Looking to the Millennium: will the tripartite relationship survive?

AuthorMallen, Ronald E.

That relationship is threatened by unilateral, economic-driven action that may result in its becoming a relic of the past

IN THE tripartite relationship, the insurer is a client and has a fundamental interest in how its appointed lawyer handles the defense. Even when the insurer is regarded as only a third-party payor, it needs fundamental information in a timely manner to fulfill its obligations under the policy. During the last two decades, however, insurance companies have imposed a variety of guidelines, case-handling regulations and bill-auditing procedures that affect the professionalism, interpersonal relationships and ethical integrity of counsel selected to defend their insureds.

Insurers always have had guidelines. Some address the most basic needs, such as timely reporting; some specify the information the insurer requires; some require that retained counsel get permission to incur extraordinary expenditures. Some guidelines have been motivated by the desire to improve the quality of representation and by the sincere belief that controls can improve the competence of the defense. Another motivation is to reduce cost by limiting what defense counsel can do without express permission.

Although none of these guidelines or motives is inappropriate--indeed, salutary when consciously balanced--an emphasis on economy can produce a reduction in the competence of the representation and detract from a lawyer's obligation of independent judgment. Concern focuses on guidelines that restrict the ability of defense counsel to perform basic and essential functions unless the prior approval of the insurer is obtained. Some guidelines mechanically limit the time or expense that can be devoted to a task, which initially removes the ability of the lawyer to make the decision.

A second issue is the imposition of billing guidelines, particularly when they entail the forwarding of billing statements to third-party auditors. The requirement to provide detailed information of this type to third parties raises concerns about waiver or disclosure of confidential client information. This articles examines the professional responsibility implications of third-party audits, leaving for other forums the examination of the economic impact on the defense lawyer and the adverse effect on the attorney-client relationship.

TESTING THE TRIPARTITE RELATIONSHIP

Recent judicial decisions, as well as debates within the legal profession, have tested both the existence and the boundaries of the tripartite relationship, which traditionally has been thought to be composed of dual attorney-client relationships by defense counsel with both the insured and the insurer. There is a triangular relationship among the parties. The triangle is completed by the contractual relationship between insurer and insured by contract, the insurance policy, and by the implied covenant of good faith and fair dealing.

Both the American Bar Association 1969 Model Code of Professional Responsibility and the 1983 Model Rules of Professional Conduct assume that insurance defense counsel can act ethically, but they impose requirements when another pays for the legal services. Model Rule 1.8(f) now provides:

(f) A lawyer shall not accept compensation for representing a client from one other than the client unless: (1) The client consents after consultation; (2) There is no interference with the lawyer's independence of professional judgment or with the client-lawyer relationship; and (3) Information relating to the representation of a client is protected as required by Rule 1.6. One of the comments to Rule 1.7 states that Rule 1.8(f) applies to insurer-appointed defense counsel and situations in which a corporation pays for the defense of its directors or employees in a matter in which it may have a conflict of interest.

Rule 1.8(f) makes no distinction between whether defense counsel is selected by the insurer or by the insured, the sole predicate being whether the lawyer is paid by another to represent a client. To maintain ethical integrity, the rule requires consultation with the client and assurance of the lawyer's independent professional judgment. Thus, the rule mandates that a lawyer assures that the party paying for the legal services does not interfere with the lawyer's independent professional judgment or with the attorney-client relationship itself.(1)

The assumed application of Rule 1.8(f), however, is questionable. The predicate is accepting "compensation for representing a client from one other than the client." Under the tripartite analysis, the insurer is a joint client. Thus, the concern is not compensation but the propriety of control by the insurer. This issue, no matter whether it involves an insurer, is no different from any multiple client situation in which one client seeks to exercise more control over counsel than the other.

Of course, there are practical differences. The insurer has a contract entitling it to control the defense. That contract usually imposes the ultimate financial risk on the insurer. The insurer, moreover, is sophisticated in handling litigation, whereas the insured may never have been involved in litigation before.

The issue of the tripartite relationship came before the American Law Institute when it was creating the Restatement (Third) of the Law Governing Lawyers, particularly Section 215. The early drafts questioned the existence of the tripartite relationship, literally invoking the requirement that an insured must give informed consent to the representation by an attorney compensated by the insurer, even where coverage was unqualified.

When Proposed Final Draft No. 2 came before the May 1998 ALI meeting for approval, the membership voted to add a specific "black-letter requirement that any direction of a lawsuit by a third person not interfere with the lawyer's independent professional judgment on behalf of the client." A subsequent motion was adopted restoring the Restatement reporters' formulations that such direction also be "reasonable in scope and character."(2)

At that meeting, the ALI gave approval to Proposed Final Draft No. 2 as the final version of the Restatement, but it established a special ad hoc committee to work with the reporters to "make certain that the changes required are adequately reflected in the final version."(3) As of August 1999, the final version had not been promulgated.

The debate within the ALI reflects judicial distrust and perhaps lack of understanding of the tripartite relationship. Preceding the ALI debate, in 1991, the Michigan Supreme Court in a legal malpractice action brought by an insurance company, Atlanta International Insurance Co. v. Bell, rejected the insurer's contention that the defense lawyer it appointed was its lawyer.(4) The court concluded that an attorney appointed by an insurer to defend an insured had an attorney-client relationship only with the insured.

In a later case, the Michigan intermediate appellate court recognized that the Michigan Supreme Court was divided in Bell, but it analyzed the opinion as leaving intact its conclusion that no attorney-client relationship existed.(5)

Although the Bell opinion mentions no coverage restriction or reservation of rights, the court cited ethics rules concerning conflicts of interest, stating that defense counsel owed no duty to the insurer that retains them. The court did not discuss how the insurer, which may be the only one at financial risk, could protect its economic interest, nor did it offer any guidance for the insurer-retained attorney to determine the duties owed to the insurer.

Other indicia of the troubled waters for the insurer's relationships with "its" lawyers started with a 1996 Kentucky Supreme Court decision, American Insurance Association v. Kentucky Bar Association, in which there was a challenge to the insurer's use of staff counsel to defend insureds.(6) The court's analysis started with the review of the bar association's Unauthorized Practice of Law Opinion U-35 concerning flat-fee billing arrangements, which had answered the question: "May an insurance company employ in-house counsel (salaried employees) to represent their insured after a lawsuit has been filed?"

The court agreed with the opinion that the use of staff counsel to defend insureds was the unauthorized practice of law because the insured, not the insurer, was the party defendant. Rejecting substantial contrary authority from other jurisdictions, the court observed that "no man can serve two masters." It stated that U-36 was limited to cases involving coverage issues, characterizing it "as a prophylactic measure, not unlike the imputed disqualification rules." The premise was the inability of salaried counsel to render independent judgment because of their relationship to their employer.

Perhaps more significant than the prohibition on the use of salaried counsel was the court's reasoning. It found no actual misconduct and did not present any anecdotal incidents of favoritism of the insurer. The power to uphold the ethics rules and disrupt the insurer's relationship with its selected counsel derived, the court held, from its power to prohibit an appearance of impropriety despite the absence of any evidence of actual misconduct.

GUIDELINES AND REGULATIONS

There are three sources of guidelines and regulations for lawyers--ethical considerations, judicial decisions, and ethics opinions.(7)

  1. Ethical Considerations

    The starting point for discussion of guidelines and regulations is the foundational principle of ABA Model Rule 1.8(f) and its counterparts in the various states. It provides:

    (f) A lawyer shall not accept compensation for representing a client from one other than the client unless: (1) the client consents after consultation; (2) there is no interference with the lawyer's independence of professional judgment or with the client-lawyer relationship; and ... The focus is on the effect on an attorney's...

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