THREE-WAY RELATIONSHIP:

HARMONY OR DISSONANCE

Introduction

When a defendant has liability insurance, the insurer often hires dependent counsel who is beholden to the insurer.1 Dependent counsel are attorneys that the insurer knows and trusts who are hired to protect its interests in the lawsuit. If the insurer concedes coverage for the lawsuit, a mostly harmonious defense team usually emerges consisting of the insurer as financier, its lawyer as advocate, and the policyholder as witness. When the insurer concedes coverage, the resulting harmony is analogous to the spirit of the Three Musketeers: "All for one and one for all." But, if conflicts of interest erupt between the policyholder and the insurer which reserves its rights to deny coverage, discord may undermine the harmony of the defense team. The "one for all" spirit may dissolve into a free-for-all. When the insurer reserves its right2 to later deny coverage, the resulting dissonance is analogous to a cheating husband who professes fidelity for his mistress, but who will never leave his wife. This dichotomy invokes Matthew 6:24: "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. You cannot serve both God and money."

Dependent Counsel

The succinct moniker "dependent counsel" 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"3 "[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"4 and "defense counsel and the insurer frequently have a longstanding, if not collegial, relationship".5 "In California, an attorney may usually, under minimum standards of professional ethics, represent dual interests as long as full consent and full disclosure occur."6

Harmony - No Conflicts of Interest

When a defendant's liability insurer unconditionally accepts both of its two primary duties to defend and to indemnify, it effectively concedes coverage.7 The policyholder, insurer, and shared lawyer may join in the "tripartite relationship." Harmony usually prevails because it is understood that the insurer alone will pay.8 Technically, dependent counsel still represents dual clients, but need not comply with Rule 3-310 if the two clients' interests do not conflict. However, even when an insurer concedes full coverage, the insurer and policyholder may have conflicting interests if the policyholder's exposure may exceed the policy limit and if the plaintiff alleges punitive damages.9 These potential conflicts of interest should require dependent counsel to comply with Rule 3-310.10 However, there is no know case law addressing this obligation, as most of the time dependent counsel's technical violation of Rule 3-310 causes not harm because the insurer pays for everything, except a modest deductible.

"In California, it is settled that absent a conflict of interest, an attorney retained by an insurance company to defend its insured under the insurer's contractual obligation to do so represents and owes a fiduciary duty to both the insurer and insured. So long as the interests of the insurer and the insured coincide, they are both the clients of the defense attorney and the defense attorney's fiduciary duty runs to both the insurer and the insured. [T]he attorney retained by the insurance company for the purpose of defending the insured under the insurance policy owes the same duties to the insured as if the insured had hired the attorney him or herself. 'In the insured-insurer relationship, the attorney characteristically is engaged and paid by the carrier to defend the insured. The insured and the insurer have certain obligations each to the other . arising from the insurance contract. Both the insured and the carrier have a common interest in defeating or settling the third party's claim. If the matter reaches litigation, the attorney appears of record for the insured and at all times represents him in terms measured by the extent of his employment. In such a situation, the attorney has two clients whose primary, overlapping and common interest is the speedy and successful resolution of the claim and litigation. Conceptually, each member of the trio, attorney, client-insured, and client-insurer has corresponding rights and obligations founded largely on contract, and as to the attorney, by the Rules of Professional Conduct as well. The three parties may be viewed as a loose partnership, coalition or alliance directed toward a common goal, sharing a common purpose which lasts during the pendency of the claim or litigation against the insured. Communications are routinely exchanged between them relating to the joint and common purpose—the successful defense and resolution of the claim. Insured, carrier, and attorney, together form an entity—the defense team—arising from the obligations to defend and to cooperate, imposed by contract and professional duty. This entity may be conceived as comprising a unitary whole with intramural relationships and reciprocal obligations and duties each to the other quite separate and apart from the extramural relations with third parties or with the world at large. Together, the team occupies one side of the litigating arena. In certain circumstances a conflict of interest between insurer and insured will trigger the insured's right to retain independent counsel at the insurer's expense. But until such a conflict arises, the insurer has the right to control defense and settlement of the third party action against its insured, and is generally a direct participant in the litigation."11

Dissonance - Conflict of Interest

When the insurer challenges coverage, the harmony of the tripartite relationship may dissolve into dissonance of which Matthew 6:24 warns - Dependent counsel cannot serve two masters, both the insurer and the policyholder. Either dependent counsel will hate the policyholder and love the insurer, or will be devoted to the insurer and despise the policyholder. Dependent counsel cannot serve both the policyholder and the provider of money, the insurer.

A reservation of rights creates conflicts of interest by introducing uncertainty whether the insurer or the policyholder must pay for the lawsuit. Conflicts between insurer and policyholder whether the defense may be ethically controlled by a common lawyer, especially one who is dependent upon the insurer. The insurer and its dependent counsel usually have a long term, committed, lucrative, and enduring relationship - analogous to a marriage. In contrast, the insurer's lawyer and the policyholder have a short term, casual, one-time encounter - analogous to an affair. Dependent counsel is often entirely dependent upon the insurer for income while the policyholder generates no revenue to the lawyer. If dependent counsel must make tough choices, the impermanent companion may be jettisoned for the comfort and security of a rich and powerful partner. To assuage for this stark economic reality, dependent counsel may profess greater loyalty to the policyholder than to the insurer - analogous to a cheating husband who professes greater love to his mistress, when in reality, he never intends to leave this wife.

"In the usual tripartite relationship existing between insurer, insured and counsel, there is a single, common interest shared among them. Dual representation by counsel is beneficial since the shared goal of minimizing or eliminating liability to a third party is the same. 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. In such a case, the standard practice of an insurer is to defend under a reservation of rights where the insurer promises to defend but states it may not indemnify the insured if liability is found. In this situation, there may be little commonality of interest. Opposing poles of interest are represented on the one hand in the insurer's desire to establish no coverage under the policy, and on the other hand in the insured's desire to obtain a ruling such liability emanated from conduct within his insurance coverage. Although issues of coverage under the policy are not actually litigated in the third party suit, this does not detract from the force of these opposing interests as they operate on the attorney selected by the insurer, who has a dual agency status.12

"The insurers' obligations are rooted in their status as purveyors of a vital service labeled quasi-public in nature. Suppliers of services affected with a public interest must take the public's interest seriously, where necessary placing it before their interest in maximizing gains and limiting disbursements. As a supplier of a public service rather than a manufactured product, the obligations of insurers go beyond meeting reasonable expectations of coverage. The obligations of good faith and fair dealing encompass qualities of decency and humanity inherent in the responsibilities of a fiduciary. Insurers hold themselves out as fiduciaries, and with the public's trust must go private responsibility consonant with that trust. Furthermore, the relationship of insurer and insured is inherently unbalanced; the adhesive nature of insurance contracts places the insurer in a superior bargaining position. The availability of punitive damages is thus compatible with recognition of insurers' underlying public obligations and reflects an attempt to restore balance in the contractual relationship."13

"[L]iability policies protect [the] insured primarily against the claims of third persons. Such policies expressly reserve to insurer the exclusive right to investigate, defend, compromise, arbitrate or otherwise dispose of a claim against an insured and obligate the insured to cooperate. Insured's failure to cooperate may release the insurer. Such a policy handcuffs the insured's ability to protect himself and creates a fiduciary agency between the two. The interests of the insurer are to delay payment or indulge in other tactical conduct to achieve frugal disposition of claims or reject them. The interest of the insured is that claims against him be finally disposed of as promptly as good faith and fair dealing requires. This conflict obligates the insurer to handle all claims with the interest of the insured uppermost."14

"[T]he 'triangular' aspect of the representation afforded the insured by the insurer's lawyers is described as a coalition for a common purpose, a favorable disposition of the claim -with the attorney owing duties to both clients. As a practical matter, however, there has been recognition that, 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."15

"In the insured-insurer relationship, the attorney characteristically is engaged and paid by the carrier to defend the insured. The tranquility of this coalition is disturbed however, where . . . disagreement arises between the members. The situation has changed. Partners have become adversaries. The closely knit fabric of confidentiality is torn and shredded."16

Attorney-Client Privilege and Work Product Doctrine

"When an insurer retains counsel to defend its insured, a tripartite attorney-client relationship arises among the insurer, insured, and counsel. As a consequence, confidential communications between either the insurer or the insured and counsel are protected by the attorney-client privilege, and both the insurer and insured are holders of the privilege. In addition, counsel's work product does not lose its protection when it is transmitted to the insurer."17

This protection from disclosure to a claimant also applies among an insurer, policyholder and independent counsel. "The right to independent representation paid for by the insurer in the circumstances found in the Cumis decision was expressly stated by the Cumis court to be a right belonging to the insured, not the insured's adversary. [A claimant], as [the policyholder]'s adversary, cannot assert [the policyholder]'s right to Cumis counsel in order to create a waiver of the attorney-client privilege and attorney work product doctrine as to communications between [dependent counsel] and the insurer."18