Third Party Insurance Defense Work: Who is really the Client? Michael McTaggart Counsel Norton Rose Fulbright US LLP November 7, 2015

Tripartite Relationship The Players Insurer/Carrier Insured/Policyholder Attorney Who does the attorney represent? To whom does the attorney owe duties? States address these questions with different approaches Texas does not follow the majority rule 2

Model Rules of Professional Conduct Rule 1.7 Conflict of Interest –Lawyer cannot represent client if representation may be materially limited by responsibilities to another client or third party Rule 1.8(f) Prohibited Transactions –Lawyer shall not accept compensation for representing a client from one other than the client unless client consents and there is no interference with lawyer’s independent professional judgment or with client-lawyer relationship Rule 5.4 Professional Independence of a Lawyer –Lawyer shall not permit a person who recommends, employs, or pays lawyer to render legal services for another to direct lawyer’s professional judgment 3

Dual Client Doctrine Attorney represents both the policyholder and the insurance company Problems!?! Significant potential for conflicts of interest between the policyholder and the insurer If conflict arises, attorney must obtain consent from both “clients” to continue representation No attorney-client privilege or confidentiality between attorney and each “client” –Big problem if representation ends due to conflict 4

Texas’ Approach – ONE client Attorney has only one client – the policyholder –Unless agreed otherwise All duties are owed to the policyholder Attorney owes “unqualified loyalty” to the insured and must protect the interests of the insured if those interests would be compromised by the insurer’s instructions [ State Farm Mutual Auto Ins. Co. v. Traver ] 5

No Legal Relationship between Insurer and Attorney No attorney-client relationship between the attorney and the insurer No legal duties Insurer cannot assert claim for professional negligence (still can sue for misrepresentation and fraud) [ Safeway Managing General Agency, Inc. v. Clark & Gamble ] 6

Parties’ Rights & Obligations Terms and conditions of the defense are contractual Insurer agrees to provide defense and pay judgment/settlement up to coverage limit Look to the policy for terms of defense: –Choice of Counsel –Texas courts have refused to recognize negligence claim against insurer when insured is dissatisfied with quality of counsel provided ( See e.g. Wayne Duddlesten, Inc. v. Highland Ins. Co.] –Control of Defense –Settlement –Client may have the right to withhold consent –Insurer’s Stowers’ obligation 7

Insurer’s Duty to Defend Texas follows “complaint-allegation” rule Insurer has duty to defend if one or more of plaintiff’s claims, taken as true, comes within the terms of the policy [Nat’l Union Fire Ins. Co. of Pittsburgh Pa v. Merchants East Motor Lines, Inc.] If insurer assumes defense, insurer is estopped from later denying coverage, unless Insurer issues a reservation of rights letter to the policyholder to preserve the ability to withhold the defense if it later becomes clear that claims are not covered under the insurance policy –must have good faith belief that complaint alleges conduct that is not covered under the policy 8

Cooperation & Communications Policies typically require that insured must cooperate in defense and provide information to insurance carrier (or risk losing coverage) No duty to provide privileged or confidential information regarding insurance coverage Counsel is typically required to keep carrier informed about material issues (Status Reports!) WARNING! Should not assume that all communications with insurer are privileged [In re XL Specialty Insurance Co.] 9

Potential Conflicts of Interest Conflicts of interest may prevent insurer from controlling defense or permit insured to refuse counsel provided by insurer Examples Defense tendered is not the complete defense it should have been Attorney hired by carrier acts unethically and at insurer’s direction advances insurer’s interests at the expense of insured Insurer attempts to obtain a concession from insured as condition of defense Coverage issues raise the most likely conflicts Insurer cannot control defense if the facts to be adjudicated in the liability lawsuit are the same facts upon which coverage depends 10

Other Issues Insurance carriers can use staff attorneys to defend policyholders provided the insurer’s and insured’s interests are congruent and counsel informs insured of their affiliation [Unauthorized Practice of Law Committee v. American Home Assurance Company, Inc.] Same analysis for additional insureds Be mindful of the jurisdiction, states address these issues differently 11