Non-delegable Duty to Comply with Rule 3-310

Introduction

The California Rules of Professional Conduct adopted by the California Supreme Court regulate the conduct of all California attorneys. Because dependent counsel always represents both the policyholder and the insurer[1] and is financially beholden to the insurer[2], they must analyze potential conflicts of interest, make written disclosure to both the policyholder and the insurer, and obtain informed written consent of both when the insurer reserves its rights to deny coverage.[3] Dependent counsel are not exempt from this non-delegable Rule 3-310.[4] Dependent counsel may not pass off to the policyholder, the insurer, the insurer’s coverage counsel, nor anyone else the duty to behave ethically.

Rule 3-310

Rule 3-310 governs an attorney’s obligation to avoid representation of adverse interests. This rule is morally rooted in the Bible: “No one can serve two masters. Either you will hate the one and love the other, or you will be devoted to the one and despise the other.” (Matthew 6:24.) “The mandatory rule of disqualification in cases of dual representations involving unrelated matters – analogous to the biblical injunction against ‘serving two masters’ (Matthew 6:24) – is such a self-evident one that there are few published appellate decisions elaborating on it.” (Flatt v. Superior Court (1994) 9 Cal.4th 275, 286.)

Rule 3-310 has three major elements: lawyer analysis, written disclosure and informed written consent. The ban on representing dual parties with conflicting interests always applies when a liability insurer reserves its rights to later deny coverage because a liability insurer is always affected substantially by resolution of the lawsuit. “A [lawyer] shall not accept or continue representation of a client without providing written disclosure to the client where: (3) The [lawyer] has or had a relationship with another entity [such as a liability insurer] the [lawyer] knows or reasonably should know would be affected substantially by resolution of the matter.”[5]

Analysis of Potential Conflicts

An ethical lawyer must inform his or her clients “of the relevant circumstances and of the actual and reasonably foreseeable adverse consequences” of representing both the interests of the insurer and a policyholder as a litigant.[6] “We conclude the Canons of Ethics impose upon lawyers hired by the insurer an obligation to explain to the insured and the insurer the full implications of joint representation in situations where the insurer has reserved its rights to deny coverage.”[7] “The potential for conflict requires a careful analysis of the parties’ respective interests to determine whether they can be reconciled.”[8] “There is no talismanic rule that allows a facile determination of whether a disqualifying conflict of interest exists. Instead, [t]he potential for conflict requires a careful analysis of the parties’ respective interests to determine whether they can be reconciled [or it] precludes insurer-appointed defense counsel from presenting a quality defense for the insured.”[9]

An ethical lawyer’s duty to do an analysis applies equally to “potential” and “actual” conflicts of interest, even though the Rule does not define the difference. “[A]n attorney may not accept representation if there is a potential conflict; it does not require an actual conflict.”[10] “[A] distinction between ‘potential’ and ‘actual’ conflicts of interest which is invalid and unworkable.”[11] A [lawyer] shall not, without the informed written consent of each client: (1) Accept representation of more than one client in a matter in which the interests of the clients potentially or actually conflict.”[12] “A conflict of interest is potential if there is no present actual conflict of interest, but there is a possibility of an actual conflict arising in the future, resulting from developments that have not yet occurred or facts that have not yet become known.” (In re Jaeger 213 B.R. 578 (Bkrtcy. C.D. Cal. 1997).) “Rule 3-310 applies when the interests of the clients are directly adverse or potentially adverse.”[13]

While the Dynamic Concepts line of cases[14] states that “[t]he conflict must be significant, not merely theoretical, actual, not merely potential”[15], this dicta has been applied only to cases interpreting contract law between the policyholder and the insurer, not the Canons of Ethics governing dependent counsel.

Written Disclosure

The rule defines “disclosure” as informing the client of the ethical lawyer’s analysis of the relevant circumstances and foreseeable adverse consequences. An ethical lawyer “shall not accept or continue representation of a client without providing written disclosure to the client where: The [lawyer] has or had a financial relationship with another entity the [lawyer] knows or reasonably should know would be affected substantially by resolution of the matter.”[16] The attorney has “an independent ethical obligation to disclose the conflict to [the clients] and either obtain written waivers of the conflict or withdraw.”[17]

Dependent Counsel Always Has a Financial Relationship With the Insurer

The financial dependence of attorney’s regularly hired by liability insurers is well recognized in California law. “As a practical matter in reality, the insurer’s attorneys may have closer ties with the insurer and a more compelling interest in protecting the insurer’s position, whether or not it coincides with what is best for the insured.”[18]Insurance companies hire relatively few lawyers and concentrate their business. A lawyer who does not look out for the Carrier’s best interest might soon find himself out of work.”[19] “[D]efense counsel and the insurer frequently have a longstanding, if not collegial, relationship”.[20] “In California, an attorney may usually, under minimum standards of professional ethics, represent dual interests as long as full consent and full disclosure occur.”[21]

A Liability Insurer Is Always Affected Substantially

By its very nature, a liability insurance policy is a contract of indemnity by which the policyholder “is entitled to recover [from the liability insurer] upon becoming liable [to an injured plaintiff by entry of judgment].”[22] Contracts of indemnity are unique in the law since they forfeit a measure of procedural due process by agreeing to be bound by the outcome of a lawsuit to which they are not a party. The doctrine of collateral estoppel applies “in order to promote judicial economy by minimizing repetitive litigation, to prevent inconsistent judgments which undermine the integrity of the judicial system, or to protect against vexatious litigation”[23] “[T]he judgment in the underlying action is conclusive as to the insurer’s liability if factual matters upon which the issue of coverage turns are expressly or impliedly determined in the prior action such determinations bind the insurer in the subsequent suit to enforce the provisions of the policy.”[24]

The “Highest Duty” of Disclosure

“[T]he 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.”[25] If dependent counsel fails to advise the insured of a conflict that has arisen, the attorney may be personally liable for resulting damages in a malpractice action and may be subject to disciplinary proceedings for professional misconduct.[26]

Informed Written Consent

“‘Informed written consent’ means the client’s or former client’s written agreement to the representation following written disclosure.”[27] A lawyer “shall not, without the informed written consent of each client: (1) Accept representation of more than one client in a matter in which the interests of the clients potentially conflict;[28] or actually conflict;[29] or Represent a client in a matter and at the same time in a separate matter accept as a client a person or entity whose interest in the first matter is adverse to the client in the first matter.”[30]

If a potential or actual conflict[31] exists, dependent counsel must comply with Rule 3-310. “If the insured does not give an informed consent to continued representation, counsel must cease to represent both.”[32]

Compensation

“A [lawyer] shall not accept compensation for representing a [policyholder/client] from one other than the client [liability insurer] unless: (1) There is no interference with the [lawyer]’s independence of professional judgment or with the client-lawyer relationship; and (2) [confidential] Information relating to representation of the client is protected; and (3) The [lawyer] obtains the client’s informed written consent.”[33]

Non-Delegable Duty to Comply

Rule 3-310 expresses mandatory obligations of an ethical lawyer. “‘Shall’ is mandatory and ‘may’ is permissive.”[34] Rule 3-310 mandatorily prohibits accepting employment without informed written consent. “A [lawyer] shall not accept or continue representation of a client without providing written disclosure to the client.”[35] “A [lawyer] shall not, without the informed written consent of each client: (1) Accept representation of more than one client in a matter in which the interests of the clients potentially conflict; or (2) Accept or continue representation of more than one client in a matter in which the interests of the clients actually conflict.”[36] “A [lawyer] shall not accept compensation for representing a client from one other than the client unless (3) The [lawyer] obtains the client’s informed written consent.”[37]

The Difference Between Independent Counsel and Dependent Counsel

The difference between dependent counsel and independent counsel[38] is that independent counsel does not represent the insurer while dependent counsel represents both the insurer and the policyholder, as a matter of law[39].

Formation of Attorney-Client Relationship

“It is elementary that the relationship between a client and his retained counsel arises from a contract, whether written or oral, implied or expressed. An attorney-client relationship can be formed though no retainer is signed or no fees are paid. When a party seeking legal advice consults an attorney at law and secures that advice, the relation of attorney and client is established prima facie.”[40]

Independent Counsel Represents Only the Policyholders

Cumis counsel represents the insured, not the insurer.”[41] Thus, the insurer’s assertion of a reservation of rights does not create a duty for independent counsel to comply with Rule 3-310. However, Cumis counsel should maintain independence from the insurer by avoiding any direct financial agreement with the insurer for payment of Cumis fees and costs. Instead, Cumis counsel may advise the insurer to discharge the insurer’s obligation to provide a defense by honoring an attorney’s lien[42] created by a retainer agreement between the policyholder and Cumis counsel.[43]

Dependent Counsel Always Represents Two Clients

“Between the attorney and the insurer who retained the attorney and paid for the defense, there exists a separate attorney-client relationship. [T]he attorney has a dual attorney-client relationship with insurer and insured. In analyzing this attorney- insurer-insured relationship, the courts have acknowledged that, as a practical matter, the attorney may have closer ties with the insurer than with the insured.”[44] “[T]he attorney [dependent counsel] has two clients.”[45] “[T]he attorney represents two clients, the insured and the insurer, and he owes to both a high duty of care imposed by statute and the rules governing professional conduct.”[46] ” (State Farm Mut. Auto. Ins. Co. v. Federal Ins. Co. (1999) 72 Cal.App.4th 1422, 1428-1429)[47]

A Reservation of Rights Triggers a Duty to Comply with Rule 3-310

“In some cases, there is a potential conflict of interest between the insurer and the insured. Usually, these conflicts involve the insured trying to obtain coverage and the insurer trying to avoid it. When this happens, defense counsel may not be permitted to represent both the insurer and the insured.”[48] “[O]nce the insurer decides to assert a coverage defense, the same attorney may not represent both the insured and the insurer.”[49] “[W]hen coverage is disputed, the interests of the insured and the insurer are always divergent.”[50]

[1] Dependent Counsel Always Represents the Insurer.

[2] Dependent Counsel Is Beholden to the Insurer.

[3] Duty of Disclosure.

[4] Dependent Counsel Is Not Exempt from Rule 3-310.

[5] Rule 3-310(B)(3) (ellipses omitted).

[6] Duty to Analyze Conflicts.

[7] San Diego Navy Fed. Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358, 375 (Cumis).

[8] Dynamic Concepts, Inc. v. Truck Ins. Exchange (1998) 61 Cal.App.4th 999, 1007-08.

[9] Gulf Ins. Co. v. Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone (2000) 79 Cal.App.4th 114, 131 (Berger, Kahn).

[10] In re Celine R. (2003) 31 Cal. 4th 45, 57 (Celine R).

[11] San Diego Navy Fed. Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358, 371, fn.7.

[12] Rule 3-310(C)(1)(2) (ellipses omitted).

[13] Sharp v. Next Entertainment, Inc. (2008) 163 Cal.App.4th 410, 426 (ellipsis omitted).

[14] Dynamic Concepts Line of Cases.

[15] Id. at 1006.

[16] Rule 3-310 (ellipses omitted).

[17] Berger, Kahn, supra, 79 Cal.App.4th at 132; see, Cumis, supra, 162 Cal.App.3d at 375.

[18] Purdy v. Pacific Automobile Ins. Co.(1984) 157 Cal.App.3d 59, 76 (ellipsis omitted).

[19] San Diego Navy Fed. Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358, 364.

[20] Gulf Ins. Co. v. Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone (2000) 79 Cal.App.4th 114, 131.

[21] Lysick v. Walcom (1968) 258 Cal.App.2d 136, 147; See, also Ishmael v. Millington (1966) 241 Cal.App.2d 520, 528; Industrial Indem. Co. v. Great American Ins. Co. (1977) 73 Cal.App. 3d 529, 537.

[22] Civ. Code § 2778(1).

[23] Clemmer v. Hartford Ins. Co. (1978) 22 Cal.3d 865, 875.

[24] Hogan v. Midland National Ins. Co. (1970) 3 Cal.3d 553, 565 (citations omitted).

[25] Betts v. Allstate Ins. Co. (1984) 154 Cal.App.3d 688, 716 (citations, quotation marks, and ellipses omitted).

[26] Lysick v. Walcom (1968) 258 Cal.App.2d 136, 148; Purdy v. Pacific Auto. Ins. Co. (1984) 167 Cal.App.3d 59, 77; “[W]ithout authority appearing as attorney for a party to an action or proceeding constitutes a cause for disbarment or suspension.” (Bus. & Prof. Code § 6104.)

[27] Rule 3-310(A)(2).

[28] The Supreme Court has made clear that the rule is not limited to actual conflicts. “[A]n attorney may not accept representation if there is a potential conflict; it does not require an actual conflict.” (Celine R, supra, 31 Cal. 4th at 57.)

[29] “A conflict of interest is potential if there is no present actual conflict of interest, but there is a possibility of an actual conflict arising in the future, resulting from developments that have not yet occurred or facts that have not yet become known.” (In re Jaeger 213 B.R. 578 (Bkrtcy. C.D. Cal. 1997).)

[30] Rule 3-310(C).

[31] Cumis, supra, 162 Cal.App.3d at 371, fn. 7 (“[A] distinction between ‘potential’ and ‘actual’ conflicts of interest is invalid and unworkable. Recognition of a conflict cannot wait until the moment a tactical decision must be made during trial. It would be unfair to the insured and generally unworkable.” (Ellipsis omitted.)

[32] Cumis, supra, 162 Cal.App.3d at 375.

[33] Rule 3-310(F) (ellipsis omitted).

[34] In re Manzy W (1997) 14 Cal.4th 1199, 1204.

[35] Rule 3-310(B).

[36] Rule 3-310(C).

[37] Rule 3-310(F) (ellipsis omitted).

[38] Difference Between Dependent Counsel and Independent Counsel.

[39] The insurer and its lawyer had “an attorney-client relationship as a matter of law.” (Berger, Kahn, supra, 79 Cal.App.4th at 127.

[40] Berger, Kahn, supra, 79 Cal.App.4th at 126.

[41] Assurance Co. of America v. Haven (1995) 32 Cal.App.4th 78, 83 (Haven) (ellipses omitted).

[42] Attorney Liens

[43] Cumis Counsel Retainer Agreement.

[44] State Farm Mut. Auto. Ins. Co. v. Federal Ins. Co. (1999) 72 Cal.App.4th 1422, 1428-29 (emphasis added and ellipses omitted).

[45] American Mut. Liab. Ins. Co. v. Superior Court (Nork) (1974) 38 Cal.App.3d 579, 592.

[46] Lysick v. Walcom (1968) 258 Cal.App.2d 136, 146 (citation omitted).

[47] State Farm Mut. Auto. Ins. Co. v. Federal Ins. Co. (1999) 72 Cal.App.4th 1422, 1428-1429 (ellipses omitted.)

[48] Haven, supra, 32 Cal.App.4th at 84 (citations and ellipses omitted.)

[49] Cumis, supra, 162 Cal.App.3d at 374.

[50] Id. at 375.

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