in American Employers Insurance Co. v. Goble Aircraft Specialties:

When counsel, although paid by the casualty company, undertakes to represent the policyholder and files his notice of appearance, he owes to his client, the assured, an undeviating and single allegiance. His fealty embraces the requirement to produce in court all witnesses, fact and expert, who are available and necessary for the proper protection of the rights of his client. It is immaterial that such procedure increases the cost to the carrier beyond the policy coverage limit.

The attorney may not seek to reduce the company’s loss by attempting to save a portion of the total indemnity in negotiations for the settlement of a negligence action, if by so doing he needlessly subjects the assured to judgment in excess of the policy limit. His duty to the assured is paramount. . . . “Divided obligations in trust relations are obnoxious to the law, and in none more so than in that of attorney and client.” ²⁵⁶⁰

Attorneys are also prohibited from entering into any agreement that limits the attorney’s independent professional judgment in representing the insured.

It is clear beyond cavil that in the insurance context the attorney owes his allegiance, not to the insurance company that retained him but to the insured defendant.²⁵⁶¹

IV. Counsel and the Insurance Company

Counsel’s relationship with the insurance company is usually viewed as that of an independent contractor engaged on a job-by-job basis to handle each matter individually. This is true even if, as will be discussed below, counsel is an employee of the insurance company, that is, staff counsel, or a member of a firm that regularly receives defense assignments from the carrier.

While a single lawsuit is most often the first and only time a particular attorney or firm will represent a particular insured, defense counsel often have a longstanding and collegial relationship with the insurance company. Often, regular fee structures have been negotiated over time and the insurance company has set up parameters for billing and reporting.

The insurance company fully expects that defense counsel will act to protect the carrier’s interests while defending the insured. This includes care in communication and requires that defense counsel not pepper the carrier’s file with communications that might be used against the carrier in the context of a bad-faith action. Care and coordination are required to keep the insurance company aware of the status of the case and to provide the insurance company the ability to take maximum advantage of settlement opportunities that arise during the course of the lawsuit.

Defense counsel, on the other hand, have their own expectations, and hope to handle the lawsuit in a manner that will lead to future business. They hope that the insurance carrier will employ their services for other matters in the future. When the defense counsel is “in-house,” and is actually a direct employee of the insurance company, he operates under an additional set of duties, goals, and obligations.

Nevertheless, some New York Courts impose a strict privity requirement and an attorney is not liable to an insurance company for negligence in performing services on behalf of his client,²⁵⁶² while other New York Courts permit such third party actions under a theory of subrogation.²⁵⁶³

As stated by the First Department in Federal Insurance Company v. North American Specialty:²⁵⁶⁴

An attorney’s paramount duty is to protect zealously the interests of his or her client, and if that duty is breached and the breach proximately causes injury, the attorney may be subject to a malpractice claim, but only by his or her client. While, concededly, third parties may be interested in the actions by another’s attorney and even benefit therefrom, that circumstance does not give rise to a duty on the part of the attorney to the third party. Were it otherwise, the attorney would be faced with the constant burden of weighing all the competing interests attendant upon such diverse obligations to the potential detriment of his or her client, to whom he owes undivided fidelity.

V. Guiding Principles and Rules Provide Little Comfort

The American Bar Association (ABA) previously promulgated a set of “Guiding Principles” for attorneys involved with liability insurance companies in furnishing legal counsel for the insureds. Unfortunately (or perhaps fortunately), these rules were repealed in 1990. Their repeal indicates how difficult it is to prescribe rules and regulations for conduct that would be appropriate in all situations.

Surprisingly, the opening salvo of the Guiding Principles was a general statement to the effect that the insurance company “has a direct financial interest in any claim presented against its insured which the company may be obligated to defend or pay.” Taking an astonishingly pragmatic approach to the situation, it went on to say that, in any suit on an insurance claim, whether the company is named as a party or not, “the company has the right to have counsel of its own choice to defend this interest” and that “so long as no conflict of interests exists, that counsel also represents the insured.”

This would appear to be a perfect example of “getting things backwards.” Is it possible that the preeminent legal minds involved in developing the Guiding Principles failed to recognize that the situations in which an insurance company would also be named a party in a lawsuit against the insured are extremely rare? (These situations are virtually non-existent in New York.) It seems that the backward principle being espoused was the following: the attorney represents the insurance company and unless there is a conflict, he also represents the insured. In fact, the only way the tripartite relationship can possibly work is if defense counsel represents the interests of the insured first, and the interests of the insurance company come second.

Nevertheless, a review of the Guiding Principles may be useful to ascertain the types of conflict situations that were expected to most frequently arise, and the type of conduct that was warranted in these situations. Because the Guiding Principles were repealed, there are only isolated formal opinions addressed to conduct required when specific perils are encountered.

Beyond formal opinions, the N.Y. Rules of Professional Conduct²⁵⁶⁵ provide some guidance.

VI. Applicable Rule Provisions

The insured is the attorney’s client, and, therefore, deserves total fidelity despite the fact that the insurance company pays the attorney’s fees.²⁵⁶⁶ Although paid by the insurer, the attorney owes undeviating and single allegiance to those he represents.²⁵⁶⁷ An attorney should not continue multiple representation unless the...