Insured's Right to Independent Counsel Resolving Policyholder and Insurer Disputes Over Selection of Counsel Today’s faculty features: 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10. WEDNESDAY, MAY 23, 2012 Presenting a live 90-minute webinar with interactive Q&A Renee C. Callantine, Partner, Meckler Bulger Tilson Marick & Pearson, San Francisco Jonathan T. Viner, Partner, Bates Carey Nicolaides, Chicago Kevin J. Kuhn, Owner, Managing Member, Kuhn Firm, Chicago
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Insured's Right to Independent Counsel Resolving Policyholder and Insurer Disputes Over Selection of Counsel
The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.
WEDNESDAY, MAY 23, 2012
Presenting a live 90-minute webinar with interactive Q&A
Renee C. Callantine, Partner, Meckler Bulger Tilson Marick & Pearson, San Francisco
Jonathan T. Viner, Partner, Bates Carey Nicolaides, Chicago
Kevin J. Kuhn, Owner, Managing Member, Kuhn Firm, Chicago
THE INSURER'S CONTRACT "RIGHT" TO DEFEND--THE "TRIPARTITE'' RELATIONSHIP RECONSIDERED
Michael M. Mnrick nnd Knren M. Dixon
Law and commentary on a liabiliry insurer's "du,ty" to defendits insured are legion; far hss lrttentinn has been giaen to theinsurefs clntract "rigltt" to defend, wbicb includes its right toselect coanzsel. The in.rurer's right to select counsel is a aaluablemeans of appropriately controlling litigation costs. In states rec-ognizing the "tripartite relationship" a.mrn.g the insurer, as-signed defense flttlrney, and the insared, and where a. reser-uation of rigbts letter m.ay be deemed to crea.te a conflict ofinterest J-or tbe nttorney) clurts mny allow the insured to selectits own counsel nt the insu.rer's expense. The authors thus sag-gest that the in,surer's selection of counsel should be exercisedwith a full a.u)areness of the ramifications of the attorn,ey-clientrelationships that ure established in connection with the attor-'ney's retention, ns a n atter of fact and/or under some states)substantizte law-r. The aathors recontmerzd that an insurer con-sider not co'nsenting to the formatio,n of ar? attxrney-client re-lationship bentseen it and the attorney in order to protect theinsurer's clntract right to select counsel.
Liabiliqy insurancc policics commonly provide that thc insurer has thc"right and dury to de the poliryholder that areotherwise within the ntially so, as courts haveheld). Litigation over for decades been prolific,spawning a muldmde of rules under different states' substantive laws. Aninsurer's correspon ding right to defend has received relatively scant treat-ment. Most fundamentally, the insurer's contract right to defend entitles
Mithael M. Mnritk ([email protected]) is a pnrtner nnd Knren M. Dixon([email protected]) is an associate with the Chicago law firm of Meckler Bu.lgerdt'l'ikon.
This article was published inthe ABA's TortTrial & Insurance Practice Law Journal'
Summer 2004 (e.q. This information or any portion thereof may not be copied or
disseminated in any form or by any means or downloaded or stored in an electronic
database or retrieval system without the express written consent of the American Bar
Association.
it to select and assign attorneys to defend lawsuits pending against itspolicyholder. This is an important and valuable right, since, in and of itself(as well as in combination with various other rights contracrually affordedto insurers), it promotes the insurer's ability to provide the policyholderwith a cost-effective defense.
Insurers historically, and quite aggressively at times, have advocated thata "tripartite," "triangular," or "two-client" relationship exists between thepolicyholder, its assigncd dcfensc counsel, and its insurer. In those sratesthat recognize the tripartite relationship, and where an insurer has agreedto defend under a reservation of rights (at least on what some courts havedeemed conflict-creating grounds),"many courrs have held that the poliry-holder is entitled to a defense through counsel it selects (often referred toby courts as "independent" counsel). lb the extent independent counsel isby decision or practice considered counsel of the policyholder's choice, theinsure articularly in comparisonto thc ncurrcd through insurer-assign ntial strength of the cov-erage rights).
represents only the poliryholder. Thus, there is no basis to require theinsurer, at its expense, to retain counsel of the poliryholder's choice. More-over' even in states recognizing the ripartite relationship, if the insurerdoes not consent to the formation of an attorney-client relationship withassigned counsel, it effectively should be able to avoid any requirement thatit pay for the policyholder's choice of counsel.
I. AN INSURER,S CONTNACT RIGHT TO SELECT DEFENSE COUNSEL
DeJense Lawyers,45 Durn LJ.255,265 (lggs) ("For the la.sicenrury thlse commoriinrrrran..arrangements have permitted the company to select counsel to defend an action. . . .").
A. The Right to Defend
The insuring agreement of standard primary-level commercial general li-abiliry policies provides that the insurer has not only the "duty," but alsothe "right," to defend the poliryholder against any suit seeking damagescovered under the poliry. The insurer, therefore, is entitled to select thelaw firm and attorneys to defend the poliryholder in the litigation forwhichcoverage is sought by the poliryholder. This right to defend is the insurer'sto exercise and, once an insurer does so, the poliryholder typically cannotdictate the choice of counsel to defend it in the litigation. The cases arelegion.2
B. The Supplernentary Payments Clause
Policics rypically contain a supplementary payments provision that setsforth the terms under which, inter alia, the insurer pays the poliryholder'sdefense costs. A common form of such clause provides:
S UPPLEMENTARY PAYMENTS1. We will pay, with respect to any claim we investigate or settle, or any "suit"
against an insured we deJend:
a. All expenses we intur
d. All reasonable expenses ir.rrrJ by the insured ltt nur requ,estto assistus in thc invcstigation or defcnse of the claim or tlc "snit" . . .i
2. See, e.g., Cent. Mich. Bd. of Ti'ustees v. Employers Reins. Corp., 1 17 F. Supp. 2d 627 ,
634 (E.D. Mich. 2000) (dre "right to defend" language confers upon the insurer rJre right toselect counsel to defend the policvholder); Arrow Electronics, fnc. v. Fed. Ins. Co., No.X0l CV000167080, 2002 WL 172662, at *9 (Conn. Supcr. Ct. 2002) ("The right to dcfendincludes a right to control the course of the defense of a claim, to decide on litigation strate€f,y,and to limit dre cost of the resolution. By proceeding to defend on its own . . . [th. insured]deprived [is insurer] of is righr tcl defend."); Interface Flooring Sys., Inc. v. Aema Cas. &Sur. Ccr., No. X02CVG9301515955, 2001 WL 238148, at *10 (Conn. Super. Ct.200l), aJfd,804 A.2d 201 (Conn. 2002) $olicvholder "had no independent right even to participate inits own defen.se, much less a right to hire its own counsel to conduct that defense without [itsinsurer'sl approval"); Doe v. Allstate Ins. Co., 653 So. 2d371,373-74 (Fla. 1995) ("Itt firl-filling irs promissory obligation to defend, tle insurer employs counsel for the insured.");Finlev v. Flome Ins. Co., 975 P.2d 1145, 1155 (Jaw. 1998) ("the insurer ... retains theconrractual right to select counsel whom it will pay to defend the insured"); Preferred Am.Inc. v. Dulceak, 706 N.E.2d 529, 533 (Ill. App. Ct. 1999) ("Where the insurer has the dutyto defend, that duty includes dre right to assurne control of the litigation; the purpose of thatright is tcl allow insurers to protect their financial interests in the outcome of the litigati<-rnand minimize unwarrantcd liability claims."); McCormack Baron Mgmt. Scrvs., Inc. v. Am.Guar. & Liab. Ins. Co., 989 S.W.2d L68, l7l n.2 (Mo. 1999) ("lhte note drat an insurer'sobligation to defend is also a rlg.ht to defend. Depending upon the lang-uage of the policy,once an insurer recognizes its right and durv to defend, it usually is afforded control over theIitigation to protect irs financial intercsts.");Ad. Mut. Ins. Co. v. Struve, 621 N.Y.S.2d 5, 7
(App. Div. 1994) (in light of the policy'.s "right to dcfcnd" languagc, "dcfendant, the insurcd,cannot dictate the choice of counsel to plaintiff, her liabilitv insurer").
3. See Insurance Senrices Offices (ISO) Form CG 00 01 10 0l (emphasis added).
Under this or similar language, the insurer's obligation is to pay only thosedefense expenses that the insurer has incurred or agreed to incur. Wherea policyholder selects defense counsel over the insurer's objection, or incurscosts without the insurer's express consent, standard supplementary pay-mcnts languagc should precludc coveragc.a
C. The Cooperation Co'ndition
A standard cooperation condition in a primary commercial general liabilityinsurance poliry provides that the "in.sured must . . . [c]ooperate with [theinsurer] in the investigation or settlement of the claim or defense againstthe 'suit."'s To the extent a policyholder insists on defense through counselnot authorizcd by thc insurcq the cooperation clausc may prcclude cov-erage due to the policyholder's failure to cooperate.6
D. Th e Voluntary Payments/Obligations Condition
Tnsurancc policies typically contain a condition providing that no poliry-holder may, "except at [its] own cost, voluntarily make a payment, assumeany obligation, or incur any expense, other than for first aid, without [theinsurer's] consent."T To the extent a poliryholder engages its own choiceof counsel without its insurer's notice or consent, ln turn expectlng pay-
4. See, e.g., Prichardv. LibertyMut. Ins. Co., 101 Cal. Rptr.2d298 312 (Ct.App.2000)("The poliry, in essence, obligates the insurer to pay tlre co.rrs in any lawsuit it defendr.");Interface Flooring ^Sr-r., 2001 WL 2i8148, at *ll ("[The insurer's] only general obligation t<-r
pav defcnsc cosLs under this provision is expressly limited to 'all cxpenses incurred by thecompany."'); Great Lakes Chem. v. Int'l Surplus Lines Ins. Co., 638 N.E.2d 847, 854 (Ind.Ct. App. L994) ("L natural reading of the provision simplv requires that when [the policy-holderj learns of a claim against iself which may be covered under the insurance policy. . .
before it incurs any defense costs.").
, 760 F. Supp. 88, 9l (D.S.C. 1991)insured). Accord C)ccidental Fire &
London, 311 N.E. 2d 330 (Ill. APP.
Ct.1974); Crown Center Redeveloprnent Corp. v. Occidental Fire & Cas. Co. of N.C., 716
S.W.2d 348 (Mo. Ct. App. 1e86).5. See ISO Form CG 00 01 l0 01.
ment with insurers.")7 . See ISO Form CG 00 01 l0 01.
ment of those fees from its insurer, the poliryholder violates the poliry'svolun tary payments/obl i gati ons con diti on. * Although many voluntary pay-ments decisions involve the issue of pre-tender defense costs, from a policylanguage and interpretation standpoint, it makes no difference when, tem-porally, thc insured incurs such costs.
Thus, in different yet complementary ways, standard general liabilirypolicies preclude coverage for the payment of defense costs of attorneysnot selected by the insurer. To the extent a policyholder seeks payment ofdefense co.sts by its insurer, it consents to the insurer's selection of counselin accordance wit-Ir the various poliry terms noted above. fu the HawaiiSupreme Court has explained:
[I]f thc clicnt docs not desirc thc representa[ion undcr the terms offcrcd bythe insurer, the insurer must either choose to defend unqualifiedly or allowthe insured to conduct its own defense of the action.
If the insured chooses to conduct its own defense, the insured is responsiblefor all attorneys' fees related tJrereto. . . . However, having refused the con-tractual terms of the policy the insured forgoes its right to compensation fordefense fees.e
Simply stated, standard commercial liability policies provide no basis fora policyholder to select its own counsel and, at the same time, demand thatits insurer pay for that counsel.
triggers t-he <lury to <lefen<{ compels our conclusion that the obligation does not includcexpenses incurred before that notificadon.").
9. Finley v. Home Ins. Co., 975 P.2d 1145, ll55 (FIaw 1998). See a/.ro InternationalAssociation of Defense Counsel, 70:4 Pnecrrcer Guroe ron INsunrNcn DBneNsn LAwynns,
II. THE DEVELOPMENT OF THE TRIPARTITE RELATIONSHIP/POLICYHOLDER SELECTS COUNSEL LINE OF CASES
Despite- the longstanding relationship between liabiliry insurance compa-nies and their retained defense counsel, significant legal commentaryt. anda growing body of case law reflect two distinct schools of thought.egardingwhether, as a matrer of theory and practice, the assigned d"i..rr" Io.rrr..lowes duties only to one client (the poliryholder) oito two clients (boththe poliryholder and the insurance ctmpany).rl
A. The Tuo-Client/Common Interest Theory
Historically, most courts have concluded that "fi]nsurance defense counselroutinely and necessarily represents two clients: insured and insurer."r2 Asone Illinois Appellate court stated: "The aftorney hired by the insurancecompany to defend in an action against the insured owes hdu.i"ry dutiesto two clients: insurer and the insured."r3 The California appellate court,in the case commonly known as cumzi, also explained: ,,In ih. usual tri-partite reladonship existing benveen insurer, inzured and counsel, there isa single, common interest shared among them. Dual representation by
counsel is beneficial since the shared goal of minimizing or eliminatingliabiliry to a third party is the same."r4
Thus, under the "two-client" or the "tripartite" relationship model, theattorney represents both the insurer and the policyholder and owes a duryof loyalty to both.rs'Ihe two-client rule is based on the premise that theinsurer is the attorney's client simply because the insurer retained the at-torney and pays its bills. Courts generally have not evaluated the facrualcircumstances of the rctention, such as whethcr the insurer (through a
retainer letter or otherwise) consents in the first instance that the attorneyrepresent it and whether the attorney in turn consents to represent theinsurer.rr'
Courts adopting the two-client theory have held that where the insurerhas agreed to provide a defense to the poliryholder under a reservation ofrights, a.n.d that reservation of rights is said to raise a conflict of interestbetween t}re insurer and the policyholder, the policyholder is entitled to a
defense through counsel of its choice (referred to by some courts as "in-dependent" counsel) at the insurer's expense.rT Not every reservation ofrights by the insurer creates a conflict of interest. Rather, a conflict ofinterest permitting the policyholder to select counsel has been foundwhere, inter alia, coverage turns on facts or issues to be determined in theunderlying action such that the insurer-assigned defense attorney wouldface conflicts of interest in deciding how to conduct the defense given hisduties of loyalty owed to both his clients.r8 A common test to determinewhether an attorney engaged by an insured has a conflict of interest inconducting the insured's defense is whether "in comparing the allegations
14. San Diego Navy Fed. Creclit Union v. Cumis Ins. Soc'y, Inc., 208 Cal. Rptr. 494,498(Ct. App. 1985).
15. Id.Seealso Parsonsv.Cont'l Nat'l Am.Group,550P.2d94(Ari2.1976); BostonOldColonylns. Co. v. Gutierrez,325 So. 2d+16 (Fla. Dist. Ct. App. 1976); Thorntonv. Paul,184 N.E.2d 335 (Ill. 1978);Maryland Cas. C<-r. v. Peppers, 355 N.E.2d 24 911.1976);Henkev. Iowa Home Cas. Co., 87 N.W.2d 920 (Iowa 1958); McCourt Co. v. FPC Props., Inc.,434N.E.2d 1234 (Mass. 1982); Harcford Acc. & Indem. Co. v. Foster, 528 So. 2d 255 (Miss.1988); Lieberrnan,419 A.2d at 417; Goldberg v. Am. Home Assurance Co.,439 N.Y.S.2d 2
(App. Div. 1981).16. See, e.g., RrsrernueNr (Tnrno) or Lew Govnnrqrwc Lawvrns $ 134, cmt. f ("The Com-
nrent takes the posirion that whether only the insured or both insured and insurer (as co-clients) enter into a client-lawver relationship with the designated lawyer is a question to bedetermined on the facts of the particular case, employing the approach indicated in $ 14.").Scc aLro ABA Formal Opin. 96-403, at 2, 3 (1996); IADC Pnecrtcer Guton, supra note9,at 16.
17. See, e.g., Blanchard v. State Farm Fire & Cas. Co.,2 Cal. Rpu. 2d 884 (Ct. App. l99l);Md. Cas. Co. v. Peppers, 355 N.E.2d 2+ (Ill.l976); Smith v. Reliance Ins. Co., 807 So. 2d1010 (La. Ct. App. 2002); Brohawn v. Tiansamerica Ins. Co.,347 L.2d8+2 (tr{d. 1975);Burdv. SussexMut. Ins. Co.,267 A.2d7 (N.f. 1970); Pub. Serv. Muc. Ins. Co. v. Goldfarb,425N.E.2d 810 (N.Y. re8l).
18. See, e.g., Dvnamic Conccpts, Inc. v. Tiuck Ins. Exch., 7l Cal. Rptr.2d 882,887 (Ct.App. 1998); Pekin Ins. Co. v. Home Ins. Co., 479 N.E.2d 1078 (I11. App. Ct. 1985); Steinmanv. Silbowitz, 714 N.Y.S.2d209 (\p. Div. 2000).
rt creates conflict-allows the pchoosing.2r These courts reasondisclaim liabiliry orhas the right to reprand, thus, the right
B. The One-Client Theory
att
,TJ
ically prohibited from acting i" ""*jthe poliryholder's detriment.22
The Third RestlttemeTtl concludes that the poliryholder and insurer arenot both clients of the attorney merely b.*rr" the insurer retains theattorney to represent the policyhold er.23 Various jurisdictions have adoptedthe one-client approach-botir before and after'the Third. Restalemenf v/aspromulgated-such that many courts and commentators have described itas thc "modern view."2+ Under the one-client approach, the insurer-ir-respective of whether it is defending the policyhoider under a reservarionof rights-is permitted to .select d.f.rr. .o,rrr.l to represent the policy_holder's interests' The policyholder is not permitted to select th"
ilLff:"Jji:ti:ilrn", rhere .""-u. ".'.";'il;il;..,"i",04^"* the poricyhorderi27' see, r.s-, Herber_tA. sulrivan, Inc. v. IJ. tica
f{u1._I1s. co., 7g_gN.E.2d 522 (Mass. 2003);Moe'er"' Ain. Guar. & r,iab. rns co" ibi sr 2dr062(Miss. 1996).,r1 t:::fEMENr
(Thrno) or Law io**r,*. Lowvens 5 it+, cmrs. d, f (2000).
because the attorney appointed by the insurer represents only the poliry-holder. Thus, that attorney cannot face any conflicts of interest, as a matterof law.2s
III. THE FALLACIES OF THE ..POLICYHOLDER CHOOSES"
ARGUMENT
The development of case law in nvo-client jurisdictions that allows thepoliryholder to select its own counsel when its insurer has reserved rightslargely arises from several incorrect assumptions and arguments.
A. Fallacy One: The Presumption of a Close and Harmonious RehtionsbipBenteen Insurers nnd the Insarance Defense Bar
In order to bolster the conclusion that the poliryholder is entitled to selectcounsel at the insurer's expense where the insurer has asserted a conflict-creating reservation of rights, proponents offer the following explanation:
The attorney-client relationship between the insured and the anorney hiredby his insurer imposes upon t}re attorney the same professional obligationsthat would exist had the attorney been personally retained by the insured.Courts have recognized, however, that t'in reality, the insurer's attorneys mayhave closer ties with the insurer and a more compelling interest in protectingthe insurer's position, whether or not it coincides with what is best for t}reinsured." This reality frequendy gives rise to conflicts of interest betweeninsurer and insured.26
Courts that express this rationale do so without a developed factual record,but instead base their decisions on what they may have perceived, at leastmany years ago, about the general relationship between insurance com-panies and the insurance defense ba
Times have changed. The dramatic deterioration of the relationship be-twccn many insurance defense firms and the insurers that engagc their5srvigs5-borne largely of hourly billing rate pressures and the insurers'imposition of billing guidelines-is well known and widely reported. Forinstance, one attorney has written:
[T]he "tripartite" relationship among insurer, outside counsel, and insured has
come under increased scmtiny of late. The nearly unanimous verdict would
25. See, e.g., L dt S Roofing Supply Co., 521 So. 2d zt 1304; Finley, 97 5 P.zd, at 1753; Thnk,715 P.2d at 1113.
26. Nandorf, Inc. v. CNA Ins. Cos., 479 N.E.2d 988, 991 (Ill. App. Ct. 1985) (internalcitations omitted). See also United States Fid. & Guar. Co. v. Louis A. Roser Co.,585 E2d932,938 n.5 (8th Cir. 1978); Purdv v. Pacific Auto. Ins. Co., 203 Cal. Rpn. 524, 534 (Ct.App. 1e84).
seem to be that the particular relationship between insurers and their outside
counscl has detcriorated at a dramatic and alarming rate.27
Another attorney has expressed a similar view:
IJnfortunately, over the last decade the insurance industry has managed vir-tually to destroy one of its most powerful and historical alliances, thatwith thedefense bar. Defense counsel historically could be counted on to support and
lobby for the interests of the insurance industry. Howeveq thanks to some ofthe industry's initiatives-for example, third party auditing bills, hourly rate
restrictions, reducdons in the number of panel counsel, etc.-and the negative
and adversarial manner in which these programs were implemented, manydefense counsel now either reftise or are less than enthusiastic about fulfillingthcir former rolc.2t
Perhaps the most public airing of discord between the insurance defense
bar and the insurers that regularly engage them arose in recent litigationbcforc thc Montana Supremc Court.2e lnsurance defcnse firms successfullychallenged insurers' submission of law firm billings to third-party fee au-ditors (arguing that to do so violated the ABA Model Rule of ProfessionalConduct 1.8(fX2); transmitting the billing statements would result inwaiver of privileged and confidential information). The insurers asserted
their practices were acceptable, given the tripartite relationship (which theinsurers argued was sufficient to preserve all privileges). The court rejectedthis argumcnt. Thc respondcnts includcd many leading property and ca-
sualty insurers, well supported by amicus curiae. The petitioner law firmsreceived support from several different bar-related groups, including Cali-fornia insurance defense organizations.
Regardless of the specific reasons for the diminished quality of relation-ships benveen insurers and the insurance defense firms they engage, thecourts' legal presumption of a close and harmonious relationship betweenthcm has no basis in current rcality. Thc nvo-client/tripartite relationshipcase law based on such an unquestioned presumption is plainly distinguish-able and subject to challenge.ro
27. Mitchell A. Orpett, Tbe Maniage oJ' Insurers and Defense Coun.rel: Renewal of Vow-r orSeflaration? (Behind tbe Scenes at the TIPS Industry Project), in LrrrcarroN ANo ADMINIsTRArIvEPnecrtcr CounsE lleNonoox (April 2000).
28. Lee L. Bennett, Defense Cmnmunity Issaes: New Liabilities and How to Respond to tbe
Plnintiffs'Bnr,69 Drr. Couns.J.273,283 (July2002).SeealsoAnonymo'us,WbotMaryof Us
Realfi 'l'hink But Are Aliaid to Say,lbn trE DrrnNsE (Julv I 991).29. See In reThe Rules of Proll Conduct,2 P.3d 806 (Mont. 2000).30. This is not to imply that strong and valuable working reladonships do not exist between
many insurers and the law firms they engage. Courts should not, however-to achieve theresult of allowing the p<-rlicyholder to select its own counsel-base their dec'isions on as-
sumptions that are not supported by a factual rccord and that may not bc accurate. Moreover,the existence of a good workinpl relationship, without acrual consent, does not give rise to an
attorney-client relationship.
B. Fallary Two: An Inntrer-Assigned Lawyer Has an Attorney-ClientRelationsbip with tbe In.surer as a Matter of La.w, Regurdless of tbe Facts
Sun'ounding th e Lauy er's Ret ention
The insurance industry and the insurance defense bar have long claimed
that merely retaining a firm to defend a poliryholder creates an attorney-client relationship benveen the insurer and the attorney(s). 1'his is true tothe extent agreed to, expressly or impliedly, but not if either does notconsent. For an attorney-client relationship to exist, both the client andthe attorney must consent to the representation. Section 14 of the Restute-
nxent (Tbird) of the Law GouemingLawyers explains:
A relationship of client and lawyer arises when:
(1) a person manifests to a lawyer the person's intent that the lawyer providelegal services for the person; and either:(a) the lawyer manifests to the person consent lo 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 onthe lawyer to provide the services; . . .3r
The rcquircment that both the attorney and thc client consent to therepresentation in order for an attorney-client relationship to arise is no less
true in instances where a liability insurer retains an attorney to representa poliryholder:
It is clear in an insurance situation that a lawyer designated to defend has a
clicnt-lawyer rcladonship with the insured. Thc insurer is not, simply by rhc
fact that it designates the lawyer, a client of the lawyer.r2
These and other authorities make clear the commonsense rule that mutualconsent must exist to form an attorney-client relationship.3l
A rcccnt rcport resulting from a decade-long study of the insurer-defense counsel-poliryholder relationship emphasizes the consensual na-rure of a defense attorney's engagement:
In our view, both majority and minority jurisdictions fboth one client and dual
client statesl wrongly treat as a question of law a matter that plainly is a ques-
tion of fact. This bccomcs ciear the moment onc considers how attorney-client
31. Rrsrernrnrer.rr (Tirrno) or Lew Govnnr.rrNc Lawvrns S 14 (2000). See also id. atcmt.b("The client-lawyer relationship ordinarily is a consensual one. A client ordinarily should notbe forced to put important legal matters into thc hands of another or to accept unwantedlegal services.").
32. Id. $ 134 cmt. f.33. See, e.g., id. $ 14 cmt. b; Cardin v. Pac. Employers Ins. Co., 745 F, Supp. 3 30 (D. Md.
1990); Flores v. Graphtex, 2000 WL 532193 (N.D.N.Y. 2000); Office of Disciplinarv Counselv. Cusnrano, 4 P.3d I109 (IIaw 2000); Pcople v. Simnrs, 716 N.F..2d 1092 (Ill. 2000); Peoplcex rel.Harrsgan v. Lann, 587 N.E.2d 521 (Ill. App. Ct. 1992); Brown v.Johnstone, 450 N.E.2d693 (Ohio Ct. App. 1982); Brents v. Halmes & Boone, LLB 53 S.W:3d 911 (Tex. App. 2001).
relarionships are created. In all jurisdictions, attorney-client relationships are
to provide them. Consequently, when an attorney-client relarionship exists
between a lawyer and a particular person (be it a carrier, a poliryholder, orsomeone else) is a question of fact that can [be] answered only in light of theundcrstanding beveen or among thc participants.Ja
Thus, in any given case, an insurance defense lawyer's engagement can belimited in scope to representing the policyholder, rf either the law firm orthe insurer does not agree to form an attorney-client relationship bet'reenthem.
A good cxample of a court's proper application of the mutual consentrule in the insurance defense context is found in Cardin a. Pncific EmployersInsurance Co.r5 The poliryholder retained Williams & Connolly to repre-sent it, tendered the case to its insurer, and then rejected the insurer'schoice of counsel. The insurer had instructed its selected counsel to rep-resent only the policyholder's interests. l'he poliryholder claimed endde-ment to payrnent of Williams & Connolly's fees because (1) a reservationof rights crcatcd a conflict of interest for thc insurer's choice of counsel;(2) the case presented unusual circumstances, including claims for com-pensatory damages in excess of poliry limits and punitive damage exposure;and (3) the insurer's choice of counsel frequently received referrals fromthe insurer and, therefore, might have an incentive not to fully protect thepolicyholder's interests.
The court rejected each of those arguments. Distinguishing San DiegoNnul Federnl Credit (Jnion u. Cum.is Insurnnce Sociely, In,c.r6-the case com-monly associated with California's so-called Cumis rule-the Cardin courtstated:
Cumis dealt with an aftorney who represented both the insurer nnd tbe insuredin the underlying suit. In that sinration, where t-he insurer defended ulder a
reservation of rights, a conflict was created because liabiliry could have beenfound under either covered or uncovered counts, and counsel representingboth insurer and insured could not serve the best interests of both at the sametimc. Thc court held that this conflict rcquired the appointment of indepen-dent counsel, who, though paid by the insurer, would be selecred and con-trolled by the insured.
Cardin argues that the principles of Cumis require Pacific [o reimburse Wil-liams & Connolly's fccs in this case. However, there is an clemental and criticaldifference between the Cumis facts and those presented in the instant case. Atno time in this case did Krause undertake to represent botb Pacifrc and Cardin,
14. IADC Pracrrcer Guron, s-u.pre norc 9, at 16.35. 7+5 F. Supp. at 330.36. 208 Cal. Rptr. 494 (Ct. App. 1985) (emphasis in original).
whereas the aftorney in Cumis was doing so. At r}re start of his represen[ation,Krause was specifically instructed to defend Cardin on all claims, covered anduncovered, and he was instructed not to consider Pacific's interest in planninghis defense.3T
Even though Maryland follows the two-client model, the court neverthe-
It is clear that an acnral conflict of interest does not exist when counsel ap-pointed by the insurer is specifically instructed to defend the insured witholtconsideration of the insurer's interest.3e
dury to defend.4oThe insurers' approach in Cardin and Driggs, approved by the courts, is
sound and the rationale should apply in all -statii
that foliow the ,,rwo-client" or "tripartite" relationship rule.
C. Fallacy Three: Tlte "Genernl" or "Mnjority" Rule Is That the policyholderCnn Select Counsel Were an Insurer As-eerts a Reservation of Rigits
not evaluate whether there has been mutual agreement bet'rreen the attor-ney and the insurer, expressly or impliedly, to the formation of an attorney-
ze the nvo-client rule, not everya conflict for assigned counsel.confl ict-creating reservation of
the policyholder:
. Giaens zt. Multikin, ex rel. McElwann-r+z ("insured is the sole client ofan amorney hired by a liability insurer pursuant to its contractual duty
. to defend'")'
,Because a lawycrlawyer's primary
rcise independent
Surety go.++ ('(we
attorney in orderle allegiance is to
the client, the insured").. Finley a. Home Insarance 5'r.+s (((Our holding that the sole client of the
attorn refl.LdJS .a. single
client an inter-ests of the insured without, at the same time, engaging in the pre-sumption that any and all defense counsel retained by the insurance
industry to represent its insureds under a reseryation of rights are con-clusively unable to do so without consciously or unconsciously com-promising the interests of the insureds").
. Tank a. Statt Farm Fire dt Cas. Co.a7 ("Both retained defense counsel
and thc insurer must understand that only the insured is the clicnt.").
41. See, e.g., Blanchard v. State Farm Fire & Cas. Co.,2 Cal. Rpu' 2d 888 (Ct' 1A'pp.
1991);
Marvland cas. co. v. Peppers, 355 N.E.2d 24 (III.l976); Smith v. Reliance Ins, co., 807 So.
In those states where the assigned lawyer is deemed solely the poliry-holder's counsel as a matter of law (or as a matter of fact), a reservation ofrights letter does not create a conflict entitling the poliryholder to selectcounsel at the insurer's expense, because the attorney solely represents thepoliryholder.
D. Fallary Foar: Poliryhold.ers Sbould Fear That Insurance Defense LazryersMay Not Exercise Independent Professional Judgment
Policyholders often argue that an attorney hired by an insurer will notexercise his own ethical, independent professional judgment in the in-sured's best interests, because the particular insurer (or insurance compa-nies in general) regularly assigns work to that attorney or firm.
'fhis argument is an excuse rather than a true reason. By and large,attorneys engaged by insurers to defend lawsuits-particularly significantproducts, cnvironmental, or other complex 625s5-l2ye earned the insur-ers' trust by performing quality work and demonstrating unquestionedethics. The notion that an insurer prefers an insurance defense firm becauseit will cut corners or subjugate the insured's interests to the insurer's isflatly wrong.
Moreover, the ABA Model Rules of Professional Conduct, the ThirdResta.temenl, and case law on lawyer ethics, informed as well by states' ethicsopinions, not by an insurance poliry, define a lawyer's ethical responsibili-tjes to his client.as The Model Rules, disciplinary rules, and ethics opinionsgenerally provide that an attorney shall not allow an insurer which is payingfor the attorney's services to interfere with or override the attorney's in-dependcnt professional judgment in rcpresenting the insured client's in-terests.4e For instance, when interpreting an insurer's litigation guidelinesrequiring prior approval of certain tasks, one courr has held that "the re-quirement of prior approval fundamentally interferes with defense coun-
48. See ABA/BNA Lawynns'M.cNuer, or Pnor'r Coxoucr $ 1101:105, at 42.49. See, e.g.,MoonL Rulns or Pnor'r, CoNoucr R. 1.7(b) ("A lawyer shall not represent a
client if the representation of that client mav be materiallv limited by the lawyer's responsi-bilities to *oth.r client or to a third p.rron, or by the laivyer's own interestsl . . a')tNioor"Rurr 5.4(c) ("A lawyer shall not permit a person who recommends, employs or pavs the lawyerto render legal services for another to direct or regulate the lawyer's professional judgmentin rcndcring such legal services."); Resrarr^4rNr (Thrno) on Law GovrnNrrvc Lrwvnns $ 134("A lawyer's professional conduct on behalf of a clienr maythan the client if . . . the direction does not interfere withprofessional judgment"); Disciplinary Commission of the Alaeral Counsel, Op. RO-98-02 (Nov. 8, 1998) ("[A]n attorney should not allow . . . any . . .
restricdotr imposed by the insurer to in any wav impair or influence thc indepcndcnt andunfettered exercise of tJre aftorney's best professional judgment in his representation of theinsured.").
sels' exercise of their independezl professional judgment, as required by Rule1.8(f). . . ."50
Bar association ethics opinions likewise emphasize that the attorney maynot allow an insurer's instructions or interests to compromise his profes-sional judgmcnt. Thc opinions interpreting ethical canons and rules typi-cally focus on the impact of both the insurer's ability to direct and controlthe litigation and its imposition of litigation guidelines on the attorney'sduty of professional judgment. For instance, one ABA opinion cautions:
Although defense lawyers must be sensitive to the economic interests of theinsurance companies that employ them and cognizant of the fact that costs oflitigation ultimately are trorne by insureds through premiums, they must notallow their professional judgment or the quality of their legal services to becompromised materially by the insurer.sl
In February 2000, the Defense Research Institute (DRI) introduced itsRecommended Guidelines for Insurers and Law Firms. Many major in-surance companies have adopted these (or substantively similar) guidelinesfor use in cases involving the defense of policyholders. The DRI Guidelinessuggest a reasonable approach for the defense of cases in which the insureris funding the defense. The DRI Guidelines emphasize that the attorney'sindepcndcnt profcssional judgment will control if a disputc arises betwccnthe attorney and the insurer over handling of the case. For example:
' The introductory "Philosophy" section of the DRI Guidelines states:"flnsurer] expects to work with the Firm and the insured to achievethe best result for the insured in an efficient and cost-conscious manner
50. In re The Rules of Profl Conduct, 2 P.3d 806, 815 (Mont. 2000). See slso Finley v.
Home Ins. Co., 97 5 P.2d 1145 (Haw. 1998) (court held attorney must comply with Rule 1.8,meanirrg attorney could not allow the insurer to interfere with the aftornev's independentprofessional judgment); State Farm Auto. Ins. Co. v. Tiaver, 980 S.W.2 d 625 , 63+ (Tex. I 998)(Gonztlez,J., concurring and dissenting) (in following litigation guidelines, "[t]here is a realrisk that these efforts at cost containment compromise a lawyer's autonomy and independentjudgment on the best means for defending an insured.").
51. ABA Comm. on Ethics and Profl Responsibility, Op. 0l-+21 (2001). See also I'riznnaBar Erhics Committee, Op. 99-08 (1999) ("while there is nothing wrong with the carrierattempting to reduce defense costs, the attorney cannot ethically participate in such an effortif it involves the use of procedures that allow a third parry to regulate or direct the lawyer'sindepcndent profcssional judgment on behalf of his client, as is thc case with this audit pro-gram"); Colorado Bar Ass'n, Op. 107 (1999) ("any guideline which arbitrarily and unreason-ably limits or restricts compensation for the reasonable time spent on tasks necessary to therepresentarion is to be avoided."); Kenrucky Bar Ass'n Ethics Comm., Op.416 (2001) (guide-lines that limited certain tasls to paralegals rather than lawyers impaired tle lawyer's inde-pcndcnt professional judgmen$; Ohio Supreme Conrt Bd. of Comm'rs on Grievanccs andDiscipline, Op. 2000-3 (2000) (improper for an insurer to impose guidelines dictatingworkallocation amon€l partners, associates, and paralegals).
consistent with the Firm's ethical obligarions. Nothing containedherein is intended to nor shall restrict Counsel's independent exerciseof professional judgment in rendering legal seryices for the Insured orotherwise interfere with any ethical directive governing the conduct ofcounscl."
' The DRI Guidelines eliminate the requirement of prior approval withregard to various defense activities but welcome a dialogue betweenthe attorney and the insurer. Further, "in the event of disagreementfover litigation strategy], the final decision will remain rhe independentprofessional judgment of defense counsel."52
:;;::fr::il:'f!'i,11-loyalties or conflicts.sl
The Model Rules, Third Restatemenf, erhics opinions, case law, and DRI
the guise of an implied in law conflict.
E- Fallary Fiae: "Itzdependent Coansel" Means "Poliryholder-Selected Coansel"
Poliryholders typically assert that "independenr" counsel is synonomouswith counsel it unilaterally selects. Ilowever, independent counsel does notnecessarily mean counsel of the policyholder's choice, but rather counselthat is professionally independent from the insurance company or fromadversity to the insurer. For instance, one court has describ.d inicpendentcounsel as follows:
One who operates independendy of the insurer-the litigation cannot be con-rolled by the insurer. Independent counsel also cannoi b..o-. involved incoverage disputes. . . . Independent counsel, although paid by the insureq mustbe loyal only to the insured, owing the insured "the full neasure of the fidu-ciary duties of loyalty and independent judgment.,'5+
5 2. S e e hrp://www.dri.org.
Accordingly, "independent" means that the attorney is professionally in-dependent of the insurer's control or influence, rather than independentlyselected by the poliryholder.ss
The poliryholder argument that only it may select independent counselalso ignorcs thc practical rcality that an insurer should be entitled to pro-vide a list of competent and ethical law firms (e.g., the insurer's panelfirms)-whose rates and capabilities are acceptable to the insurer-fromwhich the policyholder can select its counsel and./or to select a competentlaw firm that operates entirely independent of the insurer.s6
Policyholders often attempt to engage as "independent" counsel a lawfirm plainly adverse to the insurer's interests. Decisions rendered underthc two-client modcl have rejectcd thc insured's choice of counsel wherethe firm was clearly adverse to the insurer. In Nrw Yorh State Urban De-aelopment Corp. a. VSL Corp.iT the Second Circuit found that the insurer'sobjection to the policyholder's selected counsel was valid:
Northlrrook's conduct following the . . . judgment does not indicate a lack ofgood faith. Northbrook gave VSL the opportunity to submit a list of law firmsacceptable to it from which one firm would be chosen. VSL declined the offer.Northbrook did not act in bad faith by refusing to permir Gold, Farrell [thepolicyholder's selected counsell to defend VSL. Gold, Farrell brought thetlird-party action against Nortlbrook, represented VSL in the proceedingleading to the . . . judgment and instituted the contemptmotion againstNorth-brook. Furthermore, Gold, Farrell continued to represent VSL with respectto its pending third-party claims. Nortlrbrook might Iegitimately fear that,because of its prior adversarial relationship with Gold, Farrell, that firm mightaftempt to direct towards Northbrook any liability on VSL's part in the UDCaction. It was not unreasonable for Northbrook to insist on counscl indepen-dent of botlr itself and VSL.5s
55. See also Nl-Star Ins. Corp. v Stecl Bar,Inc., 324 E Supp. 160 (N.D.Ind. 1971) (insurermay select independent counscl to represent the insured); Yeomans v. Allstate Ins. Co, 324A.2d 906 (NJ. Super. Ct. 1974) (insureq not the policyholder, should be permimed to selectindependent counsel).
56. See, e.g., Cent. Mich. Bd. of Tiustees v. Emplovers Reins. Corp., 117 F. Supp. 2d627,635 (E.D. Mich. 2000) ("The insured has no absolute right to select the attorney himself, as
long as the insurer exercises good faith in its selection and the attornev selected is trulyindependent."); Aetna Cas. & Sur. Co. v. Dow Chem. Co.,44 F. Supp. 2d8+7,861 (E.D.Mich. 1997) (policyholder not entided to select counsel absent specific facmal showing ofconflict); Federal Ins. Co. v. X-Rite, Inc., 748 F. Supp. 1223 W.D. Mich. 1990) (carrierentided to presumption that counsel it selected was independent. See also Fre' Srar. ANN.S 627.426(2)(bXl) flVcst 2004) (liabiliw insurcr cannot dcny coverage unless insurer retains"independent counsel which is mutually agreeable" to the insurer and insured as provided bystatute); Am. Empire Surplus Lines Ins. Co. v. Gold Coast Elevator, Inc., 701 So. 2d 904,906 (Fla. Dist. Ct. App. 1997) (counsel must be mutually agreeable to botl insurer andpolicyhol<1er).
57. 738 F.2d 6l (2d Cir. 1984) (Ncw York law).58. Id. at66. See alsoEmplovers'Fire Ins. Co. v Beals, 2+0 A.2d 397 (R.I. 1968) (when a
conflict of interest berween the insured and the insurer in the defense of a suit requires
Therefore, "independent" counsel should be professionally independent of theinsurer's influence over the case defense. The absence of an attorney-clientrelationship benveen aftorney and insurer ensures that independence.
F. Fallary Six: A Poliqtholder's Rigbt to "In.dependent" Counsel Is Gouemed by
the Profession.nl Responsibility Rules Altltlicable to the Insurer-AssignedAttorney
It is typical for policyholders, insurers, and coverage counsel to look tolaws govcrning the defense attorneys' professional responsibilities to dc-termine whether the poliryholder is entitled to "independent" counsel.Case law, tbeThird Rettatentent, and commentators alike agree thatcontractlaw, rathcr than thc law govcrning the assigncd attorney's ethical duties,determines whether the policyholder (as opposed to the insurer) is entitledto select defense counsel.s" Accordingly, although choice of law may notarisc frequcntly in dctermining counsel selection, the law of the contract,as opposed to the law governing lawyer ethics, substantively governs thecontract rights of policyholder and insured.
(). Fallrcy Seaen: Tbe "Policyholder Cltooses" Rule Is I'{ecessary to ProtectPoliryholders Against Inadequate Lawyering b o, Insarance DefenseAttorney
Poliryholders assume (as do some courts and even certain insurers) thatallowing the policyholder to select counsel in certain reservation of rightssituations is necessary to protect the poliryholders' rights and interestsfrom inadequate representation by the insurer-assigned defense attorney.However, other existing remedies more directly and appropriatelyrespondto inadequate representation, including (l) an action by the policyholderagainst the attorneys for Iegal or profes.sional malpractice;6O or (2) an action
selection of independent counsel to represent the insured, the insured may choose to selectthe attorney, but the insurer has the right to approve this selection).
5<). See, e.g., N. Ins. Co. of New York v. Allied Mut. Ins. Co., 955 F.2d 1351, 1359 (9thCir. 1992) (law governing interpretation of contract, rather than law of jurisdiction whereassigned counsel was defending, controlled poliryholder's right representation by counsel ofchoice in a reservation of rights sinration); Golotrade Shipping & Chartering, Inc. v. TiavelersIndem. Co,706 F. Supp. 2I5,217 -18 (S.D.N.Y. 1989) (same); Rrsrarer"rnNr (Tirrno) oF THELew GovnnNtNc Lawvnns $ 134, cmt. a (2000) ("While discussions in the following com-menm will consider issues of the law governing a lawyer representing an insured person, rherelationship berween the insured person and the insurer or indemnitor will be connolled byorher law, such as the law of insurance or of contract."); Gnonrnry C. Flazano Jn., Lew orLewyrnrwc, S 12.14 (3d ed. 2001) ("Most eternal triangle issues can be resolved satisfactorilywithout a dcfinirivc judgment of the client status of thc insurance carrier, by rcference to'other'law llrinciples, including interpretation of the insurance conract. . .").
60. See, e.g., Cardinv. Pacific Employers Ins. Co., 745 F. Supp. 130, 338 n.7 (D. Md. 1990)(if "counsel selected by rhe insurer did not, in fact, fi:Ilv meet his or her professional andethical obligations, thcre would be adequate remedies available"); Gulf Ins. Co. v. Berger,Kahn, Shafton, Foss, Figler, Simon & Gladstonc, 93 Cal. Rptr. 2d 53+, 543-44 (Ct. App.2000); Am. Cas. Co. of Reading, Pa. v. C)'Flaherw,67 Cal. Rptr. 2d 539 (Ct. App.1997);Adanta Int'l Ins. Co. v. Bell, 475 N.\ l2d 294 (Mich. l99l).
b.y the nglicyhgtdgr against the insurer for extra-contracrual relief, asserting
claims of bad faith and/or breach of the implied duty of good faiih and faiidealing.6'
H- Lallry light: An Insurer Must Be a Client of the Defense Firm in Ord.erfor the Insurer to Effectiaely conduct lts claims Handling
In-appropriate case law firm,may be entitled to sue ice on thetheory that, as the po cyhold,er/client's shoes.r,3 Even aipracti.e
action against the defense attorney is limited, the insurer should carefullyconsider and balance the costs and benefits <lf selecting counsel to representthe insured against the potential need to sue the attorney in the future formishandling the defense. In the overwhelming majority of cases, and cer-tainly in the aggregate, thc financial benefits rcsulting from insurers' in-sistence on their right to select counsel will far ourweigh the contingentfuture benefit of being able to sue a lawyer in an individual case.
IV. AN ALTERNATIVE APPROACH TO THE TRIPARTITERELATIONSHIP
An insurer should considcr in appropriate cascs (where dcfending thc law-suit will be costly, for example, or where coverage defenses are weak) clearlyexpressing that no attorney-client relationship shall exist between it andthe defense attorney. Where the one-client rule governs the insurance con-tract, the insurer may appoinr its choice of counsel to defend the policy-holder. 'l'he selected attorney will represent only the policyholder's inter-ests, not the insurer's, and the policyholder remains the attorney's one andonly clicnt. Evcn in instanccs where the insurcr has rcserved rights, andwhere the "two-client policyholder chooses counsel" approach might ap-ply, an insurer nevertheless may structure the engagement to fall withinthe one-client rule:
1. The insurer contacts an attorney qualified in the field of law at issuein the underlying action and informs him that (subject to clearing conflicts)he is being retained to represent the interests of the poliryholder onfu. Theinsurer further informs the attorney, preferably through a retainer letter,that he is not the insurer's attorney (i.e., effectively expressing that theinsurer does not consent to the formation of an attorney-client relation-ship). The attorney also may provide the DRI Guidelines, or other similarguidclincs, cxprcssing clcarly thc attorney's duties to conduct litigation inthe policyholder's best interests.
2. The insurer obtains the attorney's acknowledgement that the scopeof his retention is limited to representing the poliryholder only.
3. In the event the poliryholder objects to the counsel retained bytheinsurer, the insurer should assert: (a) the poliryholder's consent to beingrepresented by the selected attorney is provided by the insurance poliryundcr which thc policyholder seeks coveragc; and (b) that the policyholderwill be the only client of the selected artorney. Thus, there is no need forseparate representation by another law firm, unless it is at the poliry-holder's sole expense.
4. With re.spect to reportinB, the in.surer should explain to the attorneythat, absent the policyholder's consent, he should not communicate ordisclose to the insurer any information about insurance coverage or privi-
Ieged matters. The insurer should work with the policyholder to establishreporting protocols. In the event of any disagreement over the means orscoPe of reporting, the insurer should explain t}rat all reporting shouldproceed between the attorney and the policyholder, and the insurer in turnwill deal direcdy with the policyholder (via its contract and common lawduties to cooperate) to obtain t}re information necessary to conduct itsclaims handling.
lJnder this straightforward retention scenario, the insurer establishesthat it does not consent to being a client of the attorney or to having theattorney represent its interests. Further, the attorney selected by the insurerunderstands he does not represent the insurer's interests, but rather thepolicyholder's. The mutual consent necessary to form an attorney-clientrelationship betrveen the aftorney and the insurer does not exist. As such,there is no basis for a corrt to find a "two-client" relationship, or for theattorney to face conflicts of interest. Thus, the poliryholder should haveno right to select counsel even in rwo-client states-nonvithstanding theinsurer's coverage positions as expressed tlrough a reservation of rightslefter, coverage litigation, or otherwise.
