United States: Bringing Counsel In From The Cold: Reconciling Ethical Rules With The Quagmire Of Insurance Defense Practice


Litigators have a tough job: demanding clients, relentless deadlines, and constant pressure to get everything just right. But insurance defense attorneys deal with this and more. Being an insurance-defense attorney means satisfying two masters: the insurance company that pays the bills, and the insured. This is not merely a matter of having to field lots of phone calls—insurance defense practice poses profound ethical dilemmas not adequately addressed by the existing rules of professional conduct. It is into this ethical morass that we will dive.

Law library shelves strain under the weight of cases and law review articles about the ethical minefield created by the tripartite relationship—the three-party relationship created when a liability insurer retains an attorney to defend its insured. Despite this attention, and despite the frequency of these issues, insurance defense counsel in most jurisdictions are left without meaningful guidance on some important issues. This void creates uncertainty and cost to insurers, insureds, and insurance defense counsel; and, because of the pervasive role of liability insurance in every aspect of our lives—these costs ultimately are borne by consumers, that is, all of us.

Our primary purpose here is not to offer a silver bullet, but instead, to start a discussion about strategies for better combatting this glaring problem. We suggest that more specific ethical rules are needed in this area, but we do not propose a set of rules that are particularly favorable to any one group—insureds, insurers, or the attorneys themselves. We simply propose that everyone involved would benefit from more specific guidance for lawyers practicing insurance defense, in supplementation to the one-size-fits-all approach of the current ethical rules. We have some suggestions, but our goal is elucidation, not prescription.

Having a single set of uniform ethical rules governing all attorneys regardless of practice area has long been accepted as the best system. The consensus has been that this uniformity prevents the practice of law from fracturing and ensures that judges and state bar officials can easily apply the same set of rules. We don't suggest a total upheaval of the American approach to ethics; we merely suggest a refinement of the rules when it comes to insurance defense practice.

Enacting particularized rules for specific practice areas is not unprecedented. For example, special ethical rules govern attorneys working for the government. Special rules also govern criminal defense attorneys who represent codefendants. And some scholars have advocated for increasing the number of practice-specific rules in other contexts. But whether states adopt these suggested reforms or not, we should at least consider creating some specific standards for insurance defense practitioners. The cost of leaving these attorneys in an ethical minefield is simply too high.

We explore this area in three steps. First, we discuss the landscape for specialized ethical rules in general. Second, we consider the need for more specialized rules in the insurance defense context. In this section, which makes up the bulk of this article, we use a common ethical issue in insurance defense practice as a case study to demonstrate why specialized rules might be helpful. After reviewing this case study, and concluding that specialized ethical rules are preferred in the insurance defense arena, we propose a model regulatory framework as a first step in creating a solution.

Our case study is an ethical dilemma faced by insurance defense attorneys daily. An attorney is hired by Insurance Company A to defend an insured who is in a lawsuit over a car accident. Insurance Company A is one of the attorney's best clients, from whom he receives a steady stream of cases. Our attorney's investigation reveals good news—another driver not yet a party to the lawsuit may have contributed to the accident. This revelation has the potential to shift the blame, and all or part of the financial responsibility, onto the shoulders of the new potential party and his insurer. But, only after joining the new party to the lawsuit as a third-party defendant does our defense counsel learn that the insurer footing the bill on the other side is his second-best client, Insurance Company B. That seems like a problem: two major clients with two sets of diverging interests in this case. Does counsel have a conflict?

Technically, Insurance Company B is not a party to the case, so our attorney's client is not directly adverse to Insurance Company B. But at the same time, he is pursuing a claim against Company B's insured, which means this insurer will foot the bill, initially for the defense, and possibly later for indemnity. Does that make his client's interests adverse to those of Insurance Company B? And if that alone does not create a conflict, what if during settlement negotiations, Insurance Company B fails to step up and adequately contribute, thereby forcing the case to trial and exposing both carriers' insureds to potential liability in excess of their liability limits? Can defense counsel call out Insurance Company B for recklessly exposing its insured? Will defense counsel find himself holding back out of concern he will upset Insurance Company B? What does defense counsel need to reveal about all of this to the insured, Insurance Company A, or even Insurance Company B? Where are the boundaries? Unfortunately, as we will see, even this frequent and not- too-complex scenario is unanswered by existing ethical rules (at least in most jurisdictions).

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