RISKVUE ARCHIVE | FEATURE STORIES

The Policyholder’s Right to Select Defense Counsel, Part 1

By Thomas C. Mielenhausen
Lindquist & Vennum, PLLP

Liability insurance policies often state that the insurer has both the right and the duty to defend its policyholder against claims seeking damages to which the insurance applies. Unless the policy contains express language to the contrary, courts typically infer that the insurer’s right to defend includes the right to select the lawyer who will defend the policyholder.

But there is a friction between the insurer’s right and duty to defend. The insurer’s duty to defend, as well as the covenant of good faith and fair dealing inherent in any insurance policy, requires the insurer to provide defense counsel whose representation will comply with the Rules of Professional Conduct and common law fiduciary duties. Likewise, the insurer-proposed defense counsel has an independent duty to the policyholder to comply with these obligations. As a practical matter, these obligations substantially limit the insurer’s ability and right to select defense counsel for its policyholder. The policyholder effectively retains the ultimate right to select defense counsel in most circumstances, regardless of the language in the insurance policy.

The Informed Consent Requirement

Before an insurer-proposed defense counsel may represent an insurer’s policyholder, she must conduct the conflicts of interest analysis required by all applicable rules of professional conduct. Proposed defense counsel also must comply with any of the disclosure and informed consent requirements established by those rules or by the law governing fiduciaries. Proposed defense counsel may not accept representation that fails to meet these threshold requirements, regardless of the language in the insurance policy.

Two important professional conduct rules relating to insurer-proposed defense counsel are Rules 1.7 and 1.8(f) of the American Bar Association’s Model Rules of Professional Conduct (“MRPC”). Most states have adopted these rules or their substantial equivalent. The flow chart appended to this article summarizes the conflicts analysis and informed consent requirements imposed by Rules 1.7 and 1.8(f).

Conflicts Analysis

Rule 1.7(a) prohibits an insurer-proposed defense counsel from representing a policyholder if the representation involves a “concurrent conflict of interest.” A concurrent conflict of interest exists if:

• the representation of one or more of the lawyer’s or her law firm’s clients will be directly adverse to the policyholder; or
  
  
• there is a significant risk that the lawyer’s representation of the policyholder (i.e., the ability to consider, recommend or carry out an appropriate course of action for the policyholder) will be materially limited by the lawyer’s or her law firm’s responsibilities to another client, a former client or a third person, or by a personal interest.

The Comments to the rule reiterate that conflicts of interest can arise not just from the lawyer’s and her law firm’s responsibilities to another client, but also from their responsibilities to a third person or from their own interests. MRPC 1.7, cmt. [1]. Thus, regardless of whether a liability insurer is a law firm’s client, the insurer-proposed defense counsel must evaluate whether there is a significant risk that representation of the policyholder will be materially limited by the responsibilities and personal interests inherent in the law firm’s relationship with the liability insurer. The proposed defense counsel must assess “the likelihood that a difference in interests will eventuate” and, if it does, whether that difference in interests will: (1) “materially interfere with the [counsel’s or her law firm’s] independent professional judgment in considering alternatives,” or (2) “foreclose courses of action that reasonably should be pursued on behalf of the policyholder.” MRPC 1.7, cmt. [8].

The Rule 1.7(a) analysis is not wholly subjective. In determining whether there is a conflict, the test is: “Would a disinterested lawyer conclude that the policyholder should not agree to the representation under the circumstances?” See 1985 Comments to predecessor version of MRPC 1.7. The insurer-proposed defense counsel and her law firm must keep in mind that this is a standard courts will apply if the policyholder challenges their conclusion that there is no conflict.

The insurer-proposed defense counsel must also analyze conflict questions under Rule 1.8(f). This rule prohibits a lawyer from accepting compensation from the insurer for representing its policyholder, unless all of the following conditions are met:

• the confidentiality of information relating to representation of the policyholder is protected as required by MRCP 1.6;
  
  
• there is no interference by the insurer with the client-lawyer relationship between the proposed defense counsel and the policyholder;
  
  
• there is no interference by the insurer with the proposed defense counsel’s independence of professional judgment; and
  
  
• the policyholder gives informed consent, or the acceptance of compensation from the insurer is impliedly authorized by the nature of the representation.

As to the fourth requirement, the insurance contract between the insurer and policyholder may constitute the policyholder’s implied authorization for the proposed defense counsel’s mere act of accepting compensation from the insurer. But any insurer-imposed conditions or limitations associated with that payment would not be impliedly authorized if they run afoul of the Rules of Professional Conduct, the insurer’s defense duties or the proposed defense counsel’s fiduciary duties, or if they are otherwise unreasonable. See, e.g., MRCP 5.4 (prohibiting lawyer from allowing person who pays it to render legal services for another to direct or regulate lawyer’s professional judgment in rendering such legal services).

Rule 1.8(f)’s prohibitions against jeopardizing confidentiality and insurer interference apply regardless of any informed consent by the policyholder. An insurer-proposed defense counsel may not defend the insurer’s policyholder if she believes that the confidentiality of information relating to representation of the policyholder would not be protected, or that there would be insurer interference with the policyholder’s client-lawyer relationship or the defense counsel’s or her law firm’s independence of professional judgment.

Informed Consent When Proposed Defense Counsel Believes There Is a Conflict of Interest

If, after conducting the above conflicts analysis, an insurer-proposed defense counsel believes her defense of the insurer’s policyholder would comply with Rule 1.8(f), but would pose a conflict under Rule 1.7(a), the counsel may nevertheless defend the policyholder if all of the following conditions are met, including the requirement of “informed consent”:

• proposed defense counsel and her law firm reasonably believe they will be able to provide competent and diligent representation to each affected client;
  
  
• the representation is not prohibited by law;
  
  
• the representation does not involve the assertion of a claim by one client against another client represented by the law firm in the same litigation or other proceeding before a tribunal; and
  
  
• each affected client gives informed consent, confirmed in writing.

MRCP 1.7(b). “Reasonable belief” means that the circumstances are such that a reasonably prudent and competent lawyer would believe she would be able to provide competent and diligent representation to the policyholder. MRCP 1.0(i) & (j). “Informed consent” denotes the policyholder’s agreement to a proposed course of conduct after the proposed defense counsel has communicated “adequate information and explanation about the material risks of and reasonably available alternatives to the proposed course of conduct.” MRCP 1.0(f).

Informed Consent When Proposed Defense Counsel Believes There Is No Conflict of Interest

If, after conducting the conflict analysis required by Rules 1.7 and 1.8(f), an insurer-proposed defense counsel believes its representation of the insurer’s policyholder would pose no conflict of interest under those rules, must the proposed defense counsel nevertheless obtain the policyholder’s informed consent to the representation? The Model Rules of Professional Conduct do not appear to require informed consent in this situation. But prudent defense counsel would nevertheless seek the policyholder’s informed consent, regardless of counsel’s own belief as to the absence of a conflict, in order to avoid the risk of breaching her common law fiduciary duties to the policyholder (and a resulting lawsuit).

A lawyer has a fiduciary duty to represent each of her clients with undivided loyalty, competence and diligence, to preserve confidences, and to disclose to the client any material matters that could affect the lawyer’s fulfillment of those obligations. In Rice v. Perl, 320 N.W.2d 407, 410 (Minn. 1982), for example, a court explained: “It is the undoubted duty of an attorney to communicate to his client whatever information he obtains that may affect the interests of his client in respect to the matters entrusted to him.” Most courts hold that, in failing to disclose material information, a lawyer’s conscious intent, motives or good faith are irrelevant to finding a breach of the lawyer’s fiduciary obligation. The duty of every lawyer is unquestioned fidelity to the client’s interests.

Insurer-proposed defense counsel recognize that, to avoid the risk of fiduciary liability, the best practice is to obtain the policyholder’s fully-informed consent to the representation, regardless of counsel’s belief that the representation would pose no conflict of interest. Otherwise, in the event the defense is unsuccessful or the policyholder gets into a dispute with the insurer, the proposed defense counsel is vulnerable to the policyholder’s claim that counsel breached her fiduciary duty by failing to disclose information adversely affecting the policyholder’s interests. Prudent defense counsel recognize that more information to the policyholder is better than less, and that the policyholder’s fully-informed consent to the representation will help to insulate defense counsel from claims of divided loyalty, lapses in competence or diligence due to financial pressures from the insurer, or breaches of confidential information.

Conclusion

The insurer’s duty to defend, and duty of good faith and fair dealing, require the insurer to provide defense counsel whose representation will comply with the Rules of Professional Conduct and common law fiduciary duties. To avoid the risk of fiduciary liability or a violation of the rules of professional conduct, insurer-proposed defense counsel needs to obtain the policyholder’s fully informed consent to the representation. As a practical matter, therefore, the policyholder holds an important card—the entitlement to informed consent—that trumps any language in the insurance policy regarding selection of counsel.

* * *

In the next issue of riskVue, we will outline the types of information and documents the insurer and its proposed defense counsel must disclose in order for the policyholder to give truly “informed” consent to the proposed representation. And we will discuss when it is reasonable for the policyholder to withhold consent and insist on its own selection of defense counsel.

Read The Policyholder's Right to Select Defense Counsel (Part 2)
Read The Policyholder's Right to Select Defense Counsel (Part 3)

ABOUT THE AUTHOR

Thomas Mielenhausen is co-chair of Lindquist & Vennum’s Insurance Recovery practice group. He can be reached at 612-371-3559 or tmielenhausen@lindquist.com.

This article is only a general summary for informational purposes and does not constitute legal advice. Consult a qualified and experienced insurance advisor for your specific situation or particular questions.

riskVue | The webzine for risk management professionals
November 2006