SC Lawyer, March 2007, #2. Heads up, defense lawyers.

• Author: By John Freeman

South Carolina Lawyer

Ethics Columns.

SC Lawyer, March 2007, #2.

Heads up, defense lawyers

South Carolina LawyerMarch 2007Heads up, defense lawyers!By John FreemanOver the years you encounter things that burst forth as innovative and wonder why the seemingly obvious advance took so long to emerge. Consider Post-Its and Velcro as examples. Both are ubiquitous, low-tech products that undoubtedly have caused users to mutter, "Why, I could have invented that."

In law, breakthroughs sometimes happen the same way. A mundane fact situation gets looked at in a new light, and suddenly the status quo changes. And so, comparative liability supplants contributory negligence, or sex discrimination comes to the fore, or products liability suits and class action cases start to spread like kudzu.

New York's Court of Appeals recently ruled that a law firm hired by an insurer to defend a policyholder presumptively owes a duty to investigate whether there is excess insurance coverage available to the insured. In so holding, the court rejected the defendant law firm's contentions that appointed counsel "never has any obligation to investigate coverage issues, as that 'would violate every principle of the tripartite relationship that exists between an insurer, an insured, and appointed defense counsel.'" The case is Shaya B. Pacific, LLC, v. Wilson, Elser, Moskowitz, Edelman & Dicker, LLP, ___ N.Y.S.2d ___, 2006 WL 3733752 (N.Y. App. Div. 2006).

In Shaya, the tort victim, Mr. Golebiewski, had been severely injured in a construction accident at one of defendant Shaya's properties. Damages in excess of $50 million were sought. Shaya had primary coverage with Lloyds of London with a $1 million policy limit. The insured was notified by a Lloyds representative about the excess claim and was encouraged to retain separate counsel regarding excess judgment issues. Meanwhile, Lloyds appointed the Wilson Elser firm to represent the insured.

The case rocked along, and summary judgment on the liability issue was granted for Golebiewski. At that point, Lloyds tendered the policy limits and Wilson Elser tendered the case to National Union Fire Insurance Co. for further defense and potential indemnification as to any excess claims. Besides denying Shaya was an insured, National Union rejected the tender on the ground that it had not received timely notice of Golebiewski's lawsuit. The damages trial yielded a verdict against Shaya for roughly $5.7 million in favor of Golebiewski and nearly $800,000 in favor of his wife. Shaya thereupon promptly sued Wilson Elser for not investigating the possibility of excess coverage and for failing to provide timely notice to National Union.

The New York appellate court considered the case after a ruling below granting Wilson Elser's motion to dismiss before discovery. The appellate court reversed, rejecting the defendant's argument that, because it had been hired by the insured's primary carrier, it would have faced an intolerable conflict of interest had it become responsible for dealing with the insured's coverage issues.

Specifically, the law firm argued that by virtue of the unique "tri-partite" relations between the insurer, insured and appointed defense counsel, the insured's appointed counsel never owes the insured any duty to ascertain whether excess coverage may be available or to take any action to perfect it. To the appellate panel, this was the central question presented by the appeal. It addressed this key issue by posing two questions. "The first is whether, under ordinary circumstances, an attorney retained directly by a defendant in a personal injury action has any obligation to investigate the availability of insurance coverage for his or her client and to see that timely notices of claim are served." In other words, what would be expected of a lawyer for the defendant under these circumstances, assuming there was no potential conflict? The second question was whether, if a duty to investigate ordinarily would exist, there is anything in the tri-partite relationship that would nullify it.

On the first question, the appellate court held that a lawyer hired directly by the defendant would owe a duty to investigate coverage and to notify carriers of a potential claim, unless the scope of representation spelled out in the retainer agreement explicitly disavowed such efforts. No such duty had been disavowed by Wilson Elser. The court then rejected the law firm's contention that counsel hired by an insurer never owes such a duty because "it would violate every principle of the tri-partite relationship that exists between an insurer, an insured, and appointed defense counsel."

In analyzing the tri-partite relation, the appellate court assumed that the insured and the insurer both were the law firm's co-clients. It still found no conflict of interest between the insurer and its insured. The court found there was no dispute between the insurer or the insured about the scope or nature of the Lloyds policy. As to possible outcomes, the court reasoned that both the insured and the insurer had the same interest in achieving a defense verdict, if possible. The court conceded the Lloyds' interest was in keeping any recovery as low as possible, hopefully below the policy limit. Assuming the recovery could not be kept below the policy limit, Lloyds had no financial interest in the outcome, whereas the insured had an interest in keeping the loss within its overall coverage. The court held that Lloyds had no interest in the existence or amount of any excess coverage, and hence appointed counsel would not be breaching any duty to Lloyds by counseling the insured about excess coverage.

Missing from the court's analysis is recognition that imposing a duty on appointed counsel to assist insureds in finding excess coverage can lead to an outcome economically advantageous to the insured but disadvantageous to the insurer. After all, interrogatories seeking insurance information are routine and, if damages are great, the odds of a primary carrier having a chance to settle for less than its policy limits will drop and may disappear when excess coverage is visible to the plaintiff.

Should this seemingly overlooked practical problem have militated a different outcome in Shaya? The answer is no. Clearly the insured is a client. A lawyer with a client owes a duty to give that client 100 percent loyalty absent a waiver featuring informed consent. Thus, absent an agreement to the contrary, that is, absent a waiver by the insured of its right to services regarding excess coverage, any insurer-appointed lawyer must assume there is a duty to investigate and counsel the insured client about that subject.

The innovative beauty of the New York opinion lies in the simple, direct two-step methodology it adopts for analyzing conflict questions. Step 1: Ask what services the client would be getting were the client the only person in the picture with the lawyer, i.e., direct, one-on-one employment. Step 2: Ask whether the client agreed to a diminished level of services in light of the conflict. If the answer at Step 2 is "No," the lawyer has a problem.

The New York court assumed that the insurer and the insured were both co-clients. In South Carolina this assumed parity is less clear. Obviously, the insured is a client. The insurer can readily be seen as a non-client indemnitor to whom contractual duties are owed and who has payment obligations covered by Rule 1.8(f). Indeed, Comment [11] expressly categorizes liability insurers as "third-party payers" to whom duties may be owed and with whom conflicts needing discussion and waivers may arise. Shayaadds to the list of items to be covered with insured's counsel's duties regarding excess coverage.