• Share
  • Email
  • Embed
  • Like
  • Save
  • Private Content
Bad Faith Nov2013 Policyholder View of Defense Counsel Ethical Duties
 

Bad Faith Nov2013 Policyholder View of Defense Counsel Ethical Duties

on

  • 343 views

 

Statistics

Views

Total Views
343
Views on SlideShare
343
Embed Views
0

Actions

Likes
0
Downloads
1
Comments
0

0 Embeds 0

No embeds

Accessibility

Upload Details

Uploaded via as Adobe PDF

Usage Rights

© All Rights Reserved

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Processing…
Post Comment
Edit your comment

    Bad Faith Nov2013 Policyholder View of Defense Counsel Ethical Duties Bad Faith Nov2013 Policyholder View of Defense Counsel Ethical Duties Document Transcript

    • A POLICYHOLDER’S VIEW OF DEFENSE COUNSEL’S ETHICAL DUTIES by A. Richard Dykstra Bruce Winchell
    • I. Introduction. In our litigious society, liability insurance is frequently called upon to provide an insured with a defense to claims. This paper discusses some of the issues that can arise, particularly in a defense under a reservation of rights, as well as some of the arguments and legal authorities that describe the obligations of carriers and counsel.1 II. Conflict of Interest - Is Appointed Defense Counsel Required to Obtain a Waiver? The starting point for an attorney’s ethical consideration before accepting an engagement is to determine whether there is any actual or potential conflict of interest, as well as the extent of disclosure and waiver that may be necessary. In Tank v. State Farm Fire and Cas. Co., 105 Wn.2d 381, at 388, 715 P.2d 1133 (1986), the court emphasized that the Rules of Professional Conduct (“RPC”) govern the relationship between appointed defense counsel and the insured client: [D]efense counsel owes a duty of full and ongoing disclosure to the insured. This duty of disclosure has three aspects. First, potential conflicts of interest between insurer and insured must be fully disclosed and resolved in favor of the insured. The dictates of RPC 1.7, which address conflicts of interest such as this, must be strictly followed (emphasis added). See also Johnson v. Continental Casualty Co., 57 Wn. App. 359, 788 P.2d 598 (1990); L &S Roofing Co. v. St. Paul Fire & Marine Ins. Co., 521 So.2d 1298 (Ala. 1987). RPC 1.7 applies whenever an insurer appoints counsel to defend its insured. RPC 1.7 provides: To comply with RPC 1.7, counsel must first determine whether the insurance company is a client and, if so, whether there is a conflict of interest between the insurance company and the insured. A. Is the Insurance Company a Client? Many law firms advertise in legal directories the names of “representative clients.” Most law firms organize their billing systems and file systems by naming the “client.” In many cases, the client listed by the law firm in these record systems will be the insurance company that referred the matter to the law firm, even though the matter may involve the law firm defending the insured. These attorney’s records are consistent with the common perception that the insurance company, as the recurring source of business, is a “client” of the law firm, even if the only work that has been referred involves, if necessary, the defense of “insureds.” Counsel should change the firm’s billing and filing systems to correctly reflect that it is the insureds that are the firm’s clients, especially in reservation of rights cases. 1 The views expressed herein are the views of the authors, not necessarily of other members of the firm, or the firm’s clients.
    • “Client” is not directly defined in the RPCs, but it is clear that a client is one who has a reasonable belief that the lawyer has agreed to perform legal services for the client. Bohn v. Cody, 11,9 Wn.2d 357, 363, 832 P.2d 71 (1992); The Restatement (Third) of the Law Governing Lawyers, § (1)(a)(2000) (hereinafter “The Restatement”). Thus, the mere fact that an insurance company has referred an insured to a lawyer and agreed to pay the lawyer to represent its insured is not sufficient to make the insurance company a client. RPC 5.4(c)2 and RPC 1.8(f)3 clarify that an insurance company does] not become a “client” of a lawyer merely because it has agreed to pay the lawyer to defend one of its insureds. The Restatement, § 134, comment f, states: The insurer is not, simply by the fact that it designates the lawyer, a client of the lawyer. Whether a client-lawyer relationship exists between the lawyer and the insurer is determined under § 14.4 WSBA Formal Opinion 195 (1999) states: The relationship between the insurance company, the insured and defense counsel is a tripartite relationship wherein the insurer, pursuant to an insurance contract, pays the costs of defense including the lawyer’s fee. However, in Washington it is clear that legally and ethically the client of the lawyer is the insured. Tank v. State Farm, 105 Wn.2d 381, 715 P.2d 1133 (1986); Van Dyke v. White, 55 Wn.2d 601, 349 P.2d (1960). 1. Reservation of Rights Cases. In cases where the insurance company has reserved its rights to deny indemnity, Tank, at 388, makes it clear that the insurance company is not the client. Therefore, simply because an attorney may be defending several reservation of rights cases on referral from an insurance company, he/she can conclude that the insurance company is not a client of the law firm. However, prospective clients should be told of any ongoing referral relationship between the insurance company and the lawyer appointed to represent them.5 A sample engagement letter for a reservation of rights defense is attached as Exhibit A at the end of this paper. 2. Non-Reservation of Rights Cases. 2 RPC 5.4(c) provides: A lawyer shall not permit a person who recommends, employs, or pays the lawyer to render legal services for another to direct or regulate the lawyer's professional judgment in rendering such legal services. 3 RPC 1.8(f) provides: A lawyer shall not accept compensation for representing a client from one other than the client unless: (1) the client gives informed consent; (2) there is no interference with the lawyer's independence of professional judgment or with the client-lawyer relationship; and (3) information relating to representation of a client is protected as required by Rule 1.6. 4 The Restatement § 14 states that an attorney-client relationship arises when “a person manifests to a lawyer the person’s intent that the lawyer provide legal services for the person.” 5 See, RPCs 1.4(b), 1.7(a) & (b), 1.8(a) & (f), and 5.4(c).
    • Tank does not answer whether the insurance company is a joint client if there is no reservation of rights because it was a reservation of rights case. Formal Opinion 195 does not limit itself to reservation of rights scenarios. Nonetheless, in Barry v. USAA, 98 Wn. App. 199, 204, 989 P.2d 1172 (1999), the Court stated in dicta: “[t]ypically in the insured-insurer relationship, the attorney is engaged and paid by the carrier to defend the insured and therefore operates on behalf of two clients.” Authorities from other states are split on whether a law firm that is representing an insured in a non-reservation of rights case also represents the insurance company. See, ABA Formal Opinion 01-421, footnote 6 (2001), for authorities that hold there is no conflict of interest where an attorney-client relationship exists between an insurer and defense counsel. In cases involving malpractice claims by an insurance company against assigned defense counsel, some courts hold that since the lawyer is representing the financial interests of both the insurer and the insured, the lawyer has dual clients. See, e.g., Fremont Indem. Co. v. Carey, Dwyer, Eckhart, Mason & Spring, P.A., 271 F.3d 1272 (11th Cir. 2001) (Florida law); Reliance Nat’l Indem. Co. v. Jennings, 189 F.3d 689 (8th Cir. 1999) (Arkansas law); Am. Int’l Adjustment Co. v. Galvin, 86 F.3d 1455 (7th Cir. 1996) (Indiana law); Northwestern Nat’l Ins. Coo. v. Osborne, 573 F.Supp. 1045 (E.D. Ky. 1983) (Kentucky law); Smiley v. Manchester Ins. & Indem. Co., 71 111.2d 306, 16 III. Dec. 487, 375 N.E.2d 118 (1978). Some cases supporting this rule rely upon the “tripartite” relationship. See, e.g., Home Indem. Co. v. Lane Powell Moss and Miller, 43 F.3d 1322, 1330-31 (9th Cir. 1995) (Alaska law); Spratley v. State Farm Mut. Auto. Ins. Co., 78 P.3d 603, 607 (Utah 2003); Gulf Ins. Co. v. Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone, 79 Cal.App.4th 114, 93 Cal.Rptr.2d 534, 542-547 (2000) Houston General Ins. Co. v. Superior Court, 166 Cal. Rptr. 904, 908 (Cal. App. 1980). Other courts hold that the insurer is a non-client beneficiary of the lawyer’s legal services. See, e.g., Paradigm Ins. Co. v. Langerman Law Offices, 200 Ariz. 146, 24 P.3d 593, 602 (2001); see also General Security Ins. Co. v. Jordan, Coyne & Savits, LLP, 357 F.Supp.2d 951 (E.D. Va. 2005), for a comprehensive discussion. Still further, in some cases the courts have refused to find that the insurance company is a client of the appointed defense lawyer without the insured’s specific consent to dual representation. See, e.g., Pine Island Farmer Coop. v. Erstad & Reimer, 649 N.W.2d 444 (Minn. 2002); ABA Formal Opinion 01-421, footnote 7 (2001). Finally, some jurisdictions, reject outright the idea that any attorneyclient relationship exists between an insurer and an attorney appointed to defend an insured. Atlanta lnt’l Ins. Co. v. Bell, 438 Mich. 512, 475 N.W.2d 294, 297 (1991); Safeway Managing Gen. Agency, Inc. v. Clark & Gamble, 985 S.W.2d 166, 168 (Tex.App. 1998). In cases without a reservation of rights, defense counsel and insurance company employees often both believe that the insurance company is entitled to rely upon appointed defense counsel’s legal advice to protect the insurance company’s interests as well as the interests of the insured. There may be exceptions, but most insurance company employees would not expect that defense counsel is free to take adversarial positions in the case against the company’s interests, or against the insurer’s interests
    • in other cases. The insurer might also expect defense counsel to consider the insurer’s interests in exchange for the prospect of future referrals. A lawyer is responsible to make sure that a potential client does not have a misunderstanding regarding the existence of an attorney-client relationship. The Restatement, § 14(1)(b). Therefore, as a practical matter, if a lawyer does not consider the insurance company to be a client, the lawyer has the responsibility to inform the insurance company or its representative. 3. Other Instances of the Insurance Company as Client. Where the law firm has previously appeared in litigation as the attorney for the insurance company (as in cases where the insurance company is a party bringing suit or being sued), the insurance company is obviously a client. However, even if no direct representation exists at the time the lawyer agrees to represent an insured, subsequent developments in the case, or in the firm’s taking of other engagements, require a renewed conflict analysis. For example, if at the start of a reservation of rights engagement to defend an insured, the firm has never represented the insurance company, and therefore the insurance company is not’ a current or former “client,” and no waiver is required. However, if the insurance company subsequently hires the law firm to represent it in an unrelated case, the law firm must now notify the client and obtain an appropriate waiver before it can accept the engagement to represent the insurance company. Alternatively, the insurance company might subsequently pay to settle all claims against the insured, and continue to have the law firm pursue the insured’s indemnity claims (known as “pay and chase”). Since the insured client has been dismissed, and the law firm is providing legal services for the insurance company, the acceptance of the engagement to “chase” other parties for the benefit of the insurance company now makes it a client of the firm. Before agreeing to the engagement for the insurance company, the law firm must determine if representing the insurance company requires disclosure of the potential conflict to any other clients being represented, or formerly represented. In another scenario, assume in a reservation of rights case that counsel has been retained by insurer “A” to represent the insured, and has obtained the recommended waiver. Later, insurance company “B” agrees to join in providing the insured with a reservation of rights defense. Since now a second insurance company is providing the defense, counsel must determine if “B” is a client, and, if so, make a disclosure and obtain a waiver as to “B.” Less obvious are cases where the law firm is representing the interests of the insurance company to obtain reimbursement of sums paid (subrogation), or sums that may be paid (indemnity) claims. Though the law firm may be maintaining the claim in the name of the insured, if the recovery is for the benefit of the insurance company, the insurance company is a client of the firm, at least from the time the insured no longer
    • has any interest in the recovery. See, e.g., Mahler v. Szucs, 135 Wn.2d 398, 417-18, 957 P.2d 632 (1998). B. Does Counsel Need to Make a Disclosure? Tank and its progeny, see Johnson v. Continental Casualty, supra, require that an attorney comply with RPC 1.7 in making disclosures of potential conflicts to the insured client he/she is being asked to represent. RPC 1.7 provides: (a) Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if: (1) (2) (b) the representation of one client will be directly adverse to another client; or There is a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client, a former client or a third person or by a personal interest of the lawyer. Notwithstanding the existence of a concurrent conflict of interest under paragraph (a), a lawyer may represent a client if: (1) the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client; (2) the representation is not prohibited by law; (3) the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal; and (4) each affected client gives informed consent, confirmed in writing (following authorization from the other client to make any required disclosures). Several preliminary points need to be made. First, a lawyer simply cannot represent one client against another, even with a waiver, if the representation of one will be directly adverse to the other. Some conflicts simply cannot be waived. RPC 1.7(b)(3). In the insurance context, this would include representing an insurance company in litigation against a client, or vice versa. The Restatement, § 122(2)(b); comment g(iii). Accordingly, such conflicts are not waivable under RPC 1.7 Second, under 1.7(b), if a lawyer cannot satisfy the threshold standard of a “reasonable belief’ that she will be able to provide competent and diligent representation to each client, then he/she must decline to represent either client. “Reasonable” is defined objectively by the RPCs, not subjectively: “‘reasonable’ . . . denotes the conduct of a reasonable prudent and competent lawyer.” Reasonable belief is used to
    • denote “that the lawyer believes the matter in question and that the circumstances are such that the belief is reasonable.” See RPC 1.0((i). WSBA Informal Opinion 897 (1985) states: Consent is not required unless it is possible that the prospective representation would materially limit (or be materially limited by) the lawyers’ responsibilities to the present clients. Factors relevant to determining whether a prospective representation could materially limit a lawyer’s existing responsibilities include the duration and intimacy of the lawyer’s relationship with the client or clients involved, the functions being performed by the lawyer, the likelihood that the actual conflict will arise, and the likely prejudice to the client from the conflict if it does arise. This is an objective standard, to which the subjective expectations of the client are relevant insofar as they are reasonable. 1. RPC 1.7((a)(1). Subsection 1.7(a)(1) deals with circumstances, somewhat less than adversarial litigation, in which the representation will still be “directly adverse” to another client. This situation would apply to cases in which there is a reasonable risk that the lawyer’s assisting one client will potentially disadvantage another client. Tank recognized that in any reservation of rights case, defense counsel must satisfy the applicable requirements of RPC 1.7. A valid waiver under RPC 1.7(b)(4) would certainly be required in any case where an insurer client appointed its lawyer to defend an insured. The Restatement, § 121 comment c(iii) states that a “substantial risk” of adverse interests is present when the risk is “significant and plausible, even if it is not certain or even probable that it will occur.” Thus, the fact that the insurer foresees a potential conflict and gives notice that it is reserving its rights would seem to automatically satisfy the “significant and plausible” standard. Under the “imputed disqualification” rule (RPC 1.10), all members of the same firm are generally treated as having the same conflicts. Therefore, the obligation to comply with RPC 1.7 applies in any reservation of rights case where a member of the appointed defense firm represents the insurer in any other case. However, RPC 1.10(a) makes clear that lawyers changing firms may continue to represent clients providing the standard screening procedures are followed. Note that the duties to disclose, consult, and obtain suitable waivers are not dependent upon the insured requesting information regarding counsel’s relationship with the insurer. See, WSBA Informal Opinion #943 (1985). 2. RPC 1.7((a)(2). Subsection 1.7(a)(2) deals with representations in which the interests of the two clients are not “directly adverse,” but nevertheless the lawyer’s representation of one client may be “materially limited” by the interests of other, clients, non-clients, or the lawyer’s own interests. This seems to be applicable to those cases where an insurer
    • appoints defense counsel, but there are no obvious coverage issues and therefore no reservation of rights. Tank did not discuss whether disclosure and waiver of conflicts of interest are required in cases where there is no reservation of rights, but certainly the RPCs provide the controlling standard. Even without a reservation of rights, a reasonable lawyer must recognize that, in most cases, there is at least the substantial risk that the interests of the insured and the insurance company will diverge at some point in the representation. For example, a “policy limits” settlement offer may be made, or the insured may want the insurance company to settle to avoid the inconvenience of attending a trial.6 Because the risk that the insurer and the insured may have differing interests is “significant and plausible,” even if it is not “probable,” under subsection 1.7(b) an appropriate disclosure and waiver is still required before counsel undertakes such a representation. Therefore, in our opinion, law firms should make a practice of satisfying the requirements of 1.7(b) even when the insurer has not reserved its rights. In our experience, most attorneys believe that they can undertake the representation of the insured as long as they do not become involved in any matter related to the dispute between the two clients. However, the lawyer actually has a duty to disclose potential conflicts and obtain sufficient waivers prior to any such dispute actually arising. In Eriks v. Denver, 118 Wn.2d 451, 824 P.2d 1207 (1992), counsel represented both a tax shelter promoter and the promoter’s tax shelter investors in audits before the IRS. The attorney discussed the possible conflict with his promoter client, but did not disclose the possible conflict to the investor clients. When an adverse ruling was received on the validity of the tax shelter, the attorney advised both clients that he had a conflict, recommended that they should get separate counsel, and withdrew. When the investors sued the attorney, the court held that the failure to disclose the potential conflict to the investor clients and get their consent before representation began was a breach of the ethical duties: Our decision requires an attorney who is aware of potential conflicts to fulfill his or her duty under the CPR by fully disclosing those conflicts before undertaking the multiple representation. The attorney must also discuss the dangers inherent in multiple representation and allow the clients the opportunity to decide whether their interests are best served by independent representation. Today we reaffirm this court’s commitment to interpreting attorney discipline rules for the benefit of the public. An attorney must discuss all potential conflict of interest of which he or she is aware prior to undertaking the multiple representation. Id. at 461. 6 This requirement would also apply where, even though the insurer is not actually a client, but the lawyer would feel that he/she is not free to take an adversarial position against an insurer (such as bringing a “bad faith” suit) because it might compromise the lawyer’s chances of getting future referrals.
    • In representing insureds who have the potential of having adverse interests to the lawyer’s insurance company client, the attorney must do more than withdraw when the potential conflict becomes actual. Counsel must discuss the potential conflict before undertaking the representation, and obtain the client’s informed consent. Many attorneys believe that as long as they remain “neutral” and do nothing to impact either client’s rights against each other, they are permitted to jointly represent both clients. We will discuss below whether this limitation on the scope of an engagement is permissible. However, the important point to recognize is that even if "neutrality” is proper, under RPC 1.7(b) the attorney must “reasonably believe” that the representation will not adversely affect either client, and the lawyer must still obtain each client’s informed consent, confirmed in writing (following authorization from the other client to make any required disclosures. C. What Is Meant By “Informed Consent.” RPC 1.7(b)4) requires that each affected client give informed consent. RPC 1.0(e) provides: “Informed consent” denotes the agreement by a person to a proposed course of conduct after the lawyer has communicated adequate information and explanation about the material risks of and reasonably available alternatives to the proposed course of conduct. In our experience, a typical Tank letter from a local law firm simply tells the proposed client that the firm has been assigned to represent him/her, that the law firm also represents the insurance company on unspecified matters, and that it will represent him/her solely in this matter. Such letters seldom have any description of the nature of the other matters that the firm handles for the insurer, the number of such matters, the history of the relationship, or the volume of fees paid by the insurance company. Nor does it include an explanation of the implications of common representation and the advantages and disadvantages involved. The question is whether a typical “terse” description satisfies the requirement of the “informed consent.” The Restatement, § 122, comment c(i) acknowledges that: [C]lients differ in their sophistication and experience, and situations differ in terms of their complexity and the subtlety of the conflicts presented. The requirements of this Section are satisfied if the client already knows the necessary information or learns it from other sources. A client independently represented . . . will need less information about the consequences of a conflict but nevertheless may have need of information adequate to reveal its scope and severity. A “terse” disclosure may be adequate, if made to a sophisticated party with a good understanding of liability insurance, including the issues raised by reservation of rights,
    • and settlement negotiations. However, where the insured is an unsophisticated layman, not represented by personal counsel and not familiar with the risks and effects of a reservation of rights defense, we submit that a “terse” disclosure is simply inadequate to satisfy the requirement of “informed consent” sufficient to satisfy the requirements of the RPCs. D. Informed Consent must be “confirmed in writing.” Consent under RPC 1.7(b) must be “confirmed in writing.” RPC 1.0(b) provides as follows: “Consent in writing” when used in reference to the informed consent of a person, denotes informed consent that is given in writing by the person or a writing that a lawyer promptly transmits to the person confirming an oral informed consent. . . . If it is not feasible to obtain or transmit the writing at the time the person gives informed consent, then the lawyer must obtain or transmit it within a reasonable time thereafter. It is common practice for counsel to simply send a letter to a client containing a disclosure and asking the client to call if he/she has any questions. This does not seem sufficient to comply with the requirement for a written consent: The requirement of consent generally requires an affirmative response by each client. Ambiguities in a client’s purported expression of consent should be construed against the lawyer seeking the protection of the consent (cf. § 18). In general, a lawyer may not assume consent from a client’s silent acquiescence. The Restatement, §122, comment c(i). The disclosure letter should contain a signature line for the client to sign under a clear acknowledgement that the client is consenting to the lawyer’s representation despite the potential conflict of interest. If that is not obtained, but the lawyer receives an express oral consent, then the lawyer has the duty to document the oral consent and transmit a copy to the insured. E. What If the Client Refuses to Consent? It is obvious that an insured, for good reason, can refuse to consent to be represented by a lawyer that has a conflict of interest. What if the insured has a frivolous reason, or simply does not want to accept a defense from a law firm that has the insurance company as a client? It seems apparent that so long as a conflict requiring waiver exists, the insured has the unfettered right to object and refuse to accept the representation. No case has been found where an insured could be compelled to accept appointed counsel who has a conflict.
    • What are the potential consequences to refusing to accept appointed counsel? In Washington an insurer has the contractual right in most policies to select counsel, but it is doubtful such a contractual right can override the RPC provisions related to conflicts of interest. Most policies simply provide that the insurer has the right and duty to defend any suits brought against the insured. They do not contain any specific agreement requiring the insured to waive its right to assert a conflict, and even if the policy had such a provision, it is very doubtful that it would be upheld. By analogy, even in cases where a client has agreed to waive future conflicts, the courts scrutinize such agreements very carefully, especially if they are general. A client’s open-ended agreement to consent to all conflicts normally should be ineffective unless the client possesses sophistication in the matter in question and has had the opportunity to receive independent legal advice about the consent. The Restatement, § 122 d. It is hard to imagine a court enforcing a waiver of the right to object to a conflict of interest merely because an insurer had inserted provisions in its policy, especially given the willingness of some courts to view policies as adhesion contracts. An insurer should not be relieved of providing a defense merely because its insured refused to accept a defense lawyer with a conflict. In Tank, the court required that an insurer appoint counsel who could ethically represent the insured in view of the conflict of interest, and it would not have done so if the conflict of interest could in any way relieve the insurer of a duty to defend. Courts in other states generally agree. Windt, Insurance Claims and Disputes, 5th Ed. (2007), § 4:20; Ashley, Bad Faith Actions, Liability and Damages (2nd Ed.) § 4:05 (1997). Accordingly, if an insured has rejected proposed counsel, the insurer has the obligation of appointing counsel that either has no conflict, or who has a conflict that the insured will waive. F. A Checklist of Topics. Cautious counsel should consider including the following items in client communication for purposes of satisfying RPC 1.7: 1. 2. 7 that the insurance company has agreed to pay for the lawyer to represent the insured (RPC 1.8(f)); the nature, extent and duration of the law firm’s representation of the insurer on other matters, including, for example, generally the amount or percentage of unrelated work that the firm receives from the insurance company, how long that has occurred, etc.;7 In making such disclosures numbered as 2, 3 and 4 herein, the insurance company’s consent to disclose such information to the insured may be required. See, WSBA Informal Opinion #943 (1985).
    • 3. whether the lawyer or others in the law firm are representing or have previously represented the insurer directly on insurance coverage claims similar to those involved in the reservation of rights; 4. whether the lawyer or the law firm is representing or has previously represented the interests of the insurance company in any other matters, such as subrogation or contribution claims; 5. the implications of common representation and the advantages and disadvantages involved; 6. whether the lawyer or the law firm considers the insurance company to be a present or former “client” of the firm; and 7. an express acknowledgement that the disclosure has been read, that the client has the opportunity to consult with counsel, and that the client agrees to waive the potential conflict of interest. This list is certainly not exhaustive, and counsel should carefully review each proposed engagement to determine all issues that are appropriately disclosed to a prospective client before agreeing to accept the engagement. III. Limiting the Scope of Representation – Is Appointed Defense Counsel Only Obligated to Provide a “Coverage Neutral” Defense? In Waite v. Aetna Cas. & Sur. Co., 77 Wn.2d 850, 467 P.2d 847 (1970), the court held that an insurance company is only obligated to pay for the defense of claims which, if proven, would be covered by the policy. Many insurance companies and defense counsel assume that since this is the standard applicable to the insurer’s obligation to provide a defense, the same rule applies to the scope of the legal services provided by assigned defense counsel. They support their position with a casual reading of Tank, where the court held that an insurer only owes a duty to give equal consideration to the interests of its insured. On this point, neither Waite nor Tank limits defense counsel’s ethical obligation to provide legal services. Instead, a careful reading of the Rules of Professional Conduct demonstrates that unless counsel complies with his/her obligations to consult with the insured at the outset regarding limiting the scope of the engagement, counsel has an obligation to fully represent the insured on all aspects of a case. This could even include representing the insured in its efforts to obtain I coverage for any judgment or settlement that may be rendered against the insured, notwithstanding the fact that the insurer would no longer pay his/her bills. While such a duty may place counsel in a conflict regarding his/her obligations to the insurance company, it may be too late for counsel to extricate himself/herself from the difficulty merely by offering to withdraw. Without a valid agreement at the outset limiting the scope of the engagement, counsel
    • may face substantial liability to the insured, the insurer, or both when he/she later tries to withdraw. A. RPC 1.2 Requires Consideration of Numerous Issues. RPC 1.2 provides in part: (a) Subject to paragraphs (c) and (d), a lawyer shall abide by a client’s decision concerning the objectives of representation, and, subject to Rule 1.4, shall consult with the client as to the means by which they are to be pursued. . . . A lawyer shall abide by a client’s decision whether to settle a matter. . . . (b) ... (c) A lawyer may limit the objectives of the representation if the limitation is reasonable under the circumstances and the client gives informed consent. RPC 1.2 raises several important issues. First, it is important to recognize that it is up to the client to decide what the scope and objectives of the lawyer’s engagement are. It is not up to the lawyer, and it is certainly not’ up to third parties, such as an insurance company. Indeed, under RPCs 1.8(f) and 5.4(c), a lawyer shall not allow a person who pays a lawyer to direct or regulate the lawyer’s professional judgment. Any effort by an insurance company to restrict what a lawyer believes is in the client’s best interests would be contrary to this rule. See, WSBA Formal Opinion 195.8 Therefore, in a typical case involving the defense of damage claims against an insured, it is up to the client to decide whether the lawyer’s role should include attempting to have the insurance company ultimately responsible for payment of any judgment or settlement. Almost any client would agree that the question of, ”who will have to pay?” is an important issue that should be included within the scope of the representation. Second, the rule requires that the attorney “consult” with the client about the objectives of the representation and the means to be used. In some cases, appointed defense counsel might only “consult” with the insurance company about the goals of the representation (trial or settlement), and how the goals will be pursued (early offer to settle, attempts to obtain pretrial dismissal, likelihood that case’, will settle or go to trial, the risks and inconvenience of going to trial). However, consulting with the insurance company about these issues raises a question as to whether the attorney allowed a non-client to interfere with his/her professional judgment. More importantly, many attorneys completely overlook the requirement that they must consult with their client about these objectives, as defined by the RPCs. See, State v. Stough, 96 Wn. App. 8 For example, Formal Opinion 195 states: “because the lawyer is being paid pursuant to billing guidelines of a person other than the client, the lawyer must initially consult with the client at the outset of the representation, and consult with the client periodically thereafter as circumstances may require, and obtain the client’s informed consent to any limitations imposed on the lawyer’s representation” (emphasis added).
    • 480, 487, 980 P.2d 298 (1999), discussing the lawyer’s obligation to give the client “the tools needed to make a knowing, voluntary, and intelligent decision free from improper influence by the lawyer.” Third, the only way that a lawyer can limit the scope of the representation is if the limitation is reasonable under the circumstances and if the client gives informed consent. As is explained above, “informed consent” is a defined term in the RPCs. An attorney should not begin an engagement without consulting with the client about the goals of the engagement, and expect that the attorney can limit the scope of representation later. The prospective client is entitled to know at the outset whether the attorney is able to provide the full range of services desired by the client. If the attorney is unable (e.g., because of conflicts with the insurer) or unwilling to accomplish all of the client’s goals of the representation, the attorney does not have the right to retroactively limit the engagement. The client has the right to refuse to consent to a limited engagement. At that point, the insurance company has the right to appoint another attorney, who of course has to comply with the same obligations to consult with the client about the goals of the representation, and must obtain informed consent to any limitation. Fourth, the responsibility to consult with the client about the goals of the representation is not limited to cases where the insurance company has issued a reservation of rights. Even though there may not be any reservation of rights, counsel is nevertheless still obligated under RPC 1.2 to consult with the “client” regarding the goals of the representation. In such a case, if the insurance company is also a client (see, conflicts discussion, supra), then counsel must consult with both clients about the goals of the representation. If the clients do not agree on the goals, then counsel cannot continue to represent either, and must withdraw. Fifth, while an insurance company may only be obligated to provide a defense of claims potentially within the scope of the policy’s coverage,’ this is an issue of the insurance company’s obligations under its policy.9 For example, if the client wants its own affirmative claims pursued, or if the client wants the lawyer to attempt to make the insurance company pay for any eventual judgment or settlement, these goals may require “extra” services that the insurance company is not obligated to pay. See, Johnson v. Continental Ca. Co., 57 Wn. App. 359, 788 P.2d 598 (1990). If the client wants “extra” services, then the client should be told what the, attorney will charge for such services. A client may decide that he/she is unwilling to become responsible for such fees and costs, and that may serve as a reason for the client to accept a limited engagement. However, the client needs to understand that if he/she has to hire another lawyer to perform these “extra” services, that attorney will often charge more, because that attorney may have to charge for doing things (like monitoring the case or attending depositions) that the defense attorney would charge the insurance company to do as 9 In Nordstrom v. Chubb 8 Sons, 820 F. Supp. 530, 536 (D. Wash. 1992), Judge Rothstein adopted the “reasonably related” standard for an insurance company’s obligation to pay legal fees. “No right of allocation exists for the defense of non-covered claims that are ‘reasonably related’ to the defense of covered claims.”
    • part of the defense of the case. It is therefore generally more expensive for the client to hire a second attorney to perform services outside the scope of the insurance company’s obligations to pay appointed counsel, and it is often less expensive for the client to simply have defense counsel bill the client for the “extra” services. Neither Tank nor any other case has been found holding that an insured is required to accept an attorney that does not comply fully with all applicable ethical duties, including the duty under RPC 1.2 to accept the insured’s decisions on the goals and means of the representation. We doubt that the insured’s duty of good faith to its insurer requires the insured to waive rights that it has under applicable ethical standards.10 Finally, an attorney who advises the client to accept a limited “coverage neutral” defense would be highly scrutinized, because of the risk that such advice is being given to further the interests of the insurance company or the lawyer’s self-interest, rather than the best interests of the client. A claim of “self-interest” could easily be made against an attorney who recommended a “coverage neutral” defense if such advice benefited counsel’s self-interest in keeping the case rather than having the case go to another attorney. Further, counsel could easily be subject to the criticism that he/she violated RPC 1.8(f) and .5.4(c) in allowing the interests of the insurer to interfere with his/her professional judgment of the best interests of the client. Where the client accepts a limited “coverage neutral” defense, counsel should be careful to document that the client was fully advised of the advantages and disadvantages of accepting such a defense. Counsel will want a record to show that’ the client accepted the limited defense for reasons that do not relate either to counsel’s self-interest or the insurance company’s interests. B. Does Appointed Defense Counsel Have to Follow the Insured’s Strategic Decisions? As discussed above in the section dealing with limiting engagements, RPC 1.2(a) provides: “A lawyer shall abide by a client’s decisions concerning the objectives of representation, . . . and shall consult with the client as to the means by which they are to be pursued. A lawyer shall abide by a client’s decision whether to settle a matter.” Tank, at 389, reinforces this latter statement: In a reservation of rights defense, it is the insured who may pay any judgment or settlement. Therefore, it is the insured who must make the ultimate choice regarding settlement. The question arises: Does an insured have the right to make all of the other strategic decisions that come up in the case, or is this right limited to “the ultimate 10 In Evans v. Continental Cas. Co., 40 Wn.2d 614, 245 P.2d 470 (1952), the court disapproved of an insurance company encouraging defense counsel to attempt to obtain findings harmful to the insured’s coverage position. However, the court did not hold that defense counsel was prevented from trying to obtain findings favorable to the insured client’s coverage position.
    • choice regarding settlement”? Nothing in the RPCs suggests that the client is not entitled to make all strategic decisions in every matter, and Tank’s comment should not be taken as limiting the right of the insured to make decisions on matters other than settlement. In some instances, defense counsel could be tempted not to solicit the insured’s input on a strategic decision, such as whether to bring a summary judgment motion that might dismiss the only covered claims (thereby arguably allowing the insurer to end its participation). However, the letter and the spirit of the ethics rules ought not be so easily circumscribed: the insured/client has the right to make such choices, and must therefore be given the opportunity to exercise those rights. The defense attorney must either take the actions dictated by the client or withdraw. Clearly, the insurance company has no right to direct the defense counsel to bring the hypothetical motion set forth above, and defense counsel would be precluded from following such directions by RPC 5.4(c). C. Another Checklist. Cautious counsel should consider, at the outset of the representation (and periodically during the representation), consulting and obtaining the client’s informed consent for any action listed here: 1. whether the client wishes to delegate to the insurance company authority to direct the law firm’s goals of representation and/or the means to attain those goals; 2. any limitations in representing the insured that the law firm will have, including whether the law firm has agreed to comply with the insurance company’s “litigation guidelines,” and how such guidelines might effect the defense provided; 3. whether the law firm will keep information relevant to any coverage issue confidential from the insurance company, or will disclose such information to the insurance company; 4. whether the law firm will bring any affirmative claims that the insured may have, or will insist that the insured obtain separate counsel to present the insured’s own claims; 5. whether the law firm will assist the insured in establishing coverage, or will insist that the insured obtain separate counsel to provide that service; and
    • 6. whether the law firm will explore settlement with the claimant for a settlement that protects the insured to the disadvantage of the insurance company.11 This list is not intended to be exhaustive, and counsel must consider whether any other issues that may involve limitation on the scope of the engagement need to be discussed with the client, and the client’s consent obtained, before the representation is accepted. IV. Confidentiality - What Can Appointed Defense Counsel Disclose to the Insurer? A. Communications to the Insurer Are Protected. Insurance companies almost always insist upon receiving information from their insureds, usually via appointed defense counsel, as they exercise their rights and perform their obligations under the policy. For example, since the insurance company generally reserves the right to settle any claims against the insured, the insurance company insists that defense counsel keep it advised of developments, and provide periodic assessments of liability and damage exposure of the insured.12 Such communications are generally protected from disclosure to third parties under the “attorney-client” and “work product” privileges, though the protection is more likely attributable to the “joint defense” doctrine. See, Heidebrink v. Moriwaki, 104 Wn.2d 392, 706 P.2d 212 (1985); Ostrager and Newman, Handbook on Insurance Coverage Disputes (13th Ed.) § 2.08[b] (2006). B. Disclosures of Confidential Client Information Must Be Authorized. Defense counsel sometimes assume that because a privilege exists protecting reports to an insurance company, there is no privilege between the insurance company and the client, and therefore all information reported to the client must also be reported to the insurance company. However, RPC 1.6(a) clearly prohibits such a result: A lawyer shall not reveal information relating to the representation of a client unless the client gives informed consent, the disclosure is impliedly authorized in order to carry out the representation or the disclosure is permitted by paragraph (b). 11 The Florida Rules of Professional Conduct 4-1.8(j) requires that a “Statement of Insured Client’s Rights” be delivered to every client whose defense is being paid for by an insurer. Though it is obviously based upon Florida law, it provides a resource of topics that should be discussed with the client. 12 Tank imposes upon the insurance company the “responsibility for fully informing the insured . . . of all developments relevant to . . . the progress of his lawsuit.” Tank v. State Farm, 105 Wn.2d at 388 (emphasis in original). While Tank goes on to impose a similar duty on counsel to keep the insured informed, the case does not specifically impose any obligation on defense counsel to make such disclosures to an insurer who is defending under a reservation of rights.
    • Washington’s RPCs were substantially revised in September 2006, and this rule is significantly broader than the earlier RPC 1.6. The earlier Rule 1.6 protected “confidences” – defined as “direct attorney client communications – and “secrets” – defined as “other information gained in the professional relationship that the client has requested be held inviolate or the disclosure of which would be embarrassing or would be likely detrimental to the client.” Since the phrase “information relating to the representation” is broader than “secrets,” the obligation to preserve confidentiality is broader. The exceptions listed in RPC 1.6(b) relate to preventing crimes, defending against the client’s claims, or letting the court know of a breach of fiduciary duty. There is no exception for disclosure to an insurance company. Indeed, RPC 1.8(f) provides that a lawyer who is representing a client shall not accept an engagement where another pays for the representation unless “information relating to representation of a client is protected as required by Rule 1.6.” Formal Opinion 195 notes: Except for disclosures that are impliedly authorized to carry out the representation, appointed defense counsel cannot disclose to an insurer confidential information provided by the client without the client’s consent, such as information that might be prejudicial to the client’s right to coverage. The Restatement, § 60 contains a similar statement: [T]he lawyer may not use or disclose confidential client information as defined in § 59 if there is a reasonable prospect that doing so will adversely affect a material interest of the client or if the client has instructed the lawyer nor to use or disclose such information. C. What is Information Relating to the Representation of a Client? The RPCs do not define the phrase “Information relating to the representation of a client.” As stated above, however, this phrase is arguably broader than either the terms “confidences” or “secrets” used in the prior RPC 1.6. The new terminology does track the Restatement, § 59. The Restatement, § 59 defines “Confidential Client Information”: Confidential client information consists of information relating to representation of a client, other than information that is generally known. Comment b notes: This definition covers all information relating to representation of a client, whether oral, documentary, electronic, photographic, or other forms. It covers information gathered from any source, including sources such as
    • third persons whose communications are not protected by the attorneyclient privilege. . . . It includes work product that the lawyer develops in representing the client, such as the lawyer's notes to a personal file, whether or not the information is immune from discovery as lawyer work product . . .. The definition includes information that becomes known by others, so long as the information does not become generally known. . . . The fact that information falls outside the attorney-client privilege or work-product immunity does not determine its confidentiality under this Section.13 Of course, this last point prevents the protections afforded confidential information from being merely redundant of protections afforded by evidence rules.14 Some examples may illustrate the breadth of ““information relating to the representation of a client.” In a reservation of rights case dealing with defective construction claims, the coverage disputes often center around whether portions of the claimed damages (e.g., damage to the insured’s work), are covered. In these cases, the insurance company wants an itemization of the damages so that it can offer to pay what may be covered and refuse to pay for types of damage that are not covered. In preparing to defend the claims, defense counsel often obtains an expert’s opinion on reasonable repair costs that contains a detailed itemization, including an itemization of the amounts to repair the insured’s work, and amounts to repair all other damages. As long as that expert’s report is work-product, it cannot be disclosed to anyone, including the insurance company, unless the client gives “informed consent.” What about the defense expert’s report once it has been produced to the plaintiff as a part of discovery? Does its production in discovery make the disclosure of the expert’s report “impliedly authorized in order to carry out the representation”? This of course begs the question: disclosure to whom? The Restatement, § 59, comment d discusses the “generally known” standard, used in the prior RPC 1.6: Whether information is generally known depends on all circumstances relevant in obtaining the information. Information contained in books or records in public libraries, public-record depositaries such s goner offices, or in publicly accessible electronic-data storage is generally known if the particular information is obtainable through publicly available indexes and similar methods of access. Information is not generally known when a person interested in knowing the information could obtain it only by means of special knowledge or substantial difficulty or expense. 13 WSBA Formal Opinion #183 (1990) is instructive: “The rule of confidentiality in the ethics rules ‘is considerably broader than the statutory attorney-client privilege,’ quoting from the predecessor rule to RPC 1.6 defining secrets in language identical to the RPC definition. In Seventh Elect Church v. Rodgers, 102 Wn.2d 527, 688 P.2d 506 (1984), the court noted that the client had specifically requested that the information ought not be disclosed, and therefore held that is was ‘a “secret” within the provisions of the Code.”‘ 14 See also, 19.108.010(4). The Uniform Trade Secrets Act defines a trade secret as information that derives value “from not being generally known.”
    • In most Washington cases, discovery responses are not generally filed with the court unless the subject of a motion. Therefore, discovery responses are not “generally known” because the insurance company could not readily obtain the information from “public” sources. The same analysis applies to discovery responses that the plaintiff may make which would itemize its damages in a way that is helpful to an insurance company attempting to segregate between covered and uncovered claims. Such information should not be disclosed to the insurance company without the client’s “informed consent.” What about testimony given in a discovery deposition? Before the testimony has been transcribed, it is only known to persons present who heard the testimony, and information obtained from that source would seem to be “confidential client information.” However, even if the deposition is transcribed, in Washington such transcripts are generally not filed with the court. Therefore, an argument can be made that it is not “generally known,” and should not be disclosed. Finally, what about testimony given in court? Again, until it is transcribed, it can be argued that it is not “generally known,” and that an attorney should not disclose such information without client consent. However, if deposition or trial testimony has been filed with the court, then it would seem to fall within the category of “generally known,” because the public can examine all portions of the court file that have not been sealed. D. Meeting the Test for Disclosure. The requirement that confidential information be disclosed only if the client provides “informed consent” has several important implications. First, it requires that the attorney be familiar with all of the issues in the reservation of rights case, even if the attorney has a limited engagement that does not include representing the client on the coverage issues. Just because the attorney has not undertaken to represent the client against the insurance company should not mean that he/she is permitted to make unauthorized disclosures that might harm the client’s interests. If an attorney does not have a clear understanding of the coverage issues, the attorney may unwittingly disclose information to the insurer that is detrimental to the client’s interests. Second, the attorney must communicate adequate information to the client and provide an explanation of the material risks of proposed conduct, explaining the disclosure issues sufficiently so that the client can make an informed decision on whether to allow disclosure of the information to the insurance company. The duty to consult imposes on defense counsel the responsibility of explaining to the client the potential advantages and disadvantages of disclosure with sufficient detail to make certain that the client understands the issue and can make an informed decision. Again, this is a function of the attorney’s obligation to protect client information, and does not depend upon whether the attorney also represents the client in the coverage dispute.
    • Third, the attorney should make certain that the client has given informed consent to the disclosures before they are made. The common practice of sending the client a copy of letters to the insurance company is simply not sufficient, because the client cannot prevent a disclosure once it has already been made. Instead, the attorney should send the client proposed letters and status reports before they are sent, so that the client has an opportunity to approve all disclosures of information. Further, the attorney should be very careful to avoid unauthorized disclosures in all other communications to the insurance company. Finally, a client can direct the attorney not to disclose certain information, even if the information seems to be generally known or not materially adverse to the client. The Restatement, § 60, comment c(ii). In other words, express orders from the client limits the lawyer’s implied authority to disclose information. Id.; WSBA Formal Opinion #183 (1990). Admittedly, insurance companies request detailed reports and evaluations from defense counsel so that they can evaluate and settle claims against the insured. If the client refuses to authorize disclosure of information that the insurance company requests to make an evaluation, the company may claim that the insured has breached its contractual obligation to cooperate. Therefore, defense counsel must inform the client during consultation regarding the possible consequences of refusing to disclose information to the insurance company. However, in our opinion, the duty to cooperate only requires the insured to do those things necessary to assist in the defense of the claims against him/her. For example, an insured can be required to cooperate with defense counsel, and attend depositions and trials. However, the duty to cooperate in the defense of the case is not the same as the duty to cooperate in the insurance company’s efforts to deny or minimize its coverage. Accordingly, many courts have held that an insured’s duty to cooperate does not imply a duty to disclose privileged communications. See Remington Arms Co. v. Liberty Mutual Ins. Co., 142 F.R.D. 408 (D. Del. 1992); Bituminous Casualty Corp. v. Tonka Corp., 140 F.R.D. 381 (D. Minn. 1992); Pittston Co. v. Allianz Ins. Co., 143 F.R.D. 66 (D. N.J. 1992); see generally, Ostrager and Newman, Handbook on Insurance Coverage Disputes (13th ed.) § 2.08[b]. Similarly, the duty to cooperate does not compel a duty to disclose confidential information to the insurer, especially when the insurer would use such information to minimize coverage. V. Lawyer’s Exposure for Failure to Comply with RPCs. There are several potentially severe consequences for an attorney that undertakes an engagement without complying with his/her obligations. First, such conduct could be the basis of a disciplinary complaint when an unhappy client is found to have liability that is not covered by insurance. Our research failed to find any published disciplinary opinions covering the violation of the conflicts, scope of engagement, and confidentiality principles discussed here in conjunction with appointed defense counsel. While this might be because most insurance defense counsel have complied with these principles, more likely few complaints are made to the bar
    • association because unrepresented insureds are not aware of their rights. Or perhaps when complaints are made, the bar counsel does not consider such conduct to warrant sufficiently severe discipline to merit a published decision. Breach of these duties can also expose the attorney to monetary claims for disgorgement and malpractice. In Eriks v. Denver, 118 Wn.2d 451, 824 P.2d 1207 (1992), a lawyer undertook an engagement without obtaining a proper waiver for potential conflicts between his clients. When a conflict actually arose, the lawyer withdrew, but the clients nevertheless sued the lawyer for disgorgement of all fees that were received by the attorney. The court found the policy behind the conflict of interest principles to be sufficiently important that it allowed disgorgement of all fees, even though there was no showing that the attorney had caused any actual damage to the clients. However, in the usual case involving insurance defense lawyers, the insurance company, not the insured client, would have paid the fees, and therefore only the insurance company should have standing to seek return of fees. Much more significant in the insurance defense context is the risk that an attorney can be sued for malpractice by the insured client for any damages caused by representation. An insured finding himself/herself without coverage for a judgment entered against him/her may want to bring a legal malpractice claim. For example, the insured may feel that he/she never was properly advised of the conflicts of interest by virtue of defense counsel also representing the insurance company. Or perhaps the client claims that he/she was never consulted or consented to limit the goals of the representation, and wanted to include forcing the insurance company to cover the claim as one of the goals of the engagement. Alternatively, a client may feel that the insurance company was able to establish the absence of coverage because defense counsel allowed the insurance company to get access to confidential client information. Since insurance coverage is becoming increasing difficult to find for many types of claims, we believe that the likelihood of such malpractice claim is growing. When it appears likely that there may be no coverage for the claims against an insured, the claimant’s attorney may offer to settle the claims against the insured in exchange for an assignment of the insured’s claims against his/her insurance company, and against his/her attorney. In such a case, the plaintiff in the underlying case against the insured would become the plaintiff against the defendant’s lawyer. However, the Washington Supreme Court recently held that a defendant may not assign a legal malpractice claim he may have against his appointed defense counsel to his adversary in the same case. Kommavongsa v. Haskell, 149 Wn.2d 288, 67 P.3d 1068 (2003). In an even more recent case, Kim v. O’Sullivan, 133 Wn. App. 557, 137 P.3d 61 (2006), the Court held that a client could not get around the rule in Kommavongsa by agreeing to prosecute a legal malpractice claim against his attorney in his own name but for the benefit of his adversary. VI. Insurance Company’s Exposure for Defense Counsel’s Ethical Violations.
    • There are potentially very severe consequences for an insurance company that appoints counsel that fails to comply with his/her ethical obligations. Washington recognizes that an attorney is generally an independent contractor, and that the insurance company is not vicariously liable for the negligence of an attorney assigned to defend an insured. Evans v. Steinberg, 40 Wn. App. 585, 699 P.2d 797 (1985); Larson v. American Bridge Co., 40 Wash. 224 (1905). However, those cases did not involve a claim that the lawyer had failed to disclose and obtain a waiver for a conflict of interest. In Van Dyke v. White, 55 Wn.2d. 601, 612, 349 P.2d 430 (1960), the court held the insurance company was estopped to contest liability under its policy because the conduct of defense counsel did not comply with his ethical duty of undivided loyalty. More recently, in Safeco v. Butler, 118 Wn.2d 383, 823 P.2d 499 (1992), the court discussed the allegations of the insurer’s bad faith, which included conduct by assigned defense counsel such as obtaining statements for the insurance company to use in denying its coverage.15 Thus, an insurance company can be held liable for defense counsel’s breach of duties owed to the insured, and such conduct can be characterized as “bad faith” conduct of the insurance company. Cases in other jurisdictions hold that where defense counsel has violated his/her ethical duties to represent the insured, and benefited the insurance company by such actions, the insurance company is liable for the resulting judgment. Windt, Insurance Claims and Disputes (5th ed.) § 4:39 (2007). Given our Supreme Court’s expansion of an insurance company’s liability for bad faith refusal to defend, See Woo v. Fireman’s Fund Ins. Co., 161 Wn.2d 43, 164 P.3d 454 (2007), Truck Ins. Exchange v. Vanport Homes, Inc., 147 Wn. 2d 751, 58 P.3d 276 (2002), and particularly, recent enactment of the Washington Insurance Fair Conduct Act – RCW 48.30.015, it is very likely that more claims will be brought against insurance companies alleging that assigned defense counsel did not ethically represent the insured, and that the company is liable for a failure to defend. In the examples given above, where the attorney fails to disclose, consult, and obtain consent to counsel’s conflict of interest, it seems to us that a viable claim can be made against the insurance company. Similarly, where counsel fails to get the client’s consent after consultation on limiting the scope of the engagement, the insurance company might be held liable for failing to provide an adequate defense. In such cases, the client should have the right to reject the designated attorney, retain its own counsel, and recover the costs of defense under a breach of contract remedy. Such conduct can also form the basis of a claim against the insurance company of bad faith failure to provide a proper defense, with all of its attendant consequences. VII. 15 ABA Opinion No. 08-450. In Ellwein v. Hartford Ind. Co., 142 Wn.2d 766, 15 P.3d 640 (2001), the court held that an insurance company had committed bad faith, as a matter of law, by attempting to use an expert hired by the defense to build its coverage case. The court stated at page 781: “A rule prohibiting the use and manipulation of the insured’s expert by the insurer can be easily extrapolated from analogous rule dealing with attorneys.”
    • On April 9, 2008, the Standing Committee on Ethics and Professional Responsibility of the American Bar Association issued its opinion No. 08-450 addressing the hypothetical situation of defense counsel retained by an insurance company to represent both the insured employer and the insured employee. This opinion addresses many of the issues raised by this paper and affirms its conclusions. In the hypothetical context of a single defense counsel being paid by an insurance company to defend both the defendant employer and its defendant employee, the ABA opinion addresses the ethical issues raised when a lawyer’s fidelity to a client and her duty to preserve the client’s confidences with respect to “information related to the representation” under RPC 1.6 conflicts with her duty under RPC 1.4(b) to provide information to a client “to the extent reasonably necessary to permit the client to make informed decisions regarding the representation.” In the context of the lawyer’s initial retention by an insurance company, the Opinion emphasizes that just because the insurer traditionally expects that the lawyer it retains will limit her representation to defense and not address coverage, does not mean that the lawyer can unilaterally impose this limitation on her client, the insured. Rather, the ABA opines that under RPC 1.2, the lawyer has a duty to obtain the insured’s “informed consent” under RPC 1.2(c) to any limitation on her representation. Assuming the lawyer does obtain both the insured employer’s “informed consent” and the insured employee’s “informed consent,” to the dual, but limited representation, the Opinion next addresses what the lawyer should do when, in the context of her representation of the employee, she learns from the employee that at the time of the incident giving rise to the lawsuit, the employee may not have been within the scope of his employment. This information may not only raise a defense to liability for the employer; it may also remove the employee from the insurer’s coverage. Absent an express agreement among the lawyer and the two clients that satisfies the “informed consent” standard of RPC 1.6(a), the ABA opines that: “whenever information related to the representation of a client may be harmful to the client in the hands of another client or a third person [i.e., insurer] the lawyer is prohibited by Rule 1.6 from revealing that information to any person, including the other client and the third person [i.e. the insurer], unless disclosure is permitted under an exception to Rule 1.6. Whether any agreement made before the lawyer understands the facts giving rise to the conflict may satisfy “informed consent” (which presumes appreciation of “adequate information” about those facts) is highly doubtful. In the event the lawyer is prohibited from revealing the information, and withholding the information from the other client would cause the lawyer to violate Rule 1.4(b), the lawyer must withdraw from representing the other client under Rule 1.16(a)(1).
    • The opinion continues, concluding that none of the three circumstances in Rule 1.6 (informed consent, implied authority or an applicable exception) under which “information related to the representation” may be revealed apply. Therefore, the lawyer has a definite duty to withdraw from representing the employee and must independently evaluate under Rule 1.16 whether she also has a duty to withdraw from representing the employer. VIII. Role of Personal Counsel. Acting as personal counsel to an insured where an insurance company is defending under a reservation of rights requires close communication with defense counsel and a clear set of expectations. The relationship should begin by requesting that the defense attorney fully disclose all prior relationships with the insurance company. If there are litigation handling guidelines or negotiated rate agreements in place, they should be disclosed. The personal counsel should set forth expectations in a written communication. Those expectations should include regular communications, an assurance that there will be no confidential communications with the insurance company that are not disclosed to the insured, a requirement that all material communications to the insurer be disclosed in advance to the insured and a clear statement of the objectives of the representation. It is frequently the case that where there are significant coverage issues, the goal of the insured will be to have the case resolved with insurance company money. The defense attorney should be asked to set forth a strategy for achieving a settlement at the earliest reasonable date. Timelines should be established and agreed upon so that the personal counsel can monitor the performance of the defense attorney. All billings sent to the carrier should be disclosed so that there is an accurate record of all of the work performed. The personal counsel should set forth the expectation that no litigation activities will be undertaken without the consent of the personal attorney if those activities could adversely affect the insured's coverage position. For instance, dispositive motions that might result in a dismissal of covered claims should not be brought without the consent of the insured. The role of personal counsel is a valuable service to an insured being defended under a reservation of rights. It confers substantial value without unreasonably high fees because the steps that need to be taken are relatively modest to ensure that the defense is handled correctly. Richard Dykstra is of Counsel at Friedman | Rubin. He has a B.A. from the University of Washington, and a J.D. from Northeastern University School of Law in Boston. He is admitted to practice in Washington and Alaska, where he represents both policyholders and advises clients on a wide variety of commercial general liability and commercial
    • property coverage cases. Mr. Dykstra also has substantial experience bringing bad faith claims against insurers. He is a frequent author and lecturer at continuing legal education seminars. E-mail: rdykstra@friedmanrubin.com Fax: (206) 623-0794 Bruce Winchell is a shareholder in the Seattle law firm of Mills Meyers Swartling P.S. where he practices in the areas of business litigation and insurance coverage litigation. He has frequently lectured for various professional groups on litigation and insurance coverage issues. Bruce is a member of the Washington State Bar Association (past chair, Litigation Section), the William Dwyer Inn of Court, and the Washington Society of Certified Public Accountants. He received his B.A. degree from Southern Illinois University and his J.D. degree from the University of Washington. Bruce is recognized as a "Best Lawyer" and "Super Lawyer." E-mail: bwinchell@millsmeyers.com Fax: (206) 386-7343