Insurance and the Tripartite Relationship: Conflicts of Interests - - PowerPoint PPT Presentation

Insurance and the Tripartite Relationship: Conflicts

• f Interests and Right to Independent Counsel

Best Practices for Identifying, Avoiding and Resolving Conflicts When the Parties' Interests Diverge 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, 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.

Sound Quality If you are listening via your computer speakers, please note that the quality

• f your sound will vary depending on the speed and quality of your internet

connection. If the sound quality is not satisfactory, you may listen via the phone: dial 1-866-927-5568 and enter your PIN when prompted. Otherwise, please send us a chat or e-mail sound@straffordpub.com immediately so we can address the problem. If you dialed in and have any difficulties during the call, press *0 for assistance. Viewing Quality To maximize your screen, press the F11 key on your keyboard. To exit full screen, press the F11 key again.

FOR LIVE EVENT ONLY

For CLE purposes, please let us know how many people are listening at your location by completing each of the following steps:

• In the chat box, type (1) your company name and (2) the number of

attendees at your location

• Click the SEND button beside the box

If you have purchased Strafford CLE processing services, you must confirm your participation by completing and submitting an Official Record of Attendance (CLE Form). You may obtain your CLE form by going to the program page and selecting the appropriate form in the PROGRAM MATERIALS box at the top right corner. If you'd like to purchase CLE credit processing, it is available for a fee. For additional information about CLE credit processing, go to our website or call us at 1-800-926-7926 ext. 35.

FOR LIVE EVENT ONLY

If you have not printed the conference materials for this program, please complete the following steps:

• Click on the ^ symbol next to “Conference Materials” in the middle of the left-

hand column on your screen.

• Click on the tab labeled “Handouts” that appears, and there you will see a

PDF of the slides for today's program.

• Double click on the PDF and a separate page will open.
• Print the slides by clicking on the printer icon.

FOR LIVE EVENT ONLY

Paul Walker-Bright, Esquire pwalkerbright@reedsmith.com Reed Smith LLP Matthew P. Keris, Esquire mpkeris@mdwcg.com 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

6

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

• r desirable

 Understand how coverage

can be affected by the tripartite relationship and conflicts of interest

7

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

• f 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

10

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

11

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

• bligations voluntarily

 Insurer pays for defense

12

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

• n 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

13

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

14

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?

16

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)

17

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

18

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

19

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?

20

Punitive Damages



Carrier Interests:

 No coverage because of

exclusionary language of policy

• r 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

• f personal counsel

 One goal: avoid personal

exposure.



Attorney Issues:

 Interests may diverge when best

trial tactic may be to admit liability

21

Restrictions of Defense Efforts and Expense



Insurer obligation limited to “reasonable” fees and costs (Model Rule 1.5)



Carrier Interests:



Guidelines provide uniformity and

• utlines 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

• r 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

• r refuses to pay for defense work

during the pendency of the file.



Failure to rectify issue may result in withdrawal. 22

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

23

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

24

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

• bligations to favor

insurer

25

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

26

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 27

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?

28

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

29

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

30

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).

31

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

32

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

• ther law.

(b) A lawyer shall explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation.

33

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)

34

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

• nly 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

38

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

• f 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.

41

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.

42

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.

43

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

• ther 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.

44

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

• ne 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.

45

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

46

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.

47