Ethical implications for defense counsel when insurers seek reimbursement.

• Author: Bangert, Jack T.

Defense attorneys will become the prime source of proof in insurers' actions to recover defense costs, and therein lie the ethical pitfalls

In July 1997, the Supreme Court of California decided Buss v. Superior Court (Transamerica Insurance Co.),(1) one of the most significant legal victories for the insurance industry in decades. Buss held that when there is no duty to defend, the insurer may seek to recover the defense costs associated with the uncovered claims. While Buss is clearly a victory for the insurance industry, the decision creates a number of ethical dilemmas for insurance defense counsel. These dilemmas will occur once insurance defense counsel become aware that a potential Buss situation may exist--that is, when counsel become aware that the insurer is actually pursuing the insured for the costs of defending uninsured claims.

THE CASE

In Buss, the defendant, Jerry Buss, was sued in a 27-count complaint arising from an alleged unilateral breach of contract. Buss turned the action over to his insurers, which, with the exception of Transamerica, denied coverage. Transamerica held two policies for Buss, one covering personal injuries, including libel and slander, and another specifically covering oral or written materials or advertising that libels or slanders. Transamerica agreed to defend on the ground that a defamation count in the complaint was at least potentially covered. However, it reserved all rights to deny coverage and reserved the right to obtain reimbursement of costs and attorney's fees if it was later determined that coverage did not exist. Because of the reservation of rights and conflict of interests between insured and insurer, Transamerica agreed to pay for independent Cumis counsel.(2)

Buss ultimately settled with the plaintiff for $8.5 million, and in a separate action, he sued Transamerica for indemnity. Transamerica cross-claimed to recoup its costs for defending the claims that fell outside the policy. The trial court denied Buss's motion for summary judgment, and the intermediate appellate court affirmed.

Affirming that decision, the California Supreme Court held that for those claims potentially covered, Transamerica cannot seek reimbursement of costs. However, where there is no duty or obligation to defend, the insurer can recover costs.

ETHICAL IMPLICATIONS

Once the underlying action has been concluded and the insurer proceeds with the reimbursement action, the burden of proof will be on the insurer to prove what costs and attorney's fees are attributable to non-covered claims.(3) In attempting to meet this burden, the insurer may look to insurance defense counsel for assistance. Obviously, there are significant ethical problems for counsel who assists the insurer in recovering defense costs from the insured after they represented the insured in the underlying action.

Once it becomes evident that the insurer may be seeking recovery for defense costs, counsel must consider the ethical implications of that representation. These ethical concerns can be divided into the issues of conflicts of interest and those dealing with confidentiality. Confidentiality and conflicts of interest are not mutually exclusive concepts; in this area of the law, they often overlap.

1. Conflicts of Interest

   1. Dual Client Doctrine

      At the root of this ethical dilemma is the "dual client doctrine"--the widespread recognition that insurance defense counsel represent both the insurer and the insured. Insurance defense attorneys may represent two clients in the same cause of action as long as they believe they can faithfully represent both.(4)

      The traditional dual-client doctrine can create ethical dilemmas in situations in which the insurer, in the reimbursement case, looks to the attorney for advice and even evidence. The insurer may seek to obtain documents or information from counsel regarding representation in the underlying case. For example, in an action against the insured to recover defense costs, the insurer will certainly request billing information to determine how much time counsel spent defending claims that were not covered. The attorney may be asked to apportion the time and expense spent defending covered and uncovered claims. This request may be made during the defense of the underlying litigation, or it may be made retroactively in preparation for seeking reimbursement.

      This situation creates an ethical problem in that by creating documents that later will be used to harm the insured, counsel may well be in the midst of a conflict of interest, as well as in grave danger of breaching the duty of confidentiality. Under the...