Transcript Slide 1

Insurance Defense
Ethical Pitfalls for Counsel and
Claims Professionals
www.gcandh.com
Expectations
Ethics Generally
Definition of ethics
noun
1 [usually treated as plural] moral principles that
govern a person’s or group’s behavior
Note: the definition does not refer to
lawfulness
Rationalization
Handicap Parking Example
Independent Judgment
SCR 3.130(5.4(c))
(c) A lawyer shall not permit a person who
recommends, employs, or pays the lawyer to
render legal services for another to direct or
regulate the lawyer's professional judgment
in rendering such legal services.
Retention by Third Party
S.C.R. 3.130(1.8)(f)
(f) A lawyer shall not accept compensation for representing
a client from one other than the client unless:
•
(1) the client gives informed consent;
(2) there is no interference with the lawyer's independence
of professional judgment or with the client-lawyer
relationship; and
(3) information relating to representation of a client is
protected as required by Rule 1.6.
Who Is The Client?
The Insured is the Client
Ethics Opinion KBA E-331
This is so because the insured is defense
counsel’s client. The insured is entitled to
competent and zealous representation, and a
defense that is not adversely affected by
prohibited conflicts of interest.
Horns of a Dilemma
Reporting to Insurer
Reporting to Insurer
Ethics Opinion KBA E-410
An attorney must be ever vigilant, pursuant to KRPC
1.1 and 1.3, to identify information that might be
disadvantageous to the client Insured and to refrain
From disclosing such information absent fully
informed client consent. If the attorney is
competent and diligent in this regard and yet
forwards to the Insurer information not known to
the attorney to be damaging, no unethical conduct
has occurred.
Reporting to Insurer
Ethics Opinion KBA E-410
The contract of insurance between the Insurer
and the Insured pursuant to which the Insurer
provides the defense commonly allows the
Insurer to have some measure of control
regarding the defense provided and commonly
requires that the Insured cooperate in the
defense. Such is a matter of contract and may
govern the rights of the Insurer and the Insured
as to each other.
Reporting to Insurer
Ethics Opinion KBA E-410
The contract of insurance does not, however, define the
ethical duties an attorney hired by an Insurer to defend an
Insured owes to the client Insured. KRPC 1.4 states that the
attorney should keep the client “reasonably informed” and
that the attorney should “explain a matter to the extent
reasonably necessary to permit the client to make informed
decisions regarding the representation.” Thus, the attorney
hired by the Insurer to defend the Insured should, at the
beginning of the client-lawyer relationship, explain to the
client the nature and requirements of the Insurer and
Insured contract.
Reporting to Insurer
Ethics Opinion KBA E-340
An insurer may have every right to conduct such investigation as it sees
fit, and may deal with its insured in a manner permitted by the terms
of the insurance contract. On the other hand, it is not necessarily
entitled to the assistance of the lawyer representing the insured.
Defense counsel’s relationship with the insured is not governed by the
insured-insurer contract, but is instead governed by the Rules of
Professional Conduct. Discussions with a client may reveal facts
affecting coverage (may suggest coverage defenses). Counsel should
resist any ‘demand’’ that might put the insured at risk. It is also clear
that any intrusion into the attorney/client sanctum should be
permitted only with the informed consent of the client.
Reservation of Rights
Reservation of Rights
Ethics Opinion KBA E-410
. . . the attorney must be ever mindful that with regard
to this tripartite relationship the attorney’s client is the
Insured and not the Insurer. As part of the duties of
competence and diligence and the duty to
communicate with the client discussed above, the
attorney should explain the nature of a defense under
reservation of rights to the client. When the Insurer
provides the defense under a reservation of rights, the
possibility exists that an impermissible conflict of
interest is created.
Reservation of Rights
Ethics Opinion KBA E-410
When an attorney represents an Insured and the Insurer is
providing the defense under a reservation of rights, the attorney
must analyze the situation under the general conflict of interest
rule, KRPC 1.7(b). KRPC 1.7(b) states that a ‘lawyer shall not
represent a client if the representation of that client may be
materially limited by the lawyer’s responsibilities to another client
or to a third person, or by the lawyer’s own interests, unless” two
conditions are satisfied.
First, the lawyer must “reasonably believe that the representation
will not be adversely affected.”
Second, the client must consent after consultation.”
Bad Faith Claims
Bad Faith Claim
Ethics Opinion KBA E-378
May a lawyer paid by insurer to defend an insured in a personal injury
action in which claims are also made against the insurer under the
UCSPA represent both the insured and the insurer?
It is the Committee’s position that defense counsel should be free to
abide by the insured’s decisions concerning the objectives of the
litigation and settlement, should be not subjected to competing loyalties
that may compromise the lawyer’s ethical obligation to hold inviolate
confidential information of the client, and should not be required by an
insurer to seek the consent of the insured to dual representation.
Cost Control and
Independence
The Insurer’s Perspective
The Attorney’s Perspective
Cost Control and Independence
A typical liability policy may contain language such as
this:
We will have the right and duty to defend the insured
against any "suit" seeking those damages. However, we
will have no duty to defend the insured against any "suit"
seeking damages for "bodily injury", "property damage",
"personal injury", or "advertising injury" to which this
insurance does not apply, We may at our discretion,
investigate any "occurrence" and settle any claim or "suit"
that may result.
Cost Control and Independence
Inherent in all of these potential conflicts is the
fear that the entity paying the attorney, the
insurer, and not the one to whom the attorney is
obligated to defend, the insured, is controlling
the legal representation.
American Ins. Ass'n v. Kentucky Bar Ass'n, 917
S.W. 2d 568, 573 (Ky. 1996)
Cost Control and Independence
American Ins. Ass'n was not the first time we rejected
a "rule [that] would be inimical to the preservation of
traditional and longstanding concepts associated with
attorney-client relationship, as recognized by
Kentucky law." [Citation omitted]. Our courts simply
cannot ignore Kentucky's consistent refusal to allow
the insurer any right to control the attorney's
independent manner of representing its insured.
That independence has a long history.
Cincinnati Insurance Company v. Hofmeister, 2004CA-002296-MR (Ky.App. 2008).
Restrictions on Tasks
Restricting Tasks
Ethics Opinion KBA E 416
May the lawyer accept representation under guidelines
that:
a. Require approval by the insurer before the lawyer
undertakes any discovery, conducts any legal research,
or files any motion?
Answer: No. The lawyer may agree, however, to guidelines
setting a reasonable, tentative budget and providing a
process for ongoing consultation.
Restricting Tasks
Ethics Opinion KBA E 416
May the lawyer accept representation under guidelines that:
b. Require all investigative work or all records review to be
performed only by the insurer’s employees or, if performed
by the lawyer’s firm, to be billed only at a paralegal rate?
Answer: No. The lawyer may agree, however, to guidelines
establishing an appropriate allocation of lawyer and nonlawyer/paralegal tasks, or setting a reasonable tentative
budget for investigative work or document review, and
providing a process for ongoing consultation.
Restrictions on Budget
Restrictions on Budget
Ethics Opinion KBA E 331
A restricted budget for the defense can pose an ethical
dilemma for defense counsel. This is so because the insured is
defense counsel’s client. The insured is entitled to competent
and zealous representation, and a defense that is not
adversely affected by prohibited conflicts of interest. At some
point, carrier imposed restrictions may threaten counsel’s
ability to provide such representation and impact on the
lawyer’s ability to bring to bear his independent professional
judgment on behalf of the insured. Occasions may arise in
which the insurer’s budgetary restrictions will justify, or
require, withdrawal.
Restrictions on Budget
Ethics Opinion KBA E 331
We are not suggesting that counsel has carte blanche
to needlessly run up a bill. Such conduct would be just
as reprehensible as yielding professional control of his
or her work to an adjuster or claims manager. Nor are
we suggesting that costs and expenses are not a
legitimate concern of the insurer. Conflicts are not
inevitable, or irreconcilable. Presumably these matters
can be resolved amicably and responsibly in the great
majority of cases.
Stealing is Stealing
Third Party Audits
Third Party Audits
Ethics Opinion KBA E-404
Question 1: Would Law Firm’s submitting its Insurance Company bills
directly to Audit Company, rather than to Insurance Company, without
the law firm’s obtaining the fully informed consent of the insured,
violate the Kentucky Rules of Professional Conduct?
Answer: Yes
Third Party Audits
Ethics Opinion KBA E-404
Question 2: Would the Law Firm’s submitting other clients’ bills to
Audit Company violate the Kentucky Rules of Professional Conduct?
Answer: Yes
Third Party Audits
Ethics Opinion KBA E-404
The Committee agrees with the views expressed in South Carolina Bar
Op. 97-22 that a lawyer may submit his or her bills directly to a thirdparty auditing firm only with the informed consent of the insured as
well as the insurer, and only so long as the lawyer reasonably believes
that doing so will not substantially and adversely affect the
representation of the insured client.
Third Party Audits
Ethics Opinion KBA E-409
Question: If an attorney is defending an Insured with the defense
being provided by an Insurer pursuant to an insurance contract
between the Insurer and the Insured, and if that attorney is aware that
the attorney’s legal bills sent to the Insurer are forwarded to an
outside auditing firm, what do the Kentucky Rules of Professional
Conduct require of the attorney?
Answer: The attorney must obtain fully informed consent from the
Insured, the client, before forwarding legal billing information to the
Insurer if the attorney knows the Insurer will send the billing
information to an outside auditor.
Third Party Audits
Ethics Opinion KBA E-409
The attorney should explain the implications of such a procedure to
the client and obtain the client’s fully informed consent before
providing the Insurer with detailed billing information. In so doing, the
attorney should also discuss with the Insured client the implications,
with regard to the insurance contract between the Insurer and the
Insured, that may flow from the Insured’s failure to consent to the
release of legal billing information.
Third Party Audits
Ethics Opinion KBA E-409
If the attorney counsels the client Insured about the possible
consequences of the disclosure of the legal billing information and
the client consents to the disclosure, the attorney must follow the
instruction of the client Insured and disclose the information. If the
attorney believes disclosure to be contrary to the best interests of the
client Insured, the attorney should counsel the client as to the
attorney’s belief. If the client consents to the disclosure contrary to the
attorney’s advice, the attorney may seek a permissive withdrawal from
the representation pursuant to KRPC 1.16(b).
Third Party Audits
KRE 503
(2) “Representative of the client” means:
(A) A person having authority to obtain professional legal services, or to act on advice
thereby rendered on behalf of the client; or
(B) Any employee or representative of the client who makes or receives a confidential
communication:
(i) In the course and scope of his or her employment;
(ii) Concerning the subject matter of his or her employment; and
(iii) To effectuate legal representation for the client.
See Asbury v. Beerbower, 589 S.W.2d 216 (Ky. 1979)
Insurer Guidelines
Paying Bills
Insurer Guidelines
Ethics Opinion KBA E 416
Question 1: In general, may an insurance defense lawyer agree to
abide by insurer-prescribed case handling guidelines in representing
the insured?
Answer: A lawyer may not agree to abide by such guidelines unless:
a) the lawyer determines that the guidelines will not interfere with
the lawyer’s independent professional judgment and other duties
owed to the insured under the Kentucky Rules of Professional
Conduct; and
Insurer Guidelines
Ethics Opinion KBA E 416
Question 1: In general, may an insurance defense lawyer agree to
abide by insurer-prescribed case handling guidelines in representing
the insured?
Answer: A lawyer may not agree to abide by such guidelines unless:
b) the lawyer discloses the guidelines’ existence to the insured,
and provides a practical explanation of their import, at the outset
of the representation and as may become necessary in specific
situations thereafter, and the insured consents after consultation
to any guideline that materially limits the representation; and
Insurer Guidelines
Ethics Opinion KBA E 416
Question 1: In general, may an insurance defense lawyer agree to
abide by insurer-prescribed case handling guidelines in representing
the insured?
Answer: A lawyer may not agree to abide by such guidelines unless:
c) the lawyer, upon undertaking the representation, performs all
duties imposed by the Rules, regardless of compensation under
the guidelines, so long as the representation continues.
Insurer Guidelines
Ethics Opinion KBA E 416
The lawyer-insurer relationship contemplates a process for ongoing consultation.
Such consultation must be genuine, with the lawyer basing each expenditure or
activity request on the needs of the insured, and the insurer giving each request
careful consideration in light of the lawyer’s independent professional judgment.
If the insurer’s guidelines do not provide such a process, the lawyer should
decline a proffered representation. In any event, the lawyer must not undertake,
and an insured client cannot be asked to accept, a representation so limited in
scope that it abridges the client’s rights, or narrows the lawyer’s duties, under
the Rules. See Comment 5 to Rule 1.2. After the representation of a client has
begun -- and continuously thereafter until the representation concludes or is
properly terminated under Rule 1.16 -- the lawyer must perform his or her
professional duties fully, and must exercise independent professional judgment in
loyalty to the client, regardless of limitations imposed by the insurer.
Just Talk
Alternative Fee
Arrangements
AFAs
Ethics Opinion KBA E 368
Question: May a lawyer enter into a contract with a liability insurer in
which the lawyer or his firm agrees to do all of the insurer’s defense
work for a set fee.
Answer: No.
American Ins. Ass’n v. Kentucky Bar Ass’n, 917 S.W.2d 568 (1996)
AFAs
Ethics Opinion KBA E 368
Yet, here the insurer wants to continue to promise the insured a
defense in the contract of insurance, while limiting the extent of its
undertaking in a side contract between the insured’s lawyer and the
insurer to which the insured is not a party. Compare E-331 (1988).
Furthermore, the lawyer is placed, by the insurer (a third person
paying for the lawyer’s services), in a position of conflict vis-a-vis the
insured client. To some extent the lawyer becomes the insurer; and
lawyer stands to gain by limiting the services rendered to the client.
See Rules 1.1 and 1.2, as well Rule 1.7(b). Admittedly, a potential for
similar conflict is inherent in other lawyer-client arrangements; but
here the insured client will have no control over the choices that will
be made.
AFAs
American Ins. Ass’n v. Kentucky Bar Ass’n, 917 S.W.2d 568 (1996)
Respondent was able to cite to nineteen such conflicts, including
representation of the insured which becomes more complex than
anticipated, resulting in financial hardship for the attorney; policy and/or
coverage defenses asserted by the insurer against the insured; and
disagreement between the insured and the insurer with regard to
settlement negotiations. Moreover, we do not believe that in most instances
the interests of the insured and the insurer are alike, but are more apt to
agree with Respondent’s contention that while the insured and the insurer
may share some common interests, the two parties are subject to complete
divergence at any time. Inherent in all of these potential conflicts is the fear
that the entity paying the attorney, the insurer, and not the one to whom
the attorney is obligated to defend, the insured, is controlling the legal
representation.
Good Ethics is a Habit
Let’s Be Ethical
Insurance Defense
Ethical Pitfalls for Counsel and
Claims Professionals
www.gcandh.com