85-F-100 - Attorney employed by Insurer to defend Insured

 

BOARD OF PROFESSIONAL RESPONSIBILITY OF THE SUPREME COURT OF TENNESSEE

FORMAL ETHICS OPINION 85-F-100


Inquiry is made concerning the ethical obligations of an attorney employed by an insurer to defend the insured when a question arises under the insurance contract as to the continuing obligation of the insurer to defend on behalf of the insured.

The matter under inquiry may arise when the insured has an automobile liability insurance policy with minimum limits, a clear case of liability of the insured, and the probability of a judgment in excess of the policy limits due to the serious nature and extent of the injuries and damages. The policy of insurance provides that the insurer's duty to defend or settle on behalf of the insured terminates when the policy limits have been exhausted. Further, due to the facts, circumstances and potential liability the insurer wishes to simply tender the policy limits into Court and assert, by means of petition for declaratory judgment or other means, that its duty to defend the insured has terminated.

When an insurer retains an attorney to represent an insured, the insured is the attorney's client. See ABA Informal Opinions 728 (1963), 822 (1965) and 783 (1965).

Tennessee Formal Ethics Opinion 83-F-52 states that an attorney is required to have a direct attorney-client relationship in the delivery of his legal services, that he should devote his
complete loyalty to the client and not allow the person or entity who pays his fee, or anyone else, to regulate, direct, control or interfere with his professional judgment.

Canon 5 of the Code requires an attorney to exercise independent professional judgment on behalf of a client. The Ethical Considerations relating to Canon 5 which are material to this inquiry are as follows:

EC 5-1. The professional judgment of a lawyer should be exercised---solely for the benefit of his client and free of compromising influences and loyalties. Neither his personal interests, the interests of other clients, nor the desires of third persons should be permitted to dilute his loyalty to his client.

EC 5-21. The obligation of a lawyer to exercise professional judgment solely on behalf of his client requires that he disregard the desires of others that might impair his free judgment. The desires of a third person will seldom adversely affect a lawyer unless that person is in a position to exert strong economic, political or social pressures upon the lawyer. These influences are often subtle, and a lawyer must be alert to their existence ---

EC 5-22. Economic, political, or social pressures by third persons are less likely to impinge upon the independent judgment of a lawyer in a matter in which he is compensated directly by his client and his professional work is exclusively with his client. On the other hand, if a lawyer is compensated from a source other than his client, he may feel a sense of responsibility to someone other than his client.

EC 5-23. A person or organization that pays or furnishes lawyers to represent others possesses a potential power to exert strong pressures against the independent judgment of those lawyers. Some employers may be interested in furthering their own economic, political or social goals without regard to the professional responsibility of the lawyer to his individual client. --- an employer may seek, consciously or unconsciously, to further its own economic interests through the action of the lawyers employed by it. Since a lawyer must always be free to exercise his professional judgment without regard to the interests or motives of a third person, the lawyer who is employed by one to represent another must constantly guard against erosion of his professional freedom.

The aspirational objectives of the Ethical Considerations cited hereinabove become mandatory in character in Disciplinary Rule 5-107(B) of the Code, to-wit:

DR 5-107(B)
A lawyer shall not permit a person who recommends, employs, or pays him to render legal services for another to direct or regulate his professional judgment in rendering such legal services.

In instances wherein an attorney is employed by an insurer to represent an insured the attorney is in the precarious position of having a potential, if not actual, conflict of interest. He is bound by Disciplinary Rule 7-101(A) to represent the client-insured zealously, and by DR 4-101 to preserve the confidences and secrets of the client-insured. There should be a full and complete disclosure of the possible effect of his representation on the exercise of his independent professional judgment and the client-insured should be given an opportunity to evaluate the need for representation free of any potential conflict and all doubts should be resolved against the propriety of representation.

The attorneys continuing ethical obligations to the client-insured following the termination of the attorney-client relationship are (i) to continue to preserve the confidences and secrets of the former client; (ii) to abstain from attacking the resolution of the legal matter accomplished on behalf of the former client; and (iii) to abstain from representing another in an action involving the former client in a matter arising out of or closely related to the previous matter.

Tennessee Formal Ethics Opinion 84-F-65 states that it is improper to represent several insureds in a class action against an insurance company in a claim for policy benefits after having ten years previously represented the parent insurance company in defense of a similar claim. The opinion quoted Autry v. State, 430 S.W.2d 808, as follows:

It has long been firmly established, both in the Canons of Professional Ethics and by judicial opinions, that attorneys cannot represent conflicting interests or undertake to discharge inconsistent duties. When an attorney has once been engaged and receives the confidences of his client, he cannot enter the services of those whose interests are adverse to that of his client or former client. The rule is a rigid one, and it is well that it is so.

The attorney in this instance specifically inquires as follows:

  1. Is it proper for the attorney, who has established contact with the insured on the basis that the attorney would be representing the insured in the tort action against him, to then represent or advise the insurance carrier in its efforts to tender the policy limits into Court and obtain permission to terminate the defense of the tort action against the insured?
  2. Should the attorney advise the insured, at the commencement of the tort action against him, that the attorney's representation will cease in the event the insurance carrier pays its policy limits into Court and ceases payment of the defense costs of the tort action?
  3. Is it proper for the attorney to seek permission to withdraw from the representation of the insured in the tort action in the event the insurance carrier has terminated its obligation to pay for the defense of such tort action?
  4. Should the attorney advise the insured that the insurance carrier is contemplating paying the policy limits into court and ceasing payment of the defense costs if the attorney, due to his relationship with the insurance carrier, is aware that such action is being considered by the insurance company?
  5. What is the attorney's obligation in relating to the insurance company discovery information obtained, which might cause the insurance carrier to determine to terminate its defense duty and exhaust the policy limits due to the information obtained by the attorney relating to the potential liability and damages involved in the particular case?

The answer to inquiry No. 1 is, No. Further, the attorney is ethically prohibited from representing or advising either the insured or insurer when a conflict arises between the insured and insurer over the coverage or terms of the policy of insurance. In such instances the attorney should advise either or both parties to seek independent legal advice and representation regarding the matter.

The answer to inquiry No. 2 is, No. The attorney is ethically prohibited from taking an adversary position or assume an adversary role with his client. This question relates to a legal interpretation of the insurance contract and therefore involves a matter of law. The attorney should not become involved in conflicts between the insured and insurer concerning interpretations of the insurance contract or any matter of law and should advise either or both parties to seek independent legal advice and representation.

The answer to inquiry No. 3 is, Yes. The attorney is not ethically obligated to continue an attorney-client relationship when there are no provisions or assurances for the payment of a
reasonable attorney fee. The withdrawal from representation should be in complete compliance with Disciplinary Rule 2-110(A)(1), (2) and (3). Further the attorney should advise the insured to seek independent legal advice and representation concerning the legal obligation of the insurer concerning the matter.

The answer to inquiry No. 4 is, Yes; and, the attorney should further advise the insured to seek independent legal advice and representation concerning the matter.

The answer to inquiry No. 5 is, (i) there is no impropriety in the attorney relating discovery information obtained regarding potential liability or damages; however, (ii) the attorney is
prohibited from relating any discovery information which would adversely affect the insureds coverage of insurance when such information is subject to the attorney-client confidences and secrets.

This opinion is not intended to undertake or attempt to address any matters relating to the interpretation of any policy or contract of insurance and not intended to address any factual or legal issues. The opinion is only intended to address the ethical obligations of an attorney employed by an insurer to defend an insured.

This 30th day of September, 1985.

ETHICS COMMITTEE:

W. J. Flippin
Edwin C. Townsend

APPROVED AND ADOPTED BY THE BOARD