insurance and the tripartite relationship: conflicts...
TRANSCRIPT
Insurance and the Tripartite Relationship: Conflicts of Interests and Right to Independent Counsel Best Practices for Identifying, Avoiding and Resolving Conflicts When the Parties' Interests Diverge
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WEDNESDAY, FEBRUARY 12, 2014
Presenting a live 90-minute webinar with interactive Q&A
Paul R. Walker-Bright, Partner, Reed Smith, Chicago
Matthew P. Keris, Shareholder, Marshall Dennehey Warner Coleman & Goggin, Moosic, Pa.
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Paul Walker-Bright, Esquire
Reed Smith LLP
Matthew P. Keris, Esquire
Marshall, Dennehey, Warner, Coleman &
Goggin
Insurance and the Tripartite
Relationship: Conflicts of Interests
and Right to Independent Counsel
Topics Rules covering the
tripartite relationship
Situations in which
conflicts frequently arise
Conflicts giving rise to
insured’s right to
independent counsel
Practice pointers for
avoiding or resolving
conflicts
Questions
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Learning Objectives Identify conflicts of
interest that can arise as a result of the tripartite relationship
Learn strategies counsel can employ to avoid or resolve conflicts of interest, including when independent counsel for the insured is necessary or desirable
Understand how coverage can be affected by the tripartite relationship and conflicts of interest
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The Tripartite Relationship
The Tripartite Relationship: The relationship
between the policyholder, insurer and defense
counsel in the defense of underlying claims
8
Conflicts of Interest and the Tripartite
Relationship Attorneys hired by insurers
have the same ethical duties to the insured as attorneys hired by the policyholder
However, where the insurer is paying the bills and routinely hires the attorney, the attorney may be inclined to promote the interests of the insurer over the insured
Attorneys have an ethical duty to inform insured of a conflict
Failure to inform the insured of conflicts can estop the insurer from denying coverage
9
Tripartite Relationship Defined Rules regarding the
tripartite relationship are not uniform among jurisdictions and are venue-specific.
Guidance from the following resources: Rules of Professional
Conduct ABA State Bar
Associations Case Law Statute Formal Opinions on
Legal Ethics and Professional Responsibility
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Ethical Rules Governing Lawyer’s
Representation of a Client
ABA Model Rules of Professional Conduct
Rule 1.2(a) – settlement decisions
Rule 1.4 – communications with client
Rule 1.6 – client confidentiality
Rule 1.7 – duty of loyalty
Rules 1.8(f) – compensation by third party
Rule 5.4(c) – independent professional judgment
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Is the Insurer a Client? Liability policies give insurer
control over defense and settlement of underlying lawsuit Insuring agreement:
insurer has the right and duty to defend the insured; right to settle
Cooperation clause: Insured is require to cooperate with insurer in defense and settlement
Voluntary payments clause: Insured may not make payments or incur obligations voluntarily
Insurer pays for defense
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Is the Insurer a Client? All authorities agree the insured is a client
ABA Model Rules and Opinions take no position ABA Standing Committee on Ethics and Professional
Responsibility Formal Opinions 96-403, 01-421
Restatement 3d of the Law Governing Lawyers § 134: insured is client, insurer may be client depending
on facts
Courts differ on whether insurer is client Yes: Arizona, California, Illinois, Massachusetts, Texas No: Maine, Michigan, Montana, Pennsylvania,
Washington
Primary duty is to insured
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When Can Conflicts of Interest
Arise?
Control of Defense Reservation of Rights
Excess Verdict Potential
Punitive Damages
Settlement
Carrier Restrictions on Litigation Costs
Disclosure of confidential or privileged information
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Control of Defense Generally no conflict if
insurer defends with no reservation of rights and exposure within limits
With no conflict, insurer can exercise right to control defense and settlement
Conflicts can arise if there are coverage questions or limitations that may result in all or part of liability not being paid by insurer
In such cases, insurer may agree to defend under reservation of rights
15
Reservation of Rights Insurer defends with reserving the right to deny indemnity
coverage for some or all the counts plead against the insured. Focus counsel to defend covered claims only. Reimbursement of defense costs from insured after determination
that no actual coverage or duty to indemnify existed.
Insured Interests: Indemnity costs Personal counsel
Attorney Issues: Counsel cannot take either client’s position regarding coverage. The best course to avoid potential conflicts may be to disregard
the coverage implications and defend entire case without design to either implicate or avoid coverage
On the other hand, how can counsel know where potential pitfalls are without understanding coverage issues?
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Effect of Reservation of Rights Reservation of rights by
itself creates conflict of interest Arizona; Kentucky;
Louisiana; Missouri
Mere reservation of rights does not create conflict of interest Alabama; Florida; Illinois;
Indiana; Nevada Fact-specific inquiry
State Statutes California Civil Code §2860
Alaska Stat. §21.89.100(c)
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When Does Reservation of Rights
Create a Conflict? Inquiry is whether
coverage turns on facts to be established in underlying case
Insurer and counsel have incentive to “steer” case towards uncovered facts
Must be “actual” conflict, not “potential”
Covered and uncovered claims asserted against insured (intentional conduct vs. negligence)
Timing of alleged wrongful acts/occurrence
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Other Circumstances Potentially
Affecting Control of Defense “Wasting” policy – defense costs erode limits
Concern over litigation’s effect on insured’s publicity, reputation or business
Insurer or insured may want to set precedent that will benefit it in other cases
E.g., 69th Street and 2nd Ave. Garage Assoc. v. Ticor Title Guar. Co., 622 N.Y.S.2d 13 (N.Y. App. Div. 1995)
Insured’s interest in quick resolution of case to preserve financing, retain customers and stay in business created conflict of interest entitling insured to independent counsel where insurer had no incentive to proceed quickly
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Excess Verdict Exposure Carriers' Interests:
Save some of policy limits Verdict potential could discourage
defense strategies or tactics that raise cost of defense
Early settlement to save on defense costs
If carrier views claim with limited exposure or negligence, they may want a trial on apportionment
Insureds' Interests: No interest in conserving defense
expenses or saving some of the policy limits
One goal: avoid personal liability Attorney issues:
Scope of representation and protection of client's personal assets
Personal Counsel involvement Settlement demand within policy
limits: What now?
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Punitive Damages
Carrier Interests: No coverage because of
exclusionary language of policy or public policy.
However, duty to defend is broader than duty to indemnify.
Duty to negotiate entire case in good faith, irrespective of the lack of obligation to pay for punitive damages.
Insured Interests: Personal exposure. Costs associated with retention
of personal counsel One goal: avoid personal
exposure.
Attorney Issues: Interests may diverge when best
trial tactic may be to admit liability
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Restrictions of Defense Efforts
and Expense Insurer obligation limited to “reasonable”
fees and costs (Model Rule 1.5) Carrier Interests:
Guidelines provide uniformity and outlines how defenses should be undertaken in a cost efficient manner.
Insistence in some instances regarding the use of flat fees/rates.
Insured Interests: Does not want to pay for defense
efforts that carrier refuses to authorize or reimburse.
A high exposure case is exactly the scenario where extraordinary defense costs are needed.
Attorney Issues: Between insurer and insured, the right
to control the defense is allocated to the insurer, however the attorney has an independent duty to zealously defend the insured.
Problems may arise if carrier directs defense counsel to take a less than aggressive approach to the defense or refuses to pay for defense work during the pendency of the file.
Failure to rectify issue may result in withdrawal.
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Insured Resists Settlement Carrier Interests:
Consent to Settlement Clause
Settlement demand within policy limits
Insured Interests: "Why should I pay when I
didn't do anything?" "I trust the legal system." Personal or professional
implications of settlement may outweigh verdict.
Attorney Issues: Carrier's invocation of
"Hammer Clause" Use of "Consent to Trial"
Authorization Withdrawal if positions
cannot be reconciled
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Consequences of a Conflict of
Interest
Enhanced duty of
good faith
Right to independent
counsel
Effect on attorney-
client privilege
Waiver/estoppel of
coverage defenses
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Enhanced Duty of Good Faith Some jurisdictions allow
defense counsel retained by insurer to continue to represent insured
Where insured is sole client of defense counsel
Courts do not presume that defense counsel will violate ethical obligations to favor insurer
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Enhanced Duty of Good Faith Enhanced duty generally requires full disclosure to
insured and involving insured in all aspects of defense Progress of the lawsuit, including settlement offers and
demands Potential conflicts of interest between insurer and
insured – must be resolved in favor of insured All information relevant to defense, including counsel’s
assessment of likelihood of adverse result
Insured has ultimate right to decide whether to settle
Counsel may not disclose insured’s confidential or privileged information that would support coverage defenses to insurer
Counsel must withdraw from representation if conflicts not resolved in favor of insured
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Right to Independent Counsel Who chooses – insurer or insured?
Insured chooses
California and Alaska statutes require minimum qualifications and limit
rates attorney may charge
Insured chooses with insurer’s consent (not to be unreasonably withheld)
Insurer chooses with insured’s consent (not to be unreasonably withheld)
Who controls settlement?
Alabama and Washington give insured right to settle, notwithstanding policy
provisions to the contrary
Other jurisdictions allow insurer to settle – separate issue from control of
defense (e.g., California)
Insurer only obligated to pay reasonable fees and costs
Can insurer continue to participate in defense?
Yes: Alaska, California
No: Illinois
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Conflicts and the Attorney-Client
Privilege Ordinarily,
communications between insurer and insured are privileged
Conflict of interest means parties are potentially adverse on coverage issues
If insured shares privileged information with insurer under these circumstances, does it waive the privilege?
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Will communications with insurers
breach privilege?
In Illinois, probably
not: Waste Mgmt. v.
Int’l Surplus Lines,
579 N.E.2d 372 (Ill.
1991)
Most other
jurisdictions reject
Illinois’ rule
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Common Interest Doctrine Insurers and policyholders have a common interest in
either defeating or settling the underlying litigation
Insurers and policyholders are in a special relationship because they are in privity of contract
Defense counsel represented both insurers, as well as policyholders, because insurers were ultimately responsible for the payment of any judgment or settlement
Applies even where defense counsel is neither retained nor in direct communication with insurers: “It is the commonality of interests which creates the exception, not the conduct of the litigation.”
Documents are prepared for the mutual benefit of the insurer and the policyholder in the underlying litigation
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No Common Interest Doctrine California: “the Waste Management common interest rule
is inconsistent with California statutory law…” Rockwell International Corp. v. Superior Court, 26 Cal. App. 4th 1255 (Ca. App. 2nd Dist. 1994).
Connecticut: Even where the insurer retained defense counsel, “they do not share common interests in the characterization of the claims or the settlement of such claims.” Thus, insurer not entitled to privileged documents. Metropolitan Ins. Co. v. Aetna Cas. & Surety Co., 249 Conn. 36 (Conn. 1999).
Michigan: an insurer had no client relationship with a defense firm that it had hired even though the policyholders it was defending were deceased and a dissolved corporation. As there was no client relationship, the insurer’s communications with the defense firm were discoverable by plaintiffs. However, work product may still be protected. Koster v. June’s Trucking, Inc., 244 Mich. App. 162 (Mich. App. 2000).
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Waiver / Privilege Between Insured
and Insurer No Waiver - Full Privilege: A policyholder may share privileged
documents and work product with the insurer without waiver even if the insurer refuses to defend
Illinois has this type of privilege
Waiver - No Privilege: A policyholder will waive privilege even if the insurer is defending without a reservation of rights
Michigan
Possible Waiver - Limited Privilege: A policyholder can share privileged information with an insurer in some circumstances – e.g., the insurer defends without a reservation of rights
Pennsylvania and Mississippi
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Limitations on Disclosures to Insurer ABA Model Rule Rule 1.4 Communication
(a) A lawyer shall:
(1) promptly inform the client of any decision or circumstance with respect to which the client's informed consent, as defined in Rule 1.0(e), is required by these Rules;
(2) reasonably consult with the client about the means by which the client's objectives are to be accomplished;
(3) keep the client reasonably informed about the status of the matter;
(4) promptly comply with reasonable requests for information; and
(5) consult with the client about any relevant limitation on the lawyer's conduct when the lawyer knows that the client expects assistance not permitted by the Rules of Professional Conduct or other law.
(b) A lawyer shall explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation.
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Disclosure Limitations: Defense Counsel’s
“Exceedingly Awkward Position”
“Defense counsel and the insurer inevitably share information about claims. With defense counsel and the insurer in frequent contact over the details of the litigation, the insurer has ample opportunity to inform defense counsel how different approaches to the claim might affect its interests. When the interests of the insurer differ from those of the insured, defense counsel who represents both may find itself in what we have called ‘an exceedingly awkward position.’”
Pine Island Farmer’s Coop. v. Erstad & Reimer, P.A., 649 N.W.2d 444, 450 (Minn. 2002)
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Defense Counsel’s Dilemma: to
Disclose or not to Disclose? Defense counsel has duty to disclose all relevant
information to insurer/client
Insured has duty to cooperate with insurer and provide requested information
Defense counsel has duty not to harm interests of insured/client
Is defense counsel obligated to inform insurer of insured’s confidential or privileged information supporting a coverage defense?
Even where insurer is a co-client, insured’s information can only be disclosed with insured’s informed consent Model Rules 1.6, 1.8 ABA Opinion 01-421
If insured will not consent, counsel may have to withdraw from representation (Model Rule 1.7)
35
Consequences of Defense Counsel
Disclosure of Confidential Information
Parsons v. Cont’l Nat’l Am. Group, 550 P.2d 94 (Ariz. 1976) Minor, a resident of a psychiatric institution, sued after
attacking several other individuals Facts initially showed minor did not have control over his
actions Defense counsel discovered confidential information in
minor’s school file that he was aware of actions and knew they were wrong
Defense counsel disclosed information to insurer, which reserved rights
Held: counsel breached fiduciary duty to minor, and resulting conflict of interest constituted sufficient prejudice to estop insurer from denying coverage
36
Waiver/Estoppel of Coverage
Defenses
In some jurisdictions (e.g., Illinois), the insurer has a
duty to disclose to insured existence of conflict of
interest and right to independent counsel
If insurer fails to adequately disclose conflict and
defends, even under reservation of rights, it will be
estopped from contesting coverage
In other jurisdictions (e.g., New York), the insurer has
no duty to disclose existence of conflict of interest
However, insurer must timely disclose grounds for
reserving rights or denying coverage or risk waiving
them
37
Waiver/Estoppel of Coverage
Defenses Pueblo Santa Fe Townhomes Owners’ Ass’n v.
Transcontinental Ins. Co., 178 P.3d 485 (Ariz. App. 2008)
Lawsuit filed against general contractor and subcontractors for construction defects
Insurer defends subcontractor for 18 months without reserving rights
Defense counsel fails to inform subcontractor that destructive testing will take place, or deadline for performing same
After insurer reserves rights and destructive testing deadline passes, subcontractor requests to perform testing but is denied
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Waiver/Estoppel of Coverage
Defenses
Pueblo Santa Fe (continued)
Held: insurer estopped from denying coverage for
insured’s settlement because it failed to timely
reserve rights
Key finding: subcontractor prejudiced because it
lost ability to conduct destructive testing that might
have supported defense
If defense counsel had kept subcontractor fully
informed of progress of case, including destructive
testing, subcontrator may not have been able to
prove prejudice, and hence no estoppel
39
Hypothetical #1 Insured is Defendant in third-party automobile case.
During the case, insured reveals that he currently is employed as a pizza delivery driver using his insured car for work.
At the time of the accident, he was not a pizza delivery man. This was the insured's third accident, and he believes that if the carrier learns that he is driving his car as a pizza delivery man, they will cancel or significantly raise the premiums under his current policy.
The insured asks the attorney to not notify the carrier of the use his automobile as a deliveryman.
40
Hypothetical #2 Insured physician is sued for medical malpractice and
is represented under a reservation of rights letter because one count of the Complaint is for fraudulently revising/altering the medical record after the fact.
Based on your review, it appears that the doctor redacted the chart.
The insurer threatens to deny coverage on the basis that the physician knew that he had a pending claim (because he had revised the medical records) and that he had not reported the potential claim in a timely manner.
During the deposition preparation, the insured states he "unsure" if he altered the chart. You do not believe the client is being truthful with you.
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Hypothetical #3 You represent a medical institution where a young patient fell on a
slippery floor just before discharge.
Plaintiffs' complaint sounds in medical malpractice corporate liability, nursing negligence and premises liability.
Future lost wages, medical expenses and pain and suffering easily exceed $1 million.
The hospital's insurance carrier which offered a GL policy limit of $1 million went bankrupt and is currently being defended through the Insurance Guranty Association. Current primary limits total the primary maximum of $300,000.00.
If the case is considered medical malpractice, coverage would include $1 million. If the case is considered a general premises liability claim, total coverage would be $300,000.00
Plaintiffs' expert report deadline expires without an expert report in support of a corporate negligence claim or nursing negligence claim. Plaintiff's counsel says he is proceeding under a premises liability claim where no expert report is necessary.
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Hypothetical #4 An attorney is retained by an insurance company to
defend the policyholder physician.
The physician does not have a consent to settle clause within his policy, but is adamant about going to trial and refuses to settle the case because of the NPDB ramifications, the potential negative publicity and because he feels he did nothing wrong.
The physician’s attorney believes that the actual damages at trial may exceed the physician’s coverage. The insurance company has expressed a desire to settle the case.
The attorney has had discussions with Plaintiff’s counsel and knows that the case can be settled within the physician’s policy limits.
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Hypothetical #5 Insured is sued for bodily injury resulting from an automobile
accident.
Carrier is defending pursuant to a reservation of rights, but may file declaratory judgment because the insured does not have liability coverage on the subject automobile. The insured alleges they intended to have the coverage.
You are assigned the defense by the insured with whom you do other business. The carrier is only put on notice well into your defense of the insured, but agrees to continue with your representation of the insured. This is your first involvement with the carrier.
Insured advises you that they may want to pay the loss and defense costs to avoid impact to their premiums. The insured then provides you with settlement authority to resolve the claim.
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Hypothetical # 6 Apex Insurance Company staffs/employs a captive firm to handle its
liability claims. In cases where two of its insureds are named, it assigns one insured to staff counsel and the other insured to an outside firm on a flat fee basis.
Suit is filed against two Apex Insurance Company insureds in a catastrophic personal injury case.
Outside counsel is assigned to "target defendant."
Staff counsel represents defendant with less culpability and decides its in client's best interests to "lay low" and approach Plaintiffs' counsel regarding discontinuance/dismissal at the appropriate time.
Outside counsel limits their investigation and discovery because "it’s a flat fee case."
Staff counsel, as an employee of Apex Insurance Company, is concerned about the case because her salary bonus is dependent on the company's financial condition.
Staff counsel considers more aggressive defense tactics, but is concerned that stance may jeopardize client's defense and culpability/settlement apportionment.
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Practice Pointers Disclose! Disclose! Disclose!
Clearly state up front limitations of representation to insurer and insured (Model Rule 1.2; ABA Opinion 96-403)
Provide full disclosure of any conflicts to both the insured and the insurer Attempt to resolve the conflicts or obtain the informed
consent from both the insured and insurer before proceeding.
If informed consent cannot be obtained from the insured and insurer, the attorney may have to withdraw from the case altogether.
Considering reaching agreement with insurer and insured at outset of case regarding what types of information will and will not be disclosed to insurer
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Practice Pointers The Insured is your client, but the insurer has
rights too Keep both parties fully informed of progress of case
and involve both in decisions
Proceed as if the insured’s own money is at risk
Protect the insured’s and the insurer’s confidential and privileged information
Litigation guidelines cannot trump obligations to exercise independent judgment and effectively represent insured
Should you be aware of coverage issues? There is no clear-cut answer.
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