Liability Risks of Assigned Insurance Counsel

©1995 New Jersey Law Journal

Medical malpractice litigation has become an incubator of problems confronting assigned counsel. These actions focus issues faced by insurer-assigned attorneys because of (i) the nature of the insurance contract, (ii) the potential for substantial verdicts and (iii) the disproportionately high percentage of medical malpractice cases which are tried to conclusion. This type of litigation illustrates the problems which now face assigned counsel generally and serves as a backdrop for the developing law which both governs attorney conduct and opens potential liability for damages.

• Defendant in a medical malpractice action alters office records and, after being challenged at deposition, accuses his attorney of having told him to make the changes. The attorney withdraws from the case and worries about a suit based on groundless accusations. His successor is later sued for failure to advise plaintiff's attorney of the alterations.

• Another lawyer tries a case for a physician and the jury returns a verdict in excess of the policy limits. The doctor, who has adamantly denied liability and looked forward to vindication at trial, then accuses his attorney of failure to recommend settlement before trial within the policy limits.

• An insurer's representative calls its assigned attorney and asks for her opinion as to whether coverage should be extended in the case of alleged defamation by the insured physician. She knows from prior experience that the policy doesn't cover the claims against her assigned client.

• An attorney is authorized to settle an action in behalf of the insured but offers less than the authorized sum in order to get a better deal for the insurer. The plaintiff then withdraws the offer to settle within the limit of the authorized settlement sum, obtains a verdict over the policy limit and the insured sues his assigned attorney for breach of fiduciary relationship.

• A physician authorizes settlement, as required by his policy for the insurer to settle, and despite withdrawal of that authorization the insurer settles without the assigned attorney advising the doctor of continuing negotiations after withdrawal. He sues his assigned attorney.

These are but a few of the recurring instances which place the attorney, assigned by the insurer under a liability policy to represent its insured, in a position of possible conflict or potential liability.

It was not long ago that insurance defense lawyers operated in a safe haven of practice. See, e.g., Wolpaw vs. General Acc. Ins. Co., 272 N.J. Super. 41 (App. Div. 1994)(a policy suit, in which the insurer was sued for assignment of multiple insureds with conflicting interests to a single firm, then filed a third party action against that law firm). They seldom had the concern of plaintiff's attorneys that their clients, or others affected by their conduct, would turn on them and sue for professional malpractice. Those days are now no more than a memory. As financial stakes have risen and reluctance to sue counsel has waned, those attorneys assigned to represent insureds in liability actions have developed greater sensitivity to the possibility of, themselves, being defendants in malpractice actions arising out of their representation of the insured. Conventional wisdom once held that an attorney assigned by an insurer to represent its insured under a liability policy stood in a dual relationship with the insured and the insurer.

In Longo v. American Policyholders' Ins. Co., 181 N.J. Super. 87 (Law Div. 1981), the court stated:

It has been recognized that the tripartite relationship between and among insurer, insured and counsel is fraught with real and potential conflicts of interest. Insurance defense counsel routinely represent two clients: the insurer and the insured. Although our courts have generally disfavored representation of multiple clients by an attorney in a single case, only recently has this delicate relationship been the subject of litigation with respect to counsel retained by an insurer to represent its insured. Problems are particularly acute with respect to counsel's representation of an insurer and the insured. The attorney's relationship with the insurer is contractual and often ongoing. In contrast, his representation of the insured is usually transitory . . ..

In this context, our Supreme Court has characterized as "paramount" the loyalty owed to the insured by the attorney. A lawyer so retained is duty-bound to represent the insured with undivided fidelity. His ethical obligation is in no sense diminished by reason of his relationship with the insurer.[citations omitted]

A striking example of the former mentality of some assigned attorneys is found in Employers Cas. Co. vs. Tilley, 496 S.W.2d 552 (Texas 1973), in which Employers, which had raised a question of notice under the policy, secured a standard non-waiver agreement from its insured, Tilley, and then engaged an attorney to represent him in defense of the personal injury action. That attorney not only performed services for Tilley in defense of the liability action but also performed services for Employers on the coverage issue, adverse to Tilley. Tilley had claimed he had no knowledge of the underlying accident until he was sued and, thus, had not previously notified Employers of it. His assigned attorney actively worked to develop evidence for Employers on the coverage question, which evidence became the basis for a declaratory judgment suit by Employers. Tilley defended the declaratory judgment action alleging, among other things, waiver and estoppel. Both parties moved for summary judgment. The trial court denied Employers' motion and granted Tilleys'. The Texas Supreme Court affirmed and held that Employers, through its assigned attorney, engaged in conduct so contrary to public policy that it had waived its policy defenses and was estopped, as a matter of law, from denying responsibility for defense and indemnification of its insured. The Texas court recognized that such conduct raised serious questions of legal ethics and public policy.

Under the policy in question (comprehensive liability) the insurance company's obligation to defend the insured provides that the attorney to represent the insured is to be selected, employed and paid by the insurance company. Nevertheless, such attorney becomes the attorney of record and the legal representative of the insured, and as such he owes the insured the same type of unqualified loyalty as if he had been originally employed by the insured. If a conflict arises between the interests of the insurer and the insured, the attorney owes a duty to the insured to immediately advise him of the conflict. 496 S.W.2D at 558.

We acknowledge that the "triadic relationship [of] insurer, insured, and counsel" creates difficult ethical problems. Lieberman v. Employers Ins. of Wausau, 84 N.J. 325, 338, 419 A.2d 417 (1980). Nonetheless, it is clear that insurance counsel is required to represent the insured's interest as if the insured hired counsel directly. Ibid. Indeed, insurance counsel's loyalty to the insured may actually be paramount. Ibid. Permitting insurance counsel to impeach the credibility of an insured places counsel in a position of representing conflicting interests, and actually permits counsel to elevate the insurer's interest over the insured's. Such practice cannot be condoned. [273 N.J. Super. at 286]

In Parsons v. Continental Nat'l. American Group, 550 P.2d 94 (Arizona 1976), the issue arose as to whether CNA, in a garnishment action against it (a method of executing judgments in Arizona), was estopped from denying coverage under its policy. Its defense to that action was based upon confidential information obtained by the insurer's assigned attorney, developed by him as a result of representing its insured in the underlying tort action. The tort plaintiffs were brutally assaulted by a 14 year old insured and the insurer's investigator, after reviewing the minor insured's background, came to the conclusion that he was not in control of his senses at the time of the incident. He suggested that the case be settled within the coverage of the policy. He was unable to do so and suit was instituted against the teenage insured. Thereafter, CNA's retained counsel undertook the insured's defense and continued to communicate with CNA, advising the company he had secured a confidential file on the minor insured from the institution where the minor had been incarcerated, which showed that the insured was fully aware of his acts and knew that what he was doing was wrong. Based on this information received from the assigned attorney, CNA at trial successfully invoked the intentional act exclusion in its policy and defeated the garnishment action filed by the successful plaintiffs. Plaintiffs contended in the policy suit that CNA should be estopped to deny coverage because it had waived the exclusion by taking advantage of the fiduciary relationship between its assigned attorney and the insured. The Arizona Supreme Court agreed and condemned the actions of the attorney who used his position as counsel for the insured to further the insurer's interest.

The attorney in the present case continued to act as Michael's attorney while he was actively working against Michael's interests. When an attorney who is an insurance company's agent uses the confidential relationship between an attorney and a client to gather information so as to deny the insured coverage under the policy in the garnishment proceeding we hold that such conduct constitutes a waiver of any policy defense, and is so contrary to public policy that the insurance company is estopped as a matter of law from disclaiming liability under an exclusionary clause in the policy. [550 P.2d at 99.]

What is the extent to which an assigned attorney must go to secure sufficient settlement monies from the insurer? This issue arose in Purdy v. Pacific Auto Ins. Co., 157 Cal. App. 3d. 59, 203 Cal. Rptr. 524 (Ct. App. 1984). The assigned attorney was sued for loss sustained due to the insurer's refusal to settle on behalf of its insured. No claim was made of attorney incompetence in handling the litigation or that the assigned attorney intentionally conspired with the insurer. Rather, the claim of professional negligence was based on the lawyer's failure to effectuate a settlement. The court indicated that there was no authority to hold a lawyer legally responsible for failing to persuade an insurer to take a particular course of action. As stated by the court,

A lawyer cannot properly compel a client to take his or her advice; a lawyer may strongly advise action by a client, action highly beneficial to the client or others, action clearly indicated by known facts, but there is no duty on the part of the client to follow the lawyer's lead - that is not the nature of the relationship, assuming the client is legally capable of acting on his own behalf. [203 Cal. Rptr. at 534-535.]

Ordinarily, the insurer retains, under the liability policy which it issues, the exclusive right to settle any claim or suit against its insured within the limits of the policy.

It was early stated that an insurer has the right to make a compromise or settlement of any claims against the insured, and that it is not bound to consult the interests of the insured to its own prejudice. The law favors settlement without recourse to litigation.

Liability insurance contracts have been held to give the insurer the absolute authority to settle claims within the policy limits, and the insured has no power to compel the insurer to make such settlements, or to prevent it from doing so. [7C J. Appleman, Insurance Law and Practice, ¤ 4711 (3d ed. 1983).]

But what if the policy requires authorization of the insured to settle? In Lieberman v. Employers Ins. Co. of Wausau, 84 N.J. 325 (1980), remanding, modifying and affirming 171 N.J. Super. 39 (App. Div. 1979), the insured physician sought damages from the attorney retained by his insurer to represent him in a medical malpractice action. After signing a settlement consent form (which the policy required in order to allow the insurer to settle), the defendant physician received information indicating possible malingering by the plaintiff. He advised the insurer who passed it on to the physician's assigned attorney. That attorney investigated the allegation and reported his conclusions to the insurer, but not to his physician-client. Because the insurer felt it would not be able to prove at trial that plaintiff was a malingerer, it opted to pursue settlement. Meanwhile the physician, based on the new information he believed had been uncovered, determined that he wished the matter to go to trial. He advised the insurer of his withdrawal of consent to settle. The physician's withdrawal of consent was rejected by the insurer. The physician's assigned attorney then acceded to a request from plaintiff's attorney to negotiate directly with the insurer, but failed to keep his physician-client advised of these developments. The case was settled without further communication to the physician. This resulted in a premium surcharge, based on this settlement and two prior settlements to which the physician had consented. He sued the insurer for the amount of the premium increase and sued his assigned attorney for breach of his obligations arising from their attorney-client relationship.

The Supreme Court, in its review of the issues presented by the insured's action, held that defense counsel owed to the insured the same unqualified loyalty as if he had been personally retained. By ignoring the wishes of his physician-client to litigate rather than to settle, a right which the physician had under his malpractice policy, he breached his duty and became liable for resultant damages. The Court stated that, when the insurer refused to accede to the legitimate demand of its insured, the attorney had a duty (a) to inform the physician of the conflict in which he had been placed and (b) to withdraw from the case completely or terminate his representation of either the insured or the insurer. The court further held that damages for injury to reputation which the physician sought from the attorney were recoverable if proximately caused by that attorney's professional negligence.

An attorney's vulnerability on settlement was also illustrated in Ziegelheim v. Apollo, 128 N.J. 250 (1992), a matrimonial action, in which the court recognized the client's right to a claim against her attorney for negligently settling her divorce case, despite her approval at that time. The claim in Ziegelheim was that her attorney was negligent in the advice given her as to the wisdom of settlement on the terms offered by her husband.

One of the most thoughtful and comprehensive discussions of the relationship between assigned attorney, insured and insurer is found in the Mississippi case of Hartford Accident & Indem. Co. v. Foster, 528 S.2d 255 (Mississippi 1988). In Foster, a bad faith action was instituted by the insured against his liability insurer and his attorneys (Coker) for refusal to settle a case within policy limits and for breach of fiduciary duty owed to him by Coker, his assigned counsel. The Supreme Court of Mississippi, reversing the determination of the trial court, granted judgment as a matter of law in favor of Coker. The evidence showed that Coker, in defense of the action on behalf of Foster, had performed professionally in discharging that obligation. He adequately communicated to Foster the status of the matter and opinion, based on his evaluation of the facts as well as the statements of his insured, that the case was defensible. Although there were settlement discussions during trial the case went to a jury, which returned a verdict in excess of Foster's policy limit. It was the opinion of assigned counsel that the trial had gone well for the defense and, viewing the jury deliberations prospectively, that the odds overwhelmingly favored either a defense verdict or a modest plaintiff's verdict. At the conclusion of the bad faith action, the jury returned a verdict in favor of Foster and against Hartford and Coker.

The Supreme Court reversed as to both Hartford and Coker based on an analysis of the actions of the insurer and by concluding as a matter of law that there was a proper discharge by the attorney of his obligations toward the insured. The court recognized the nature of the assigned attorney's duty:

There can be no question but that the lawyer owes his client absolute loyalty, and is required to devote his professional ability solely in the interest of that client . . ..

The fact that the insurance contract authorizes the insurance company to employ an attorney to handle the defense of a case in no way impairs or diminishes the duty of the lawyer to the insured client. A contract which authorized any dilution of the ethical obligation of an attorney to the client would be void as against public policy. (citations omitted)

The conflict of interest issue, see Lieberman, supra, is not one which is always susceptible of easy resolution in policy limit cases. As the Court stated in Foster:

In sum, the ethical dilemma thus imposed upon the carrier-employed defense attorney would tax Socrates, and no decision or authority we have studied furnishes a completely satisfactory answer. We would first observe that it is of the utmost importance that the lawyer promptly recognize the difficult problem which faces him, and which requires the most carefully measured words. The best this Court can offer is that the attorney, after informing his clients of the settlement terms, and giving them the advice as above noted, should not be prohibited from honestly and carefully answering questions pertaining to the law and facts of the case, his impressions of the witnesses, the jury, and the trial judge, such as he would normally be asked as attorney, and expected to be able to answer. At the same time, he must scrupulously guard against violating his absolute, non-delegable responsibility not to urge, recommend or suggest any course of action to the carrier which violates his conflict of interest obligation. This is a tortuous, perilous path. [528 S.2d at 273 (citations omitted)]

This case illustrates the pitfalls which often go unrecognized by unthinking assigned counsel. The developing law in this field should be required reading for all partners and associates in firms which do this work. A constancy to the insured in all evaluations, communications, and trial and settlement decisions should furnish the polestar of attorney action. This standard is the only one which will reduce the potential for liability and guarantee that the attorney's professional conduct meets the requirements of our ethical rules.