1. Insurance Defense Ethical Pitfalls for Counsel and Claims Professionals www.gcandh.com

2. Expectations

3. Ethics Generally Definition of ethics noun 1 [usually treated as plural] moral principles that govern a persons or groups behavior Note: the definition does not refer to lawfulness

4. Rationalization

5. Handicap Parking Example

6. Independent Judgment SCR 3.130(5.4(c)) (c) A lawyer shall not permit a person who recommends, employs, or pays the lawyer to render legal services for another to direct or regulate the lawyer's professional judgment in rendering such legal services.

7. Retention by Third Party S.C.R. 3.130(1.8)(f) (f) A lawyer shall not accept compensation for representing a client from one other than the client unless: (1) the client gives informed consent; (2) there is no interference with the lawyer's independence of professional judgment or with the client-lawyer relationship; and (3) information relating to representation of a client is protected as required by Rule 1.6.

8. Who Is The Client?

9. The Insured is the Client Ethics Opinion KBA E-331 This is so because the insured is defense counsels client. The insured is entitled to competent and zealous representation, and a defense that is not adversely affected by prohibited conflicts of interest.

10. Horns of a Dilemma

11. Reporting to Insurer

12. Ethics Opinion KBA E-410 An attorney must be ever vigilant, pursuant to KRPC 1.1 and 1.3, to identify information that might be disadvantageous to the client Insured and to refrain From disclosing such information absent fully informed client consent. If the attorney is competent and diligent in this regard and yet forwards to the Insurer information not known to the attorney to be damaging, no unethical conduct has occurred.

13. Reporting to Insurer Ethics Opinion KBA E-410 The contract of insurance between the Insurer and the Insured pursuant to which the Insurer provides the defense commonly allows the Insurer to have some measure of control regarding the defense provided and commonly requires that the Insured cooperate in the defense. Such is a matter of contract and may govern the rights of the Insurer and the Insured as to each other.

14. Reporting to Insurer Ethics Opinion KBA E-410 The contract of insurance does not, however, define the ethical duties an attorney hired by an Insurer to defend an Insured owes to the client Insured. KRPC 1.4 states that the attorney should keep the client reasonably informed and that the attorney should explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation. Thus, the attorney hired by the Insurer to defend the Insured should, at the beginning of the client-lawyer relationship, explain to the client the nature and requirements of the Insurer and Insured contract.

15. Reporting to Insurer Ethics Opinion KBA E-340 An insurer may have every right to conduct such investigation as it sees fit, and may deal with its insured in a manner permitted by the terms of the insurance contract. On the other hand, it is not necessarily entitled to the assistance of the lawyer representing the insured. Defense counsels relationship with the insured is not governed by the insured-insurer contract, but is instead governed by the Rules of Professional Conduct. Discussions with a client may reveal facts affecting coverage (may suggest coverage defenses). Counsel should resist any demand that might put the insured at risk. It is also clear that any intrusion into the attorney/client sanctum should be permitted only with the informed consent of the client.

16. Reservation of Rights

17. Ethics Opinion KBA E-410... the attorney must be ever mindful that with regard to this tripartite relationship the attorneys client is the Insured and not the Insurer. As part of the duties of competence and diligence and the duty to communicate with the client discussed above, the attorney should explain the nature of a defense under reservation of rights to the client. When the Insurer provides the defense under a reservation of rights, the possibility exists that an impermissible conflict of interest is created.

18. Reservation of Rights Ethics Opinion KBA E-410 When an attorney represents an Insured and the Insurer is providing the defense under a reservation of rights, the attorney must analyze the situation under the general conflict of interest rule, KRPC 1.7(b). KRPC 1.7(b) states that a lawyer shall not represent a client if the representation of that client may be materially limited by the lawyers responsibilities to another client or to a third person, or by the lawyers own interests, unless two conditions are satisfied. First, the lawyer must reasonably believe that the representation will not be adversely affected. Second, the client must consent after consultation.

19. Bad Faith Claims

20. Bad Faith Claim Ethics Opinion KBA E-378 May a lawyer paid by insurer to defend an insured in a personal injury action in which claims are also made against the insurer under the UCSPA represent both the insured and the insurer? It is the Committees position that defense counsel should be free to abide by the insureds decisions concerning the objectives of the litigation and settlement, should be not subjected to competing loyalties that may compromise the lawyers ethical obligation to hold inviolate confidential information of the client, and should not be required by an insurer to seek the consent of the insured to dual representation.

21. Cost Control and Independence

22. The Insurers Perspective

23. The Attorneys Perspective

24. Cost Control and Independence A typical liability policy may contain language such as this: We will have the right and duty to defend the insured against any "suit" seeking those damages. However, we will have no duty to defend the insured against any "suit" seeking damages for "bodily injury", "property damage", "personal injury", or "advertising injury" to which this insurance does not apply, We may at our discretion, investigate any "occurrence" and settle any claim or "suit" that may result.

25. Cost Control and Independence Inherent in all of these potential conflicts is the fear that the entity paying the attorney, the insurer, and not the one to whom the attorney is obligated to defend, the insured, is controlling the legal representation. American Ins. Ass'n v. Kentucky Bar Ass'n, 917 S.W. 2d 568, 573 (Ky. 1996)

26. Cost Control and Independence American Ins. Ass'n was not the first time we rejected a "rule [that] would be inimical to the preservation of traditional and longstanding concepts associated with attorney-client relationship, as recognized by Kentucky law." [Citation omitted]. Our courts simply cannot ignore Kentucky's consistent refusal to allow the insurer any right to control the attorney's independent manner of representing its insured. That independence has a long history. Cincinnati Insurance Company v. Hofmeister, 2004- CA-002296-MR (Ky.App. 2008).

27. Restrictions on Tasks

28. Restricting Tasks Ethics Opinion KBA E 416 May the lawyer accept representation under guidelines that: a.Require approval by the insurer before the lawyer undertakes any discovery, conducts any legal research, or files any motion? Answer: No. The lawyer may agree, however, to guidelines setting a reasonable, tentative budget and providing a process for ongoing consultation.

29. Restricting Tasks Ethics Opinion KBA E 416 May the lawyer accept representation under guidelines that: b. Require all investigative work or all records review to be performed only by the insurers employees or, if performed by the lawyers firm, to be billed only at a paralegal rate? Answer: No. The lawyer may agree, however, to guidelines establishing an appropriate allocation of lawyer and non- lawyer/paralegal tasks, or setting a reasonable tentative budget for investigative work or document review, and providing a process for ongoing consultation.

30. Restrictions on Budget

31. Ethics Opinion KBA E 331 A restricted budget for the defense can pose an ethical dilemma for defense counsel. This is so because the insured is defense counsels client. The insured is entitled to competent and zealous representation, and a defense that is not adversely affected by prohibited conflicts of interest. At some point, carrier imposed restrictions may threaten counsels ability to provide such representation and impact on the lawyers ability to bring to bear his independent professional judgment on behalf of the insured. Occasions may arise in which the insurers budgetary restrictions will justify, or require, withdrawal.

32. Restrictions on Budget Ethics Opinion KBA E 331 We are not suggesting that counsel has carte blanche to needlessly run up a bill. Such conduct would be just as reprehensible as yielding professional control of his or her work to an adjuster or claims manager. Nor are we suggesting that costs and expenses are not a legitimate concern of the insurer. Conflicts are not inevitable, or irreconcilable. Presumably these matters can be resolved amicably and responsibly in the great majority of cases.

33. Stealing is Stealing

34. Third Party Audits

35. Ethics Opinion KBA E-404 Question 1: Would Law Firms submitting its Insurance Company bills directly to Audit Company, rather than to Insurance Company, without the law firms obtaining the fully informed consent of the insured, violate the Kentucky Rules of Professional Conduct? Answer: Yes

36. Third Party Audits Ethics Opinion KBA E-404 Question 2: Would the Law Firms submitting other clients bills to Audit Company violate the Kentucky Rules of Professional Conduct? Answer: Yes

37. Third Party Audits Ethics Opinion KBA E-404 The Committee agrees with the views expressed in South Carolina Bar Op. 97-22 that a lawyer may submit his or her bills directly to a third- party auditing firm only with the informed consent of the insured as well as the insurer, and only so long as the lawyer reasonably believes that doing so will not substantially and adversely affect the representation of the insured client.

38. Third Party Audits Ethics Opinion KBA E-409 Question: If an attorney is defending an Insured with the defense being provided by an Insurer pursuant to an insurance contract between the Insurer and the Insured, and if that attorney is aware that the attorneys legal bills sent to the Insurer are forwarded to an outside auditing firm, what do the Kentucky Rules of Professional Conduct require of the attorney? Answer: The attorney must obtain fully informed consent from the Insured, the client, before forwarding legal billing information to the Insurer if the attorney knows the Insurer will send the billing information to an outside auditor.

39. Third Party Audits Ethics Opinion KBA E-409 The attorney should explain the implications of such a procedure to the client and obtain the clients fully informed consent before providing the Insurer with detailed billing information. In so doing, the attorney should also discuss with the Insured client the implications, with regard to the insurance contract between the Insurer and the Insured, that may flow from the Insureds failure to consent to the release of legal billing information.

40. Third Party Audits Ethics Opinion KBA E-409 If the attorney counsels the client Insured about the possible consequences of the disclosure of the legal billing information and the client consents to the disclosure, the attorney must follow the instruction of the client Insured and disclose the information. If the attorney believes disclosure to be contrary to the best interests of the client Insured, the attorney should counsel the client as to the attorneys belief. If the client consents to the disclosure contrary to the attorneys advice, the attorney may seek a permissive withdrawal from the representation pursuant to KRPC 1.16(b).

41. Third Party Audits KRE 503 (2) Representative of the client means: (A) A person having authority to obtain professional legal services, or to act on advice thereby rendered on behalf of the client; or (B) Any employee or representative of the client who makes or receives a confidential communication: (i) In the course and scope of his or her employment; (ii) Concerning the subject matter of his or her employment; and (iii) To effectuate legal representation for the client. See Asbury v. Beerbower, 589 S.W.2d 216 (Ky. 1979)

42. Insurer Guidelines

43. Paying Bills

44. Insurer Guidelines Ethics Opinion KBA E 416 Question 1: In general, may an insurance defense lawyer agree to abide by insurer-prescribed case handling guidelines in representing the insured? Answer: A lawyer may not agree to abide by such guidelines unless: a) the lawyer determines that the guidelines will not interfere with the lawyers independent professional judgment and other duties owed to the insured under the Kentucky Rules of Professional Conduct; and

45. Insurer Guidelines Ethics Opinion KBA E 416 Question 1: In general, may an insurance defense lawyer agree to abide by insurer-prescribed case handling guidelines in representing the insured? Answer: A lawyer may not agree to abide by such guidelines unless: b) the lawyer discloses the guidelines existence to the insured, and provides a practical explanation of their import, at the outset of the representation and as may become necessary in specific situations thereafter, and the insured consents after consultation to any guideline that materially limits the representation; and

46. Insurer Guidelines Ethics Opinion KBA E 416 Question 1: In general, may an insurance defense lawyer agree to abide by insurer-prescribed case handling guidelines in representing the insured? Answer: A lawyer may not agree to abide by such guidelines unless: c) the lawyer, upon undertaking the representation, performs all duties imposed by the Rules, regardless of compensation under the guidelines, so long as the representation continues.

47. Insurer Guidelines Ethics Opinion KBA E 416 The lawyer-insurer relationship contemplates a process for ongoing consultation. Such consultation must be genuine, with the lawyer basing each expenditure or activity request on the needs of the insured, and the insurer giving each request careful consideration in light of the lawyers independent professional judgment. If the insurers guidelines do not provide such a process, the lawyer should decline a proffered representation. In any event, the lawyer must not undertake, and an insured client cannot be asked to accept, a representation so limited in scope that it abridges the clients rights, or narrows the lawyers duties, under the Rules. See Comment 5 to Rule 1.2. After the representation of a client has begun -- and continuously thereafter until the representation concludes or is properly terminated under Rule 1.16 -- the lawyer must perform his or her professional duties fully, and must exercise independent professional judgment in loyalty to the client, regardless of limitations imposed by the insurer.

48. Just Talk

49. Alternative Fee Arrangements

50. AFAs Ethics Opinion KBA E 368 Question: May a lawyer enter into a contract with a liability insurer in which the lawyer or his firm agrees to do all of the insurers defense work for a set fee. Answer: No. American Ins. Assn v. Kentucky Bar Assn, 917 S.W.2d 568 (1996)

51. AFAs Ethics Opinion KBA E 368 Yet, here the insurer wants to continue to promise the insured a defense in the contract of insurance, while limiting the extent of its undertaking in a side contract between the insureds lawyer and the insurer to which the insured is not a party. Compare E-331 (1988). Furthermore, the lawyer is placed, by the insurer (a third person paying for the lawyers services), in a position of conflict vis-a-vis the insured client. To some extent the lawyer becomes the insurer; and lawyer stands to gain by limiting the services rendered to the client. See Rules 1.1 and 1.2, as well Rule 1.7(b). Admittedly, a potential for similar conflict is inherent in other lawyer-client arrangements; but here the insured client will have no control over the choices that will be made.

52. AFAs American Ins. Assn v. Kentucky Bar Assn, 917 S.W.2d 568 (1996) Respondent was able to cite to nineteen such conflicts, including representation of the insured which becomes more complex than anticipated, resulting in financial hardship for the attorney; policy and/or coverage defenses asserted by the insurer against the insured; and disagreement between the insured and the insurer with regard to settlement negotiations. Moreover, we do not believe that in most instances the interests of the insured and the insurer are alike, but are more apt to agree with Respondents contention that while the insured and the insurer may share some common interests, the two parties are subject to complete divergence at any time. Inherent in all of these potential conflicts is the fear that the entity paying the attorney, the insurer, and not the one to whom the attorney is obligated to defend, the insured, is controlling the legal representation.

53. Good Ethics is a Habit

54. Lets Be Ethical

55. Insurance Defense Ethical Pitfalls for Counsel and Claims Professionals www.gcandh.com