What is the Tripartite Relationship of Insurance Defense Counsel and Who is the Client?

By Melanie McDonald
Kelley Drye & Warren LLP

You are working in your office when Partner walks in, grinning from ear to ear.  Recently, he has been playing a lot of golf with senior claims reps at XYZ Insurance Company, and it looks like his efforts have paid off.  XYZ has just hired the firm to defend Acme Crane Company in a fatality crane accident.  Partner wants you to work with him on the matter.  Now, you are also grinning!

Partner states that Paralegal will instruct you on XYZ’s billing requirements which are a bit different than those of other clients.  And, Partner tells you to pack your bag because you and he are going to meet with Acme’s risk manager, safety officer and general counsel about the accident.

So, who is the client, anyway? 

Welcome to the world of the tripartite relationship, a relationship unique to attorneys who practice insurance defense work. This triangular relationship between the defense lawyer, the insurance company, and the insured (a/k/a policyholder) is created when the insurer hires defense counsel to defend a suit against the insured. The attorney’s obligations to those two parties vary by jurisdiction.  Under California case law both the insured and the insurer are clients, if there is no conflict, and defense counsel must adhere to all rules of ethics in representing both. In the event a conflict arises, the attorney must see to it that the insured is advised of its rights to independent counsel.[i]

Liability Insurance 101

Commercial insureds, such as Acme, typically purchase Commercial General Liability (CGL) insurance, which would be triggered by this accident.  Here, when the accident occurred, Acme would have given XYZ notice of the accident, and the XYZ would have assigned an adjuster who would begin investigating.  When the suit was filed, Acme would again give notice to XYZ, requesting a defense.

Liability policies contain two primary obligations by the insurer: (1) a duty to defend the insured and (2) a duty to indemnify the insured for loss, such as a settlement or judgment, if the claim comes within the terms of the policy. The duty to defend is often stated to be broader than the duty to indemnify, because the insurer must defend if the allegations of the plaintiffs’ complaint indicate a possibility for coverage. Ultimately, however, the insurer may have no duty to indemnify the insured. [ii]

Generally, a liability insurer has the right to control the defense, and the policyholder is required to surrender control over the defense to the insurer.[iii]  Once suit is filed, if the insurer determines that there is a duty to defend, based on a possibility of coverage, the insurer will hire defense counsel.  

Reservation of Rights and Cumis Counsel

If the insurer sees any potential that the matter will trigger a policy exclusion or otherwise not be covered, the insurer will send the policyholder a reservation of rights letter informing the policyholder that the insurer will defend the matter but is reserving its rights to deny coverage.  A reservation of rights letter, in and of itself, does not create a conflict for defense counsel, but it should put defense counsel on higher alert to watch for one. If a conflict of interest arises, California Civil Code Section 2860 requires that the insurer pay for independent, “Cumis” counsel for the insured.[iv]

So, where is the conflict or potential conflict?

There may be no conflict. Often this three-part relationship works smoothly, as both the insured and insurer clients want the case defended well and to limit their ultimate liability.  However, potential conflicts can arise, including in the following scenarios:

  • Suppose plaintiffs in the case against Acme allege negligence, and also, oppressive, fraudulent or malicious conduct, and they seek punitive damages.  As a matter of public policy, punitive damages are generally not insurable in California.[v]  Thus, the potential exists that plaintiffs could obtain a judgment against Acme for punitive damages for which XYZ would deny coverage.  Suppose also that the policy limits of the XYZ policy are $5 million, plaintiffs are seeking $8 million in actual damages, plus punitive damages, but plaintiffs indicate to that they will settle for $5 million.  However, based on your reports to XYZ, the XYZ adjuster does not value the actual damages at $5 million. If the case does not settle, there is a potential for an uninsured loss to Acme.  For example, if a jury awarded $6 million in actual damages, plus $1 million in punitive damages, Acme would be exposed to $2 million in uninsured loss.[vi] 

Acme would want to settle (without admitting liability, much less a basis for punitive damages), but XYZ—in control of the defense and the decision to settle—likely would not want to settle, based on defense counsel’s valuation. Can you, insurance defense counsel, in order to protect Acme, ethically push for a settlement that is greater than your evaluation of the actual damages, but within policy limits, even thought that settlement is not necessarily in the best interest of XYZ?Must you?

  • Suppose during your initial investigation you learned in a confidential communication with Acme that Acme’s crane operator was impaired at the time of the accident. The insurer did not discover this in its own investigation, and the plaintiffs do not know this fact. Yet.  And suppose that the case can now be settled quickly, within policy limits, if this fact is not disclosed, but once this fact is discovered, you know, as defense counsel, that the settlement value will go up and that XYZ may seek to deny coverage for the individual crane operator. 

It is the duty of any attorney to maintain inviolate the confidences of a client and to preserve at every peril to himself/herself the client’s secrets. (Bus. & Prof. Code, § 6068, subd. (e).) Thus, where Acme has revealed matters to defense counsel in confidence, and these matters are not intended to be heard by XYZ, your firm may not reveal them to XYZ, despite the attorney-client relationship between you and XYZ.

These are just a couple of not-so-uncommon tricky situations that can arise in the tripartite relationship.  Insurance defense counsel in a tripartite, dual-client relationship defense counsel must be especially alert for conflicts and potential conflicts.

[i] State Farm Mut. Auto. Ins. Co. v. Federal Ins. Co., 72 Cal.App.4th 1422 (1999) (attorney in this triangular relationships represents two clients, the insured and the insurer; the trio operating as a “loose partnership, coalition or alliance directed toward a common goal [and] sharing a common purpose”; and each member of the trio “has corresponding rights and obligations founded largely on contract, and as to the attorney, by the Rules of Professional Conduct as well.”)

[ii] Montrose Chem. Corp. v. Superior Court, 6 Cal.4th 287, 299-300, 861 P.2d 1153, 1160 (1993) (insurer must defend if the underlying complaint alleges facts establishing “a bare ‘potential’ or ‘possibility’ of coverage” even if, ultimately, there is no coverage).

[iii] See St. Paul Mercury Ins. Co. v. McMillan Homes Constr., Inc., Case No. 15CV1548 JM(BLM), 2016 WL 5464553 (S.D. Cal. Sept. 29, 2016), citing Gibraldo, Jacobs, Jones & Assoc. v. Agrippina Versicherunges A.G., 3 Cal. 3d 434, 449, 476 P. 2d 406 (1970). 

[iv] San Diego Navy Fed. Credit Union v. Cumis Ins. Society, Inc., 162 Cal.App.3d 358, 375 (1984) (Court of Appeals holding, “[w]here there are divergent interests of the insured and the insurer brought about by the insurer’s reservation of rights based on possible noncoverage under the insurance policy, the insurer must pay the reasonable cost for hiring independent counsel by the insured.”). Cumis has been superseded by California Civil Code Section 2860, but independent counsel appointed in this conflict situation is still commonly referred to as “Cumis counsel.”

[v] PPG Industries, Inc. v Transamerica Ins. Co., 20 Cal. 4th 310, 319, 975 P.2d 652, 658 (1999) (Supreme Court holding that insurer’s indemnification of insured’s punitive damages award would violate public policy).

[vi] It should be noted under this scenario that I do not mean to imply that these facts, alone, create a conflict. In fact, “under the express language of [Section 2860(b)], the fact that punitive damages are alleged does not itself create a conflict, nor does a conflict exist solely because the insured is sued for an amount in excess of the policy limits.”  Gafcon, Inc. v. Ponsor & Assoc., 98 Cal.App.4th 1388, 1421 (2002).