Presenting a live 90-minute webinar with interactive Q&A 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 WEDNESDAY, FEBRUARY 12, 2014 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Paul R. Walker-Bright, Partner, Reed Smith , Chicago Matthew P . Keris, Shareholder, Marshall Dennehey Warner Coleman & Goggin , Moosic, Pa. 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 .
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Insurance and the Tripartite Relationship: Conflicts of Interests and Right to Independent Counsel Paul Walker-Bright, Esquire pwalkerbright@reedsmith.com Reed Smith LLP Matthew P. Keris, Esquire mpkeris@mdwcg.com Marshall, Dennehey, Warner, Coleman & Goggin
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 or 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 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 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 obligations 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 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 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., 69 th Street and 2 nd 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
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