Ethics Opinon 1987-1

I
QUESTION PRESENTED

An insured defendant ("Client") in a personal injury case has received a "reservation of rights letter" due to a prayer for punitive damages in a third party complaint. Attorney "A", selected by the insurer to represent Client prior to the issuance of the reservation of rights letter, has accomplished substantial preparation of the case including conversations with Client, in which confidential information was disclosed. Subsequent to the issuance of the reservation of rights letter, Client elected to be represented by independent counsel of his own choosing, having been informed of his rights to do so.

QUESTION: Is Client's informed consent required for Attorney "A" to maintain a role in the case on behalf of the insurance company?

II
SUMMARY

When an insured has selected independent counsel in response to an insurance company reservation of rights letter, counsel selected earlier by the insurance company to represent the insured, who has received confidential information, should obtain the informed written consent of the insured before continuing to represent the insured at the request of the insurance company in connection with any aspect of the insured's case, unless there is no foreseeable likelihood that the confidential information might be useable to the detriment of the insured.

III
DISCUSSION

California Rules of Professional Conduct rule 5-102(B) provides:

"A member of the State Bar shall not represent conflicting interests, except with the written consent of all parties concerned."

California Rules of Professional Conduct rule 4-101 provides:

"A member of the State Bar shall not accept employment adverse to a client or former client, without the informed and written consent of the client or former client, relating to a matter in reference to which he has obtained confidential information by reason of or in the course of his employment by such client or former client."

A "reservation of rights letter" is one sent by an insurance company to inform its insured that there is an issue concerning whether a portion of the claim is covered by the policy. For example, an insurance company may not insure against claims for punitive damages in California. Where a complaint contains a prayer for punitive damages, the "reservation of rights" letter represents that the company will investigate, negotiate and otherwise continue to handle the claim without waiving its right to deny coverage later. Where any aspect of a claim may be covered by the policy, the insurance company is obligated to pay for the defense on the entire claim.

Business and Professions Code section 6068 provides in part:

"It is the duty of an attorney:

. . . .

(e) To maintain inviolate the confidence, and at every peril to himself to preserve the secrets, of his client."

The insured cannot be expected to know whether facts and issues are beneficial or detrimental to his case. One of the prime reasons he seeks the advice of counsel is to obtain a legal interpretation of the facts. He must be free to disclose to his attorney all that he perceives as relevant, whether it be good or bad, without fear of reprisal.

For cases upholding the confidential nature of communications between an attorney and his client, see Sharon v. Sharon (1889) 79 Cal. 633, 22 P. 26, People v. Canfield (1974) 1 Cal.3d 699, 117 Cal.Rptr. 81, People v. Johnson (1980) 105 Cal.App.3d 884, 164 Cal.Rptr. 746.

The issue in San Diego Navy Federal Credit Union, et. al. v. Cumis Insurance Society, Inc., 162 Cal.App.3d 358, 208 Cal.Rptr. 494, (12/3/84), [petition for rehearing denied 2/21/85] was whether an insured Credit Union was entitled to have its insurance company pay for independent counsel chosen by the Credit Union to defend a third party action in response to a reservation of rights letter from the insurer. The plaintiff in the third party action sought $750,000.00 in general and $6.5 million dollars in punitive damages for tortious wrongful discharge, breach of the covenant of good faith and fair dealing, wrongful interference with an inducing breach of contract, breach of contract and intentional infliction of emotional distress. In finding for the Credit Union, the Court of Appeal [Fourth District, Division 1] concluded that the attorney selected by the insurance company has a dual agency status, representing both the insured and the insurer in the third party litigation. The court said:

"We conclude the Canons of Ethics impose upon lawyers hired by the insurer an obligation to explain to the insured and the insurer the full implications of joint representation in situations where the insurer has reserved its right to deny coverage. If the insured does not give an informed consent to continued representation, counsel must cease to represent both." (Emphasis added.)

We note that the instant issue differs from that discussed in Formal Opinion 1984-84 issued by the State Bar of California Standing Committee on Professional Responsibility and Conduct in which a prospective client met with an attorney to discuss a possible claim against an insurance carrier which the attorney frequently represented. The attorney so notified the Inquirer, and referred him to other attorneys active and competent to handle matters of that type. Years later, when the Attorney was requested by the same insurance carrier to pursue an action against the Inquirer for recovery of multiple payments on a series of alleged fraudulent insurance claims, the committee concluded that the Attorney could not represent the insurance carrier against the Inquirer unless the Attorney was wholly satisfied that by virtue of the passage of time or the nature of the confidential information in his possession there would be no reasonably foreseeable likelihood that the confidential information might be useable to the detriment of the Inquirer.

Under the hypothetical facts above, confidential information was obtained by Attorney "A" from Client. Unless there is no reasonably foreseeable likelihood that the confidential information might be used to the detriment of Client, the Committee believes that to permit Attorney "A" to continue to represent the Client without the Client's informed written consent would be inconsistent with the Cumis position, and the cited Rules Professional Conduct.

This opinion is advisory only. It is not binding upon the State Bar, the Board of Governors, its agents or employees, or the San Diego County Bar Association, its agents, employees or members.

Disclaimer: This opinion was issued by the Legal Ethics Committee of the San Diego County Bar Association. It is advisory only and is not binding upon any member of the SDCBA, any other member of the State Bar of California, the State Bar of California or its Board of Governors, or any persons or tribunals charged with regulatory responsibilities. The SDCBA, its officers, directors, agents, and the Legal Ethics Committee members assume no responsibility or liability in rendering this opinion.