Duty to Advise Regarding Settlement

Introduction

Regardless of whether an insurer says accepts full coverage (“Yes”), denies all coverage (“No”), or reserves its rights to later deny coverage (“Maybe”), a conflict of interest may arise among the policyholder, the insurer and their common lawyer if the plaintiff offers to settle the lawsuit for a sum within the policy limit. Both the insurer and dependent counsel have a duty to advise the policyholder regarding settlement opportunities that could affect the policyholder’s interests.

Insurer’s Duty to Advise the Policyholder of Settlement Offers

A liability insurer’s duty of good faith and fair dealing includes an obligation to advise the policyholder of settlement offers. “Every insurance contract contains an implied covenant of good faith and fair dealing. Wrongful failure to defend opens the insurance carrier to liability for the whole amount of the judgment including any amount in excess of the policy limits. Good faith and fair dealing means that each party is prevented from interfering with the other’s right to benefit from the contract. The covenant of good faith and fair dealing is always a prominent issue in the settlement phase of insurance cases because of the possibility of a conflict of interest between the interests of the insurer and the insured. Where a conflict of interests emerges, the carrier has the obligation of protecting the interests of the insured equally with his own. When such a conflict occurs, it arises not at the litigation stage but rather at the moment when a third party claimant offers to settle an excess claim within the policy limits. The measure for determining whether the insured’s interests were properly considered is whether a prudent insurer without policy limits would have accepted the settlement offer. In deciding whether to compromise the claim, the insurer must conduct itself as though it alone were liable for the entire amount of the judgment. The insurer must give informed consent to any offer of settlement and must advise the insured of the offer and the company’s assessment of that offer.”[1]

Dependent Counsel’s Duty to Advise the Policyholder of Settlement Offers

Dependent counsel also has a fiduciary duty to the policyholder/client to advise of settlement offers. “The lawyer’s duty to his client arises from his contractual obligation as well as ethical demands. When a lawyer negligently advises his client, a violation of his duty occurs.”[2] “[S]ince [dependent counsel] was representing two parties with divergent interests, insofar as the settlement of the case was concerned, [dependent counsel] labored under the duty of disclosing all facts and circumstances which, in the judgment of a lawyer of ordinary skill and capacity, were necessary to enable each of his clients to make free and intelligent decisions regarding the subject matter of the representation.”[3]

In one reported case, a plaintiff made a settlement offer for policy limits. Dependent counsel had “no discussion of a possible conflict of interest arising because of the settlement demand. [The policyholder] was told nothing about the known liability problems. [T]he lawyers assured [the policyholder] she would win at trial.”[4] “In accepting employment to render legal services, an attorney impliedly agrees to use such skill, prudence, and diligence as lawyers of ordinary skill and capacity commonly possess, and he is subject to liability for damage resulting from failure so to perform. Furthermore, it is an attorney’s duty to protect his client in every possible way, and it is a violation of that duty for the attorney to assume a position adverse or antagonistic to his client without the latter’s free and intelligent consent given after full knowledge of all the facts and circumstances. The attorney is precluded from assuming any relation which would prevent him from devoting his entire energies to his client’s interest. These traditional obligations of an attorney are in no way abridged by the fact that an insurer employs him to represent an insured. Typically, in such a situation, the attorney in effect has two clients, to each of whom is owed a high duty of care. To the insured, the attorney owes the same obligations of good faith and fidelity as if he had retained the attorney personally. Provided there is full disclosure and consent, an attorney may undertake to represent dual interests. However, whether in the insurer-insured context or otherwise, the attorney who undertakes to represent parties with divergent interests owes the highest duty to each to make a full disclosure of all facts and circumstances which are necessary to enable the parties to make a fully informed decision regarding the subject matter of litigation, including the areas of potential conflict and the possibility and desirability of seeking independent legal advice. The loyalty owed to one client by an attorney cannot consume that owed to the other. Thus a lawyer who, while purporting to continue to represent an insured and who devotes himself to the interests of the insurer without notification or disclosure to the insured, breaches his obligations to the insured and is guilty of negligence.”[5]

“Consequently, if the attorney “attempts dual relationship without making the full disclosure required of him, he is civilly liable to the client who suffers loss caused by lack of disclosure.”[6] “[T]he attorney had no legal right to stipulate away the insured’s rights without his consent. . . . [B]ecause the attorney’s active conduct prejudicially affected the insured’s substantive rights his breach of duty to the insured amounted to legal malpractice.”[7]

“[S]ince [dependent counsel] was representing two parties with divergent interests, insofar as the settlement of the case was concerned, [dependent counsel] labored under the duty of [disclosure] to enable each of his clients to make free and intelligent decisions regarding the subject matter of the representation. [Dependent counsel’s] duty, therefore, included the obligation to attempt to effectuate a reasonable settlement.[8]

Notwithstanding the attorney-client and work product privileges, discovery may be taken against dependent counsel. “While the practice of taking the deposition of opposing counsel should be severely restricted, and permitted only upon showing of extremely good cause . . . in those cases in which an attorney for a party is the sole, or principal, negotiator and in which bad faith is alleged and punitive damages are sought based upon that allegation of bad faith, then we think the facts fall outside attorney-client privilege, and outside the work product rule, and the deposition of the attorney may be taken, subject to all proper objections.”[9]

“Not only was counsel put in the position of representing clients with conflicting positions regarding settlement, one set of clients – the insurers – was seeking to settle the case with the other clients’ money. Under these circumstances, we hold the [policyholders] were entitled to independent counsel at the insurers’ expense to represent them in the settlement negotiations.”[10]


[1] Miller v. Elite Ins. Co. (1980) 100 Cal.App.3d 739, 756 (citations omitted).

[2] Commercial Standard Title Co. v. Superior Court (1979) 92 Cal.App.3d 934, 941.

[3] Lysick v. Walcom (1968) 258 Cal.App.2d 136, 151 (Lysick).

[4] Betts v. Allstate Ins. Co. (1984) 154 Cal.App.3d 688, 703.

[5] Id. at 715-716 (citations and quotation marks omitted).

[6] Novak v. Low, Ball & Lynch (1999) 77 Cal.App.4th 278, 283.

[7] Lysick, supra, 258 Cal.App.2d at 149.

[8] Id. at 151 (ellipses omitted)

[9] Fireman’s Fund Ins. Co. v. Superior Court (1977) 72 Cal.App.3d 786, 790.

[10] Golden Eagle Ins. Co. v. Foremost Ins. Co. (1993) 20 Cal.App.4th 1372, 1396.

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