Ethics in Brief

Ethics in Brief is designed to present ethical issues that practitioners might well face on a daily basis. It is a service of the Legal Ethics Committee of the San Diego County Bar Association.


The “Tripartite Relationship” Some Thoughts on Avoiding the Pointy End

Typically, when a lawyer represents two clients in the same matter, the relationship is both clear and balanced. The lawyer owes equal loyalty to each client; neither has a primary claim on the lawyer’s fidelity. Indeed, should one client insist the lawyer not disclose important information to the other, the lawyer likely has to withdraw from the representation of at least that client—perhaps both. The reason? Rules of Professional Conduct, rule 3-310(C)(2) prohibits representation of clients with adverse interests in the same matter, and rule 3-500 requires communication of significant developments in the representation to a client. An instruction by one client not to reveal important information to the other flies in the face of rule 3-500’s mandate, triggering the precise adversity rule 3-310(C)(2) will not allow.

The Unique Duality—Insurer-Insured

But one species of representation creates a unique duality—the “tripartite relationship” of lawyer, insurer and insured. When an insurer engages a lawyer to represent, typically defend, its insured, the lawyer has two clients: insurer and insured. That’s been the law in California for some while. Purdy v Pacific Auto Ins. Co. (1984) 157 Cal.App.3d 59, 76; American Mut. Liab. Ins. Co. v. Superior Court (1974) 28 Cal.App3d 579, 591-592. The underlying theory is that each has a common interest: proper resolution of the claim against the insured. The lawyer owes each the same duty of loyalty the lawyer would owe any two clients in the same matter—but with a twist.

Conflicting Information

What if the lawyer learns facts from the insured, in confidence, during the representation that, if pursued or revealed, would seriously affect or even destroy coverage? Certainly they constitute “significant developments” in the representation that rule 3-500 would ordinarily require a lawyer to inform a client, with dispatch. But here, the unique duality comes into play. The lawyer’s “primary duty” is to the insured—even though both insurer and insured are “clients” in the same matter. Purdy, supra at p. 76. The duty of loyalty bars a lawyer from taking an action detrimental to the interests of a client; the duty of confidentiality—Business and Professions Code section 6068, subdivision (e)(1)—prohibits revelation of information detrimental to a client’s interests. Even in the tripartite relationship, the Rules of Professional Conduct govern the lawyer’s actions. Gafcon Inc. v. Ponsor & Assoc. (2002) 98 Cal.app.4th 1388, 1411-1412. So, . . .

The lawyer presses on with the representation of the insured, without disclosing the damaging facts to the insurer. Or, the lawyer believes that she or he cannot continue the dual representation—because the conflict of interest is too compelling—and the lawyer has to withdraw from the representation of the insured, triggering the appointment of independent (Cumis) counsel under Civil Code section 2860.

What about disclosure of the reasons for the conflict to the insurer? No. The confidentiality obligation of section 6068, subdivision (e)(1), seals the lawyer’s lips.

Conflicting Strategies

What happens in this complicated tango when the lawyer is defending the insured who faces two claims—e.g., professional negligence and fraud—one covered by the errors and omissions policy; the other not? In the lawyer’s judgment a summary adjudication motion will likely dispose of the professional negligence claim on an issue of law; the fraud claim, likely not.

In ordinary circumstances, a trial lawyer might choose to eliminate the legally weak claim, knowing how difficult it will be for a plaintiff to muster the facts to prove fraud at trial. Does, however, the duty of loyalty to the insured require the lawyer to hold back—if a successful motion likely destroys coverage, perhaps even continuation of a defense? The question appears to answer itself.

Settlement Conflicts

What is the lawyer’s duty to the insured when the probable outcome is liability with an award well in excess of coverage? How forceful does the lawyer have to be with the insurer to push a policy limits settlement when available? The lawyer’s duty of candor to both clients mandates honest assessment of the probable outcome and damages. Does the lawyer’s duty to the insured, however, require special advocacy in favor of a policy limits settlement—even if those communications may later be used in a subsequent “bad faith” action against the insurer should events turn out poorly? How strongly must the lawyer press an insurer’s adjuster who is adamant against offering policy limits in spite of the lawyer’s best judgment?

Does the lawyer in fact serve the interests of both clients—when facts and judgment dictate—to press hard for such a resolution. For the insured, to be quit of the claim; for the insurer, to avoid a significant payment, or second-guessing and a “bad faith” claim, in the face of an excess judgment?

Role of Rule 3-600

The insurer is an organization. Rule 3-600 reminds lawyers that, when representing an organization, the organization—not the individual directing the representation—is the client. The rule also mandates that when someone within the organization/client continues to act to its detriment, the lawyer must report that conduct “up the chain.” Thus, in the tripartite relationship, rule 3-600 dictates that, in some circumstances, the lawyer must reject the immediate adjuster’s decisions—no matter how uncomfortable to future employment prospects—and go up the organization to “the highest authority” who can act for it. Ultimately, that may even trigger the lawyer’s duty to withdraw under rule 3-700.

Conclusion

In short, most often the tripartite relationship proceeds without a hitch, in the best interests of insurer and insured. But at times circumstances require careful thought about the potential ethical pitfalls this unique duality presents.

-- Edward J. McIntyre