The So-Called “Tripartite Problem” of Insurance Defense Lawyers and Its Solution

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);     C_{2 =} Primary Carrier#2 (PC₂₎.
C₁ = Policyholder (P/Id)[24];          C₂ = a Named Insured (N/Id).[25]
C_{1 =}  Policyholder;                      C₂ = an Unnamed Insured (UnN/Id).[26]
C₁ = Policyholder;                      C₂ = an insured Mortgagee (IdM).[27]
C_{1 =} Policyholder;                       C_{2 =} a Loss Payee (LPee).[28]
C₁ = Policyholder                       C₂ = a defending carrier (D/Ir)[29]
C₁ = Primary Carrier[30] (P/C);       C₂  = Excess Carrier (ExC).[31]
C₁ = Carrier [any level]               C₂ Umbrella Carrier (UC)[32]
C₁ = Insurer,[33] (Ir);                     C₂ = Reinsurer (Re).[34]

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 PC_2.  There would not necessarily be any conflict of interest between PC₁ and PC_3, insofar as they are both trying to prove that they do not have coverage for a given loss, but that PC₂ does.   In the foregoing 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 PC_2.

Of course, exactly the same points can be made about ExCs on the 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 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 problems. The whole array of problems can be pictured as a square. The top left point is C_1a; the top right point is C_1b, i.e., different defended insured: the lower left point is D/Ir_2a  and at the lower right is D/Ir_2b.[35] 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.

The TxDRs have contained a law, Rule 1.07 is entitled “Conflict of Interest: Intermediary,” and an 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 situations 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 three conditions are met. They are, roughly speaking, these:

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 inappropriate.

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 respects.

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 unusual, 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 performance.

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.[38] 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?[39] 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?”[40]  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 discussed.

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 so on.)

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[41] 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 Triangularity.”

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 a simple triangle. All sorts of different images and metaphors can be created by using different types of 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 an 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[42] 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 context.[43]

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.[44]

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 expressways and that they are toll roads, probably in several senses.[45]

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.[46] 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 that 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 that ___________?”)

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 to defend it and hence a right to “run the show.”

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 practice law.[47] 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.[48]

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 defended insured.

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, C_1, and the defending insurer, C₂, are L’s clients, but the interests of C₁ always take precedence over the interests of C_2. 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.[49]

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):

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.[50]  In that case, the Supreme Court said this:

And there is another case that 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:

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 paradox.

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 C_2.  But L’s doing this will harm C₁, so—as a consequence—L has a duty not to disclose that true proposition to C_2.  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.[51]

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 evolution.

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 human existence.)

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 has.

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.[52] 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.[53]  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 out.  That 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.[54]

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 lawyer.

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 C_1. 

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 C_1.

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 “secrets”?

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 independent counsel.

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 necessary.

Obviously, almost all, if not all confidentiality problems can be solved by careful and precision scope configuration.

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.

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.[58] 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.[59]

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 simplicity.

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?

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.”[60]

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 avoid participating.

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.

Why this question keeps coming up is difficult to understand. Either the insured is a C of L or it is not.

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