When a liability insurance carrier hires an attorney to defend its insured, a complex three-party, or tripartite relationship is created. The legal basis for the relationship is a contract (the insurance policy), by which the insurer is obligated to provide a defense to the insured. The insurer subsequently contracts with an attorney to defend the insured. The attorney retained by the insurer represents both the insurer and the insured.1 In fact, according to a North Carolina ethics opinion, “The representation of insured and insurer is a dual one, but the attorney’s primary allegiance is to the insured, whose best interest must be served at all times.”2 As a result of the complexities of this tripartite relationship, counsel selection problems can arise.
One such problem arises when a liability insurer decides to defend a claim filed against its insured under a reservation of rights. A reservation of rights is essentially the insurer’s notice to its insured that the insurer’s provision of a defense does not constitute waiver of the right to deny coverage later.
Assume that your company and the driver of one of your company vehicles have been sued as a result of an automobile accident in which your driver was involved while he was on company business. The plaintiff alleges that your company and its driver intentionally caused her injuries, therefore entitling her to recover punitive damages. Once the plaintiff has filed and served your company and your driver with a summons and complaint, you contact your insurer to inform them of the lawsuit.
Thereafter, the insurer hires an attorney to defend your company and the driver. Assume further that you subsequently receive a letter from your insurer notifying you that your company is providing a defense subject to the insurer’s reservation of rights to disclaim coverage based upon an “intentional acts” exclusion in your company’s insurance policy. If the plaintiff is able to prove that your company and its driver intentionally caused her injuries, then the exclusion will apply and your company will be denied coverage. Under such a scenario, your company may also be liable for any punitive damages claimed by the plaintiff. Therefore, proof of your company’s intentional acts will simultaneously benefit your insurer’s dispute of coverage and potentially leave your company liable for compensatory and punitive damages. Thus, a conflict of interest has arisen between your company and its insurer, which could affect the ability of the attorney hired by the insurer to adequately represent both your company and the insurer.
For instance, the attorney hired by your insurer may very well be a regular insurance defense attorney with an ongoing relationship with the insurer. When some or all of the allegations in the plaintiff’s complaint do not fall within the scope of coverage under your insurance policy (as in the above example), such an attorney may unwittingly fail to recognize his/her duty of primary allegiance to your company. In fact, North Carolina requires that your attorney avoid representation of a client if such representation is “materially limited by the lawyer’s responsibilities to another client.”3
In some jurisdictions, it has been decided that once a reservation of rights letter is issued, the insured is entitled to have counsel of its own choosing, paid for by the insurer.4 Those decisions also hold that the insured is entitled to control the defense once the reservation of rights letter is issued. The North Carolina courts have been silent on these issues. Regardless of the location of the suit, if a reservation of rights letter is issued, you should evaluate counsel selection and determine whether the one chosen by the insurance carrier is satisfactory to you. You may have regular litigation counsel or you may know of some other defense counsel you consider preferable. Evaluate your options and make an objective decision about what is best for your company.
If you are content with the attorney retained by your insurer, you have the option of accepting that representation. Rule of Professional Conduct 1.7 allows the attorney hired by your insurer to defend your company in a conflict scenario if (1) the attorney determines that he/she will be able to provide “competent and diligent representation,” (2) the representation does not involve a direct adversarial relationship between your insurer and your company, and (3) your company and the insurer give informed written consent.5 Informed consent requires that your company and the insurer be made aware of the reasonably foreseeable ways that the conflict could have an adverse impact upon the representation. For instance, in the example, the defense counsel should inform you that the development of the facts in the lawsuit against your company and its driver could benefit your insurer to your company’s detriment.
Even if no specific conflict exists and your insurance carrier accepts responsibility for the potential loss, you are still permitted to express your preference regarding counsel selection. The North Carolina Rules of Professional Conduct require insurance counsel to obtain the consent of the client for the representation when it is paid for by a third party.6 If you are not satisfied with counsel selected by your insurance carrier, you can withhold consent and ask for alternatives for you to consider, or offer your own suggestions and request that the insurance carrier use your preferred counsel. You are obligated to cooperate with your insurance company in the defense, but your views about counsel should be given consideration by the insurance company.
When subjected to suit, you are entitled to legal counsel with whom you are satisfied. Within the tripartite relationship, you are owed the primary allegiance of your counsel and you should actively assert your right to have representation from an attorney that recognizes and follows this primary loyalty. If you believe a loyalty problem exists, are concerned that it may arise, or simply prefer other counsel, you must make your position known to the insurance carrier representative handling your case. Your preferences regarding defense counsel should be made known at the commencement of the litigation, if possible, in order to avoid the necessity for changing horses in mid-stream. When faced with the complexities of the tripartite relationship, early evaluation and action are essential in obtaining counsel satisfactory to the insured.
1 North Carolina Revised Rules of Professional Conduct, Formal Op. 14 (2000).
2 North Carolina Revised Rules of Professional Conduct, RPC 92 (1991).
3 North Carolina Revised Rules of Professional Conduct, Rule 1.7(a)(2).
4 See Ollie’s Seafood Grille and Bar, LLC v. Selective Ins. Co. of S.C. (South Carolina Lawyers Weekly No. 008-001-04); BP Oil Co. v. Federated Mut. Ins. Co., Inc., 329 S.C. 631, 496 S.E.2d 35 (1998) and Navy Federal Credit Union v. Cumis Ins. Soc., Inc., 162 Cal. App. 3d, 208 Cal. Rptr. 494 (1984).
5 North Carolina Revised Rules of Professional Conduct, Rule 1.7(b).
6 North Carolina Revised Rules of Professional Conduct, Rule 1.8(f).