Insurance Law CLE Chap 17 - Conflicts of Interest
Chapter 17
CONFLICTS OF INTEREST
Jack Levy, B.A., New York University (1990); J.D., University of Oregon School of Law (1993);
admitted to the Oregon State Bar in 1993; attorney, Gilbert Levy Bennett, Portland, Oregon
The author and the OSB Legal Publications Department thank the authors
of all prior editions of this chapter for their contributions.
§ 17.1-7 OSB Formal Ethics Op No 2005-98—Fee Agreements: Flat Fees, Diligence, and Competence 17-17
Appendix 17A Abbreviations. 17-19
§ 17.1 INTRODUCTION
The Oregon State Bar (OSB) Formal Ethics Opinions address an array of issues regarding insurance-related conflicts of interest. They are primarily directed to insurance defense lawyers and are focused on the “tripartite relationship,” which defines the lawyer’s role as representing both the insurer and the insured, and further defines the insured as the lawyer’s “primary client” (whatever that means). One of the opinions is directed to the plaintiffs’ bar, answering whether an injured party’s lawyer may communicate advice to an unrepresented insured tortfeasor (see § 17.1-8). This chapter surveys these ethics opinions, highlighting the key conflict-of-interest issues that are woven into them, to help lawyers better serve their clients and to avoid ethical hazards in the process. The reader is cautioned that the ethics opinions are advisory only. See Evraz Inc., N.A. v. Cont’l Ins. Co., Civ No 3:08-CV-00447-AC, 2013 US Dist LEXIS 165430, at *14, 2013 WL 6174839 (D Or Nov 21, 2013) (collecting cases and noting that none of the opinions cited by the insurer have been interpreted or adopted by the Oregon Supreme Court). Further, each case is fact-specific and insurance policies are unique contracts, so careful attention should be given to conflict-of-interest issues as they arise. The OSB Formal Ethics Opinions are available online at <www.osbar.org/ethics/ethicsops.html>.
§ 17.1-1 OSB Formal Ethics Op No 2005-121 (rev 2016)—Conflicts of Interest, Current Clients: Insurance Defense
OSB Formal Ethics Op No 2005-121 (rev 2016) defines the insurance defense lawyer’s primary ethical obligation to the insured client. The fact pattern involves a lawyer who is hired by the insurance company to defend a complaint against the insured. The complaint includes two claims for relief. One claim is potentially covered by the policy, for example, a negligence claim, and the other claim is likely not covered by the policy, for example, an intentional act. See, e.g., Casey v. Nw. Sec. Ins. Co., 260 Or 485, 491 P2d 208 (1971) (insured’s criminal conviction conclusively established that the injury was intentionally inflicted and, therefore, the insured’s civil liability was not covered by the insurer). The lawyer has grounds to move against or potentially settle the covered claim, but not the uncovered claim. The insured does not want the lawyer to do so. The opinion concludes that the lawyer may not file the motion or settle only the covered claim.
The logic behind the opinion is that the lawyer is considered to have two clients, the insurer and the insured, but when their interests are in tension, the lawyer must refrain from any action that would impair the insured’s coverage. This multiple-client relationship implicates Oregon Rule of Professional Conduct (RPC) 1.7 on current-client conflicts of interest.
Note: The Oregon Rules of Professional Conduct are found at <www.osbar.org/_docs/rulesregs/orpc.pdf>.
The opinion highlights that Oregon RPC 1.7 is generally not considered to raise conflict problems in insurance defense given the “community of interest” growing out of the insurance contract, because the relationship among the lawyer, the insured, and the insurer is both created and limited by the insurance policy. This is especially the case when the insurer defends an insured without any reservation of its rights to later deny coverage for the claim.
Note: Some actual conflict situations may arise even in cases where the insurer has not made a reservation of rights, for example, if the insured substantially fails to cooperate in the defense of the case, or if the insured flatly refuses to allow the lawyer to settle the case, although such events rarely occur. The Ethical Oregon Lawyer § 10.2-2(e)(5) (OSB Legal Pubs 2015).
The dynamics are different, however, when the insurer agrees to defend the case but subject to a reservation of rights. To resolve the tension between the insurer and insured in these cases, the opinion requires that the lawyer must treat the insured as the lawyer’s “primary client” whose protection must be the lawyer’s “dominant” concern. For this reason, the opinion concludes that the lawyer cannot file the motion.
To flesh out the contours of what it means to treat the insured as the primary client, it is important to focus on the reason stated in the opinion for the insured’s position against filing the motion:
Lawyer also knows that Insured does not want Lawyer to bring such a motion or effect such a partial settlement because doing so would leave Insured without an Insurer-paid defense on the second claim for relief and would diminish the ability of Insured to get funds from Insurer to help settle the case as a whole.
OSB Formal Ethics Op 2015-121 (rev 2016) (emphasis added).
In other words, the opinion acknowledges the economic realities facing insurance companies in fulfilling their defense obligations. Since defense costs could easily surpass the settlement value of a garden-variety case, the opinion surmises that the insurer may be leveraged by the insured to “help” settle potentially uncovered claims in order to avoid exposure to future defense costs. Further, it is arguably bad practice for an insurer to choose to spend $10,000 defending a case because of a dispute over whether there is coverage for $1,000 in claimed damages.
As a backstop, it is established that the underlying liability action against the insured will not be given collateral-estoppel effect in a subsequent coverage dispute if there is a potential conflict between the insurer and the insured. Ferguson v. Birmingham Fire Ins. Co., 254 Or 496, 509–11, 460 P2d 342 (1969). However, in Fountaincourt Homeowners’ Ass’n v. Fountaincourt Dev., LLC, 360 Or 341, 358, 380 P3d 916 (2016), the court noted that “[w]hat the insured had become obligated to pay as damages and whether the insurer ultimately was liable under its policy presented questions of law for the court to determine by reference to (a) the contract [of insurance] and (b) the judgment and record in the underlying proceeding.”
In a footnote, the court in Fountaincourt acknowledged the potential ethical dilemma for defense counsel in trying a case where both potentially covered and uncovered damages are at issue, but then bluntly instructs that the coverage issues could not have been tried in the underlying negligence proceeding:
As the parties recognize, an attorney attempting to do both at the same time in the same proceeding faces not only practical but potential ethical dilemmas. See, e.g., Oregon Formal Ethics Opinion No. 2005-121 (opining that attorney hired by insurer to defend insured under reservation of rights could not ethically move for dismissal of only claim covered by insurance); cf. Eastham v. Oregon Auto. Ins. Co., 273 Or 600, 607, 540 P2d 364 (1975) (in settlement negotiations in this context, insurer must give equal consideration to the conflicting interests of itself and its insured).
[Insurer] argues on review that both the trial court and Court of Appeals decision in the present case impermissibly gave preclusive effect to the verdict in the underlying case and, in essence, would require an attorney defending an insured to try coverage issues in the underlying proceeding in a manner that is ethically problematic. We disagree. The coverage issues were not, and could not have been, tried in the underlying negligence proceeding. That the damages awarded in the underlying proceeding needed to be considered in determining coverage in the later proceeding does not in any way suggest that the coverage issues could or should have been litigated in the underlying proceeding, or that [insurer] was precluded from making any legal argument or presenting any evidence on a genuine issue of material fact in the garnishment proceeding.
Fountaincourt Homeowners’ Ass’n, 360 Or at 357 n 7.
So, while the opinion apparently informs the lawyer to take a pragmatic and expansive view of what the insurer may be willing to pay to get the case resolved, unfortunately, the opinion and decisional law do not offer further guidance on what else the lawyer is supposed to do, or refrain from doing, in order to treat the insured as the “primary client.” The Ethical Oregon Lawyer gives some outside examples, but does not provide a holistic assessment of what the lawyer is supposed to do when the lawyer’s respective clients are in conflict:
[A] lawyer could not defend the insured in the underlying action while at the same time prosecuting a declaratory-judgment action to establish a lack of coverage on the insurer’s behalf, because that would constitute an actual conflict. OSB Formal Ethics Op No 2005-77. On the other hand, a lawyer who has previously advised the insurer that it may have a defense to either coverage or a duty to pay may subsequently represent the insured in the underlying action if both the insurer and the insured consent. OSB Formal Ethics Op No 2005-77.
Practice Tip: When conflicts may exist with an insurer by virtue of the tripartite relationship, insurance defense counsel may be able to contractually limit the applicability of the conflicts doctrine by reaching a nonengagement agreement with the insurer. If the insurer agrees, notwithstanding the default assumption of joint representation under Oregon law, that it is not the lawyer’s client for purposes of defending the insured, the lawyer should be able to treat the insurer as a third party and share the required information under a common-interest theory rather than an attorney-client relationship.
The Ethical Oregon Lawyer § 10.2-2(e)(5).
While this practice tip suggests removing the insurer from the attorney-client relationship, the consequence of doing so are not clear. Further, given that the opinion itself recognizes a tripartite client relationship, a breach of that relationship may pose risks to the confidentiality of the communications shared among the attorney, the attorney’s client, and the insurer. See, for example, United Pac. Ins. Co. v. Trachsel, 83 Or App 401, 404 731 P2d 1059, rev den, 303 Or 332 (1987), in which the court explained that the “[work-product] rule protects only those things which are prepared in ‘anticipation of litigation’ and not those prepared in the regular course of business. . . . Investigation reports prepared by or for an insurer may fall into either category depending on the purpose of the investigation disclosed by the evidence.”
In other words, the nature of the communications among these parties may come into question, especially in pre-suit matters.
The lawyer should always be mindful of the lawyer’s base ethical obligations to both clients, including honest communications. See Oregon RPC 1.4 (communication); Oregon RPC 8.4 (misconduct). To this end, the insurance defense lawyer’s engagement letter should provide clarity regarding the services that the lawyer will be providing in defense of the reservation-of-rights case, and the services that are outside the scope of the engagement, so that the insured clearly understands what to expect. By way of example, the following points may be covered in the letter:
· I was retained to defend you in this accident claim. I am not handling any other legal matters on your behalf.
· I will not be providing legal advice to you or your insurance company on whether there is insurance coverage available for the claim(s) being made against you. You may retain separate legal counsel at your expense to advise you on insurance coverage matters.
· I will be communicating with you and the insurance company on a periodic basis to provide information affecting the issues of liability and damages in order to prepare the case, and to secure funds to settle the case, as appropriate. In doing so, I will not be disclosing information if disclosure would be against your interests.
· I have reviewed and evaluated the insurance company’s billing requirements and other directions as reflected in its litigation guidelines. Based on that review, and based on the facts of your case as I currently know them, I conclude that compliance with the guidelines will not materially compromise my professional, independent judgment on your behalf or my ability to provide you with competent representation. Further, on an ongoing basis throughout the case, I will reevaluate whether my continued compliance with the guidelines limits my ability to exercise independent judgment on your behalf. I will advise you if any concerns arise.
· The ethical rules governing lawyer conduct state that you and your insurance company are both considered my clients. However, even though the insurance company is paying for my services, I must and will in fact treat you as my “primary client” whose protection must be my “dominant” concern. I take this ethical charge very seriously even though I have a business relationship with your insurance company.
· If you have any questions or concerns about these ethical disclosures, please contact me so that we can discuss.
This list is not exhaustive. Instead, it is intended to convey that a clearly defined scope of services is one way of expressing dominant concern for the insured.
Insurance coverage law is nuanced and evolving, and in the end, there are more conflict-of-interest situations that could potentially arise in a reservation-of-rights defense than are capable of resolution in this chapter. The most frequently recurring issue on point in this author’s experience is how much and what kind of information the defense counsel should voluntarily report to the insurer on issues potentially affecting coverage. For this reason, it is recommended that insurance defense counsel develop a heightened understanding of insurance coverage law. In construction-defect litigation, for example, the hot button issues of liability insurance coverage may involve the following:
· damages alleged to exist as compared to the damages that have been identified in the course of investigations— generally involving coverage for resulting damages versus exclusions from coverage for damages solely to the insured’s work or product;
· timing of the insured’s work—generally involving prior work exclusions and known loss provisions in policies;
· number and kind of dwelling units at issue—Generally involving habitational exclusions (i.e., condominium or tract home exclusions, or exclusions based on the number of units within a planned community);
· type of building materials used—generally involving exclusions of coverage when certain building materials are used on a project, such as exterior insulation and finish systems (synthetic stucco); and
· whether or not the insured obtained indemnity and additional insurance protection from subcontractors—generally involving additional condition endorsements, which require an insured to obtain additional insurance and to secure indemnity agreements from its subcontractors as conditions of coverage.
Further, the insured’s state of mind (be it innocent, negligent, reckless, or intentional) may also raise an issue potentially affecting coverage. However, whether and what state of mind is dispositive to coverage depends on the facts of the case and the policy language at issue. See Harrell v. Travelers Indem. Co., 279 Or 199, 567 P2d 1013 (1977) (policy covered an award of punitive damages absent an exclusion to the contrary; insuring against punitive damages did not violate public policy, given that the insurance was against punitive damages occasioned by reckless as distinguished from intentional conduct).
The reader is cautioned that policy language varies from insurer to insurer and can vary from year to year for the same insurer. The policy language needs to be evaluated in comparison to the facts of the case. In high severity or other problem coverage cases, the lawyer should consider recommending to the insured that the advice of separate insurance coverage counsel should be obtained.
The point is that insurance defense lawyers who handle reservation of rights cases need to have a working knowledge of insurance coverage in order to better serve their primary client. A common refrain among defense counsel is “I just handle the defense, not the coverage.” While that may be true as far as the formal assignment goes, in consideration of this opinion, defense counsel should be keenly aware of where the coverage traps lie, so as not to unwittingly step into them.
Finally, the reader should note that there is an exception to the tripartite relationship in the defense of environmental claims, in which ORS 465.483 applies to provide the insured with independent counsel when the insurance company reserves its rights to deny coverage. This has been interpreted to mean truly independent counsel: “the Oregon legislature did not intend for the insured to accept defense counsel selected by the insurer under a reservation of rights, but to select its own ‘independent counsel’ who will be compensated by the insurer.” Siltronic Corp. v. Employers Ins. Co. of Wausau, 176 F Supp 3d 1033, 1053 (D Or 2016).
§ 17.1-2 OSB Formal Ethics Op No 2005-157 (rev 2016)—Information Relating to the Representation of a Client: Submission of Bills to Insurer’s Third-Party Audit Service
OSB Formal Ethics Op No 2005-157 (rev 2016) involves the conflict-of-interest issues that may arise when an insurance defense lawyer represents an insured client whose insurance company is paying the bills. The insurer’s billing guidelines require the lawyer to submit the insured’s detailed bills to a third-party billing audit service. The opinion concludes that the lawyer may not submit the insured’s bills to a third-party audit service except when the bills contain no information protected by Oregon RPC 1.6 on confidentiality of information, unless one of the exceptions contained in that rule applies.
The opinion goes on to state that, depending on the case, the lawyer may need to discuss with the insured the risks, if any, that may arise from the submission of the detailed bills to the third-party audit service. For example, the risk of adverse effects on the insurer–insured relationship. In other words, disclosure of some facts in detailed bills may affect the insured’s coverage under the policy. Further, the opinion discusses the risk of waiving the lawyer-client privilege. It cites to United States v. Massachusetts Inst. of Tech., 129 F3d 681, 97-2 US Tax Cas ¶ 50,955 (1st Cir 1997), which holds that the defendant waived the attorney-client privilege when it previously gave its legal billing statements to a government auditing agency, because the governmental auditing agency was a possible adversary.
One approach to this issue is to consider the third-party audit service to be the insurer’s agent, and to consider the disclosure as impliedly authorized in order to carry out the joint representation afforded under the policy. This view comports with the “community of interest” theory of the parties’ tripartite relationship arising out of the insurance contract. Under the tripartite relationship the insurer and presumably its agents are not adversaries of the insured with respect to defending against liability. Although there is no Oregon authority on point, OSB Formal Ethics Op No 2005-157 (rev 2016) itself highlights the discussion of the insurer–insured conflict issues as discussed in The Ethical Oregon Lawyer, to provide some guidance on the handling of intramural communications. See also OSB Formal Ethics Op No 2005-166 (rev 2016) (Competence and Diligence: Compliance with Insurance Defense Guidelines), which condones the submittal of billing statements to the insurer:
Insurer may require Lawyer to inform Insurer about the litigation process through periodic status reports, detailed billing statements, and the submission of other information. Lawyer’s compliance with this aspect of the Guidelines does not necessarily violate Lawyer’s ethical obligations if the disclosure of such information advances the interests of both Insured and Insurer, and does not otherwise compromise Lawyer’s duty to maintain his or her independent judgment. Cf. OSB Formal Ethics Op No 2005-157 (rev 2016).
On the other hand, the opinion also concludes that the lawyer may ethically seek the insured’s consent to submit its bills to a third-party audit service as long as the conflict is waived in accordance with Oregon RPC 1.7. In other words, unless a conflict exists that cannot be waived, it is permissible for the lawyer to ask the insured for consent to disclose the bills to the third-party audit service.
Lawyers would likely benefit from further clarification on this issue.
§ 17.1-3 OSB Formal Ethics Op No 2005-166 (rev 2016)—Competence and Diligence: Compliance with Insurance Defense Guidelines
As a corollary to OSB Formal Ethics Op No 2005-121 (rev 2016) and OSB Formal Ethics Op 2005-157 (rev 2016), this opinion concludes that a lawyer may comply with the insurance company’s litigation guidelines only if the lawyer has an opportunity to review and evaluate the guidelines with respect to each case and, based on that review, the lawyer reasonably concludes that compliance with the guidelines will not materially compromise the lawyer’s professional, independent judgment or the lawyer’s ability to provide competent representation to the insured. OSB Formal Ethics Op No 2005-121 (rev 2016). This comports with the lawyer’s primary obligation to the insured as described in OSB Formal Ethics Op 2005-121, defining the tripartite relationship. As dictated by the opinion, the lawyer cannot agree to comply with the guidelines before reviewing and analyzing the facts and issues of each case because such an advance agreement would potentially surrender the lawyer’s professional judgment. Moreover, throughout the case, the lawyer has an ongoing ethical obligation to reevaluate whether the lawyer’s continued compliance with the guidelines impedes the lawyer’s ability to exercise independent judgment.
Perhaps because of ethics opinions such as this one, insurance companies typically require compliance with their published guidelines but only to the extent that compliance is consistent with the lawyer’s ethical obligations to the insured.
§ 17.1-4 OSB Formal Ethics Op No 2005-30 (rev 2016)—Conflicts of Interest, Current Clients: Simultaneous Representation of Insurer and Insured
OSB Formal Ethics Op No 2005-30 (rev 2016) permits a lawyer retained by an insurance company to pursue a subrogation claim on its behalf, as well as simultaneously pursuing uninsured damages on the insured’s behalf, such as the deductible, as long as the lawyer does not permit improper influence within the meaning of Oregon RPC 5.4(c) and obtains informed consent from the insured pursuant to Oregon RPC 1.8. Interestingly, this opinion highlights that consent is not necessary if it does not reasonably appear that a conflict is present:
As discussed in OSB Formal Ethics Op No 2005-27, a lawyer may represent multiple clients without special disclosure and consent if it does not reasonably appear that a conflict is present. Cf. In re Stauffer, 327 Or 44, 48 n 2, 956 P2d 967 (1998) (citing In re Samuels & Weiner, 296 Or 224, 230, 674 P2d 1166 (1983)).
§ 17.1-5 OSB Formal Ethics Op No 2005-22—Conflicts of Interest, Current Clients: Avoiding Influence by Others —Minor Conservatorship
OSB Formal Ethics Op No 2004-22 permits a lawyer retained by an insurance company to handle a conservatorship proceeding to legally effect a minor settlement of an injury claim where the injured minor and the minor’s parents are unrepresented, as long as the lawyer consults with and obtains the informed consent of the minor and the minor’s parents before proceeding. Like the discussion of OSB Formal Ethics Op No 2005-30 (see § 17.1-4), the lawyer cannot permit improper influence by the insurance company within the meaning of Oregon RPC 5.4(c) and must obtain informed consent pursuant to Oregon RPC 1.8. Further, the opinion specifies that the lawyer may not permit the insurance adjuster to direct or regulate the services being provided.
§ 17.1-6 OSB Formal Ethics Op No 2005-77 (rev 2016)—Conflicts of Interest, Current Clients: Representation of Insured after Investigation of Matter for Insurer
OSB Formal Ethics Op No 2005-77 (rev 2016) permits a lawyer retained by an insurance company to defend its insured even after the lawyer has advised the insurer on coverage, that is, that the insurer has a duty to defend the insured, but also that the insurer may not have a duty to indemnify the insured (e.g., no duty to pay any ultimate judgment). In this situation, because the lawyer had worked for the insurer on the coverage question, if there is a significant risk that the lawyer’s representation of the insured in defense of the underlying claim will be materially limited by the lawyer’s responsibilities to the insurer, a conflict will be present under Oregon RPC 1.7(a). Consequently, the lawyer could not represent both the insurer and the insured in the underlying action without a reasonable belief that the lawyer could competently represent both clients, and only after receiving informed consent, confirmed in writing, from both the insurer and the insured pursuant to Oregon RPC 1.7(b). The opinion specifies that the disclosure to the insured must include a discussion of the fact of the prior representation of the insurer on the coverage question and its potential significance.
§ 17.1-7 OSB Formal Ethics Op No 2005-98—Fee Agreements: Flat Fees, Diligence, and Competence
OSB Formal Ethics Op No 2005-98 permits an insurance defense lawyer to accept flat-fee defense assignments. However, the lawyer cannot ethically assist the insurer in violating the fiduciary obligation that the insurer owes to its insureds to provide a competent defense. The lawyer could not ethically accept the representation if the flat fee per case rate quoted by the insurer to the lawyer were so low as to compel the conclusion that the insurer was seeking to shirk its duties to the insureds and to enlist the lawyer’s assistance in doing so.
§ 17.1-8 OSB Formal Ethics Op No 2005-16—Communicating with Unrepresented Persons—Unrepresented Insured
Finally, one for the plaintiffs’ bar. OSB Formal Ethics Op No 2005-16 prohibits a lawyer who represents an accident victim from writing to inform the at-fault party of the seriousness of the injuries and to recommend that the at-fault party instruct the party’s insurance company to accept a policy-limits demand. This is because Oregon RPC 4.3 prevents the lawyer from giving advice to an unrepresented person if the lawyer knows or reasonably should know that the interests of such a person are or have a reasonable possibility of conflicting with the interests of the lawyer’s client.
To sum up, most insurance defense assignments, including those afforded under reservation of rights, are concluded without controversy. Nonetheless, there is a growing body of insurance coverage litigation in the Oregon courts, and the lawyer will never know in advance whether the underlying case will lead to the next court decision on coverage. A Lexis search reveals 90 reported and unreported federal and state Oregon opinions within the past 10 years that include the term “insurance coverage” and with “insurance” in the name of the case. To abide one’s ethical responsibilities, and to provide good service for clients, the lawyer should remain mindful of the duty of honest communications while at the same time navigating around conflict and confidentiality challenges that may arise so as to help land a successful outcome for the lawyer’s primary client, the insured. As a practical matter, it is not always clear what information is worth volunteering versus what information should be held back in the interest of the insured, in which case, coordination with the insured’s coverage counsel, while potentially costly to the insured, may provide the best protection in the end. If anything, participation of coverage counsel in the stickier cases should at least help the lawyer identify and hopefully avoid ethical and malpractice traps.
Appendix 17A Abbreviations
OSB
Oregon State Bar