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Ethical considerations within the tripartite relationship of insurance law - who is the real client?

DEFENSE ATTORNEYS working within the insurance industry face various ethical dilemmas. This article examines the tripartite relationship, which has existed for more than three quarters of a century and includes a detailed look at such issues as who the attorney represents and what duties he or she owes to specific parties. Additionally, this article discusses potential conflicts of interest within the tripartite relationship, such as insurance carrier litigation guidelines, third-party audits, and defense subject to a reservation of rights. Finally, this article concludes with a brief discussion of the client theory.

I. Explanation of the Tripartite Dilemma

It is 7:30 a.m. on a Monday morning, and Bob is driving down a crowded freeway during his morning commute. Wondering why the traffic is moving so slowly this morning, Bob begins fidgeting with his radio dial, attempting to tune in a news station. Bob's other hand is firmly attached to his daily cup of steaming hot cappuccino. With one hand on the radio and the other homing his coffee, Bob is forced to steer his vehicle using only his knee. Suddenly, Bob "s vehicle hits a bump on the freeway and his cappuccino spills all over him. Momentarily forgetting where he is or what he is doing, Bob's reaction to the hot coffee is to squirm about and writhe in pain. When he does so, his knee slips from the steering wheel and his vehicle careens into another car in the lane beside him. An accident ensues. While Bob is uninjured, the driver of the other vehicle is not so lucky. That driver, an elderly woman, is taken away in an ambulance. Suffering severe whiplash and a deep laceration of the head, the woman's memory is significantly diminished, and she has lost control of some of her motor functions.

This scenario could occur in any town across the country. Suppose that Bob is being sued by the woman. According to his insurance policy, his carrier must provide him with a defense. Things now begin to get tricky. The relationship that is created when an insurance carrier (hereinafter "insurer") hires a lawyer to represent a policyholder (hereinafter "insured") is called the tripartite relationship. (1) This relationship has provided many insurance defense lawyers with serious confusion as to what duties are owed to whom. The tripartite relationship is unique in that it often creates a situation in which the attorney is unsure who he represents. This can create serious questions of loyalty for the attorney.

Texas Supreme Court Justices Raul Gonzalez and Gregg Abbott aptly noted:
   The duty to defend in a liability policy
   at times makes for an uneasy alliance.
   The insured wants the best defense
   possible. The insurance company,
   always looking at the bottom line, wants
   to provide a defense at the lowest
   possible cost. The lawyer the insurer
   retains to defend the insured is caught in
   the middle. There is a lot of wisdom in
   the old proverb: He who pays the piper
   calls the tune. The lawyer wants to
   provide a competent defense, yet knows
   who pays the bills and who is most
   likely to send new business. This socalled
   tripartite relationship has been
   well documented as a source of
   unending ethical, legal, and economic
   tension. (2)


Debate over this relationship is not new. From the 1940s to the 1960s, Professor Robert E. Keeton brought the issues surrounding the tripartite relationship to the forefront of the scholarly community. During the 1970s and 1980s, however, the subject basically dropped off the radar. In recent years, the announcement of the Restatement (Third) of the Law Governing Lawyers, the political attention directed toward the insurance industry, and the drastic increase in legal malpractice suits derived from insurance disputes have all contributed to a resurrection of the tripartite debate.

Who is the Client?

One prominent author has noted that the rules surrounding insurance defense litigation "fail to provide clear and defensible answers to the most basic questions, such as whether an attorneyclient relationship exists between the insurance company and the lawyer retained to handle the lawsuit against the insured ... The obvious danger is that insurance defense lawyers will act improperly, even when they attempt to adhere to the law." (3) The very nature of the tripartite relationship, the hiring of an attorney by a non-party to represent another party to a lawsuit, leaves the defense attorney to wonder whether he has one client or two. Some attorneys claim to only represent the insured. Some say that they represent the insurer for some purposes but not others. Some say that the insurer is an employer, but not a client. Because of the high potential for conflicts of interest, it is rare, however, that an attorney will claim to represent both the insured and the insurer in every instance. (4)

The American Bar Association (ABA) Model Rules of Professional Conduct set forth the ethical rules by which attorneys in the United States are bound. The Rules also lay the groundwork for the attorney-client relationship. While it may seem like a small distinction, being labeled a "client" can be very advantageous. First, a client has the ability to sue a lawyer for malpractice. (5) This is essentially the client's means of holding the attorney accountable. Without this status, the client has no recourse in the event that the attorney fails to perform his duties. Second, a client is entitled to confidentiality. (6) This ensures that the client's discussions with his attorney will not be disclosed and used against him later. Finally, a client gets to define the objectives of the representation, gets to decide when and if settlement is appropriate, and is to be kept informed by the attorney throughout the representation. (7)

An attorney-client relationship arises when: (1) a person manifests to a lawyer the person's intent that the lawyer provide legal services for the person; and (2) either (a) the lawyer manifests to the person consent to 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 on the lawyer to provide the services." (8) Although "no written contract is required in order to establish the relationship ... paying a lawyer does not by itself create a client-lawyer relationship with the payor if the circumstances indicate that the lawyer was to represent someone else." (9)

The insurer is the entity in question with regard to "client" status. If the insured is considered the attorney's client, but the insurer is a non-client, then the insurer may find itself frustrated by the lawyer's ethical duties to the insured. While the insurer, who is paying the attorney's bill, may wish to know what exactly is going on with a particular case, there may be things that the attorney cannot ethically tell the company. Further, the insurer probably wants to exercise some degree of control over the costs incurred in defending the lawsuit. However, the lawyer must do what he sees fit and what is best for the insured, regardless of what the insurer's wishes may be. That may include spending money that the insurer has not approved. In addition, the insurance company also wants to retain the right to sue the lawyer for malpractice if he is careless or incompetent, since it will be the insurer's pocket from which the loss will come.

There are three theories on the topic of representation in the tripartite relationship:

1) The Two-Client Theory;

2) The One-Client Theory; and

3) The Third-Party-Payor Theory (sometimes referred to as the One-and-a-Half-Client Theory). (10)

Two-Client Theory

The basic law in the United States regarding joint clients is relatively clear: "Clients may jointly retain (or one client may retain for the joint benefit of others) the services of an attorney as their common agent on a legal matter of common interest...." (11)) The Two-Client Theory is currently the majority view of the tripartite relationship among American courts. (12) Under this theory, both the insured and the insurer are clients of the defense attorney. Accordingly, the attorney owes a duty of care to both the insured and the insurer.

The rationale behind this theory is that "both the insured and the insurer are beneficiaries of the company's exclusive control over the litigation." (13) While opponents of this theory believe that an insurer must receive the insured's informed consent before consulting with the attorney in an attempt to manage the litigation, those in favor of the Two-Client Theory believe that such a requirement simply hinders the flow of the case through litigation. Proponents of the Two-Client Theory argue that the majority of cases settle quickly, and within the policy limits; thus, there is little likelihood that any conflicts will arise. Advocates "discount the notion that conflicts of interest dominate the insurer/insured relationship and bolster the idea that 'companies and insureds usually enjoy a substantial commonality of interests, even when their interests do not perfectly align.'" (14) They reason that having the insurer as a second client, one who is extremely familiar with the litigation process, can only be helpful to the insured. (15)

The Arizona Supreme Court was faced with this issue when the case of Paradigm Insurance Co. v. Langerman Law Offices came before it in June, 2001. (16) The issue before the court was whether an attorney could be held liable to an insurer, which had assigned to that attorney the task of representing an insured, when the attorney's negligence damaged, not the insured, but only the insurer. The plaintiff, Paradigm Insurance Company (hereinafter "Paradigm"), had issued an insurance policy to Dr. Benjamin Vanderwerf covering medical malpractice liability. One of Dr. Vanderwerf's patients, Renee Taylor, brought a malpractice suit against him, and included his employer, Samaritan Transplant Services (hereinafter "Samaritan"). According to Dr. Vanderwerf's policy, Paradigm would be responsible for paying the doctor's liability to Ms. Taylor if liability was found, and for paying for the legal defense of any liability claims brought against the doctor. (17)

Paradigm hired Mr. Langerman as defense counsel for Dr. Vanderwerf, and the doctor consented to this representation. (18) During the course of the representation, Langerman failed to investigate or determine whether Dr. Vanderwerf's defense was covered by Samaritan's liability policy. After discovering that Mr. Langerman had a conflict of interest in the case, he was replaced by a new attorney. The new attorney discovered that Dr. Vanderwerf was, in fact, covered under Samaritan's insurance policy; further, he discovered that Samaritan's policy was Dr. Vanderwerf's primary coverage. However, when the new attorney attempted to submit Dr. Vanderwerf's liability to Samaritan's carrier, he was rejected because the request was untimely. Thus, Paradigm was left with the responsibility to pay for Dr. Vanderwerf's liability., Although Mr. Langerman's failure to investigate Samaritan's insurance policy did not injure the insured (Dr. Vanderwerf), it did increase Paradigm's costs tremendously; they lost their opportunity to seek indemnification from Samaritan's insurance provider which should have been Dr. Vanderwerf's primary coverage. Later, when Mr. Langerman sought payment for his services, Paradigm refused to pay, citing his negligence as the reason. Mr. Langerman then sued to collect his fees.

The trial court "held that because there was no express agreement that Langerman could represent both Paradigm and Vanderwerf, no attorney-client relationship existed between Langerman and Paradigm." (19) Accordingly, the trial court found that "Langerman owed no duty of care to Paradigm and could not be held liable for negligence that injured only Paradigm but not Langerman's sole client, Vanderwerf." (20) The appeals court reversed, relying instead on the theory of an implied, rather than express, attorney-client agreement. It held that where "no real or apparent conflict between the insured and the insurer" exists, defense counsel represents both. (21) Hence, the attorney owes a duty of care to not only the insured, but also the insurer.

The Arizona Supreme Court, in its landmark decision, held that when the interests of the insured and the insurer coincide, the lawyer has a duty to both the insured and the insurer. The Court held that "either intent or acquiescence may establish the relationship." (22) Clearly, the Arizona Supreme Court, though it does not reference the theory as such, is adopting the Two-Client Theory. According to the Restatement (Third) of the Law Governing Lawyers, "a lawyer owes a duty of care ... to a non-client when and to the extent that: (a) the lawyer knows that a client intends as one of the primary objectives of the representation that the lawyer's services benefit the non-client." (23) Thus, the lawyer can be held liable to the insurer even if the insurer is considered to be a non-client. (24) However, the insurer would only be a non-client, under the Arizona Supreme Court's ruling, in the event that a conflict arises.

One-Client Theory

Despite the fact that the Two-Client Theory is currently the majority view in the United States, the judicial trend is moving toward the increasing "supremacy of the attorney's obligation to the insured." (25) The apparent rationale behind this theory is the integrity of the lawyer's service to his primary client, the insured. (26) Proponents of this view believe that allowing an insurer to have an attorney-client relationship weakens the attorney's loyalty to the insured.

In Atlanta International Insurance Co. v. Bell, the Michigan Supreme Court set forth its preference for the One-Client Theory. (27) On August 31, 1977, Herbert H. Harvey went to work as a tile-setter at a construction site. Security Services, Inc. (hereinafter Security Services), was employed to provide security and safeguard the site. As Mr. Harvey entered the worksite, he passed two departing Security Services' employees, and, approximately 120 feet into the construction site, fell into a twenty by twenty-foot hole, subsequently dying from his injuries. In September, 1980, the administrator of Mr. Harvey's estate brought a lawsuit against several parties, including Security Services. The plaintiff, Atlanta International Insurance Company (hereinafter Atlanta), insured Security Services. As part of Atlanta's obligation under Security Services' policy, Atlanta retained John W. Bell and David H. Hertler (hereinafter Bell and Hertler) to represent Security Services in the suit. Bell and Hertler answered the complaint, but failed to raise comparative negligence as a defense. A judgment was subsequently entered against Security Services, which Atlanta, as Security Services' primary insurer, was required to pay. Atlanta then filed this suit, alleging that Bell and Hertler had committed legal malpractice in failing to raise comparative negligence as a defense. Bell and Hertler contended that no attorney-client relationship existed with Atlanta, and thus they could not be held liable for malpractice.

The Michigan Supreme Court held that "[t]raditional legal doctrine thus mandates that only a person in the special privity of the attorney-client relationship may sue an attorney for malpractice ... This rule exists to ensure the inviolability of the attorney's duty of loyalty to the client ... Allowing third-party liability generally would detract from the attorney's duty to represent the client diligently and without reservation ... The essential purpose of the general rule against malpractice liability from third parties is thus to prevent conflicts from derailing the attorney's unswerving duty of loyalty to the client." (28) Thus, the Court found that Atlanta had not established an attorney-client relationship with Bell and Hertler, despite the fact that Atlanta had hired, paid the fees, and bore the brunt of Bell and Hertler's misconduct.

Another proponent of the One-Client Theory said, "The professional judgment of a lawyer should be exercised, within the bounds of the law, solely for the benefit of the client and free of compromising influences and loyalties. Neither the lawyer's personal interests, the interests of other clients, nor the desires of third persons should be permitted to dilute the lawyer's loyalty to the client." (29) This is the view that appears to be gaining steam in American law at the moment.

Third-Party Payor Theory

Advocates for the Third-Party-Payor Theory, otherwise known as the One-and-a-Half-Client Theory, argue that the lawyer should "be deemed to represent both the insurer and the insured until something goes wrong, at which time the insurer would no longer be a client.... (30) The theory is "premised on the assumption that, although undivided loyalty is required to the insured, the company is in the best position to manage and control the litigation and often relies on the attorney to protect its economic interests." (31) If the insurer can manage the litigation without compromising the attorney's loyalty to the insured, then the attorney can, and does, owe the insurer a duty of care.

The Restatement (Third) of the Laws Governing Lawyers "imposes limitations on the control that a third person may exercise over the lawyer's work." (32) Although insurance companies may be tempted to believe that the Third-Party-Payor Theory allows them the right to both sue for malpractice and exercise exclusive control over the litigation, the Restatement clearly rebuts that view. Instead, the Restatement indicates that if an insurance company is a third party payor, it gives up the right to sue for attorney malpractice when it exercises exclusive control over the litigation. Under this theory, insurers are not able to enjoy the full range of benefits and rights of control that they would like, those which they would ordinarily have under the Two-Client Theory. This theory basically allows the insurer to claim "client" status to such an extent that it has the right to manage the litigation. However, if control over the litigation is exercised, then the insurer does not have the right to sue the attorney for malpractice. The Third-Party-Payor Theory is, in essence, an 'either/or' theory. The insurer can either manage the litigation and lose its right to sue for malpractice, or leave the management up to the attorney and sue for malpractice in the event that things go awry. Proponents claim that this theory is quite logical; if the insurer manages the litigation, then anything that the attorney does is under the insurer's direct control, thus preempting any claim that the insurer might have for malpractice. Most commonly, however, everything flows fairly smoothly and the insurer is never put in the position of needing to sue the attorney. Thus, the insurer is treated as a client, the insured is most definitely treated as a client, and the attorney can pursue both their interests fully and without conflict.

The underlying concept of the Third-Party-Payor Theory is the insurer's economic reliance on the attorney. (33) This idea is consistent with the legal principle of promissory estoppel, which is set forth in contract law. (34) This idea was acknowledged by the Arizona Supreme Court in Langerman, stating that insurance defense negligence can have an enormous economic impact on the insurer while having little or no effect on the insured. (35) As proponents of this theory argue, the insurer's direct financial interest in the litigation justifies its ability to either control the litigation or sue the defense attorney for malpractice.

Practitioners' Thoughts on the Debate

In an attempt to understand the situation from a practitioner's standpoint, I sent questionnaires to attorneys throughout the Midwest. The attorneys I selected were chosen because of their background and experience in insurance defense. I asked that these attorneys explain their thoughts on several topics. One question I posed to the attorneys was who they felt was a client in the tripartite relationship. Because of the ongoing relationship that some of these attorneys have with insurance carriers, I promised that those who chose to participate would remain anonymous. Thus, I will be referencing them without naming sources.

From the responses I received, it is clear that no real consensus exists among those practicing in the tripartite relationship. Some clearly believe that the One-Client Theory is correct, while others explained that they follow the Two-Client Theory or the Third-Party-Payor Theory. The managing attorney at an in-house counsel office explained that his position on this debate is clear: He has a duty to the insured which is greater than his duty to the insurer. He stated that the best way to approach the situation is to be completely honest from the outset, explaining to the insured the exact nature of the relationship between the various participants (the lawyer, the insured, and the insurer). He also stressed the importance of making sure that the insurance carrier has an understanding of the limits of its relationship with him.

Another attorney, who is the managing attorney of an in-house staff counsel office for a major insurance provider, said that "[a]ll attorneys at our office fully understand that their primary duty is to their client, the insured. The claims adjusters also understand this, and recognize and accept that we must sometimes make recommendations that they may disagree with, in order to advance our client's best interests." Obviously, this attorney is advocating the One-Client Theory, stating that he must do what is best for his client, the insured, regardless of what the insurer's wishes may be.

An attorney, who has twenty-seven years of legal experience (mainly in civil defense practice) and has been hired by different insurance carriers on several occasions, said that "it is important for the lawyer to remember that their client is the insured The lawyer must proceed under the same ethical considerations as if the insured were paying for the representation himself." He went on to state that the lawyer must approach the representation with blinders on, representing only the insured. Again, this attorney clearly believes in the One-Client Theory.

One attorney, who has thirty years of civil defense experience and has been hired by insurance providers on many cases, said that he tries to avoid any conflicts by reporting to both the insured and the insurer as needed. This view adheres to the Two-Client Theory approach to the tripartite relationship. Another attorney, who has been hired as defense counsel on several cases by a large insurance provider, said that he works with the insurance company to pre-approve any expenses and work in order to maintain his relationship with the company. However, he went on to say that in the event the insurance company does not agree with expenses that he feels are necessary, he would pursue that defense at his own expense ... he is ethically bound to do so. This is arguably an example of the Third-Party-Payor Theory. The attorney allows the insurance company an opportunity to control the litigation, but will provide the defense that he sees fit, despite what the insurance provider may dictate.

Finally, one attorney, who is the managing partner of the insurance law department at a large metropolitan firm, said that the client may be either the insurer or the insured, depending on the type of case. This is an important distinction. He pointed out that in a personal injury case (like the hypothetical involving Bob above) the insured is the sole client. However, in other cases (such as one involving a house fire where the insurer believes that the insured set the fire), the insurer itself would be the client. In that situation, the insured is suing his own insurance company for denying his claim. There, the insurance carrier hires the attorney to represent it against the insured whose claim the insurer is denying. That, however, is not the type of case that really involves the tripartite relationship. The tripartite relationship only exists in the instance that an attorney is hired by the insurer to represent the insured against an outside plaintiff.

What are the Duties and to Whom are They Owed?

Once the client or clients have been identified, the duties and obligations within the tripartite relationship must still be identified. The insured typically owes the insurer the duty to give notice of all claims and to cooperate with the investigation, defense, and settlement of such. On the flip side, the insurer generally owes the insured the duty to indemnify and to provide defense counsel to represent the insured in litigation. However, it has been held in courts throughout the country, that the duty to defend is greater than the duty to indemnify. (36) The insurance policy "requires the insurer to provide a defense to the policyholder against a claim if any of the allegations against the policyholder could result in a judgment that the insurer would be obligated to pay, even if such claims appear frivolous." (37) Insurers generally believe that this entitles them to take "complete and exclusive control of the suit against the assured." (38) Others believe that allowing the insurer to manage the litigation has too large a potential to cause a conflict of interest for the defense attorney.

The duties owed to the insurer by the defense attorney are generally set forth in the insurance policy, to which the defense attorney is not even a party (the policy is a contract created between the insurer and the insured). Those duties typically include notice and reporting requirements, claims-handling procedures with which the attorney is expected to comply, and ensuring that the insurance company has timely information concerning the progress of the suit. This duty includes providing notice of any settlement negotiations and any offers made by the opposing side. However, depending upon which client theory an attorney subscribes to, he may owe the insurer the same duties, or some variation thereof, that he owes the insured.

The defense attorney owes the insured the duties of loyalty, confidentiality, and competence, just as though the insured had hired the attorney himself. (39) The attorney is also duty bound to protect the interests of the insured at all times, especially if those interests would be compromised by the insurer's instructions in managing the litigation. Thus, the defense attorney must balance the interests of the insured in obtaining an adequate and ethical defense, with his responsibilities to the insurer under the terms of the insurance policy/contract and the retainer agreement by which the insurer hired the attorney. Sometimes a conflict is simply unavoidable.

II. Addressing Potential Conflicts of Interest

The Restatement (Third) of the Law Governing Lawyers says a conflict of interests exists, "if there is a substantial risk that the lawyer's representation of the client would be materially and adversely affected by the lawyer's own interests or by the lawyer's duties to ... a third person." (40) There is an inherent possibility of conflicting interests in the tripartite relationship. In Langerman, the Arizona Supreme Court stated that "actual conflicts between insured and insurer are quite common and that the potential for conflict is present in every case." (41) The Court went on to say, however, that the interests do not automatically conflict. Going a step further, the Court held that in most cases the potential for conflicts never materializes, and thus, it is acceptable for an attorney to take on both the insured and the insurer as clients.

The ABA Model Rules of Professional Conduct state that "[a] lawyer shall not represent a client if the representation of that client will be directly adverse to another client." (42) However, the lawyer may represent more than one client if each client consents to the representation and the lawyer reasonably believes that the representation will not be adversely affected or materially limited by his duties to an additional party. Therefore, both the insured's informed consent and the attorney's determination as to whether a conflict (or potential conflict) exists are prerequisites to a defense attorney accepting dual clients.

In the event that an insured does not give his informed consent to the representation, some jurisdictions require that the insurer provide independent counsel for the insured. (43) In San Diego Navy Fed. Credit Union v. Cumis Insurance Society, Inc., the California Court of Appeals held that if an insured does not give informed consent to the counsel appointed to him by the insurance carrier, counsel must cease to represent both the insurer and the insured. (44) Moreover, where the insured and the insurer have divergent interests, the "insurer must pay the reasonable cost for hiring independent counsel by the insured." (45) This ideology, of the insurer being required to provide Cumis counsel in the event that the insured does not consent to the insurer-appointed counsel, is growing in popularity in jurisdictions across the country. (46)

If a defense attorney is faced with a potential conflict of interest between clients, he is required to either decline representation if it has not yet commenced, or withdraw from representation if it has already begun. (47) "A possible conflict of interests does not itself preclude the representauon." (48) "The critical questions are the likelihood that a conflict will eventuate and, if it does, whether it will materially interfere with the lawyer's independent professional judgment...." (49) Thus, it is up to the attorney to make a determination, from the outset, as to whether he believes that there is a strong likelihood that a serious material conflict will occur, which would preclude dual representation or representation of co-clients. To avoid losing clientele (namely insurance carriers), attorneys will often err on the side of the insurer, finding no material limitations to the dual representation.

There are several potential conflicts that the attorney must consider when determining whether or not to take a case and, if he does, then who exactly to take on as "clients."

Insurer Litigation Guidelines

According to the ABA Model Rules of Professional Conduct, "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;...." (50) The reasoning behind this, as far as it applies to the insurance defense context, is that the insurer may, by virtue of the fact that it controls the purse strings, exert so much control over the lawyer that the lawyer feels an economic incentive to "lick the hand that feeds it." (51) This could obviously present a conflict of interest for the attorney, who is supposed to protect the insured with due loyalty.

According to Restatement (Third) of the Law Governing Lawyers, "a lawyer's professional conduct on behalf of a client may be directed by someone other than the client if: (a) the direction does not interfere with the lawyer's independence of professional judgment; (b) the direction is reasonable in scope and character; and (c) the client consents to the direction...." (52)

Notice that both the Restatement and the Model Rules mention interference with the attorney's independent professional judgment. It appears as though the drafters of these two rules were aware of the potential harm that could occur if a third party, in this case the insurance company, were allowed to direct the attorney on what to do and how to do it. However, most insurance liability policies include language giving the insurance carrier the right to exercise at least some degree of control over potential litigation. (53)

The controls that insurance carriers set forth to manage litigation are called litigation guidelines. Although not unique to the tripartite relationship, litigation guidelines are common practice in the insurance industry. However, the guidelines in the insurance industry are somewhat unique. They differ from those in other industries in that that they are promulgated by someone other than the client.

In the insurance arena, litigation guidelines cover a wide array of tasks that an attorney may perform in providing a defense. "Litigation management guidelines typically include a statement of the insurer's goals (quality legal services at the lowest possible cost); a delineation of the respective duties of the claims professionals and the attorney; standard procedures for handling lawsuits, including required periodic consultations with or submissions to the claims manager to permit insurer direction of the case; an enumeration of tasks which require the insurer's prior approval ...; and staffing guidelines and limitations." (54) Among those tasks requiring the insurer's pre-approval are: (1) hiring an expert; (2) hiring an investigator; (3) taking depositions; (4) videotaping depositions; (5) filing motions; (6) undertaking discovery; (7) expenditures for travel; (8) computerized legal research; and (9) determining how many attorneys may attend depositions, hearings, and trials. (55)

Imagine the following scenario. This debate becomes clear when facts such as these are laid out.
   Dr. Jones is sued for malpractice by her
   patient. Concerned about her medical
   reputation, Dr. Jones desires that the
   case go through trial so that she can be
   vindicated of any wrongdoing. She
   does not want to settle the claim
   because she fears that doing so may
   subject her to review before the
   licensing board. Furthermore, she
   knows her premiums will skyrocket if
   she settles. The insurance company, on
   the other hand, prefers to settle the
   claim for as little as possible rather than
   go through trial. It knows that any court
   decision could have long-lasting effects
   not only on its business but also on the
   entire industry, and it fears having to
   pay the potentially enormous damages
   award if it loses at trial. (56)


Given this scenario, the defense attorney faces several complex questions. Since the attorney knows that his primary duty of care is owed to the insured, he has to determine what to do with regard to the insurer's guidelines. Let's assume that the attorney sees no tactical reason that the insured's line of thinking is a bad move or is incorrect. If he attempts to sway his client by advocating settlement, he breaches his ethical duty to the insured by allowing the insurer to interfere with his professional judgment.

Obviously these litigation guidelines, in certain situations, can further confuse an already confusing situation. There is currently a national trend cautioning insurance defense attorneys against the ethical pitfalls inherent in submitting to certain requirements set forth by insurance companies in an effort at cost reduction. (57) However, many insurers have stated that the guidelines are just that, guidelines. When a conflict arises, insurers say that the defense attorney should simply contact the insurance company to work out an acceptable plan of action that allows him to fulfill his ethical obligations to the insured and satisfy the insurer's requirements as well.

One frequently overlooked aspect of these litigation guidelines, however, is the role that they play in helping insurers make certain that defense counsel is doing what they were hired to do, which is provide a solid defense for the insured. In many cases, litigation guidelines "establish deadlines by which depositions are taken, fact investigation and 'paper discovery' is initiated, and decisions are made about the filing of dispositive motions." (58) Hence, they can provide some benefit to the insured.

Third-Party Audits

In the context of the tripartite relationship, common issues involving confidentiality and communications by defense counsel normally concern: (1) what information should be provided to the insured and the insurer; and (2) whether certain information should be withheld from one or the other." (59) According to the ABA Model Rules of Professional Conduct, "[a] lawyer shall not reveal information relating to representation of a client unless the client consents after consultation, except for disclosures impliedly authorized in order to carry out the representation...." (60)

The ethical objection to third-party audits is that billing statements, which contain confidential client information that the lawyer has a duty to protect, are turned over to third-parties. While the insurance contract/policy may evidence an agreement between the insured and the insurer granting the insurer access to the client's confidential or secret information, the defense attorney has a duty to the client, controlled not by the policy, but by the Rules of Professional Conduct.

The Model Rules, and at least twenty-eight federal jurisdictions, have ruled that this information is not allowed to be disclosed without client consent. (61) In fact Pennsylvania requires that counsel obtain, in addition to the informed consent of the insured, a copy of the agreement between the auditor and the insurer, the identities of all other insurers whose accounts the auditor views, the identity of all employees who have access to insurance company files, and the level of security and confidentiality of the files an the measures taken to ensure that confidentiality. (62)

The issue then becomes to what extent a client must be informed by his attorney before he can give his lawful consent. Actually obtaining "informed consent" can be very difficult in reality. The attorney must recognize that the insured usually is not a sophisticated legal consumer, but a layperson with little to no legal experience. He must make the insured aware of the potential harm that could arise out of disclosing certain confidential information. Only after the insured has all the facts can he make an informed decision about whether to give his consent.

Defense Under a Reservation of Rights

The next issue of confidentiality involves a defense subject to a reservation of rights. The insurer, insured, and defense counsel general" share the common goal of minimizing, or altogether defeating liability. (63) When an insured is sued, the legal complaint filed against him may state several different claims, some of which may be covered by his liability insurance policy and some of which may not. The insurance company is obligated to provide a defense for the insured if any of the claims could be covered. However, the company may not be obligated to pay the damages for certain types of claims. A reservation of rights letter may be sent to an insured, from the insurer, giving the insured notice that even though the company is providing a defense in the lawsuit, depending on what happens, certain losses may not be covered by the terms of the policy. With the reservation of rights letter the company "reserves" its right to deny coverage at a later date based on the terms of the policy. Mindful of this inherent conflict of interest, many courts require the insurer to pay for independent Cumis counsel, selected by the insured, when electing to defend subject to a reservation of rights.

While it is clear that defense counsel must keep confidential from the insurer any information the insured has shared that could damage the insured's coverage position, this may be difficult. (64) For example, assume that the insured client discloses to the defense attorney, in their first meeting, that the insured knew of a possible claim long before ever being sued. Defense counsel must recognize the harmful potential that this information has; it could give rise to a late notice defense and possible loss of coverage for the insured. The defense attorney must also be aware of any facts disclosed by the insured that would constitute fraud upon the insurer, such as an intentional misrepresentation of facts on an application for insurance. Aside from constituting a coverage defense, this information is evidence of illegal activity by the insured. The attorney must then determine whether this information should be disclosed to the insurer, and more importantly, whether withdrawal is necessary.

Liability policies usually do not provide coverage for damages that are caused intentionally. Suppose the insured injures someone under circumstance where the injury could have been an accident, but may also have been intentional. The legal complaint, which the plaintiff filed with the court, alleged that the injury was caused by negligence and that the insured acted intentionally. The plaintiff will then be forced to prove, in court, that it was one or the other. In this scenario, the insurer would likely write a reservation of rights letter informing the insured that it would provide a defense, but would not pay damages if the court finds that the insured acted intentionally to cause the harm.

Some commentators have taken the view that the insurer is entitled to information that may give rise to a coverage defense. Their suggestion is that the defense attorney should tell everyone (the insured and the insurer) at the outset of the litigation, that "[t]here can be no secrets in the tripartite relationship. When either client imparts relevant information, it must do so with the understanding that defense counsel can share the information with the other client." (65) This clearly applies only to those who subscribe to the Two-Client Theory of representation.

Many would oppose this view of confidentiality in the tripartite relationship. The idea that counsel can avoid all pitfalls by simply informing everyone that all information will be shared in both directions ignores the risks that defense counsel's action pose for the insured, as well as the insurer. "Defense counsel's improper disclosure to the insurer of evidence of a coverage defense is not only potentially damaging to the insured, it can also have the effect of damaging the insurer by estopping it from denying coverage if the information was provided to the insurer after it was on notice of the potential defense." (66)

Clearly there are several issues involved when an insurer defends the insured subject to a reservation of rights. There are also many more potential conflicts of interest within the tripartite relationship. Some of those include questions regarding the use of flat fee arrangements (whether an attorney can provide a competent defense when he is hired to defend a number of similar cases for a flat fee) and in-house counsel (whether the use of staff attorneys employed by insurance carriers constitutes the illegal practice of law by the insurers). (67)

III. Conclusion

One author described the tripartite relationship as "ethically sanctioned 'duality of representation.'" (68) Another author noted that "the Restatement's analysis of the relationship was 'conceptually impoverished.'" (69) The American Bar Association, meanwhile, recognized that "the Model Rules of Professional Conduct offer virtually no guidance as to whether the lawyer retained and paid by an insurer to defend its insured represent the insured, insurer, or both." (70) These issues are at the heart of the debate over the tripartite relationship that exists in insurance law.

One thing is certain. This area of the law that governs the tripartite relationship is devoid of any consistency. Sometimes attorneys do not even know who it is that they are representing. Not only do the rules change from jurisdiction to jurisdiction, but from company to company and from firm to firm. Does the attorney represent only the insured, as the One-Client Theory describes, does he represent both the insured and the insurer, as the Two-Client Theory sets forth, or does he represent both until something happens to change that, which is what the Third-Party-Payor Theory advocates? There is no clear way for the insurance defense attorney to know what to do or what rules to follow. It is unfortunate because good, ethical attorneys can find themselves inescapably trapped in unethical situations without making any conscious decisions to place themselves there. Until courts and legislatures in this country can come to some conclusion, however, it seems inevitable that this uncertainty will continue.

(1) Nathan Andersen, Risky Business: Attorney Liability in Insurance Defense Litigation--A Review of the Arizona Supreme Court's Decision in Paradigm Insurance Co. v. Langerman Law Offices, BYU L. REV. 643, 643-74 (2002) (discussing the tripartite relationship).

(2) Michael D. Morrison and James R. Old, Jr., Economics. Exigencies and Ethics: Whose Choice? Emerging Trends' and Issues in Texas Insurance Defense Practice, 53 BAYLOR L. REV. 355-56, 349-418 (2001) (quoting State Farm Mut. Auto. Ins. Co. v. Traver, 980 S.W.2d 625,633 (Tex. 1998)).

(3) Id. at 644. (quoting Charles Silver, Flat Fees and Staff Attorneys: Unnecessary Casualties in the Continuing Battle over the Law Governing Insurance Defense Lawyers, 4 CONN. L.J. 205, 206 (1997-98)).

(4) Andersen, supra, note 1, at 665 (discussing different theories of representation in the tripartite relationship).

(5) Thomas D. Morgan, What Insurance Scholars Should Know About Professional Responsibility, 4 CONN. INS. L.J. 6, 1-15 (1997-98) (discussing the One-Client, Two-Client Issue). (6) Morgan, supra, note 5, at 665; see also ABA MODEL RULES OF PROFESSIONAL CONDUCT RULE 1.6 (2001) (discussing confidentiality).

(7) Morgan, supra, note 5, at 665; see also ABA MODEL RULES OF PROFESSIONAL CONDUCT--RULES 1.2 AND 1.4 (2001) (discussing client decisionmaking and objective-setting).

(8) Andersen, supra, note 1, at 656 (quoting RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS 14 (1998)).

(9) Andersen, supra, note 1, at 657 (quoting RESTATEMENT (THIRD) OF TIlE LAW GOVERNING LAWYERS 14 CMT. C (1998).

(10) Andersen, supra, note 1, at 665 (discussing different theories of representation in the tripartite relationship).

(11) PAUL R. RICE, ATTORNEY-CLIENT PRIVILEGE IN THE UNITED STATES 8:16 (2d ed. 1999).

(12) Andersen, supra, note 1, at 665 (discussing the Two-Client Theory).

(13) Andersen, supra, note 1, at 665-66.

(14) Andersen, supra, note l, at 666 (quoting Charles Silver, Does Insurance Defense Counsel Represent the Company of the Insured?, 72 TEx. L. REV. 1609 (1994)).

(15) Andersen, supra, note 1, at 666 (discussing the Two-Client Theory).

(16) Langerman, 24 P.3d 593 (Ariz. 2001).

(17) Andersen, supra, note 1, at 645 (citing Thomas D. Morgan, Whose Lawyer Are You Anyway?, 23 WM. MITCHELL L. REV. 11, 11-12 (1997)) (Mr. Morgan discusses the basic insurance coverage included in a typical liability insurance policy similar to the policy in Langerman).

(18) Langerman, 24 P.3d at 594.

(19) Id. at 595.

(20) Id.

(21) Id.

(22) Id. at 596.

(23) Andersen, supra, note 1, at 649-50 (quoting RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS 51(3) (1998)).

(24) Langerman, 24 P.3d at 602.

(25) Andersen, supra, note 1, at 666 (quoting Eileen M. Dacy, The Delicate Balance of the AttorneyClient Privilege in the Tripartite Relationship, 602 PLI/Lit 199, 205 (1999)); see also Jill B. Berkeley. Confidential Communications Among the Insured. the Insurer. and Defense Counsel, 26 SPG Brief 22, 26 (1997)).

(26) Andersen, supra, note 1, at 666 (discussing the One-Client Theory).

(27) 475 N.W.2d 294 (Mich. 1991).

(28) Id. at 296.

(29) Andersen, supra, note 1, at 667 (quoting Rian D. Jorgensen, Lawyers' ProJessional Liability: Overview and Current Issues, 563 PLI / Lit 89, 95 (1997)).

(30) Andersen, supra, note 1, at 668.

(31) Andersen, supra, note 1, at 668.

(32) Andersen, supra, note 1, at 669 (quoting RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS 215 cmt. a (1998)).

(33) Andersen, supra, note 1, at 668.

(34) Promissory estoppel is the principle that a promise made without consideration may nonetheless be enforced to prevent injustice if the promisor should have reasonably expected the promisee to rely on the promise, and if the promisee did actually rely on the promise to his detriment. BLACK'S LAW DICTIONARY (7th ed. 1999).

(35) Andersen, supra, note 1, at 669 (citing Paradigm Insurance Co. v. Langerman Law Offices, 24 P.3d 593,599-600 (Ariz. 2001)).

(36) Enserch Corp. v. Shand Morahan & Co.,_952 F.2d 1485, 1493 (5th Cir. 1992).

(37) Danny M. Howell, Defense Counsel and Coverage Implications of the Tripartite Relationship, COVERAGE (Vol. 13, No. 7, Nov.--Dec. 2003). The periodical Coverage is produced by the ABA Section of Litigation, Committee on Insurance Coverage Litigation.

(38) Morrison and Old, supra note 2, at 358 (citing G.A. Stowers Furniture Co. v. Am. Indem. Co., 15 S.W.2d 544, 547 (Tex. Comm'n App. 1929); see also Continental Cas. Co. v. Huizar, 740 S.W.2d 429, 434 (Tex. 1987)).

(39) ABA MODEL RULES OF PROFESSIONAL CONDUCT--RULES 1.1, 1.3, AND 1.6 (2001) (discussing the attorney's duty of competence, diligence, and confidentiality in representing a client).

(40) Andersen, supra, note 1, at 648-49 (quoting RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS 121 (1998)).

(41) Langerman, 24 P.3d 593,596 (Ariz. 2001).

(42) Andersen, supra note 1, at 654 (quoting ABA MODEL RULES OF PROFESSIONAL CONDUCT RULE 1.7(8) (2001)).

(43) Joseph W. Ferraro, Conflicts of Interest: Hawaii Supreme Court Rejects Cumis Counsel Doctrine, Mound, Cotton, Wollan & Greengrass Newlsetter (Vol. 8, No. 2) (1999), available at FindLaw.com.

(44) San Diego Navy Fed. Credit Union v. Cumis Ins. Society, Inc., 162 Cal. App. 3d 358 (1984).

(45) Id.

(46) Ferraro, supra note 43. The independent counsel that must be provided by the insurer at the insured's request is called Cumis counsel, after the California case from which the rule originated.

(47) Andersen, supra, note 1, at 654 (citing ABA MODEL RULES OF PROFESSIONAL CONDUCT--RULE 1.7 CMTS. 1-2 (2001)).

(48) Andersen, supra, note 1, at 654 (quoting ABA MODEL RULES OF PROFESSIONAL CONDUCT--RULE 1.7 CMT. 4 (2001)).

(49) Andersen, supra, note 1, at 655 (quoting ABA MODEL RULES OF PROFESSIONAL CONDUCT--RULE 1.7 CMT. 4 (2001)).

(50) Nancy J. Moore, The Ethical Duties' of Insurance Defense Lawyers. Are Special Solutions Required?, 4 CONN. L.J. 277, 259-303 (1997-98) (quoting ABA Model Rules of Professional Conduct--Rule 1.8 (2001)).

(51) Andersen, supra, note 1, at 660 (quoting Thomas D. Morgan, Whose Lawyer Are You Anvway?, 23 WM. MITCHELL L. REV. 11, 24 (1997)).

(52) Andersen, supra, note 1, at 559 (quoting RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS 134 (1998)).

(53) Andersen, supra, note 1, at 650 (citing Eileen M. Dacey, The Delicate Balance of the A ttorney-Client Privilege in the Tripartite Relationship, 602 PLI / Lit 199, 203 (1999)).

(54) Howell, supra note 37.

(55) Morrison and Old, supra note 2, at 383-84; see also Howell, supra note 37.

(56) Andersen, supra, note 1, at 652.

(57) Morrison and Old, supra note 2, at 350.

(58) Howell, supra note 37.

(59) Howell, supra note 37 (citing Ronald E. Mallen and Jeffrey M. Smith, LEGAL MALPRACTICE [section] 29.8 AT 248 (5th ed. 2000)).

(60) Thomas D. Morgan, 4 CONN. INS. L.J. at 4 (quoting ABA MODEL RULES OF PROFESSIONAL CONDUCT--RULE 1.6 (2001)).

(61) Morrison and Old, supra note 2, at 360. The following jurisdictions have case law, ethics rulings, or opinions stating that client consent is required before statements containing confidential information may be submitted to auditors: Alabama, Alaska, Colorado, the District of Columbia, Florida, Hawaii, Indiana, Kentucky, Louisiana, Maryland, Massachusetts, Mississippi, Missouri, Montana, New York, North Carolina, Ohio, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, and Wisconsin.

(62) Jeffrey Jarman, The Tripartite Relationship--Effectively Managing Conflicts of Interest in Insurance Litigation, Converium Reinsurance, Inc. Research (December 1998) (www.converium.com/188.asp). Converium is an independent world-wide reinsurance organization. Mr. Jarman is the Senior Vice President for Converium North America. Among their other tasks, Converium specialists publish research on a broad range of insurance issues.

(63) Allison M. Mizuo, Finley v. Home Ins. Co.: Hawaii's Answer to the Troubling Tripartite Problem, 22 HAWAII L. REV. 675,675-708 (2000).

(64) See also Howell, supra note 37.

(65) See also Howell, supra note 37.

(66) See also Howell, supra note 37.

(67) Morrison and Old, supra note 2, at 394-417 (discussing flat fee arrangements and staff counsel).

(68) Andersen, supra, note 1, at 651 (quoting Michael J. Brady and Heather A. McKee, Ethics in Insurance Defense Context: Isn't Cumis Counsel Unnecessary?, 58 DEF. COUNS. J. 230 (1991)).

(69) Andersen, supra, note 1, at 651 (quoting Charles Silver and Michael Sean Quinn, Are Liability Carriers Second-Class Clients? No. But They Mav Be Soon A Call to Arms Against the Restatement (Third) of the Law Governing Lawyers, COVERAGE (Vol. 6, No. 1, Jan.--Feb. 1996).

(70) Andersen, supra, note 1, at 651 (quoting ABA COMM. ON ETHICS AND PROF'L RESPONSIBILITY, FORMAL OP. 421, at 45 (2001)).

Amber M. Czarnecki attended Michigan State University where she received her Bachelor degree in Business Administration/Pre-Law in 2002. She graduated from Michigan State University College of Law in Mav, 2006, and she was admitted to the Michigan Bar in October, 2006. She is currently employed by State Farm Mutual Automobile Insurance Company where her practice is primarily focused on probate issues involved with insurance litigation. Amber is a member of the American Bar Association and the Oakland County Bar Association. She and her husband, Matt, currently reside in Commerce Township, Michigan. In her spare time, Amber enjoys reading, knitting, watching movies, taking walks with her dog, and spending time with friends and family.
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