Navigating Issues of Dual Representation Where Both Appointed Counsel and Independent Counsel Jointly Defend a Covered Lawsuit

Civil Code Section 2860(f) Allows Appointed Counsel to Serve Jointly with Defense Counsel

In many cases, a defendant in a lawsuit may want to select their own lawyer, even if they believe that their liability insurance obligates the insurer to appoint one. If the defendant chooses to do so: “both the counsel provided by the insurer and independent counsel selected by the insured shall be allowed to participate in all aspects of the litigation. Counsel shall cooperate fully in the exchange of information that is consistent with each counsel’s ethical and legal obligation to the insured.”[1]

Precluding Communications That Divest The Policyholder of Its Rights to Coverage and Control of a Conflicted Case Through Independent Counsel

The challenge presented is where there are a number of communications and documents exchanged between the lead counsel that is selected by a policyholder to defend its interests in a lawsuit with substantial exposure (typically a commercial lawsuit) and a conflict allegedly created because of the nature of the insurer’s reservation rights. In such a circumstance, the attorney appointed by an insurer is entitled to associate as counsel to be a reference attorney on the lawsuit, but not to control the case. Implicit in the statutory scheme is the acknowledgment that associated counsel is not lead counsel and that the insured’s retention of associated counsel does not discharge the insurer’s duty to defend the insured, which requires it to pay independent counsel. A failure to do so is an abandonment of its insured which cannot be remedied by the selection and payment of appointed counsel.

Query: What is the solution if the appointed attorney demands access to all documents exchanged between the lead counsel and the policyholder, even though their content might be problematic under the statutory provision which protects an insured from having to divulge to the insurer information related to its coverage dispute?

Section 2860(d) provides that independent counsel must: “disclose to the insurer all information concerning the action except privileged materials relevant to coverage disputes.”[2] Under such circumstances, what choices does a policyholder’s independent counsel have regarding that communication?

A Corollary of the Policyholder’s Right to Retain Its Own Independent Counsel Is to Be Compensated for Additional Communications Necessary to Interact with Appointed Counsel

 Independent counsel, acting on behalf of the policyholder rather than the insurance company, may very well want to ascertain information from the policyholder that helps in defending the case, but which the insurer may attempt to use to deny coverage. In those cases, counsel is bound by ethical principles not to divulge that information to the insurer. “[An] insurer does not have the right to receive any information of the insured that is protected by attorney-client privilege, work-product immunity, or a defense lawyer’s duty of confidentiality under rules of professional conduct, if that information could be used to benefit the insurer at the expense of the insured.”[3] The Restatement of the Law of Liability Insurance provides that “[t]he insurer is obligated to pay the reasonable fees of the defense counsel…” in situations where a conflict arises. Under these authorities, this entitles the independent counsel to withhold certain information from the appointed counsel.

The Right to Independent Counsel May Be Triggered by Appointed Counsel’s Open-Ended Reservation of Rights Under Developing Case Law Nationwide

Under Cunniff v. Westfield, Inc., an insurer’s open-ended reservation of the right to disclaim coverage results in a “conflict requiring independent counsel.”[4] The insurer therein “reserve[d] the right to any policy defenses not heretofore raised.” The court applied law that is analogous among many jurisdictions to hold that there was a clear conflict of interest arising from such a provision. By implicitly reserving all rights, an insurer may continue to attempt to avoid coverage by invoking policy exclusions as matters develop in the criminal investigation, including at the most critical time when the defense requires urgent action. Based on this logic, independent counsel is needed to protect the insureds’ rights due to the conflict created by the implicitly open-ended reservation of rights letter (“ROR letter”). In many cases an open-ended reservation of rights allows an insurer to select appointed counsel whose communications may be detrimental to the coverage interests of its insured.

Policyholders Should Not Allow the Insurer’s Right to Control Counsel to Prevail Where a Right to Independent Counsel Necessarily Arises

While appointed counsel may claim that their job is solely to focus on a defense, inevitably the claims representative they report to will request information which is problematic vis-à-vis coverage issues. If they claim that they have not looked at the ROR letter, and thus are unaware of the coverage issues, that blindness itself is a failure to assure that their activities do not inadvertently jeopardize the insured’s rights to maintain potential coverage in a matter.

To avoid taking adverse acts that compromise its insured’s rights, the appointed counsel must be knowledgeable about the effects of its actions.[5] As part of its duty to defend, the insurer must provide its insured with a full defense.[6] This must be provided through competent counsel.[7] Ordinarily, that duty is met by hiring one defense lawyer to represent the interests of both the insured and insurer, but it is not met by hiring a single lawyer where there is a conflict of interest.[8] Indeed, under California law, appointed counsel owes its insured a fiduciary duty.[9] Insurers are chargeable with all facts known to their appointed counsel in the conduct of the defense.[10] Facts that lead the Insurer’s appointed counsel to favor the insurer over the insured may create a conflict, including inadequate compensation, which may cause appointed counsel to not properly discharge its ethical duties.[11]

Appointed counsel may be subject to suit by an insurer for legal malpractice. It is not an independent contractor as an attorney-client relationship exists between the insured and appointed counsel.[12] Work done by appointed counsel is chargeable to the insurer, including that which is not competent or not up to appropriate professional standards.[13]

Conclusion

The better course of action is for appointed counsel to be knowledgeable about the insured’s issues and refrain from taking action that is problematic. Further, for independent counsel to be compensated for any additional expenses it must incur in avoiding conflicts, as well as educating appointed counsel to its potential role in the lawsuit, as appointed counsel’s fees do not discharge the defense duty of an insurer, it will rarely make economic sense for an insurer to employ both. Any insistence that it maintain that right may suggest a questionable strategy to try to use appointed counsel as a vehicle to divest its insured of its rights to a covered defense.

If you enjoy this content, you can find my full list of blogs here: https://docs.google.com/document/d/1N3YsMmn0Ii1GqHWSBEE1pPzh1jQbU6htkJZ2e55Y2eM/edit?usp=sharing

* David A. Gauntlett is a principal of Gauntlett & Associates and represents policyholders in insurance coverage disputes regarding intellectual property, antitrust, and business tort claims, as well as in the underlying actions. He also serves as an expert witness on insurance coverage issues and represents policyholders and their counsel on a range of fee dispute issues with their insurers. Mr. Gauntlett can be reached at (949) 514-5662 or dag@gauntlettlaw.com. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.

[1] Cal. Civ. Code § 2860(f) (West 2019).

[2] Id. at § 2860(d).

[3] Restatement of the Law of Liability Insurance § 11 (Am. L. Inst. 2019).

[4] Cunniff v. Westfield, Inc., 829 F. Supp. 55, 56 (E.D.N.Y. 1993).

[5] See CROSKEY, ET AL., CALIFORNIA PRACTICE GUIDE: INSURANCE LITIGATION, Chap. 7B-K, p. 7B-91, § 7:769

(Rutter Group 2006) (“As part of its duty to defend, the insurer must provide a full defense by competent

counsel. That duty is breached when an insurer furnishes defense counsel whose ability to represent the insured

is impaired by a disqualifying conflict of interest. In such cases, the insured is usually permitted to hire

independent counsel at the insurer’s expense.” (emphasis added)).

[6] Montrose Chemical Corp. v. Superior Court, 861 P.2d 1153, 1157, (Cal. 1993).

[7] Assurance Co. of America v. Haven, 32 Cal. App. 4th 78, 90 (1995).

[8] Rockwell Int’l Corp. v. Superior Court, 26 Cal. App. 4th 1255, 1263-64 (1994).

[9] Gafcon, Inc. v. Ponsor & Associates, 98 Cal. App. 4th 1388, 1406 (2002) (“In California, it is settled that absent a conflict of interest, an attorney retained by an insurance company to defend its insured under the insurer's contractual obligation to do so represents and owes a fiduciary duty to both the insurer and insured.”)

[10] New York Life Ins. Co. v. Occidental Petroleum Corp., 43 Cal. App. 2d 747, 751 (1941) (“A

principal is charged with knowledge of the facts known by its agent and by his acts within the scope of his

authority.”); American Guar. & Liab. Ins. Co. v. Vista Med. Supply, 699 F. Supp. 787, 794 (N.D. Cal. 1988) (“[I]n a

declaration she made in the underlying sate court action, [the claimant] states [facts evidencing a claim for

defamation]. American has knowledge of these facts, as it has been conducting the defense of Vista, under a

reservation of rights.” (emphasis added)).

[11] State Farm Mut. Auto. Ins. Co. v. Federal Ins. Co., 72 Cal. App. 4th 1422, 1429; Purdy v. Pacific Auto. Ins. Co., 157 Cal. App. 3d 59, 76 (1984) (While panel counsel owes duties to both his clients, “[a]s a practical matter . . . there has been recognition that, in reality, the insurer’s attorneys may have closer ties with the insurer and a more compelling interest in protecting the insurer’s position, whether or not it coincides with what is best for the insured.”).

[12] Gulf Ins. Co. v. Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone, 79 Cal. App. 4th 114, 126, 127,

 (2000) (Speaking of the duties of independent counsel: “This belies the tripartite relationship that exists between the insurer, the insured and counsel defending the insured. ‘The attorney hired by the insurance company to defend in an action against the insured owes fiduciary duties to two clients; the insurer and the insured. . . .’ Counsel retained by an insurer to defend its insured has an attorney-client relationship with the insurer.” (citation omitted)).

[13] Panoutsopoulos v. Chambliss, 157 Cal. App. 4th 297, 305 (2007) (“[W]here an ‘attorney gives his client a written opinion with the intention that it be transmitted to and relied upon by the plaintiff in dealing with the client[,] ... the attorney owes the plaintiff a duty of care in providing the advice because the plaintiff’s anticipated reliance upon it is ‘the end aim of the transaction.’ ”).