ETHICAL ISSUES ARISING FROM THE TRIPARTITE RELATIONSHIP
Michael R. Vescio
SmithAmundsen LLC
4811 South 76th Street, Suite 306
Milwaukee, WI 53220
This will not be the first time – or even the second time[1] – that someone has invoked this particular Biblical passage when embarking on an analysis of the tripartite relationship found at the heart of insurance tort defense litigation, but the association remains an illuminating one:
No man can serve two masters.
Matthew 6:24. On the other hand, as a sort of counterpoint, it is worth noting the indignation of an Indiana appellate court when encountering an argument that a lawyer’s independent judgment as a professional might stand compromised because of the lawyer’s relationship with the insurer hiring the lawyer to provide a merits defense:
In its petition for rehearing the manufacturer . . .
. . . first asserts that the trial court erred in failing to reconsider an apparent conflict of interest arising from the fact that the attorney who originally represented it in filing the motion to set aside the default judgment was employed by its insurance carrier under the defense clause contained in the policy. The total argument is that because the carrier would be relieved of liability (because it had not been timely notified of the suit) if the judgment were not set aside, we should believe that the carrier and the attorney somehow failed to present the manufacturer's case for relief from judgment.
We consider the arguments impertinent, if not scandalous. Without considering the respected reputation of the attorney involved, we point out that on a daily basis defense attorneys employed by insurance carriers on behalf of policy holders are called upon to deal with matters in litigation where the interest of the policy holder and the carrier do not fully coincide. Under such circumstances the attorney's duty is, of course, to the insured whom he has been employed to represent. In response the defense bar has exhibited no inability to fully comply with both the letter and the spirit of Canon 5 of the Code of Professional Responsibility. If it were otherwise we suspect the desirability of requiring carriers to supply defense counsel would have long since disappeared as a term of the policy.
Siebert Oxidermo, Inc. v. Shields, 430 N.E.2d 401, 402-03, aff'd 446 N.E.2d 332, 341 (Ind. 1983) (emphasis added). The point made in the last sentence of the Siebert Oxidermo passage above is an appropriate one: Since there remains a thriving market for insurance policies that necessitate the routine creation of the tripartite relationship, it seems to follow that the existence of such relationships results in sufficient benefit to outweigh any mischief resulting from the existence of such relationships.
I.WHAT IS THE “TRIPARTITE RELATIONSHIP”?
A Wisconsin Supreme Court plurality described the classic “tripartite” insurance defense relationship:
In a typical tripartite insurance relationship, involving an insurer, the insured, and the insurance defense attorney, the insurer has a duty to retain and pay for an attorney to represent the policyholder/insured when the insured is sued by a third party. See Randall Riopelle, Note, When May an Insurer Fire Counsel Hired To Represent the Insured?, 7 Geo. J. Legal Ethics 247 (1993). As such, the insurer maintains the right to control the defense, the settlement of a claim, and the payment of a claim within the policy limits.
Marten Transport, Ltd. v. Hartford Specialty Co., 194 Wis. 2d 1, 18, 533 N.W.2d 452, 457 (1995).
II.WHO IS THE CLIENT?
Without a doubt, the individuals or entities against whom a third-party claimant has asserted a claim qualify as the merits defense attorney’s clients. No firm, general agreement exists regarding whether – and to what extent – the insurance company paying for the defense also meaningfully qualifies as the merits defense attorney’s client. The only thing that might be said with a degree of confidence – not certainty, and only a degree of confidence – is that ordinarily an insurance company involved in the tripartite relationship either qualifies as a “client” per se[2] or is at least entitled to some of the same considerations to which a lawyer’s client is entitled.
The most instructive case in Wisconsin concerning the proper characterizations of the bilateral relationships that comprise the tripartite relationship is Marten Transport, Ltd. v. Hartford Specialty Co., 194 Wis. 2d 1, 13 533 N.W.2d 452 (1995). The supreme court in that case did not issue a majority opinion, but instead a plurality, concurrence, and dissent. Justices Geske, Abrahamson, and Chief Justice Heffernan joined in the plurality opinion in Marten Transport. Justices Steinmetz and Day joined in the concurring opinion and Justices Wilcox and Bablitch dissented. Thus, to determine whether the Marten Transport decision stands as authority for any legal principles, the courts and litigants must look to any common ground among these opinions; the establishment of judicial authority requires a majority of the participating justices to agree on a particular point. SeeState v. Dowe, 120 Wis. 2d 192, 194-95, 352 N.W.2d 660 (1984).
In Marten Transport, because of the terms of the insurance contract, a business remained self-insured within certain dollar limits, while utilizing an insurer for claims administration and any indemnification needed above the established dollar limits. Marten Transport, 194 Wis. 2d at 10, 533 N.W.2d at 454. At the insistence of the business, the insurer grudgingly agreed that the business could utilize a lawyer chosen by the business as the lawyer defending the business from any claims that arose. Id. at 11, 533 N.W.2d at 454-55. The lawyer formally entered appearances in numerous cases expressly on behalf of both the business and the insurer, holding itself out to tribunals and to other third-parties as counsel for the insurer. Id. at 23, 533 N.W.2d at 459. Nevertheless, later, when the business decided to sue the insurer, the lawyer commenced an action against the insurer. Id. at 11, 533 N.W.2d at 454.
The insurer filed a motion to disqualify the lawyer, on grounds that the lawyer previously represented and continued to represent the insurer alongside the business. Id. at 11, 533 N.W.2d at 454-455. The circuit court denied the motion to disqualify, concluding that the appearances on behalf of the insurer were merely pro forma, noting that the insurer knew about the nature of the attorney-client relationship that existed between the lawyer and the business. Id. at 12, 533 N.W.2d at 455. The intermediary court of appeals reversed, concluding that the attorney-client relationship existing between the lawyer and the insurer precluded adverse representation. Id.
The Wisconsin Supreme Court – in a mandate joined by both the plurality and the concurrence – reversed the court of appeals decision. Id. at 25, 533 N.W.2d at 460. According to the plurality, the relationship between a merits defense lawyer and the insurer obliged to some extent to indemnify the lawyer’s insured client constitutes a co-agency relationship. Id. at 18, 533 N.W.2d at 457. The concurrence would have adopted the “single representation rule,” under which the lawyer in the tripartite relationship owes an undivided loyalty to the non-insurer client, with no attorney-client relationship at all existing between the lawyer and the insurer. Id. at 28, 533 N.W.2d at 461. Since under both the co-agency concept in the plurality, and the single representation rule in the concurrence, the lawyer in Marten Transport could represent the business in litigation adverse to the insurer, no disqualification could occur.
Arguably, especially given the peculiarities that result from Wisconsin’s direct-action statute, in light of the rulings in Marten Transport, a lawyer may “merely fulfill a position” for an insurance company, entering “pro forma appearances as attorney” for the insurance company to avoid default, without meaningfully creating a lawyer-client relationship between the lawyer and the insurance company. Id. at 15-16, 533 N.W.2d at 456.
III.WHOSE DEFENSE IS IT?
The merits defense attorney must in any event maintain the attorney’s professional independence:
A lawyer may be paid from a source other than the client, if the client is informed of that fact and consents and the arrangement does not compromise the lawyer’s duty of loyalty to the client. See Rule 1.8(f). For example, when an insurer and its insured have conflicting interests in a matter arising from a liability insurance agreement, and the insurer is required to provide special counsel for the insured, the arrangement should assure the special counsel’s professional independence.
SCR 20:1.7, cmt.
An interesting case exists that might inform an analysis of an insurer’s responsibility for the defense it pays for. In Jacob v. West Bend Mutual Ins. Co., 203 Wis. 2d 524, 553 N.W.2d 800 (Ct. App. 1996), an insurer concluded that no coverage existed for its insured under the policy it issued, but the insurer nevertheless advised the insured to hire a lawyer chosen by the insured, whose fees the insurer would pay. Id. at 530-531, 553 N.W.2d at 802. The independent defense lawyer decided as a tactical matter to refrain from actively defending a lawsuit naming the now-deceased insured. Id. at 531, 553 N.W.2d at 803. After the circuit court granted default judgment against the insured, and after the circuit court overruled the insurer’s coverage defenses, the circuit court ruled that the insurer breached its duty to defend its insured because it hired attorneys who permitted default judgment to be entered and agreed with the strategy that yielded this result. Id. at 534, 553 N.W.2d at 804. The intermediary court of appeals reversed. When it did so, it did so on the theory that the insurer had no right to meddle in tactical or strategic defense decisions:
Contrary to the trial court’s reasoning, the law does not bind the insurer to the tactics and strategy selected by the insured’s attorney, thereby depriving the insurer of its coverage defense if that strategy should fail. The matter of tactics and strategy is properly left to the attorney and the client – here Beverly and Betty Limbach. Unless it abandoned its denial of coverage, West Bend had no authority to intervene in, or interfere with, that relationship. By not answering the Jacobs’ complaint, Beverly and her client, Betty Limbach, made a tactical decision that was theirs and theirs alone to make.
Jacob v. West Bend Mutual Ins. Co., 203 Wis. 2d 524, 536-537, 553 N.W.2d 800, 804-805 (Ct. App. 1996).
Other Wisconsin decisional law suggests that an insurer has a right to input in – if not outright control of – the defense its payments provide for. See, e.g., Marten Transport, Ltd. v. Hartford Specialty Co., 194 Wis. 2d 1, 18, 533 N.W.2d 452, 457 (1995) (“the insurer maintains the right to control the defense, the settlement of a claim, and the payment of a claim within the policy limits”).
IV.CONFLICTS OF INTEREST
The tripartite relationship is usually harmonious. See Douglas Richmond, Walking a Tightrope: The Tripartite Relationship Between Insurer, Insured and Insurance Defense Counsel, 73 Neb. L. Rev. 265, 270-71 (1994). The relationship, however, entails in inherent potential points that might naturally lead to conflicts of interest:
A.Classic Potential Conflicts of Interest
1.The Close De Facto Economic Relationship Between the Insurer And Defense Counsel
2.Claimed Damages Exceed Limits
3.Insured’s Interests In the Side Effects Of Litigation
4.Insured’s Desire For Good Precedent Over Bad Precedent
5.Insurer’s Interest in Containing Litigation Costs
6.Reservation Of Rights Letter and Ongoing Insurance Coverage Disputes
Although cases exist suggesting that whenever a coverage dispute arises, an insured must – if desired – be accorded the right to choose the lawyer who will conduct the merits defense, the Wisconsin Supreme Court has yet to issue a definitive ruling. There are three main schools of thought on this subject:
(1)Good faith counsel selection. An insurer issuing an insurance policy stating that the insurer has the duty and right to defense by counsel of the insurer’s own choice under the direction of the insurer – regardless of the reservation of coverage rights – retains that right absent a breach of the duty to defend so long as the lawyer who defends is chosen in good faith and remains a professional exercising independent judgment;
(2)Genuine conflict of interest. An insurer reserving rights regarding the existence of coverage retains the right to select counsel and participate in defense decisions so long as no genuine conflict of interest arises. A genuine conflict of interest arises when issues relevant to the insurance coverage dispute are also relevant to the insured’s defense against liability and damages claims on the merits, and when a particular outcome would be favorable to the insurer insofar as the coverage issues while at the same time being unfavorable to insured insofar as the merits defense is concerned. SeeHK Systems, Inc. v. Admiral Ins. Co., 2005 U.S. Dist. LEXIS 39939, at *24-28 (E.D. Wis. 2005);
(3)Automatic relinquishment. An insurer reserving rights regarding the existence of coverage must uniformly grant the party claiming the status as an insured the right to select and control the lawyer whose fees and costs will be paid by the insurer while a court resolves the insurance coverage dispute.
B.New Potential Conflicts
1.Wis. Stat. § 628.46 – Timely Payment of Claims Statute
2.Burning Limits Policies
V.POSITIVE STEPS TO LIMIT PROBLEMS
A. Consider An Engagement Letter
B.Affirm Scope of Representation As Case Progresses
NOTE: This outline contains no legal advice. Anyone who wishes to obtain legal advice based on their particular facts and circumstances should obtain such advice from their own counsel of choice. Nothing in this outline is intended to be used for, and none of the information in this outline may be used for, the development of a legal strategy, the formation of an attorney-client relationship, or the adoption of a legal position or opinion.
[1]See, e.g., Wisconsin Patients Compensation Fund v. Physicians Ins. Co. of Wis., 2000 WI App 248, ¶ 11, 239 Wis. 2d 360, 369-70, 620 N.W.2d 457, 461; State Farm Auto Ins. Co. v. Traver, 980 S.W.2d 625, 634 (Tex. 1998) (Gonzalez, J., dissenting).
[2]For example, one Texas court has asserted:
Reality and common sense dictate that the insurance company is also a client. The insurance company retains the attorney, controls the legal defense, decides if the case should be settled, and pays any judgment or settlement amount up to the policy limits. It is a fiction to say that the insured is the only client in view of the contractual relationships. We agree that the insured is the primary client and that ethical choices must be resolved in favor of the insured. But under contract law, the attorney can have two clients.
American Home Assurance Company, Inc. v. Unauthorized Practice Of Law Committee, 121 S.W.3d 831, 838 (Tex. Ct. App. 2003) (footnotes omitted).