SUBROGATION ETHICS: GETTING THE MONEY (ETHICALLY) AS PRESENTED AT THE NASP 2000 CONFERENCE

Transcription

1 SUBROGATION ETHICS: GETTING THE MONEY (ETHICALLY) AS PRESENTED AT THE NASP 2000 CONFERENCE by Scott S. Katz Butler Burnette Pappas Miami Tallahassee Tampa

2 Subrogation Ethics: Getting The Money (Ethically) I. Ethical Dilemmas During The Investigation And Coordination of Subrogation Claims A. "Staying True" to the Insurer-Client Relationship 1. During the investigation of a subrogation claim, the initial contacts with the insured often can create ethical dilemmas for subrogation attorneys and insurance adjusters. This is because the information revealed by the insured may be detrimental to the insured's claim for insurance benefits. 2. It is critical to make sure that the insured understands that during the initial investigation of a subrogation claim, the insurer and the insured do not necessarily have totally aligned interests. a. Coverage questions may exist. b. Disputes on damages valuation can arise. c. Strategy differences concerning methods for notifying tortfeasors may develop. 3. Subrogation counsel must make sure that he clearly communicates to the insured that during the investigation of the subrogation claim he is only an attorney for the insurer. The subrogation attorney can never mislead the insured about his purpose. a. "In the course of representing a client, a lawyer shall not knowingly: (a) Make a false statement of material fact or law to a third persons;... Model Rules of Professional Conduct Rule 4.1(a) (1999). b. "In dealing on behalf of a client with a person who is not represented by counsel, a lawyer shall not state or imply that the lawyer is disinterested. When the lawyer knows or reasonably should know that the unrepresented person misunderstands the lawyer's role in the matter, the lawyer shall make reasonable efforts to correct the misunderstanding." Model Rules of Professional Conduct Rule 4.3 (1999). 2

3 c. Although there is no prohibition on offering generic advice" to an unrepresented insured during the investigation of a subrogation claim, the subrogation attorney must not offer "legal advise." If asked to do so, the subrogation lawyer has an ethical duty to tell the unrepresented insured to seek out independent counsel. See Model Rules of Professional Responsibility Rule 4.4 cmt. (1999). d. From a practical point of view, one must also remember that during the investigation of a subrogation claim, information transmitted by the insured to subrogation counsel is not protected by the attorney-client privilege. However, that same information - - if transmitted to either a subrogation lawyer or an insurance adjuster -- may qualify for limited protection from subsequent discovery if it can be deemed work product. 4. Insurance adjusters involved in the investigation of a potential subrogation claim must communicate clearly to the insured that there is a "duality of purpose" during the loss investigation, to wit: The facts revealed during the investigation could affect both the presently pending first party insurance claim and the anticipated subrogation claim. Insurance adjusters must make sure that the insured understands that at the early stages of the investigation, there is not necessarily a total alignment of interests between the insurer and the insured. See Rules of Professional Conduct, for CPCU, Rule 3.1 (1995). 5. Insurance professionals involved in the investigation of subrogation claims "shall not violate any law or regulation relating to professional activities... Rules of Professional Conduct, for CPCU, Rule 3.3 (1995). Thus, insurance professionals must make sure that their investigative activities do not constitute spoliation of evidence to the detriment of their own insureds or any other persons. See Miller v. Allstate Ins. Co., 573 So. 2d 24 (Fla. 3d DCA 1990); Auto Owners Ins. Co. v. Chapman, 469 SE.2d 783 (Ga. Ct. App. 1996). B. "Tagging On" The Insured's Uninsured Claim 1. There is no ethical prohibition against having one attorney represent and coordinate the subrogation claims of an insurer and its insured, respectively. In fact, this is the preferred practice because it allows for a coordinated legal strategy with a reduction in costs. 3

4 2. When considering whether to add on the uninsured interests of an insured to an insurer's subrogation claim. the subrogating carrier must consent knowingly to the arrangement, and the insurance adjuster and subrogation lawyer must be certain that the attorney can be loyal to both the "old" and new client. Further, the now, multiple clients and their attorney must directly consider all of the pros and cons of such multiple party representation before proceeding with such representation. See Model Rules of Professional Conduct Rule 1. 7(b)(I 999), ABA Comm. On Professional Ethics and Grievances. Formal Op. 282 (1950); ABA Comm. On Ethics and Professional Responsibility, Informal Op (1976). 3. So long as a full disclosure of the pros and cons of multiple party representation takes place, the interests of the insurer and insured do not have to be totally aligned. See Model Rules of Professional Conduct Rule 1.7 cmt. (1999); State Bar of Georgia, Formal Op (1993) (Ethical Considerations of an Attorney Representing an Insurance Company on a Subrogation Claim and Simultaneously Representing the Insured); See generally, Acheson v. White, 487 A.2d 197 (Conn. 1985); Sellers v. Superior Court of Az., 742 P.2d 292 (Ariz. Ct. App. 1987). C. Solicitation of Services 1. There are severe restrictions on the ability of an attorney to solicit new business directly from an injured party. However, because the subrogation attorney is initially placed in contact with the insured by a "prior personal or professional relationship," i.e., during a time period when she is working solely for the insurer, it is ethical for the subrogation attorney to subsequently approach the insured for the purpose of "tagging on" her interests, so long as the insured is also made aware that she is not required to hire the subrogation attorney. See Model Rules of Professional Conduct Rule 7.3 cmt. (1 999); ABA Comm. On Ethics and Professional Responsibility, Informal Op (1976); ABA Comm. On Professional Ethics, Informal Op. 880 (1966); ABA Comm. On Professional Ethics, Informal Op. 633 (1963). 2. Nevertheless, a subrogation attorney must still comply with all applicable ethical rules related to solicitation of new business. For example, "[a] lawyer shall not make a false or misleading communication about the lawyer or the lawyer's services." Model Rules of Professional Conduct Rule 7.3 (1999). 4

5 D. Intermediation of Pro Rata Litigation Fee Agreements 1. A pro rata litigation fee agreement is a document executed by the insurer, the insured and the subrogation lawyer, which sets forth the rights and obligations of these three parties vis-a-vis the pursuit of a particular subrogation recovery. Typically, the agreement will set forth the terms of the attorney's representation and fees, and it also establishes the rights of the various parties to control the litigation. Moreover, it delineates a clear division between the insured and insurer as to the responsibility for their respective shares of attorneys fees and costs, as well as their respective rights to the hopeful recovery from the commonly pursued tortfeasors. 2. Jurisdictions address the entitlement to "recovery proceeds" differently. Some jurisdiction allow for an automatic "pro rata" distribution of subrogation recoveries, to wit: The insured and insurer share on a percentage basis based on their respective losses. Other jurisdictions insist that the insured be made completely whole before an insurer can share in any recovery. Yet other jurisdictions allow the insurer to recover first, before the insured is paid for its uninsured losses. 3. Whenever an insurance adjuster communicates with an insured about her entitlement to proceeds from the effectuation of a subrogation recovery, the adjuster has an ethical obligation to accurately describe the insured's rights under the applicable laws. Such communications often occur during the time when a pro rata litigation fee agreement is being discussed. After all, an insurance professional is charged with keeping "fully informed of each and every law and regulation governing or otherwise pertaining to his business activities." Code of Professional Ethics of the American Institute for Chartered Property Casualty Underwriters, p. 1 3, (4 th Ed. 1995). Also, "[I]n the conduct of business or professional activities,... [an insurance professional] shall not engage in any act or omission of a dishonest, deceitful, or fraudulent nature." Id. at "When the lawyer has not regularly represented the client, the basis

6 or rate of the fee shall be communicated to the client, preferably in writing, before or within a reasonable time after commencing the representation." Model Rules of Professional Conduct Rule 1.5(b) (1999). Also, the terms of any contingency fee agreement must be placed in writing. See Model Rules of Professional Conduct Rule 1.5 (c) (1999). Accordingly, in the context of a typical contingency fee subrogation case for an insurance carrier and/or the insured, it virtually impossible for a subrogation lawyer to be handling the case ethically without a written pro rata litigation fee agreement. 5. It is important for the subrogation lawyer to avoid conflicts of interest between his clients - - the insurer and the insured. A written pro rata litigation fee agreement makes sure that both clients know what will happen in the event of a settlement or verdict. In turn, disputes and thus conflicts of interest are avoided. Also. the common law requirements of a particular jurisdiction, as it relates to determinations of recovery splitting. can be altered by a written pro rata litigation fee agreement, so long as sufficient consideration is exchanged. For example, in a jurisdiction where the insured is normally entitled to the first dollar from any recovery, the parties could agree to a shared recovery split, so long as the insurer also agrees pay the litigation costs for the insured. 6. A subrogation lawyer is ethically permitted to assist in the drafting of a pro rata litigation fee agreement as an Intermediary. However, in order to do so, the subrogation lawyer must be certain that each client fully appreciates the issues at hand, the risks and advantages involved, and the effect on attorney client communications. The lawyer must also feel comfortable that there is little risk of prejudice to either client, and that he can maintain loyalty to both the insurer and the insured. See Model Rules of Professional Conduct Rule 2.2 (1999). II. Ethical Dilemmas When Prosecuting Or Defending Claims That Involve Other Insurers A. The Problem With Being A Plaintiff 6

7 The pursuit of a subrogation claim, similar to the representation of any plaintiff s claim, often involves the forwarding of demand packages and the filing of lawsuits. Accordingly, from time to time, the liability insurance policy of a tortfeasor is triggered by a subrogation case, which in turn injects the liability carrier of the tortfeasor into the proceedings. Because most subrogation counsel are also insurance defense lawyers, situations arise where the carrier on the "other side" has a past or present relationship with subrogation counsel. This raises the specter of an ethical dilemma. B. An Ethical Dilemma Versus A Business Dilemma The ethical rules governing the practice of law clearly forbid a lawyer from representing a client "if the representation of that client will be directly adverse to another client." Model Rules of Professional Conduct Rule 1. 7 (1999). The Model Rules do not, however, address whether a liability carrier I s presence "on the other side" of a subrogation claim is "directly adverse" within the meaning of the Model Rules. Thus, in the context of a subrogation case, this scenario actually presents a "business dilemma" for subrogation counsel, not an "ethical dilemma." This is especially the case in the typical subrogation case, where the issues at hand are primarily economic and do not concern divided loyalties or client confidences. (Gardner v. North Carolina State Bar, 341 S.E.2d 517, 521 (N.C. 1986); Comm. On Legal Ethics v. Frame, 4'33 S.E.2d 579, (W.Va. 1993). C. A Business Dilemma Can Become An Ethical Dilemma The ethical rules are clear, however, that if a lawyer cannot assure a client of his unfettered loyalty in a matter, an ethical dilemma has arisen for the lawyer. In the context of a subrogation claim, if a subrogation lawyer has concern that he will be adversely affected in his business relations because the liability carrier on the 4 4other side" will somehow retaliate against him, an ethical problem is created, and the lawyer must withdraw from the representation as subrogation counsel. See Model Rules of Professional Conduct Rule 1.7 (1999); See generally National Medical Enters., v. Godbey, 924 W.W.2d 123 (Tex. 1996). D. Subrogation Defense Cases 7

8 The converse is true when counsel is asked to defend against a subrogation case brought by an insurance carrier she typically represents. This is because the claims have the potential for revelation of the client, subrogating insurer's confidences. Thus, this scenario does involve a "directly adverse" representation, which would require counsel to obtain a waiver of the conflict by the clients involved. Port Authority of NY and NJ v. Arcadian Corp., No , 1996 U.S. Dist. LEXIS , at *10 (D.N.J. Sept. 25, 1996); See Model Rules of Professional Conduct Rule 1. 7 cmt. (1999). III. Ethical Dilemmas Arising During Joint Representation Of The Insurer And Insured A. The Problem During the course of litigation, and despite the best efforts of all involved, it is still possible for events to occur during litigation that can create conflicts of interest between the subrogating insurer and its insured. This can happen due to factual revelations through discovery or trial; or because a court makes a ruling that causes the insurer and insured to become adverse to one another; or when unexpected facts arise that make recovery more likely for either the insurer or insured, but not both, or because a litigation strategy is required which benefits one client and not the other. B. The Solution No matter the problem that arises under the circumstances described supra, the Model Rules require the subrogation lawyer to use the litigation fee agreement, or some other method, to "intermediate" the controversy between his insurer and insured clients. If good faith intermediation can not resolve the controversy, and if the litigation fee agreement does not address the requirements of counsel, withdrawal as counsel is required. See Model Rules of Professional Conduct Rule 1.4, Rule 1.7, and Rule 2.2 (1999). 8