Sean Quinn, Ph.D., J.D., C.P.C.U., Etc.
This long essay started as a lecture to a CLE group. I began the lecture by asserting that I planned to say nothing that was not controversial. I did not succeed. I should have said that I did not intent to assert any conclusion that was not a controversial proposition. I think I might have succeeded in carrying out that claim. It is for the reader to determine whether I succeeded in this essay. If you find the essay boring or sleep inducing, keep reading in bed late at night. You will find it very helpful.
The topics of this essay are each part of the
constellation of rules, principles, ideals, laws, regulations, precedents, legal
history, customs, traditions, plus philosophical conclusions and arguments
which constitute legal ethics, broadly conceived, a subdivision of the universe
of values and ethics, even more broadly conceived. The target of all
these discussions is the topic of how relationships between clients and their
attorney/lawyers can be constructed and,
in the end, shaped, especially in insurance contexts.
At the most general, when asking questions about legal ethics, a lawyer (L)
must always start with questions like these. What should I do? What should I
not do? What sort person should I be? What sort of person am I? What sort of
culture-society-state should we have, including a legal system? What sort do we
have? And so forth, where each of the “Is” has defined himself or herself as a
Legal ethics by itself broadly conceived
includes not only law(s) specially designed to regulate lawyers as a profession,
models for such bodies of law, various professional guidelines for lawyers, and
the RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS (1998), all of these
containing statute-like components.
And then there is an overlapping group
of court decisions on a variety of
topics, other parts of both civil and criminal law (like the laws of legal
malpractice), general fiduciary duty law, rule of and other law pertaining to
litigation procedure (e.g., rules of civil procedure, e.g., regarding court
order sanctions of various sorts ), and—yes, contrary to the superficial views
of some—the law of contract.
The law of negligence, for example, the principle substantive law for legal
malpractice derives from the common law, surrounding and relatively current cultural
values, and ethics incorporated into the culture over time.
Moreover, legal ethics broadly conceived includes not only the law, but the
principles and visions of the surrounding culture, e.g., that of our polis.
And this sort of thing can be found in law reviews, books by professors in law
schools, English and history professors, and on and on.
The law of negligence, for example, the principle substantive law for legal
malpractice derives from the common law, surrounding and relatively current
cultural values, and ethics incorporated into the culture over time.
Ultimately, as the title entails, this essay is about conflicts of interests
problems facing lawyers involved in insurance work. It will begin with general
observations, however, and then focus on some specific types of legal-ethics problems involving insurance
lawyers. The insurance industry is as broad as the rest of the commercial and
government regulated world, and not all of that can be covered here.
So the topics will be the professional ethical problems facing lawyers that
usually called coverage lawyers and/or
insurance defense lawyers. In the meantime, it is worth pointing out that
insurance lawyers have all the same types of ethics problems any other lawyer (and/or type of lawyer) can have.
Every lawyer (“L”) is a fiduciary of each of her clients (“C”).
This proposition entails that in every professional
situation every L must place the interests of a pertinent C ahead of
her/his own and ahead of those of anyone else, including but not
restricted to other Cs. The “anyone
else” includes other Cs and other third
parties who are not Cs. (How far “ahead” C’s interests, as opposed to those of
L, etc., must be conceived is an interesting and complex, one without
established answers. (For the sake of simplicity an insured will be referred to
as C1, usually without reference to how many of them there are, and
an insurer will be referred to as C2.)
the fiduciary relationship between any L and all of L’s Cs, taken one at a
time, is restricted to the scope of
representation, issues pertaining to conflicts of interests are central to the
In fact Geoffrey Hazard, one of the most prominent commentators on legal ethics
and the law of lawyering of the last couple of generations and still currently
writing at 85, has explicitly asserted that
interest is the central ethical problem of [the legal profession], and indeed
the problem that gives [the legal profession] its defining characteristic.
By definition, the function of [our]
profession is to serve interests beyond the [legal] professional’s own self-interest. The concept of ‘conflict of
interest’ is a reflexive definition of this fundamental characteristic, for it
implicitly identifies those other interests that the professional must
recognize[, i.e., those of clients]. Accordingly, to analyze the problems of
[the legal profession]’s conflicts of interest is to probe the essence
of the profession itself. [Emphases added.]
Notice how broad the idea of conflict
of interest may be in this hazardous passage. At the same time keep in mind
the idea of there perhaps being a scope
to a client-lawyer relationship. Back to conflicts.
For one thing, L may have a conflict of
interest, a conflict of interests, conflicts of interest, or conflicts of
interests between herself and C. Or L may have one or more conflicts involving one or
more interest between C‘s interests and those of non-Cs, e.g., family members,
family, other close relationships, the
idea of family, church, state or state institutions, and so forth.
For another thing, L may have a variety of
relationships with a client, only some of which involve the person being a
client and/or only some of which L being (or functioning as) L. In those
contexts, L can treat C unethically and/or illegally in an assortment of ways
that do not involve “legal ethics” or what might be called the “ethics of
lawyering.” For example, C might also be L’s girlfriend or boyfriend, t
o use the ageless lingo of today. Not
every mistreatment by L of C qua-boyfriend or qua-girlfriend) would be a matter
of legal ethics although it might involve
the ethics of someone who is a lawyer or the accepted ethical norms of society.
(Of course, some particularly dramatic, poor-taste and “low-class” trysting even with non-clients can lead to
At the same time, “codes”
of legal ethics set forth the idea of conflict
of interest in two quite different ways.
On the one hand, the codes recognize that lawyers have all sorts of duties. The
TEXAS DISCIPLINARY RULES OF PROFESSIONAL CONDUCT (“TxDRs”) and the MODEL RULES
OF PROFESSIONAL CONDUCT [of the American Bar Association] (“MRs”) both begin
with a passage entitled “Preamble: A Lawyer’s Responsibilities.” They contain very expansive sets of principles and recognize that Ls have
obligations with different origins and running in different directions. Under
the Texas Preamble ¶#1, for example,
the legal system and a public citizen having special responsibility for the quality
of justice. Lawyers, as guardians of the
law, play a vital role in the preservation of society. The
fulfillment of this role requires an understanding by lawyers of their
relationship with and function of our
legal system. A consequent obligation of lawyers is to maintain the highest
standards of ethical conduct. [Emphases added.]
This passage captures majestically though some might say mythologically)
some of—but only some of–the origins of Ls’ diverse duties and obligations
other than those s/he simply owes a given client. It might be worthwhile to mention in passing that a sexual dimension, if there is any, of an L & C relationship which is not simply
one of client-attorney, is explicitly regulated by some codes and not others,
e.g., MR 1.8(j), but not the TxDRs, and both of these are about to be
In contrast to this broad and diverse
way of describing and conceiving the conflicts among various interests facing
L, there is also a narrower and more concentrated way of thinking about
and describing conflicts of interest and that one concerns principally the pickles and problems that wash over and may drown L when s/he
represents more than one client in the same or closely related matters.
In everyday lawyer-discourse, when we speak of conflicts of interests we are
operating under the narrower conceptualization. In addition, the concept of interests
in the phrase conflicts of interest usually
refers to economic/financial interests, at least when used in what might be called
The codes themselves work this
way. Each of these two (2) codes has an
entire section entitled “CLIENT-LAWYER RELATIONSHIP.” In each of these
sections, the so-called “conflicts rules” are set forth.
The TxDRs have seven (7) separate rules
utilizing or pertaining to the idea conflict
of interest, four (4) of the 7 beginning with the words “Conflict of
one more nearly does; and three or four (3-4) of them concern situations, where
L has (or has had, ) more than one client, e.g., C1 and C2.
And then there are the more specialized conflict rules. Here are the seven titles:
1.06. Conflict of Interest: General Rule,
1.07 Conflict of Interest: Intermediary,
1.08 Conflict of Interest: Prohibited Transactions,
1.09 Conflict of Interest: Former Client.
1.10 Successive Government and Private Employment
1.11 Adjudicatory Official or Law Clerk
1.13 Conflicts: Public Interest Activities
Rule 1.08 is the one pertaining only to possible relationships between L and
C (or C1).
The MRs also has conflict rules—how could it not?—though only two of them
begin with the words “Conflict of Interest.”
Here are their titles:
1.7 Conflict of Interest: Current
1.8 Conflict of Interest: Current Clients Specific
1.9 Duties to Former Clients,
1.10 Imputation of Conflicts of
Interest: General Rule,
1.11 Special Conflicts of Interest for Former and Current Government
Officials and Employees,
1.12 Former Judge, Arbitrator, Mediator or Other Third-Party Neutral,
1.14 Client with Diminished Capacity.
Obviously, the ideas and problems surrounding the concept conflict of interest take up an enormous
part of each of the codes. This fact is nearly a necessary truth when one
remembers that L’s being a fiduciary of C is another one of the core truths
about the nature of what it is to be a lawyer.
Both TxDRs and MRs have a rule in their “CLIENT-LAWYER RELATIONSHIP”
sections regarding how L must structure his/her practice when C is an
organization and not an actual human
person. The TxDR is 1.12 “Organization as a Client,”
while the MR is 1.13, and it has the same name.
Each of these rules encompasses the
others and contains particular reference as to how L may relate to employees,
directors, partners, shareholders, and so forth or to the organizations if they
are business, and mutatis mutandis to other organizations, e.g., governmental
For each of the rules formulated in the two
codes being discussed, there are, of course, comments, and while they are not
“statute-like” the way the rules themselves are, they have considerable power.
Often they are some weaker legal regulation but still rule-like. They have been
promulgated by agents of the state in most jurisdictions, to wit: the judiciary
or some part of it—the Texas Supreme Court, for example.
In addition, as a practical matter, judges take them seriously when
considering sanctions, for example, as do bar committees when making
recommendations regarding lawyer misconduct and how to treat it. One of, if not “the” most important comment is this one following TxDR 1.06:
“Loyalty is an essential element in the lawyer’s relationship to a client.” Although it is
not always said just this way, here is an important truth about L’s duty
of loyalty to her/his client:
C within the law and within the scope,
reasonably understood, of the agreed representation.
There are other origins of duties involving various high than average levels
of some of expected and socially approved loyalty, and a duty of substantial
loyalty can originate in some relationship other than one
involving a fiduciary duty. L’s duty of loyalty
to C is “absolute,” though it must be confessed the idea of absoluteness is on the obscure side, and
while a principle, a rule, and an ideal, it is also a rhetorical device
designed to induce an outlook of shock-and-awe, depending on context, when it
comes to discourse regarding professionalism.
Notice that the concept of scope was
crucial to the bold-print summary a few sentences ago on the nature of L’s
fiduciary relationship with her Cs. Not only should the idea of scope be kept in mind by the reader, but
the idea of scope configuration (i.e.,
agreed scope determination and/or scope shape) should be, as well.
The Client-Attorney Relationship:
What is it, then, to be the attorney for a client—an L for a C? How should
the depth of this concept be understood? Does it have a rigorous definition?
Section 14 of the RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS is at
least as good a place to start as any. It is entitled “Formation of a Client-Lawyer
Relationship,” and here is its text:
and lawyer arises when: (1) a person
manifests to a lawyer the person’s intent that the lawyer provide legal
services for the person; and either (a) the lawyer manifests to the person consent
to do so; or (b) the lawyer fails to manifest lack of consent to do so, and the
lawyer knows or reasonably should know that the person reasonably relies on the
lawyer to provide the services; or (2) a tribunal with power to do so appoints
the lawyer to provide the services. [Emphasis added.]
This section does not give us, nor shall any of
the rules provide us with the nature and range—the essence—of the lawyer-client
relationship. The reason is simple
enough. No definition is ever complete.
In this case, the phrase “legal services” remains undefined. How could
it be otherwise since they are so diverse and vary by context? The underlying idea is that pretty much
everyone in the profession knows roughly
what they include, so nothing further need be said. Still, one might ask, what
all is within the purview of the idea services
of a lawyer, legal services, or maybe better yet, services of a lawyer qua lawyer.
There does the client-lawyer relationship end?
How do the edges of a client-relationship
and the problems of conflicts of interest fit together? Plainly the concept of scope—scope of relationship—is crucial. Surely
there is always a scope, though it may be
vague, uncertain, fuzzy, and/or
ambiguous. One of the underlying theses of this
essay is that, in at least some contexts, clarity is a virtue, and clarity can
solve various problems that have kept Ls awake for a long time—centuries maybe?
Consider the problems facing Oliver Cromwell in WOLF HALL and BRINGING UP THE
In any case, the RESTATEMENT THIRD takes another whack at the topic of the
client-lawyer relationship in §16 entitled “A Lawyer’s Duty to a Client—In
General.” Here’s part of the rule:
with the lawyer’s other legal duties and subject to the other provisions of
this Restatement, a lawyer must, in matters within the scope of the
representation (1) proceed in a manner reasonably calculated to advance a
client’s lawful objectives, as defined by the client after consultation; (2)
act with reasonable competence and diligence; (3) comply with obligations concerning
the client’s confidences and property, avoid impermissible conflicting
interests, deal honestly with the client, and not employ advantages arising
from the client-lawyer relationship in a manner adverse to the client; and (4)
fulfill valid contractual obligations to the client. [Emphasis added.]
and as will become even more apparent later, the phrase “scope of the
representation” is both central and crucial. In addition,
the RESTATEMENT THIRD contains a section on scopes of representation. It is §19
and is entitled “Agreements Limiting
Client or Lawyer Duties.” Here is a relevant part of that rule, §19(1):
requirements stated in this Restatement, a client and lawyer may agree to limit
a duty that a lawyer would otherwise owe
to the client if: (a) the client is adequately informed and consents; and (b)
the terms of the limitation are reasonable in the circumstances.
Comment c to this rule states this: “Clients and lawyers may define in
reasonable ways the services a lawyer is to provide. . . .” In other words, C and L can define scope of the
services L is to perform for C. (Interestingly, §16 appears to go the other way
and place in the hand of C, the right to determine and demand all sorts of
things about the C-L relationship, e.g., its goals, and L must “proceed in a
manner reasonably calculated to advance a client’s lawful objectives, as
defined by the client after consulation[.]” And comment c makes it clear at
length that “clients define their objectives[.]”
How can Cs and Ls together define the scope of the representation,
but only C—granted only after consultation with L—can define its goals.
Aren’t the two inextricably twined together?
MR 1.2, “Scope of Representation . .
.[B]etween Client and Lawyer[,]” [Emphasis added]
is differently worded, and apparently different in content, though
actually virtually, and practically speaking,
identical in relevant part to §16(1) of the RESTATEMENT THIRD—the rule
just discussed Here is the language of
if the limitation is reasonable under the circumstances and the client given
informed consent. [Emphasis added.]
The TxDRs at least appears to work a
bit differently. The rule is 1.02(a)-(b) and is entitled “Scope and Objectives
of Representations.” Here is the part of its language relevant to the purposes
of this essay:
lawyer shall abide by a client’s decisions (1) concerning the objectives and
general methods of representation. . . . [But] (b) [a] lawyer may limit the scope,
objectives and general methods of the representation if the client consents
after consultation. [Emphasis added.]
Arguably TxDR 1.02(a) (b) and MR 1.2(c) turn out
to be the same. From a practical point of view, they appear to be exactly the
opposite of that. In one of the rules lawyers decide while in the other rule lawyers abide. Maybe there are different
areas being structured and regulated. Maybe, as a practical matter, the different
rules will end up in the same place.
Before turning to the next step in this
essay’s , portraits, projections and reasoning, it is worth mentioning that
under both the TxDRs and the MRs, there is no special civil cause of action available
to clients, for recovery from L, it having violated one or more of them.
This is not some sort of immunity, however,
since under many circumstances violation of at least some of these rules can be
used as part of proving elements of an existing civil action, e.g., negligence,
legal malpractice, breach of fiduciary duties, and/or the violation of some
A Central & Explicit Texas Rule
The central, explicit rule, given the topic of this essay in Texas, is rule TxDR
1.06, “Conflicts of Interest: General Rule,” and its subjections (a) and (b).
Setting aside the obvious rule that L
may not represent opposing parties in the same litigation; see 1.06(a), under
represent a person if the representation of that person: (1) involves a
substantially related matter in which that person’s interest are materially
and directly adverse to the interests of another client of the
lawyer or the lawyer[‘]s firm; or (2) reasonably appears to be or
[to] become adversely limited by the
lawyer[‘]s or the law firm’s responsibility to another client or to a third
person or by the lawyer’s or law firm’s own interests. [Emphases added.]
But there is an exception to this iron-clad looking rule. It is to be found in TxDR 1.06(c):
client in the circumstances described in (b) if: (1) the lawyer reasonably*
believes the representation of each client will not be materially affected; and
(2) each affected or potentially* affected client consents to such
representation after full* disclosure of the existence, nature, implications*
and possible* adverse consequences of the common representation and the
advantages* involved, if any. [Emphases added.]
The language of MR 1.7(a), “Conflict of Interest: Current Clients”:
represent a client if the representation involves a concurrent conflict
of interest. A concurrent conflict of interest
exists if: (1) the representations of one client will be directly adverse to
another client, or (2) there is a significant risk that the representation of
one or more clients will be materially limited by the lawyers responsibilities
to another client, the former client or a third person or by a personal
interest of the lawyer. [Emphases added.]
MR 1.7(b), as the rule stated ab
initio, is an exception to subsection (a):
existence of a concurrent conflict interest under paragraph (a), the lawyer may
represent a client if: (1) the lawyer reasonably believes that the lawyer will
be able to provide competent and diligent representation to each affected
client; (2) the representation is not prohibited by law; (3) the representation
does not involve the assertion of a claim by one client against another client
represented the lawyer in the same litigation or other proceeding before a
tribunal; and (4) each affected client gives informed consent, confirmed in writing.
The two sets of “conflict of interest prohibition & regulation rules”—the
TxDRs and the MRs–differ slightly, but the general themes are the roughly the
the MRs contain one rule not explicitly found in the TxDRs, to wit: MR 1.8(b),
where the whole rule containing subsection (b) is entitled “Conflict of
Interest: Current Clients: Specific Rules.” Here is MR 1.8(b):
representation of a client to the disadvantage of the client unless the client
gives informed consent, except as permitted by these Rules.
As a practical matter,
in Texas, it is prudent for L to make sure that there has been
and is compliance with all of the
“ordinances” in both sets of rules. Thus,
from a practical standpoint, MR 1.8(b) should be treated, though assuredly not actually
classified as, a Texas rule.) Courts from around the country often cite rules
officially adopted in a jurisdiction and the MRs together without
distinguishing them, although the opposite is also true in different cases.)
(At the same time, it must be conceded that MR 1.8(b) is a very strange
rule. There are two key phrases. One is “use information. . . to the disadvantage of” while the other is
“informed consent.” The term
“use” is must broader than “disclose.” The term “use” is itself
multi-dimensional; not all uses involve disclosures. L can use information he
has from a client in order to invest, purchase, sell, and/or find a new sex
partner, to wit the client’s spouse. None of these involve disclosure. The terms “informed consent” are not entirely
clear, but Comment c for MR 1.7 is helpful.)
The problem under discussion, then, centers on L having more than one
client. When do those situations arise for the insurance lawyer? I shall
restrict my remarks to coverage controversies and defenses provided by insurers to insured. Of course, insurance lawyering
involves lots of other kinds of issues. In any case, here is a schema of relevant categories:
C1 = Primary Carrier#1 (PC1); C2
= Primary Carrier#2 (PC2).
C1 = Policyholder (P/Id);
= a Named Insured (N/Id).
C1 = Policyholder; C2 = an Unnamed Insured
C1 = Policyholder; C2 = an insured Mortgagee
C1 = Policyholder; C2 = a Loss Payee (LPee).
C1 = Policyholder C2 = a
defending carrier (D/Ir)
C1 = Primary Carrier
(P/C); C2 = Excess Carrier (ExC).
C1 = Carrier [any level]
C1 = Insurer,
(Ir); C2 = Reinsurer (Re).
It’s not hard to see how conflicts of interests will develop for an L in
each of these situations. At the same times, it
is not uncommon for participants in and observers of the insurance “scene” not
to focus on a potential conflicts in this area and thereby miss one, or just not
worry about it.
Also, a number of configurations which
might look like “conflictual” situation but aren’t actually, at least not yet. Time
can be important. Here is an example. There is a
example. A PC2 has a policy period a specified year but not
more. PC1 states that it has coverage for covered losses during the
previous year only, and PC3 states that its policy period is only for
the year after that of PC2. There
would not necessarily be any conflict of interest between PC1 and PC3,
insofar as they are both trying to prove that they do not have coverage
for a given loss, but that PC2 does. In the forgoing
case, L could without question represent them both. A conflict would arise, however, if they—PC1
and PC3—sought to fob coverage off on the other one, whether
by itself or in conjunction with PC2.
Of course, exactly the same points can be made about ExCs on same “horizontal” level, and as to more than
one Re on the same level.
Much attention is paid to problems that arise in the area of
liability insurance (third-party coverage) but less in the area in the area of
first-party coverages. Little attention
at all is paid to the
conflicts-of-interest problems for, what might be called, the coverage bar. And
yet they are there, hidden.
The Insurance Lawyer and Some
of Interest Problems—
The essay now turns to two different categories of conflict problems. The first one may be classified as a Texas problems for formalistic reasons, if none
else. The second one is quite a general
set of problem. The whole array of problems can be
pictured as a square. The top left point is C1a; the top
right point is C1b, i.e., different defended insured: the lower left
point is D/Ir2a and at the
lower right is D/Ir2b.
In the picture, there is a straight line
running three times as long as any side of the square from the center of the
square downward zigging and sagging to a point directly, vertically below the
center point; the end of that line is L. The letter L is enclosed in a small
circle designated by arrows as running both clockwise and counterclockwise.
Here is the picture:
Each of these points can be connected
to each other one. This can be done with any sort of line—straight or curved, bobbing and weaving, zigging or zagging.
The lines may be continuous, hyphenated, dotted closely, or any other groups of
symbols where the “road” stays a line or some sort, and all lines are of the
same shape, etc. And it can be done all
at once, i.e., each point connected to each other point, though thet leaves a mess even in the imagination.
This diagram pictures one level of the patterns of possible conflicts of
interest. It could get larger and larger as there are either more and more
insureds, more and more insurers, and/or
more and more insurers.
This is a picture of possible
conflicts. This essay shall consider them in simpler numbers, however.
Insurance Lawyer as Intermediary and
The TxDRs have contain a law, Rule 1.07 is entitled “Conflict of
Interest: Intermediary,” and a explicit equivalent
of which is not found in the MRs.
Therefore, I shall proceed as if this were a “Texas Only” problem, which is
almost certainly is not, at least roughly speaking. Comment 5 to this rule
terms the process as “intermediation.”
Rule 1.07 pertains to situation in
which L represents two or more clients involved in the same matter and they have a divergence of view,
i.e., a disagreement. The core rule of 1.07(a) is that L is forbidden by law to try and mediate and
thereby resolve the dispute unless all of three conditions are met. They are,
roughly speaking, these:
dimensions of the form of joint and common representation are disclosed and
explained by L to each C, including its effect on attorney-client privileges;
believes an array of propositions including [i] that the matter can be resolved
without litigation, [ii] that each C can reasonably make informed decisions,
and [c] that the attempt at settlement by mediation will not prejudice the
interests of any consenting C, if the process is unsuccessful, and
undertaken and completed impartially and without improper effect on any of the
It is natural to first consider this
rule as applying to organization formation, probate matters, agreements as to
marriage, and perhaps not to litigation, except for family related matters. But
that is not how the general terms of the rule work. Rule 1.07 does not require that each client
have separate legal representation
There is no reason to believe that this rule could not be employed in some litigation contexts, and
Rule 1.07 might fit some insurance defense contexts quite well. There is a
certain resemblance between trying to organize pieces of an insurance defense arrangement,
process or system and putting together other, more formal, organizations.
The rule contains four (4) more subsections, but none of them—or all of them
together—make the use of this rule in the insurance defense situation
Indeed, except for the rule’s requirement the clients to be involved, the
requirement of consent in writing after there being formal consultations as to
the topic of the intermediation, etc., is not exactly clear. These sorts of arrangements are accomplished frequently and to the advantage of
all involved. Frequently, there are informal writings indicating consent by
both C1 and C2. When there are a lot of C1s,
more formality is probably required.
Insurance defense counsel, by definition, is
a lawyer who is representing one or more insureds in a lawsuit against it (or
them), under one or more liability insurance policies, issued by one or more
carriers, where the policies need not be, but often are, identical in relevant
Usually, such lawyering is compensated directly from the relevant insurer(s)–their policies obligating them to pay
their insureds defense costs, among other
things, “on behalf of” their insureds. Less often, but by no means unusually, insurance
defense counsel is paid directly by the insured(s) being defending, and the
insured(s) is/are reimbursed by the carrier(s) that have that obligation.
When it comes to the payment of the legal fees of
insurance defense counsel, reasonable timeliness, from the point of view of L,
is seldom the defending insurer’s goal, and even less are the chances that a
defending insurer will accidentally blunder into this kind of timely
It is important to remember that, under most
circumstances, a carrier that is a party to a routine, widely used contract of
liability insurance has both a duty to actually defend, i.e., take charge of
defending its insured(s) and a right to do so, upon required or appropriate
request/demand. One of the
prerequisites to each of these is the carriers having received contractually or
otherwise legally required notice of the claim against it.
Assuming that a carrier has a right to defend its insured(s), it has a right to
conduct the defense in accordance its exercise of its own competent,
reasonable, and prudent discretion. It also has a duty to do this.
Temporally speaking, there are a number of different types of “conflict
problems” relevant here. Here are two sub-types of one of the types. In general, one of them arises when L is
trying to decide whether to defend two or more different potential Cs. The
first kind of question L must ask is “Will I come to have set of
prohibited client-lawyer relationships if I undertake to represent C1 and
C2 in this matter?
The other sub-type exists when L is
already representing two or more Cs, who themselves may have conflict problems
between at least the two of them. In the is L’s question is, “Should I continue
to represent both C1 and C2 or should I withdraw from representing at
least one of them?” In this second situation, L must ask of course, insurance defense counsel have
exactly the same problems.
Here are two sub-types of conflict problems of another, different type, facing
insurance defense counsel. Each of these may arise in either of the two just
First, when may L represent two or
more insured defendants, C1
and C2, in the same or related litigation when the interests
of those two clients are in conflict? The conflicts between or among the
conflicted clients may be as to who has liability and/or they might be as to who has a given type of insurance. (Of course, there can be any number of Cs, and they
may all be insured under the same policy, e.g., as P/Id, N/Id, uN/Id, Id/M, and
Second, when may L represent both one
or more of insureds and one or more of their defending insurers in the same or
closely related litigation? For many years,
this issue has been controversial in different jurisdictions
in different ways and for different reasons.
It is so pervasive a concern that it
has been given a group of similar names. One of
them uses the phrase “tripartite relationship” and “Problem of the Tripartite
Relationship”; many of them including the word “triangle,” or one of its
linguistic siblings, e.g., “triangularity.” Then it is called the “Problem of the
Triangular Relationship,” of what I would simply call, the “Problem of
The general idea is that the relationship amongst a defendant insured, a
defending liability insurer, and defense
counsel is like the three end-points and lines of the lines in simple triangle. All sorts of different images and metaphors can be created by using
different types triangles, different angles, lines of different lengths, and
the images need not be restricted to plane geometry, a plain enough approach, or
even two-dimensional graphics.
The immediate reaction most Ls have when
first hearing about this issue is to believe and assert that L may not
represent both an insured defendant and its defending insurer precisely because
any two or more such entities have a ineradicable set of conflicts. Then there is often
a second reaction, to wit: that the two (or more) potential clients consenting
to the dual representation is ineffectual in almost all cases because effective
rational consent—consent based upon reason–to ignoring client conflict is
impossible. It could never be based on a
rational insured’s having been
fully informed as to dangerous conflictual possibilities (or that, if such a
thing is possible at all, the requirement of being-fully-informed in advance is
easily stumbled over or intentionally abused and so should never be invoked).
Many commentators, legal thinkers,
professors, insurance claims executives, philosophers of law and insurance have
reached the conclusion that a defending L need not ever be conceived a
representing both the defended insured and the defending insurer (in relationship
with) the same litigation or with respect to it. On this view, it is
thought the L can provide a perfectly reasonable defense of his C1
the insured without also having the defending insurer as C2, in that
In addition a good number of commentators,
legal thinkers, professors, insurance claims executives, philosophers of law
and insurance have reached the opposite conclusion, namely, that an L defending
C1 almost always also represents the defending insurer, C2
and so must almost always be conceived
of as representing both the defended insured and the defending insurer (in relationship with) the same litigation or
with respect to it. On this view, it is suggested L cannot be thought of as providing C1 a
reasonable defense unless L also represents, C2, at least one of the defending
insurers. In other words, L cannot be conceived of as rendering C1 acceptable
legal services (services qua lawyer) unless she also provides them to C2,
the defending carrier.
For neither of these views does it matter
whether or not L for C1 deals only with L for C2, or
whether there is a chain of such Ls. If L for C1 is reporting
to and receiving “suggestions from” L for C2 in this kind of
context, L is a Lawyer for C2.
On the first of these two views, the lines of the triangle are like one-way
streets. On the second view, they go in two directions. (Although the following
metaphor is not exactly used, one can
rest assured that the streets are not express
ways and that they are toll roads, probably in several senses.
Before going any further, however, on either
road, it is necessary to distinguish the issue here under discussion with
another one–a proposition (or set of them) with respect to which there is
absolute agreement—indeed, one with respect to which no dispute even possible.
It is this. When L is representing a defended insured by defending it in (or leading
up to) a lawsuit (or “close relative” form of legal dispute resolution, like an
arbitration), L may not serve the interests of the relevant insurer(s) by
actually or attempting to undermine the insured’s coverage(s) and/or coverage
claims to any degree, and L must undertake avoiding to let this be a
consequence of his actions, remembering at all times that the entity being
defended is his client and one to which L owes a fiduciary duty.
Thus, because of this duty of L to his client, C1, representing an
insured, L may not set out to or let the insurer paying the tab screw his
client the insured.
This proposition is even more obvious when
the insured is itself making a first-party claim, say, to use a new-fangled
example, because its cyber security system has been breached by clever but
villainous hackers, and consequently, it is sustaining insured losses. At the same time, one might wish to remember
that a liability insurer’s duty to defend an insured is really a first-party type legal duty and not simply part of a
purely third-party form of insurance.
There is not universal agreement as to the following, however. When a defending insurer instructs L to act
in a way which is inconsistent with the
interests of C1 L should fire the insurer. There is no disagreement
about whether L should or should not do something. L must do something. The lack of agreement would be over what L should do, and it what order L’s actions should be undertaken. One might suggest that L should seek and conduct
various discussions with the defending insurer. (L: “Are you really suggesting
Now that the distinction between (1)
deliberate torpedoing and (2) routine practice has been made, let us return to
the “one-way street” versus “two-way street” problem, and an instance of (2),
more or less.
Remember what has already been discussed
about the defending insurer’s relevant rights and duties under the contract of
insurance. It has the right to conduct the defense of the insured, and no one could doubt whether it has
a duty to do it competently. The insured has contractually agreed to this; it
has agreed that the insurer has a right defend it and hence a right to “run the
But—and now we arrive at a critical
juncture–the insurer cannot do this just by itself, if for no other reason that
it is not a human person and therefore does not and cannot have a license to
But the insurer must have satisfactory
information regarding the case in order to evaluate rationally/reasonable
strategy and tactics, questions of law, and questions of law and facts mixed
together, and questions of facts relevant to the litigation taken just by
themselves. It will also need help in making litigation-related defense decisions and many of those usually come from
lawyers, and some of them probably must come from a litigation lawyer. This will
be defense counsel.
But when L does these things, in effect at the insurer’s request, C2
has become L’s client. L is by agreement providing
the defending insurer with legal services, and thereby creating or maintaining
a client-attorney relationship with the defending insurer.
Section 14 of the RESTATEMENT structures the creation of a client-attorney
relationship this way: the client “manifest” its intent that L shall render it
legal services, and L manifests the
intent to do so. But that is exactly what
happens between the defending insurer and L regarding C1, the
There is a third school of thought which is, for
a practical point of view the right one–call it the “Fraction Theory”–but one
that suffers from a conceptual problem. It is incoherent. According to the
third school both the defended insured, C1, and the defending
insurer, C2, are L’s clients, but the interests of C1
always take precedence over the interests of C2. This system has
even been something like called the “1½ Client System.” The trouble is that L owes each of its clients a fiduciary duty;
consequently no actual client can ever be a “half-client,” and no client can be
the “Favorite Son” client, at least not without fully informed consent.
Significantly, Texas courts have never adopted the “One Client-or—Onaway” system.
A recent case setting this forth is In re
Sassin, 2013 WL 3385106 (Tex. App. –
El Paso, nothing further):
preclude an attorney hired and paid by the insurance company from representing
the insured so long as the insured consents to [or acquiesces in that]
Unfortunately Sassin is not reported
anywhere, that I know of, except “WL”; it is not reported in SOUTHWEST REPORTED
(3d), and so is not “official”—and so may not become important–though it is
very clear. One of the decisive Texas case,
is the already cited Unauthorized
Practice of Law Committee case.
In that case, the Supreme Court said
an insurance defense lawyer cannot represent
both the insurer and the insured, only that the lawyer must represent the insured and protect his interests from
compromise by the insurer. And we have noted that
‘an insurer’s right of control generally
includes the authority to make defense decisions as if it were the client ‘where
no conflict of interest exists.’‘“ Northern
County Mut. Ins. Co. v. Davalos, 140 S.W. 685, 688 (Tex. 2004).
And there is another case which impliedly
adopts the “Two-Client View. It is American Centennial Ins. Co. v. Canal Ins.
Co., 843 S.W.2d 840, 484-85 (Tex. 1992). Here is the relevant passage; it is
explicitly about the rights of excess carriers but what it says includes
primary defending carriers, and even carriers that are horizontally on the same
level as them:
excess and primary carriers and the insured generally overlap in
ensuring that the merits of the defense are not precluded from being heard
because of attorney malpractice. ‘The best interests of both insurer and
insured converge in expectations of competent representation. . . . [N]o new or
additional burdens are imposed on the [defending] attorney, who already has the
duty to represent the insured. . . . [Emphasis added.]
Id. at 484-65. Obviously, the holding of the
case pertains to excess carriers, but the logic of the court’s reasoning
includes defending primary carriers as well.
It is worth mentioning in passing that the
requirements in this case use a crucial part of the legal ethics rules in TxDr,
namely Rule 1.01 and ABA MR §1.1, both of which, right out of the starting
gate, that attorneys representing clients “provide competent representation to
a client.” The rules do not say that a lawyer does not owe such a duty to a
non-client like a defending liability insurer.
Not only did the Texas Supreme Court adopted
this view–the “Two Client Sytem,” at least to some extent, and not only
is it the correct one and the one I am
expounding, contains only three merely
possible prima facie paradoxes, i.e., solvable problems and and only one actual
Consider the following general and hypothetical problem. Suppose L comes to
know, say, from investigation of
discovery that certain negative propositions upon which the existence of
coverage may hinge are true and so may defeat coverage. If the defending insurer is one of L’s
clients, C2, L has a duty to disclose that true proposition—that
fact—to C2. But L’s doing
this will harm C1, so—as a consequence—L has a duty not to disclose
that true proposition to C2. Now
let’s look at this type of problem from a general, abstract point of view. Call
this the “Reporting Problem.”
The first prima facie “perhaps-paradox” is the following. As a
general principle, every client has a right to sue its lawyer for malpractice,
assuming the case is not frivolous. Hence,
if C2 is a client of defense lawyer, L, so
that L has two clients, the liability carrier, C2, being one of them, then C2 has the
right to sue L for malpractice. But many states, do not recognized this and bar liability insurers from
suing defense counsel for malpractice. Some think, or have thought, that Texas
is like this.
This is a problem based on an error in
the body of the law, not a paradox. It has a solution. Change the law. The law should recognize that
liability carriers should be able to sue defense lawyers for malpractice for
negligent duties L breaches as to it.
There is no paradox; there is only a requirement of legal
So why has this hitherto been ignored? An erroneous embracing of the “One
Client System” would account for it. But
a more significant reason, one might think, is to protect lawyers from
unnecessary malpractice law suits. It might be, however that this is a mere
superstition. It is extremely unlikely
that liability carriers would bring these lawsuits, except under very serious
circumstances. (It does happen, once in
a while, of course. Not long ago I saw a case in which the insurer had been
sued for seriously flawed, and a lot of money was a stake, so the insured sued
defense counsel for malpractice. I thought that if anyone was guilty of
mishandling the insured’s case, it was the defense lawyer, and not the insurer’s
adjuster. This is not the place to be discussing actual guilt.)
In any case, the “Reporting Problem” is not really
a problem from the point of view of the first “perhaps-paradox.” If L’s
reporting is negligently defective, C2 has a malpractice suit. Will this happen more often than very rarely?
It will not.
The second possible paradox is this one. Every L owes each of his/her/”trans?” Cs a duty of
what is usually called either “undivided
loyalty” or “unqualified loyalty.” At least as compared with L’s interests but
also with regard to anyone else involved
in a relevant matter, L must put C’s interests first. But this doctrine, if understood literally, would entail that L could
never, in any type of matter, represent two clients, since L would have the
same level of loyalty to each of them, that is, L would have to divide his
maximal loyalty between two Cs.
It is not a problem that L’s capacity for having “in its being” a necessary
level loyalty would thereby be reduced in
the aggregate. The levels of loyalty of which an
L is capable—or which it has–are not
like water in a fish tank such that if the plug at the bottom is pulled the
amount of loyalty diminishes, just as the water in the fish tank will. (In
passing, it is also worth noting that some Ls are capable of having—and may
actually have–higher level of loyalty than other Ls. Within specified—and not
precisely specifiable—limits there are no rules of professional ethics
regarding required aggregate amounts of loyalty. Differences are a matter of
The problem actually arises from the idea of
L’s having equal loyalty to two different entities, where the word “undivided”
and therefore the concept of undividedness
implies that L cannot have an equal level of loyalty to two different
Cs—where undividedness entails not
just that one client may not have more of L’s loyalty than another, but that
they cannot both have an equal amount, an about which is greater than any non-C
But the existence of two equal loyalties—two loyalties being equal to each
other in amount–does not entail that one must be favored over the other when
the interest of the two clients conflict.
One of several states of affairs
must result. Here are some examples: (1) The clients rationally agree to
reasonable a solution. (2) The clients let L decide, each having waived
relevant rights. (3) The clients let an
agreed person other than L decide. (4) The clients throw the dice, flip the coin,
or do something like that. (5) The lawyer is
replaced. Of course (5) can be a very expensive solution, and (2) is
unlikely under many circumstances, though
not others. My
experience is that so long as everyone involved is rational, solution (4) is
rare but possible. Some like to gamble.
The idea that there is a sixth alternative in which the Cs duke it out
is something like contradictory. Notice that solutions (1)-(5), and others
suppose that TxDR 1.07 arrangements will not work.
So far this argument has hinged on the
concept of undividedness. What if the discussion is switched to the phrase “unqualified loyalty”
and hence the concepts of being
unqualified and being unlimited. It
seems to me that the intended purposes of
undividedness and being unqualified are actually the same. Even if I am wrong about this, however, L is
permitted to have two clients in many sorts of contexts, and there is not real difference between many of them and the
one under discussion.
Now we should turn back to the hypothetical
situation which has given rise to this discussion of prima facie paradoxes,
that are not paradoxes at all and to the one—a third one—which is
actually a paradox. Sometimes the Reporting Problem cannot be solved.
The thing about genuine paradoxes is that they cannot be solved. They are mysteries,
to be sure, but not all mysteries can be solved. There is not always a
discoverable answer waiting, as it were, to be
found. Some lawyers have suggested practical solutions to solving the
like including “forbidden” disclosures in a report and then blacking them
idea won’t work since the blackness of the passage of the report probably
entails an earlier act of blackening that will tip C2 off to the
problem facing it and will stimulate it to ask questions and investigate the
matter itself. So L will have sent
a signal it had a duty to C1 not to do.
A practical non-solution, the correct “way out,” is to accept the
fundamental contradiction and then ignore it. L has a duty to tell and a duty
not to tell. L cannot do both. From the overall
point of justice full truth and impartiality are required, and lawyer—as
officers of the court, if for no other reason—are professionally committed to
justice–not absolute and perfect justice, just justice. Sometimes the
existence of unsolvable, insoluble mysteries can be leavened by faith, in this
case, faith in the overall system.
Some comfort can be taken in this fact
of imperfection. Usually the whole matter
will not explode. First, the compensating the loss may be well within policy
limits, or there may be excess coverage. Second, C2 may not notice
the disclosure. The number of defense lawyer reports to insurer that go unread and/or
unstudied is large. Third, C2 may
ignore the problem for any of a whole variety of reasons.
At long last, after much mulching, rooting, digging,
and other gardening, the essay arrives at its central point. As a practical matter and as a matter of sound legal
practice, the problems that worry observers and practitioners about the
“Tripartite Problem” when there is C1, C2, and L is that
there be client-lawyer contracts (or near-contracts) setting forth with
precision the scope of the representation and hence the scope of L’s duties qua
To illustrate this point, consider the relationship between L and C2,
the defending carrier. The scope of work specified in that contract is that L
shall have the duty to and only to
render C2 necessary legal services in defending C1
in the specified lawsuit and shall have no other duties. Mutatis mutandis, the
same approach would be employed in the agreement between L and C1.
The agreements might even go so far as explicitly stating that L will have a
duty not to provide any other legal services to that client in relation to the
instant case. Indeed, from a theoretical standpoint, this is probably the best
way to completely solve the “Problem of
L-C1-C2 Triangularity.” This last step—the no-duty-to
step– is unnecessarily alienating, to say the least, and its absence will
probably not really be an actual problem
except on the rarest of occasions. Indeed, the technical “need” for it is so
abstract, that most people will not even notice its absence.
A key implication of this scope
configuration and configurating point is that if the scope of L’s
client-attorney relationship with C2 is clearly restricted to
helping C2 defend C1, L cannot have a duty to C2 to
help it undercut or even lessen the defense to C1.
Assessing potential damages is part of defending. This point may be articulated even more clearly (if it needs to be) by the
L-C2 scope provisions in the agreement specifically stating that L
has no duty to C2 (and/or cannot have no duty to C2)
other than helping or cooperating in the defense of C1.
In passing, it is worth noting that from a how-to point view, it may not be
necessary to include these alienating complexities immediately. It may be
possible to wait to specify the scope of L’s relationship with C2 until
a conflict of interest controversy begins to develop.
Ls are fiduciaries of their Cs. The person to
whom L owes a fiduciary duty is entitled to keep its own secrets. L has a duty
not to disclose them or anything close to them. This is often called Ls duty of
confidentiality, and it is required by all codes of legal ethics. TxDR Rule
1.05, MR §1.6 and RESTATEMENT Chapter 5, pp. 452-517.
A question now prevents itself. If L
represents both C1 and C2, does joint representation
create new confidentiality problems regarding what L knows about C1’s
I think the answer is probably “No.” This is
true for at least two reasons. First, L’s has a duty to C1 not to
disclose its “secrets,” whether or not L is also C2’s lawyer.
Second, C1 since it is an insured, has a duty to cooperate with the
insured in providing it a defense. Hence, the insured, the entity that also
happens to be C2, has a duty to provide its defending insurer with
necessary information. Probably, that happens virtually “without saying.” If it
doesn’t, then L would have a duty to its client C1 to recommend to
it, and deliberate with it, about refusing to disclose. Third, this would be
true whether or not there has been a reservation of rights letter. Fourth, it
would be true in the end whether or not the insured had independent counsel. A
defending insurer has a right to all information it might need to make a
coverage decision, and having a reasonable view about coverage, is a necessary
condition for an insurer having a duty to settle and/or pay indemnity. In fact,
all of these problems, in the end, are problems for C1 or not it has
In this context, at least, it is worth
remembering that an insured being defendant has a right to independent counsel
under all circumstances. To the extent
that it has a right to independent counsel only, paid for by the insurer, there
having been a reservation of rights communiqué from its insurer is a condition
Obviously, almost all, if not all
confidentiality problems can be solved by careful and precision scope
The Problems of Liability Insurers Retaining Rights
This section takes up two matters.
The real issue pertains to conflicts of interest facing defense counsel
when the defending carrier has reserved some of its rights. §VII.B. A prolegomena to that discussion, however, is an
outline of the nature of rights reservations and the possible consequences for
defense counsel of such a reservation.
Reservations of Rights By a Defending
transactions of various sorts is common in many kinds of relationships—in some restricted areas, even
marriage. Hence, quite predictably, for many, many years, a liability insurer
that has been called on to defend one or more of its insureds may well reserve
its right to deny the claim to the insurer of the insured’s performance under
the contract of insurance given the claim made against it by a third party. Often this is done by a reservation of rights
letter addressed to the claimant policyholder.
A reservation of rights letter simply sets forth at least some of the
reasons the insurer think it might justify its
denying a claim.
rights used to be called “non-waiver agreements,” falsely unless there has
actually been an agreement—which, these days, there usually isn’t in the duty
to defend context–or simply and more accurately “non-waiver notices.” The point to the term “non-waiver” was that the
insurer was bringing to the insured’s attention that it was not waiving its
right later to deny part(s) or all of the claims against the insured but had
only agreed to defend.)
reservations fall into two categories. First, the insurer may wish to state
reasons it thinks it has or might acquire regarding its apparent duty to defend.
Second, the carrier may wish to take up the
defense of the insured without reserving right with respect to that duty but reserve
rights it thinks it has or may acquire regarding its duty to pay compensable
damages on behalf of the insured, if the insured ends up having a different
reserved is usually the insurer’s listing thoroughly, usually by quoting, parts of the policy which the insurer thinks
may justify denial of the claim. Sometimes insurers prefer not to its
denial of a claim something other than a “denial”; for example, the insurer
might say that it was “declining” claim. The only difference, of course, is
grounds upon which the claim might end up being denied. However, if it
undertakes to provide a reservation of rights letter, it must list all of those
it reasonably thinks it might use or be able to use. If new ones arise later, the insurer should
provide the insured with a supplement or a revised reservation of rights
letter. (Of course, the use of supplements and revisions breeds litigable
controversies, and the result of this is often the use of overly expansive
reservation of rights letters. Reserving the rights of an insurer is an art,
not some sort of stringent compliance. Almost all conduct of an insurer in
coverage disputes generates controversy; only some of it is genuine; and fear
of failure is not something an insurer needs at this point.)
believed that if an insurer issues a reservation of rights letter, the
insured has an automatic and indefeasible right to independent counsel and the
same sort of right regarding the conduct of the litigation. In other
words, if an insurer issues a reservation of rights letter (and does not
withdraw it upon a demand from the insured), then the insurer loses its rights
under the contract to conduct the defense of the case, although it does not
lose its duty pay reasonable fees and expenses for that defense.
reservation of rights letters, though not obligations under the contract of
insurance, can be required by law, e.g., §541.060 of the Texas Insurance Code
and the custom or tradition of using them is so long and so strong that such
letters should often be issued where arguably appropriate. (Sometimes they should be issues for other
reason than to prevent the apparent triggering of portions of statutes or
elements of the common law in the jurisdiction. At the same time, they need not
be over done. Insurers’ reserviing rights is an art involving judgment, and not
either strict conformity to danger avoidance or liberal discretion.)
jurisdictions, a liability carrier’s issuance of a reservation of rights
communiqué does not automatically and absolutely entail that the insured has a
right to independent counsel of its own choosing and/or that it may conduct
entirely the development of its case.
In general, such a right would need to be
grounded upon the terms of the contract of insurance, and no such contact provides
the insured with any such right (at least none that I know of).
insurer to accede to the insured’s demand, while—at least privately–knowing
that the insured has no such right. Avoiding unnecessary conflict is almost
always prudent; the “devil” lies in the complex idea of something’s being
A Carrier’s Reservation of Rights and
Its Implications for
matter, perhaps it should be observed that no counsel in a simple first-party
insurance dispute case—insured versus insurer–is affected by the fact that an
involved insurer has issued a reservation of rights letter. The reason
is simple. In first party insurance disputes,
the insurer is on one side of the table; the insured is on the other; and
that’s no one lawyer or law firm will be representing them both (well, almost
never, so the “almost never” situation can be ignored inthis essay).
parties involved, and the fact that a reservation of rights letter has been
issues may affect the dispute and could affect counsel. If, for example, L is to represent a P/C and an ExC, if the P/C issues a
reservation of rights letter, it may be that L should not also be representing
But these problems do not involve the same difficulty as is created by the “triangularity” found in the
duty-to-defend situation. So how does this work.
Someone might argue that when an insurer asks for independent counsel, if
the defending carrier is going to submit to the insureds demand, it should
issue another reservation of rights letter centering upon the provisions of the
policy that give it the right, as well as the duty, to defend. If the insured
proves recalcitrant, the insurer might consider offering it a list of trust worthy
lawyers in place of independent counsel.
In passing it may be worth observing, that an insured’s insisting upon
independent is frequently a bad idea. Let the insurer defend the case; let it
pick its counsel; get you own independent “watch dog” counsel; have
investigative reports written regularly. As an end-game, if there is an
excessive loss, sue what my Irish atheistical friends call the “B’jesus” out of
the insurer and the lawyer it selected—contingency fees available.
First, if a reservation of rights letter has been issued and the insured thereupon demands that it have independent
counsel, one of two situations arises.
Either the insured will want L to represent it or it won’t.
If the insured does not want L, L is gone. In voluntary civil litigation clients
don’t get stuck with lawyer they don’t
want, under most circumstances.
If L has never been hired, then the potential
C—the one that is about to seek, or has sought, independent counsel because of the
carrier’s issuance of a reservation of rights letter–will never have
manifested a desire that L provide it with legal services. If all this
happens after L has been selected, C will simply have withdrawn its
manifestation of desire for legal
services from L.
Second, it could happen that the insured wants to keep L. So what happens under these circumstances? If L stays the insured will be its client and the
defending insurer will not, although the insurer will probably have started
being its client, of Quinn’s “Two Way Street System” for understanding the
“Triangle” is correct. In that
case, L may remain on as the insured’s lawyer—as the lawyer of C1 only
if C2 consents, after having received fully informative request. My conjecture is that L should not be
the one preparing this request, unless C2 consents in advance.
Assuming C2 consents to L staying on as C1’s defense
counsel, L’s two-client problems evaporate. L will not be reporting to the
defending insurer—certainly not without C1’s consent. L will still be issuing reports of some sort to C, his
only client, and it may wish to share those reports, or parts of them, with the
defending insurer, but that is not L’s problem. (And if C does not report to the defending
insurer correctly, that too is not L’s problem, with some fringe exceptions,
say, involving honesty.) The defending insurer will not be paying L, probably,
so L has no duty to the defending insurer to formulate invoices that are
disclosive to it in a way L’s client does not want. (Of course, there may be a
dispute later between C and the defending insurer about reimbursement as to
legal fees, but that too is not L’s problem.)
Thus, a defending insurer’s issuance of a reservation of rights letter can
have good results for L or bad ones. L
may get exiled, or s/he may be embraced together with the blessing of
What might L’s role be when there is a dispute between C1 and C2
regarding the handling of the defense of the pending lawsuit? Obviously L
functioning as intermediately is the best of the alternative, where possible.
But what if that won’t work? What then? How else must or might L function?
there is no question regarding coverage and there has been no reservation of
the defense has been whizzing, strolling,
lumbering, stumbling, or limping along, and no one is complaining;
there are no settlement offers are that there
unlikely to be any, given the emotion state of the plaintiff;
there is a witness (W) the deposition of whom C1
believes should be taken, she might/could be a significant witness but
she will probably not be a key witness;
W lives on a boat on Lake Balkhash in Kazakstan,
not exactly near the town, nearer the thermal power plant down the lake;
the defending insurer, C2, does not
believe that the deposition is needed and doesn’t want to spend the money,
which will be quite a lot;
the positions of C1 and C2 are
growing more intractable.
Does L have a duty to anybody to do anything? Suppose that L does have
duties here. To whom are they owed? What are they? To what extent is L’s
judgment significant? Isn’t the insurer’s right to control the defense
determinative from a legal point of view? Does it matter that W does not speak
English? What might the duties be if the deposition could be “Skyped,” though
the effectiveness of this would be uncertain? How might it matter if
W was C1’s former lover? She is a recklessly mouthy blackmaileress? Current
mistress? The plaintiff does not want to go and take the deposition there, but
would be willing to go if it were moved
to Paris. Does the insured defendant have a right to go? With the insurer
paying the tab? Can the situation be described in such a way that the insured
really, really needs to be at the deposition?
Among all these questions some of the
potential answers are routine defense lawyer legal services. True? But what
else is there? Any chance that there are problems of behavioral subtlety L needs to have in dealing with C1?
C2? Suppose, down deep in L’s
bones, as it were, she knows that the deposition needs to be taken? Should not
be taken? Has little to do with the case but C1 actually, secretly wants to fish in the lake?
Should L back C1 in this? Obviously not. But does L have a duty to
investigate C1’s true desire?
The most dramatic “clash” of this sort is an oft discussed, though rare,
predicament found in some tort cases where liability insurance is involved. This is the so-called “Stowers Situation.”
Suppose the plaintiff-(alleged victim)
makes a policy-limits demand to settle: C1
wants it done; C2 not In other words, the defending liability
insurer does wish to accept that offer of settlement, often called a “demand
for settlement.” The defending insurer wasn’t to go forward to see what next
offer there may be, if any, or it may wish to try the case. Although the “Pure Stowers Paradigm” does not involve the insurer making its own
offer, there is no reason why they should not be part of a mix.
Assuming that L is the lawyer for C1 but not the defending
insurer, L has a duty to try and
convince the defending insurer to comply with the Stowers demand, even if L thinks otherwise. This is a requirement of undivided, unqualified loyalty to C1.
It is part of L’s duty to defend zealously. L probably also has a duty to C1
t o try and persuade the defending to make a less sizable offer and opposed
to not participating affirmatively in the settlement process.
At the same time, L has no duty to assist C1 in trying to
defraud or trick the defending insurer This raises very interesting questions
if C1 and the plaintiff are cooperating, perhaps in cahoots, in
trying to get the case settled at approximately policy limits. L may be walking
a fine line here. It may be in C1’s interest to “encourage”
settlement, but if C1is considering being in cahoots with the
plaintiff, L may need to reason with C1 about this and may need to
Now we get to the interesting part. Assuming
that L is the lawyer for C1 and the lawyer for C2 , L has
a duty to try and convince the defending insurer, one of L’s clients, to comply
with the Stowers demand, even if L
thinks otherwise. This may strike
one as a example of a conflict of
interest. This need not be the case, if
the goals of the client-lawyer relationships have been shaped or configured correctly. L’s function for both clients is to defend and help
the insurer to defend C1. When L tries to convince C2 to
comply with the Stowers demand, response
with an offer of its own, L is acting within the scope of his client-lawyer
relationships—both of them. Might L have a duty to both C1 and
C2 to advise C1 that his preference is unsound and that
the carrier thinks so for reasons X, Y, and Z? Surely that too is part of his
duties. (Again, this is a bit reminiscent of TxDR Rule 1.07.)
The only interesting question here, it seems to
me, is what L’s duty might be if C2 asks him what he personally thinks. Early I argued that the
problem of conflicts of interest was not entirely solvable—that it was an
actual, real paradox—this is another manifestation of exactly that actual, real
paradox. Obviously, L has a duty to report what C1 wants or thinks
it wants, but must L take the next step and say what s/he thinks? And would L’s declining to
address his personal views actually tell the defending insurer, C2 what
he actually thinks? I will leave this insolvable puzzle sitting on the table,
but remind the reader that nothing is ever absolutely
and completely solvable down to its very core.
How much does tripartitery or
triangularity have to do with this set of problems? None.
When lawyers discuss what is sometimes called the “Problem of the Eternal
Triangle,” one of the themes is usually this one.
do when an insurer sometimes L’s client and often his “bread and butter,” asks
him to do something that either is or feels like it may be (or come to be) something
contrary to the interests of an insured, also L’s client?”
Why this question keeps coming up is difficult to understand. Either the
insured is a C of L or it is not.
insured is not a client of L, and the requests of the insurer, a client of L,
are not improper, then L is legally and ethically permitted to do as C
a client of L, ask L to do something inconsistent with the pertinent interests
of the insured, L’s duty is to refuse the insurer’s request.
In Case-(2), if L is tempted to do as
the insurer has requested, it is nothing but temptation—temptation and nothing
else. Consequently, L is legally
obligated to refuse his client–the insurer s—request.
There is nothing more to talk about.
There is no controversy to have. The law and the ethics of the profession
require what they require and nothing short of it. Grumbling, whining, and
complaining about losses of income are irrelevant, inelegant, and unattractive,
so far as membership in the noble profession is concerned. Perhaps a key to this
is to keep in mind the truth and meaning of the proposition that
fiduciary duties to their clients.
See Thomas D. Morgan, LAWYER LAW: Comparing The ABA Model Rules of Professional
Conduct with the ALI Restatement (Third) of the Law Governing Lawyers (2005).
This useful book was published by the Center for Professional Responsibility of
the ABA.) 
The phrase “conflict of interests” suggests that there is only one
conflict but at least two interests. The phrase “conflicts of interest”
suggests that there are several conflicts but only one type of interest at
stake. As a generic and general term it
seems to me that both words should be capitalized, so it becomes “conflicts
of interests.” The only problem with this phrase is that it is not
customary and does not slip off the tongue so easily. Plainly if C has two sets
of interests, and they are different, L may have a conflict with one of them
but not another, and vice versa. T here
is no such thing as one type of interest which is the only one which can impede
satisfactory client-attorney relations.
referred to sometimes as “her,” sometimes and “him,” and sometimes as both but
in the alternative using “and/or.” Clients will almost always be referred to as
From now on, through the entirety of this essay take the word “scope,” and the
concepts it expresses, to be of maximal importance. In a sense, this essay will try to solve a
snagging problem by “scoping things out,” though not as that phrase is usually
This point illustrates how important it
is to get the scope of a representation clearly formulated in the
retainer agreement, i.e., the client-attorney contract.
“Conflicts of Interest in the Classic Professions,” Roy G. Spece, Jr., David S.
Shimm, and Allen E. Buchanan, CONFLICTS
OF INTEREST IN CLINICAL PRACTICE AND RESEARCH 85 (Oxford U.P.Pr 1996). Professor
Hazard’s articles was about a variety of professions, of which the
practiced of law is one. I have restricted his observations to the legal
profession. (Professor Hazard is currently
professor emeritus at Yale, among other places, and distinguished
professor at both Penn and Cal-Hastings.)
one wonders if every t type of conflict of interest does not involve a conflict
between L and at least one C, with the exception that L does not realize t hat
there is a conflict among Cs or a conflict between herself and one or more Cs.
See Susan P. Shapiro, TANGLED LOYALTIES[:] CONFLICT OF INTEREST IN LEGAL
PRACTICE (2002) for a survey of different sources and different types of
conflicting interests. Technically Ms. Shapiro is not actually a lawyer but a
sociologist on the” faculty” of the research group of the American Bar
Association. This book is one of
sociology—interviews, reports on them, maps, demography—but there are themes of
ethical lawyering prominent in the book, and she might as well be a lawyer when
it comes to legal ethics. She knows a lot more about it than most. Interestingly, Dr. Shapiro has an expansive
interest in lawyer conflict of interest problems. See her “Conflict of Interest
at the Bedside: Surrogate Decision-Making at the End of Life,” in Anne Peters
et al, CONFLICT OF INTEREST IN GLOBAL, PUBLIC AND CORPORATE COVERNANCE, 334-54
(Cambridge U.Pr. 2012).
See, for example, “Judge, Sex, Complainant,
Witness, Conviction & 1983” Quinn’s Commentaries of Lawyers and Lawyering,
August 4, 2014. The literature on this scintillating topic is not quite substantial, but not sparse
either. There are, also, of course, many
of them coming from California, it seems. Some might ask, “Where else?”
(Ind. April 21, 2015).
The term “codes” is used here because the systems of legal ethics about to be
mentioned look like codes. They look
like statutes and comments on statutes. Not all sources of legal ethics comes
from codes, of course, there are also cases, textbooks, treatises, books
setting forth ideals, criticisms of various sorts (individualistic and
system-oriented), in Texas there is the “Lawyers Creed,” and so forth. The rules that are at the heart of every
current system of legal ethics narrowly conceived are not principles of
evaluation which lawyers have imposed on themselves to perform self-regulation,
as it were. They are enactments of
agencies of the state, often, as in Texas, the Supreme Court. They might as well be statutes, though they
are not passed by a legislature. Thus
they are not administrative rules either.
(Of course, there also actual statutes—statutes passed by a
legislature–governing the conduct of lawyers.).
Given the underlined terms, it is difficult to see how lawyers cannot take
seriously the idea—or maybe just an ideal–of the “lawyer/statesman” proposed
by Anthony Kronman in his THE LOST LAWYER (1993 ), as criteria for at least
excellent lawyering. See Quinn’s Commentaries on Lawyers and Lawyering entitled
“Kronman’s Ideal…” 4/24/14.
fact is mentioned only because one wonders whether having the phrase “conflict
of interest” come first is designed to
press home the importance of the rule.
Again, notice which word comes first, contrary
very long traditions. Consider the phrases “attorney-client relationship,” “attorney-client privilege”
and so forth.
Entities cannot be attorneys and hence cannot legally practice law. Unauthorized
Practice of Law Committee v. Am. Home Assurance Co., Inc., 261 S.W.3d 24
I will follow the ordering of the terms found in these titles when talking
about L-C or C-L relationships. Putting
the word “Client” first suggests that the client comes firm, and putting the
word “Lawyer” second, suggest that the lawyer comes second. This is a nice semantic way to illustrate
subtlety how important the nature of fiduciary relationships is in C-L/L-C
The first sentence in the first comment on MR 1.07 is this: “Loyalty and
independent judgment are essential elements in the lawyer’s relationship to a
client.” There are several ways to think about this apparently trivial
One may wonder whether this is actually a rule or merely an ideal, and if it’s
an ideal, how close to being a rule is it. Moreover, one may also wonder what
it is for a scope of representation to be reasonably understood. Obviously, in a contentious divorce case,
among all others, L does not have a duty to literally take a real bullet
directed at L’s client; L has no duty to step in front of C, though L might
have a duty to do just that for one of his children, though not qua L. So much
for “absolute loyalty”? (If the question nags you, think scope.) The codes are quite clear that lawyers are forbidden from
undertaking to perform criminal acts with client. Given at least that rule and
perhaps others, L would never be obligated to “take a bullet,” in the
metaphorical sense, from the law for the
illegal conduct of C.
Given the topic of the paper consider the plight of a lawyer who undertakes
investigating the claim of an insured and then decides or helps decide the
liability of the insurer, if any. Is L
functioning as a lawyer, or is L functioning as an insurance adjuster, or is L
doing both at the same time.
In general, if L1 cannot render legal
services to a person, and L1 is in some sense a member of a law
firm, then no member of that law firm can do what is prohibited as to L1.
See TxDR 1.06(f).
The asterisks are added by the author to trigger awareness as to how deep,
expansive, complicated, and difficult litigation would be where this passage,
and those like it, were substantially and/or generally at issue.
a comic dimension to this. Consider the last of the asterisks. Q. “Tell me Mr. L, and remember you are a sworn witness, before
your client consented to the scope of the client-attorney relationship, as he
most certainly did in this case, having made an enormous amount of money in it,
did you fully disclose to him all the many advantages involved in his doing
I am treating a policyholder as the or an owner of a policy.
This is often practical discourse in the industry not legal
parlance. In addition, sometimes the
term “policyholder” refers to the insured with whom the carrier of the agent
deal with—usually or always.
And there may be many more than one named insured.
And here may many more than one unnamed insured.
Though there may be more than one. A covered mortgagee is a named insured, at
least usually, though it may also have its own policies as backups.
And there may be many of these. Literally, a loss-payee (or, loss payee) is
anyone designated to receive payment, and sometimes anyone who actually
received payment. That is not common
usage in industry practice, however. There are many different kinds of loss payees, so far as the industry is
concerned, not only mortgage holders,
but any secured creditor, any creditor, any unnamed insured, and sometimes
anyone other than the policyholder. Industry lingo is shaped for practical use
This can one or more carriers at any level.
Of course, “carriers” and an
“insurers” are the same type of entity;
they are the same thing, just different words.
There are many different kinds and/or levels of excess carriers, so there are
many levels above which there are excess
carriers. Excess carriers are often stacked one on top of another, and
sometimes one level may have several carrier stretched out horizontally, as it
were, just as it can be for primary carriers.
Roughly speaking, umbrella policies are policies which are primary with respect
to some coverages, and excess with respect to others.
One of any type, e.g., P/Id, N/Id,
UnN/Id, and more.
And there are more of both kinds of Cs.
The idea of Ir1b is symbolic only. There can be any number of the Id1s,
i.e., Id1c, Id1c, Id1d,
and so forth. The same is true for Ir/s. And the same is true for Ir/s that are C2/s.
And so it looks like the consultation process must each me L to C alone without
other Cs present.
It is not clear to me that C1, for example, must believe that a
failed intermediation, will not adversely affect the interests of C2
It might be worth noticing that in the context of liability insurance, there
may be two types of claims. In one of
them an alleged victim makes a claim against the insured (“You injured me.
Pay!”), in the other the insured goes to its insurer and files a claim for
defense, indemnity, or both. (“I’ve been sued. Defend me, and, as necessary,
pay for me if I have to pay.”) If course, there are many variation on this
paradigm, and many problems that there being two different types of claims can
As a general rule, if L can represent both of them, L can represent one of
them. Of course, if L learned
endangering secrets about either of them, L probably cannot represent the
other. Fully informed consent can change the answer.
If the answer is “Withdrawal is advisable” or “Withdrawal is a ‘must’” L should
probably withdraw from representing both of them, at least without
consent. The fully informed consent of
the clients can change the answer.
Louisiana is a special case, and nothing at all said here, e.g., about Texas is
intended to have any authoritative role in thinking about the related law in
its geographical neighbor Louisiana.
Or the insurer, for that matter.
As formulated here, the issue has nothing to do with whether L may represent a
defended insured in an ethically and legally permitted manner while
representing the defending insurer in other matters.
The literature on this general topic is enormous. For a defense of the Two
Party System that covers most of the, to this day, influential literature
containing arguments and not simply case histories, see Michael Sean Quinn,
“Whom Does the Insurance Defense Counsel Represent,” 2 J. of TEX. INS. L. 12-22
(2000). For a rather hard-edged—some might
say “acid” discussion of some still influential literature, see Charles Silver and
Michael Sean Quinn “Wrong Turns on the Three Way Street: Dispelling Nonsense
about Insurance Defense Lawyers, 5 COVERAGE 1, 4-18 (1995). For more on the Texas versions of this problem see Jes Alexander, “The Bermuda Triangle in Texas: How to Navigate the Tripartite Relationship,” 2014 INSURANCE LAW INSTITUTE CLE (November 13-14 (2014)
For a portrait of many views and many problems, see Eric Mills Holmes, “A
Conflicts-of-Interest Roadmap for Insurance Defense Counsel: Walking an Ethical
Tightrope Without a Net.” 26 WILLAMETTE L. Rev. 1-112 (Winter 1989). Without intending any criticism of the essay
itself, many readers tire of the usual, formulaic, scary sounding formulations
of titles of essays. There is no such
thing as a roadmap for a tightrope, and there are almost always safety nets of
some sorts where lawyers make mistakes that done themselves, more-or-less by
themselves cause disasters.
A well recognized, though flawed, case enunciating this obligation in Texas is
Employers Causality Co. v. Tilley, 496
S.W.2d 552 (Tex. 1973), although the law of this case was well known well
before the date of this decision.
See note 17.
Even if one were to say, “No. The insurer can hire additional counsel to study
the work of defense counsel,” the probabilities are virtually certain that
defense counsel will have to provide examining counsel with information and
opinion. In the absence of this sort of
thing, the defending insurer will probably not be able to make reasonable
decisions, which is its duty to do.
And I have never heard of such an arrangement being made. Nor have I seen
stories about anything like it in the literature.
cited in n.17 Sometimes the Traver case is regarded as more significant than it
is. See State Farm Mutual Auto. Ins. Co., 989 S.W.2d 625 (Tex. 1998). Neither
dissenting nor concurring opinion constitute part of the law. See Mid-Continent Casualty Co. v. Elan
Energy, Inc., 709 F.3d 515 (5th Cir. 2013).
See Michael Sean Quinn and Susan Scott Hayes, Lawyer-Performance Suits Brought by Liability Insurers Against Defense
Counsel, 30.8 Ins.
Litig. Rptr 245-65 (June 1, 2008),
cited in a more general and more
recent piece, John S. Wilkerson, III and Jeffrey Stover, Insurers’ claims for Legal Malpractice Against Defense Counsel Hired
forTheir Insureds,___ FDCC ___ (2010±),
easily locatable on the Internet. The
most frequently cited case on the topic of liability carriers suing defense counsel is Atlantic In’l Ins. Co. v. Bell, 475
N.W.2d 294 (Mich. 1991). See also Steward
Title Guaranty Co. v. Sterling Savings Bank, 311 P.3d 1 (Wash. 2013).
Of course, if Solution (2) is adopted, L must be objective and reasonable. L
may not favor one client over the other. L must try and reason correctly. This may or may not involve striking a
This matter can get even more subtle and complicated. I suspect that the ideas unqualified and unlimited may
not be the same, though they can be made that by some sort of stipulation.
In this area, the most interesting problem is this. What if L has reported to C2 the
existence of a relevant problem, e.g., a coverage problem, and thereby notified
his client of a true proposition of which it needs to be aware. But L knows
that C2 has not been paying attention or has not understood what it
is being told, even though any high school sophomore getting more than C-
grades would understand what was being said. if they had only read it. Wouldn’t L have, as part of its fiduciary
duties, an obligation to take the matter up again in order, if nothing else, to
make sure that the client realized what was being reported to it? It seems to me that deliberate obscurity in
L’s report to C2 would raise similar problems.
For general treatments of reservations of rights by insurers, See, COUCH ON
INSURANCE 3d, Chapter 202, III, (2015).
For an interesting discussion of the nature, elements and power of reservation
of rights letters, see Western Heritage
Ins. Co. v. Love, 24 F.Supp.3d 866 (W.D.Mo. 2014). There have been little,
if any, changes in the law of reservation of rights letters in recent times.
Hence, to the extent that the following was every helpful, it still is: Michael
Sean Quinn, “Reserving Rights Rightly: The Romance and the Temptations,” 7
COVERAGE 23 (1997). A copy is attached to the author’s website,
www.michaelseanquinn.com. For what is unquestionable the best how-to essay on
this topic—a truly excellent piece of readable work—see Robert Lamb, “How to
Write Reservation of Rights Letters Right and How to Respond to Them,” 19th
ANNUAL INSURANCE LAW INSTITUTE, November 13-14, 2014. This CLE is sponsored by
the University of Texas Law School and the State Bar of Texas Insurance Law
Section. For those who enjoy “absurd”
law suits—irrational lawsuits based on
error from beginning to end—there one essentially involving a dispute
supposedly generated by a reservation of rights letter, see Marquis
Acquisitions, Inc. v. Steadfast Ins. Co., 409 S.W.3d 808 (Tex.
App.—Dallas 2013, no pet.)
Quinn’s Controversial Suggested Rule: In “almost never” situations, once its
status is established, err on the side of caution. . Opposite position: Err on
the side of caution only you don’t have assets substantially in excess of
losses following upon error.
Of course, there are technical differences as to whether L has already become
the insured’s client. I shall ignore
this dichotomy, for the most part.
am ignoring government supplied lawyers. I am also ignoring situation in which
there is no reservation of rights letter but the carrier simply wants to
require that its insured accept a given L as its lawyer. This can happen, but it is
G.A.Stowers Furniture Co. v. American Indemnity Ins. Co., 15 W.W.2d 544
(Tex.Comm. App. 1929, holding approved). See Lee H. Shidlofsky and Douglas P.
Shelley, “Stowers: 2012 Update,” 25th
ANNUAL [TEXAS] CONSRUCTION LAW CONFERENCE, March 1-2 (2012). Vince Morgan and Michael Sean Quinn, “Damn
Fools,” 6:1 JOURNAL INSURANCE LAW 1-21
(2005), and again later. The Stowers cases and literature are
Originally posted on 08/04/2015 @ 4:49 pm