MEMORANDUM OF LAW

CONFLICTS OF INTEREST

INTRODUCTION

A conflict of interest may arise in any situation in which a person has a duty to more than one person or organization, but cannot do justice to the actual or potentially adverse interests of both parties. California law governing conflicts of interest between an insurer and its policyholder is distinct from the law governing conflicts of interest between an attorney and client. However, these two bodies of law are symbiotic since an attorney cannot represent dual clients whose interests conflict and an insurer must provide independent counsel if dependent counsel has unresolved ethically conflicts representing both the insurer and the policyholder.1

An insurer has fiduciary like obligations to its policyholder, which preclude the insurer from interfering with the policyholder's rights.2 The insurer's fiduciary obligations arise from the contract of insurance, statutes and regulations and decisional law of bad faith.3

Separately, an attorney cannot represent two clients whose interests potentially or actually conflict.4 An attorney's fiduciary obligations to a client are governed by a separate body of law, including the State Bar Act, Rules of Professional Conduct, and decisional law.

CONFLICTS OF INTEREST BETWEEN INSURER AND POLICYHOLDER

While insurer conflicts of interest commonly arise when an insurer reserves it rights to deny coverage to its policyholder,5 conflicts may arise in a variety of way. "Some of the circumstances that may create a conflict of interest requiring the insurer to provide independent counsel include: (1) where the insurer reserves its rights on a given issue and the outcome of that coverage issue can be controlled by the insurer's retained counsel; (2) where the insurer insures both the plaintiff and the defendant; (3) where the insurer has filed suit against the insured, whether or not the suit is related to the lawsuit the insurer is obligated to defend; (4) where the insurer pursues settlement in excess of policy limits without the insured's consent and leaving the insured exposed to claims by third parties; and (5) any other situation where an attorney who represents the interests of both the insurer and the insured finds that his or her representation of the one is rendered less effective by reason of his [or her] representation of the other.'"6

"But not every reservation of rights entitles an insured to select Cumis counsel."7 "A disqualifying conflict exists if insurance counsel had . . . incentive to attach liability to [the insured]."8 "It is only when the basis for the reservation of rights is such as to cause assertion of factual or legal theories which undermine or are contrary to the positions to be asserted in the liability case that a conflict of interest sufficient to require independent counsel, to be chosen by the insured, will arise."9

Broad reservations of rights almost always create disqualifying conflicts since coverage may be denied based on issues of substance in the third party liability suit. "Of course, the insurer may have more than one defense to coverage. In that event, the trial court will need to consider each defense separately to decide whether it can be determined without prejudice to the insured and whether it is amenable to resolution by summary judgment or summary adjudication."10

CONFLICTS OF INTEREST BETWEEN ATTORNEY AND CLIENT

An attorney cannot represent two clients whose interests conflict without analyzing the conflict,11 making written disclosure, and obtaining the informed written consent of both clients.12 "The paradigm case requiring independent counsel is one in which the way counsel retained by the insurance company defends the action will affect an underlying coverage dispute between the insurer and the insured."13

Dependent counsel always represents the insurer as a client even though the insurer is not technically a party to the policyholder lawsuit.14 Dependent counsel represents the interests of the insurer and is beholden to the insurer.15 The difference between dependent counsel and independent counsel is that the latter represents only the policyholder. The phrase "dependent counsel" describes the counterpart to "independent counsel." This moniker acknowledges that "[a]s 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"16, "[i]nsurance 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."17 and "defense counsel and the insurer frequently have a longstanding, if not collegial, relationship".18 "In California, an attorney may usually, under minimum standards of professional ethics, represent dual interests as long as full consent and full disclosure occur."19 Some dependent counsel may incorrectly assert that they are exempt from compliance with Rule 3-310.20 A client who is concerned that dependent counsel may have unresolved conflicts of interest may inquire of the lawyer, who must respond.21 Because dependent counsel are usually reliant upon insurers for their livelihood, some will offer a series of excuses why they have no conflicts of interest, many of which are erroneous.22

"A conflict of interest between jointly represented clients exists whenever their common lawyer's representation of the one is rendered less effective by reason of his representation of the other. [T]he existence of a conflict depends upon the grounds on which the insurer is denying coverage. [W]here the reservation of rights is based on coverage disputes which have nothing to do with the issues being litigated in the underlying action, there is no conflict of interest requiring independent counsel."23

"Conflicts [of interest] come in all shapes and sizes. The following list, by no means exhaustive, illustrates circumstances giving rise to a conflict: ¶ (1) counsel has divided loyalty between current client and former clients; ¶ (2) counsel has acquired a pecuniary interest which is adverse to the interests of the client; ¶ (3) unpaid fees to counsel may result in the sacrifice of important client rights; . . . ¶ (5) there is a conflict between the interest of the insurer and the insured which in turn creates a conflict for counsel hired by the insurer to represent the insured; . . . ¶ (7) there has been an irreparable breakdown of the working relationship between counsel and client; ¶ (8) counsel plans to take on the role as a witness; ¶ (9) there have been settlement negotiations in which attorney's fees are recoverable apart from the amount sought for damages."24