Ethical considerations within the tripartite relationship of insurance law - who is the real client?

• Author: Czarnecki, Amber

DEFENSE ATTORNEYS working within the insurance industry face various ethical dilemmas. This article examines the tripartite relationship, which has existed for more than three quarters of a century and includes a detailed look at such issues as who the attorney represents and what duties he or she owes to specific parties. Additionally, this article discusses potential conflicts of interest within the tripartite relationship, such as insurance carrier litigation guidelines, third-party audits, and defense subject to a reservation of rights. Finally, this article concludes with a brief discussion of the client theory.

1. Explanation of the Tripartite Dilemma

   It is 7:30 a.m. on a Monday morning, and Bob is driving down a crowded freeway during his morning commute. Wondering why the traffic is moving so slowly this morning, Bob begins fidgeting with his radio dial, attempting to tune in a news station. Bob's other hand is firmly attached to his daily cup of steaming hot cappuccino. With one hand on the radio and the other homing his coffee, Bob is forced to steer his vehicle using only his knee. Suddenly, Bob "s vehicle hits a bump on the freeway and his cappuccino spills all over him. Momentarily forgetting where he is or what he is doing, Bob's reaction to the hot coffee is to squirm about and writhe in pain. When he does so, his knee slips from the steering wheel and his vehicle careens into another car in the lane beside him. An accident ensues. While Bob is uninjured, the driver of the other vehicle is not so lucky. That driver, an elderly woman, is taken away in an ambulance. Suffering severe whiplash and a deep laceration of the head, the woman's memory is significantly diminished, and she has lost control of some of her motor functions.

   This scenario could occur in any town across the country. Suppose that Bob is being sued by the woman. According to his insurance policy, his carrier must provide him with a defense. Things now begin to get tricky. The relationship that is created when an insurance carrier (hereinafter "insurer") hires a lawyer to represent a policyholder (hereinafter "insured") is called the tripartite relationship. (1) This relationship has provided many insurance defense lawyers with serious confusion as to what duties are owed to whom. The tripartite relationship is unique in that it often creates a situation in which the attorney is unsure who he represents. This can create serious questions of loyalty for the attorney.

   Texas Supreme Court Justices Raul Gonzalez and Gregg Abbott aptly noted:

   The duty to defend in a liability policy at times makes for an uneasy alliance. The insured wants the best defense possible. The insurance company, always looking at the bottom line, wants to provide a defense at the lowest possible cost. The lawyer the insurer retains to defend the insured is caught in the middle. There is a lot of wisdom in the old proverb: He who pays the piper calls the tune. The lawyer wants to provide a competent defense, yet knows who pays the bills and who is most likely to send new business. This socalled tripartite relationship has been well documented as a source of unending ethical, legal, and economic tension. (2) Debate over this relationship is not new. From the 1940s to the 1960s, Professor Robert E. Keeton brought the issues surrounding the tripartite relationship to the forefront of the scholarly community. During the 1970s and 1980s, however, the subject basically dropped off the radar. In recent years, the announcement of the Restatement (Third) of the Law Governing Lawyers, the political attention directed toward the insurance industry, and the drastic increase in legal malpractice suits derived from insurance disputes have all contributed to a resurrection of the tripartite debate.

   Who is the Client?

   One prominent author has noted that the rules surrounding insurance defense litigation "fail to provide clear and defensible answers to the most basic questions, such as whether an attorneyclient relationship exists between the insurance company and the lawyer retained to handle the lawsuit against the insured ... The obvious danger is that insurance defense lawyers will act improperly, even when they attempt to adhere to the law." (3) The very nature of the tripartite relationship, the hiring of an attorney by a non-party to represent another party to a lawsuit, leaves the defense attorney to wonder whether he has one client or two. Some attorneys claim to only represent the insured. Some say that they represent the insurer for some purposes but not others. Some say that the insurer is an employer, but not a client. Because of the high potential for conflicts of interest, it is rare, however, that an attorney will claim to represent both the insured and the insurer in every instance. (4)

   The American Bar Association (ABA) Model Rules of Professional Conduct set forth the ethical rules by which attorneys in the United States are bound. The Rules also lay the groundwork for the attorney-client relationship. While it may seem like a small distinction, being labeled a "client" can be very advantageous. First, a client has the ability to sue a lawyer for malpractice. (5) This is essentially the client's means of holding the attorney accountable. Without this status, the client has no recourse in the event that the attorney fails to perform his duties. Second, a client is entitled to confidentiality. (6) This ensures that the client's discussions with his attorney will not be disclosed and used against him later. Finally, a client gets to define the objectives of the representation, gets to decide when and if settlement is appropriate, and is to be kept informed by the attorney throughout the representation. (7)

   An attorney-client relationship arises when: (1) a person manifests to a lawyer the person's intent that the lawyer provide legal services for the person; and (2) 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." (8) Although "no written contract is required in order to establish the relationship ... paying a lawyer does not by itself create a client-lawyer relationship with the payor if the circumstances indicate that the lawyer was to represent someone else." (9)

   The insurer is the entity in question with regard to "client" status. If the insured is considered the attorney's client, but the insurer is a non-client, then the insurer may find itself frustrated by the lawyer's ethical duties to the insured. While the insurer, who is paying the attorney's bill, may wish to know what exactly is going on with a particular case, there may be things that the attorney cannot ethically tell the company. Further, the insurer probably wants to exercise some degree of control over the costs incurred in defending the lawsuit. However, the lawyer must do what he sees fit and what is best for the insured, regardless of what the insurer's wishes may be. That may include spending money that the insurer has not approved. In addition, the insurance company also wants to retain the right to sue the lawyer for malpractice if he is careless or incompetent, since it will be the insurer's pocket from which the loss will come.

   There are three theories on the topic of representation in the tripartite relationship:

   1) The Two-Client Theory;

   2) The One-Client Theory; and

   3) The Third-Party-Payor Theory (sometimes referred to as the One-and-a-Half-Client Theory). (10)

   Two-Client Theory

   The basic law in the United States regarding joint clients is relatively clear: "Clients may jointly retain (or one client may retain for the joint benefit of others) the services of an attorney as their common agent on a legal matter of common interest...." (11)) The Two-Client Theory is currently the majority view of the tripartite relationship among American courts. (12) Under this theory, both the insured and the insurer are clients of the defense attorney. Accordingly, the attorney owes a duty of care to both the insured and the insurer.

   The rationale behind this theory is that "both the insured and the insurer are beneficiaries of the company's exclusive control over the litigation." (13) While opponents of this theory believe that an insurer must receive the insured's informed consent before consulting with the attorney in an attempt to manage the litigation, those in favor of the Two-Client Theory believe that such a requirement simply hinders the flow of the case through litigation. Proponents of the Two-Client Theory argue that the majority of cases settle quickly, and within the policy limits; thus, there is little likelihood that any conflicts will arise. Advocates "discount the notion that conflicts of interest dominate the insurer/insured relationship and bolster the idea that 'companies and insureds usually enjoy a substantial commonality of interests, even when their interests do not perfectly align.'" (14) They reason that having the insurer as a second client, one who is extremely familiar with the litigation process, can only be helpful to the insured. (15)

   The Arizona Supreme Court was faced with this issue when the case of Paradigm Insurance Co. v. Langerman Law Offices came before it in June, 2001. (16) The issue before the court was whether an attorney could be held liable to an insurer, which had assigned to that attorney the task of representing an insured, when the attorney's negligence damaged, not the insured, but only the insurer. The plaintiff, Paradigm Insurance Company (hereinafter "Paradigm"), had issued an insurance policy to Dr. Benjamin Vanderwerf covering medical malpractice liability. One of Dr. Vanderwerf's patients, Renee Taylor, brought a malpractice suit against him, and included his employer, Samaritan Transplant Services (hereinafter "Samaritan")...