Pitches and Fallacies of Dependent Counsel – PP

Attorneys have fiduciary obligations of the very highest character, which bind them to the most conscientious fidelity to the client.[1] Like all attorneys, dependent counsel hired by the insurer owes four primary duties to the policyholder: full and fair disclosure,[2] confidentiality,[3] undivided loyalty,[4] and competent representation.[5]

When an insurer reserves its rights to deny coverage to the policyholder, the reservation always creates some conflict of interest between the policyholder and the insurer. Simply put, the reservation of rights says that the insurer wants the policyholder to pay, while the policyholder wants the insurer to pay. Often dependent counsel may telephone the policyholder to orally assure the policyholder not to worry about the insurer’s reservation of rights and not to doubt the lawyer’s trustworthiness. The caller may make one or more of the following pitches. Each is supplemented by legal authorities which may expose the as a fallacy.

 

1.   The Pitch: Let’s talk.

The Fallacy: Mere talk is insufficient.

A lawyer hired by the insurer may call or visit to orally assure the policyholder that the lawyer is trustworthy. But oral communication is insufficient to satisfy ethical obligations. Dependent counsel cannot ethically start work without written disclosure to and informed written consent of the policyholder. Disclosure of potential conflicts of interest must be in writing.[6] The policyholder’s consent to conflicted representation must be in writing.[7] The policyholder may be protected by insisting that the lawyer confirm all oral assurances by following up with a written record that develops admissible, unambiguous evidence. A lawyer that fails to make required written disclosure may not be trustworthy.

2.   The Pitch: We can win this!

The Fallacy: Most cases settle. Plus, there’s a downside to “winning”.

Dependent counsel may appeal to the policyholder’s competitive pride to crush the plaintiff. But the truth is that most cases settle.[8] Such optimism may be tested by asking for a writtten guarantee of success. Also, an insurer funded settlement is not necessarily a win for the policyholder. By reserving its rights, the insurer can sue the policyholder for reimbursement of its cost of settlement because “an insurer may be reimbursed for a reasonable settlement payment made over the objection of its insureds.”[9]

3.   The Pitch: Most of the time, nothing bad happens.

      The Fallacy: But what about this time?

Every time the insurer reserves its rights, the policyholder bears the burden of uncertainty as to who will end up paying. The policyholder may shift the burden of uncertainty back to the insurer by requesting that it withdraw its reservation of rights – now. If it does, coverage is likely assured.[10] If it does not, the policyholder risks loss of coverage in the future while only the insurer is protected.[11]

4.   The Pitch: There’s no harm in waiting.

The Fallacy: Silent acquiescence is dangerous.

Silence in the face of a reservation of rights may constitute a legal acceptance of the terms of the reservation, thereby effectively changing the terms of the policyholder’s contract with the insurer.[12] “The insurer need only notify . . . the assured that it is conducting the . . . defense of the tort claim under a reservation of the right to assert policy defenses at a later time, and the assured’s silence will usually be deemed acquiescence. Courts have in general been fairly liberal in implying reservations.”[13] “An insurer may agree to defend a suit subject to a reservation of rights. In this manner, an ‘insurer meets its obligation to furnish a defense without waiving its right to assert coverage defenses against the insured at a later time.’ By accepting the insurer’s defense under these circumstances, the insured is deemed to have accepted this condition.”[14] “[T]he existence of a conflict of interest should be identified early in the proceedings so it can be treated effectively before prejudice has occurred to either party.”[15]

5.   The Pitch: We’re all in this together.

The Fallacy: One common goal does not eliminate all conflicts of interest.

The defense team of insurer, its lawyer, and the policyholder do want to defeat the plaintiff. (See, fallacy #2.) The defense team often has a harmonious relationship commonly known as the “tripartite relationship.”[16] However, the harmony exists only “absent a conflict of interest.”[17] When the insurer reserves its rights to deny coverage, evidence developed by dependent counsel during the defense can be used against the policyholder to defeat coverage. “The tranquility of this coalition is disturbed . . . where . . . disagreement arises between the members. . . . The situation has changed. Partners have become adversaries. The closely knit fabric of confidentiality is torn and shredded.”[18]

6.   The Pitch: I don’t represent the insurer.

The Fallacy: But dependent counsel does represent the insurer’s interests as a client.

The insurer is not a party named in the lawsuit filed against the policyholder. Therefore, dependent counsel does not technically appear as an attorney of record for the insurer in the lawsuit. But the lawyer still represents the interests of the insurer in the conduct of the lawsuit. Dependent counsel accepts direction from the insurer and reports confidential information to the insurer. As a potential payor, the insurer’s interests will always be substantially affected by the outcome of the lawsuit. Therefore, the insurer has an attorney-client relationship with its lawyer, and its lawyer is obligated to protect the insurer’s interest. “[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. . . . The insurer characteristically engages and pays the attorney to defend the insured.”[19]

7.   The Pitch: My job is limited to defending, not coverage.

The Fallacy: The policyholder needs a lawyer to protect, not ignore coverage?[20]

By reserving its rights, the insurer is warning the policyholder that it wants the policyholder to pay for the lawsuit. The policyholder does not have to be content with a lawyer who will not protect the policyholder fully. “The lawyer’s duty to his client arises from his contractual obligation as well as ethical demands.”[21] Before an attorney may limit the scope of his representation of the policyholder as a client, he must seek and obtain the policyholder’s informed written consent.[22] Dependent counsel should advise the policyholder to consult with independent counsel before giving consent to limited representation.[23] Silent acquiescence can hurt the policyholder. (See fn. 12.)

8.   The Pitch: I’m coverage neutral.

The Fallacy: Neutrality is not protection.

All lawyers owe a duty of undivided loyalty to each client. (See, fn. 4.) Claiming neutrality does not change the fact that if dependent counsel can impact the policyholder’s coverage for good or ill, he or she is not neutral. Ignorance of coverage issues can be dangerous. Dependent counsel who is not aware of all coverage issues might inadvertently disclose information to the insurer which is harmful to the policyholder’s coverage.

9.   The Pitch: Conflict? What conflict?

The Fallacy: The lawyer cannot ethically start work without analyzing conflicts of interest. Feigning ignorance them does not resolve conflicts.

All lawyers have an initial burden of analyzing conflicts of interest. The lawyer cannot ethically start work until conflicts are cleared.[24] A reservation of rights creates conflicts of interest that require dependent counsel to analyze and disclose potential conflicts.[25] Dependent counsel with actual knowledge of a conflict risks discipline by the State Bar. Ethical violations which are “wilful”[26] tend to garner greater punishment. “[T]he rule of disqualification in simultaneous representation cases is a per se or ‘automatic’ one. . . . The reason for such a rule is evident, even (or perhaps especially) to the nonattorney. A client who learns that his or her lawyer is also representing a litigation adversary . . . cannot long be expected to sustain the level of confidence and trust in counsel that is one of the foundations of the professional relationship. All legal technicalities aside, few if any clients would be willing to suffer the prospect of their attorney continuing to represent them under such circumstances.”[27]

10. The Pitch: There is no “actual” conflict of interest.

The Fallacy: Ethics require disclosure and consent for potential conflicts.

The California Rules of Professional Conduct are clear: “A member 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.”[28] While some cases say that an insurer does not have to pay for the policyholder’s independent lawyer unless the conflict is actual and significant, not potential and theoretical,[29] no cases excuse dependent counsel from adherence to ethical rules. Also, the leading case noted that “a distinction between ‘potential’ and ‘actual’ conflicts of interest which is invalid and unworkable.”[30]

11. The Pitch: I’ll favor you over the insurer.

The Fallacy: Money is the root of all evil.

The life blood of an insurance defense firm is insurance companies. Future revenues depend on keeping the insurer happy. In contrast, neither the policyholder nor any other policyholder has and never will pay dependent counsel a dime. Yes, “[t]he attorney’s primary duty has been said to be to further the best interests of the insured.”[31] “A different situation is presented, however, when some or all of the allegations in the complaint do not fall within the scope of coverage under the policy. . . . Opposing poles of interest are represented.”[32]

12. The Pitch: I’m free.

The Fallacy: The policyholder may end up paying.

While the policyholder does not directly pay dependent counsel at the outset, the policyholder may end up being financially responsible for these fees and costs. By reserving its rights, the insurer can sue the policyholder for reimbursement of its cost of defense.[33] Dependent counsel may not ethically accept compensation from the insurer without the policyholder’s informed written consent.[34]

13. The Pitch: Hire some other lawyer to protect you from me.

The Fallacy: Why should the policyholder pay?

Nothing in ethics or law relieves a conflicted lawyer of ethical violations because another lawyer also represents the client.[35] While a statute permits dependent counsel to participate in litigation under certain circumstances, the statute itself reassures clients that lawyers must behave ethically.[36] An attorney is the client’s agent on matters for which the attorney is employed, so that the client may be bound by the attorney’s acts.[37] Also, the policyholder paid premiums with a reasonable expectation that the policyholder’s insurer would provide to the policyholder an ethical lawyer.

14. The Pitch: So prove it.

The Fallacy: No, dependent counsel should prove it.

Dependent counsel has the legal duty to advise the policyholder about conflicts of interest, not the other way around. “The rationale is that, as between the lay client and the attorney, the latter is more qualified to recognize and analyze the client’s legal needs.”[38] “One of an attorney’s basic functions is to advise. Liability can exist because the attorney failed to provide advice. Not only should an attorney furnish advice when requested, but he or he should also volunteer opinions when necessary to further the client’s objectives.”[39] There is no reciprocal duty by the client to prove to the lawyer an absence of conflict. Because dependent counsel cannot accept the job without written disclosure and informed written consent, the burden of avoiding conflicts rests on the lawyer alone. The attorney has “an independent ethical obligation to disclose the conflict to [the clients] and either obtain written waivers of the conflict or withdraw.”[40] If the policyholder sues dependent counsel, the policyholder will have an initial burden of proof[41] to show that dependent counsel failed to comply with Rule 3-310.

15. The Pitch: You can’t fire me.

The Fallacy: Oh, yes I can.

Clients have the absolute right to terminate their lawyer’s services at any time with or without cause: “The relation between them is such that the client is justified in seeking to dissolve that relation whenever he ceases to have absolute confidence in either the integrity or the judgment or the capacity of the attorney.”[42]

16. The Pitch: You can’t stop me!

The Fallacy: Oh, yes I can.

One tool to compel ethical compliance by dependent counsel is to expressly withhold authorization to appear[43] and consent to representation. (See, fn, 7.) The policyholder’s ultimate power rests with the right to give testimony, upon which both liability and coverage may depend. If necessary, the policyholder may also file a motion to disqualify conflicted dependent counsel.

17. The Pitch: My firm will continue, even if I quit.

The Fallacy: Oh, no it won’t.

“[W]here an attorney is disqualified because he formerly represented and therefore possesses confidential information regarding the adverse party in the current litigation, vicarious disqualification of the entire firm is compelled as a matter of law.”[44] “[A]n attorney continues to owe a former client a fiduciary duty even after the termination of the relationship. [A]n attorney is forever forbidden from using, against the former client, any information acquired during such relationship, or from acting in a way which will injure the former client in matters involving such former representation. These duties continue after the termination of the relationship in order to protect the sanctity of the confidential relationship between and attorney and client.”[45] “Once the moving party in a motion for disqualification has established that an attorney is tainted with confidential information, a rebuttable presumption arises that the attorney shared that information with the attorney’s law firm.”[46]

18. The Pitch: The next firm appointed by the insurer will be the same.

The Fallacy: And it too must behave ethically.

All attorneys are subject to the same rules, including any new lawyers. The policyholder need not have trust in dependent counsel unless the conflicted lawyer earns it.



[1] “Few precepts are more firmly entrenched than the fiduciary nature of the attorney-client relationship, which must be of the highest character.” (Styles v. Mumbert (2008) 164 Cal.App.4th 1163, 1167 (“Styles”).)

[2] “The duty of a fiduciary embraces the obligation to render a full and fair disclosure to the beneficiary of all facts which materially affect his rights and interests. Where there is a duty to disclose, the disclosure must be full and complete, and any material concealment or misrepresentation will amount to fraud. [A]lthough the defendant makes no active misrepresentation, this element is supplied by an affirmative obligation to make full disclosure, and the non-disclosure itself is a ‘fraud.’” (Neel v. Magana, Olney, Levy, Cathcart & Gelfand (1971) 6 Cal.3d 176, 188-189 (Neel) (citations, ellipses, and quotations marks omitted)); See, Article: Duty of Disclosure.

[3] “It is the duty of an attorney to do all of the following: (e) (1) To maintain inviolate the confidence, and at every peril to himself or herself to preserve the secrets, of his or her client.” (Bus. & Prof. Cd. . §6068(e).) “One of the principal obligations which bind an attorney is that of fidelity, the maintaining inviolate the confidence reposed in him by those who employ him, and at every peril to himself to preserve the secrets of his client.” (Anderson v. Eaton (1930) 211 Cal. 113, 116); See, Article: Duty of Confidentiality.

[4] “An attorney’s duty of loyalty to a client is not one that is capable of being divided, at least under circumstances where the ethical obligation to withdraw from further representation of one of the parties is mandatory, rather than subject to disclosure and client consent.” (Flatt v. Superior Court (1994) 9 Cal.4th 275, 282 (Flatt)); See, Article: Duty of Undivided Loyalty.

[5] “[T]he special obligation of the professional is exemplified by his duty not merely to perform his work with ordinary care but to use the skill, prudence, and diligence commonly exercised by practitioners of his profession.” (Neel, supra, 6 Cal.3d at 188); See, Article: Duty of Competent Representation.

[6] “A member shall not accept or continue representation of a client without providing written disclosure to the client where: (3) The member has [a] relationship with another . . . entity [ie. the insurer] the member knows or reasonably should know would be affected substantially by resolution of the matter.” (Rule 3-310(B).)

[7] “A member 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.” (Rule 3-310(C)(1)(2).)

[8] Judicial Counsel statistics show that as few as 4% of some kinds of cases go to trial.

[9] Blue Ridge Ins. Co. v. Jacobsen (2001) 25 Cal.4th 489, 492 (Blue Ridge).

[10] “[T]he insurer’s unconditional defense of an action brought against its insured constitutes a waiver of the terms of the policy and an estoppel of the insurer to assert such grounds [to deny coverage].” (Miller v. Elite Ins. Co. (1980) 100 Cal.App.3d 739, 754.)

[11] “An insurer may agree to defend a suit subject to a reservation of rights. In this manner, an insurer meets its obligation to furnish a defense without waiving its right to assert coverage defenses against the insured at a later time.” (Blue Ridge, supra, 25 Cal.4th at 497 (citation and quotation marks omitted).)

[12] See, Article: Acquiescence Is Dangerous.

[13] Val’s Painting & Drywall, Inc. v. Allstate Ins. Co. (1975) 53 Cal.App.3d 576, 586.

[14] Blue Ridge, supra, 25 Cal.4th at 497-498.

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

[16] See, Article: Three Way Relationship – Harmony or Dissonance.

[17] Gafcon, Inc. v. Ponsor & Associates (2002) 98 Cal.App.4th 1388, 1406.

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

[19] State Farm Mutual Automobile Ins. Co. v. Federal Ins. Co. (1999) 72 Cal.App.4th 1422, 1428-29.

[20] “To defend meaningfully, the insurer must defend immediately [and] entirely.” (Buss v. Superior Court (1997) 16 Cal.4th 35, 49 (Buss).

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

[22] ABA Model Rule 1.2(c) (limited representation requires client’s informed consent); Janik v. Rudy, Exelrod & Zieff (2004) 119 Cal.App.4th 930, 940.

[23] Nichols v. Keller (1993) 15 Cal.App.4th 1672, 1684 (Nichols).

[24] See, fn. 7.

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

[26] See, Phillips v. State Bar (1989) 49 Cal.3d 944, 952.

[27] Flatt, supra, 9 Cal.4th 275, 284-285.

[28] See, fn. 7.

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

[30] Cumis, supra, 162 Cal.App.3d at 371, fn.7.

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

[32] Cumis, supra, 162 Cal.App.3d at 364; See, text at fn. 16.

[33] “[M]ay the insurer seek reimbursement from the insured for defense costs? Yes.” (Buss, supra, 16 Cal.4th at 51-52.)

[34] “A member shall not accept compensation for representing a [policyholder ]-client from one other than the client [ie. insurer] unless: (3) The member obtains the client’s informed written consent.” (Rule 3-310(F).)

[35] See footnotes 7 and 22.

[36] “[C]ounsel provided by the insurer . . . shall be allowed to participate in all aspects of the litigation. . . that is consistent with each counsel’s ethical and legal obligation to the insured.” (Civ. Cd. §2860 (f).)

[37] Cd. Civ. Proc. §283; Blanton v. Womancare, Inc. (1985) 38 Cal.3d 396, 403.

[38] Nichols, supra, at 1685.

[39] Id., at 1684-1685; See Article: Duty to Advise.

[40] Berger, Kahn, supra, 79 Cal.App.4th at 132.

[41] Ev. Cd. §500.

[42] Fracasse v. Brent (1972) 6 Cal.3d 784, 790; See, Article: Client May Fire Attorney.

[43] “Corruptly or wilfully and without authority appearing as attorney for a party to an action or proceeding constitutes a cause for disbarment or suspension.” (Bus. & Prof. Cd. §6104.)

[44] Flatt, supra, 9 Cal.4th at 283.

[45] Styles, supra, 164 Cal.App.4th at 1167 (Citations and ellipses omitted.)

[46] Kirk v. First American Title Ins. Co. (2010) 183 Cal.App.4th 776, 809-810.

Please enter your email address in order to view this page.
Your email address will not be sold to or shared with third parties.
DutytoDefend.com