Annual HADA Seminar 2014

Transcription

1 Annual HADA Seminar 2014 Burlington, Vermont September 30 - October 1, 2014

2 2014 Annual HADA Seminar Wednesday, October 1, 2014 Burlington, Vermont Thank You to Our Golf Sponsors Dana F. Braun Longest Drive Callaway, Braun, Riddle & Hughes, P.C Frank J. Szilagyi Closest to the Pin Szilagyi & Daly Jeffrey Johnson Closest to the Line Johnson Law Group

3 Tuesday, September 30, Annual HADA Seminar Agenda 5:00 pm 7:00 pm Welcome Reception Cocktails and hors d oeuvres will be served 7:00 pm Dinner on your own in Burlington Wednesday, October 1, :30 am 8:00 am Continental Breakfast 8:00 am 8:05 am Welcome and Introductions 8:05 am 9:10 am General Session Winning the Case: Competency, ADA 9:15 am 10:55 am Break Out Sessions (45 minutes each) Cutting Through the Smoke Reasonable Accommodations and Medical Marijuana Navigating Representation of PHAs, Board of Commissioners, Executive Directors, Employees, Contractors... 11:05 am 11:55 am Interactive Panel Discussion and Mock Grievance Hearing 11:55 am 12:00 pm Closing 12:00 pm 1:00 pm Lunch Non-Golfers Golfers drive to Vermont National Country Club 12:30 pm Golfers Pick Up Boxed Lunches 1:00 pm Tee Off! 18 Holes of Golf Followed by Dinner and Prizes

4 I. Who s Who in HADA

5 State Name Firm Contact Info Other Alabama Charles A. Stewart, III Bradley Arant Boult Cummings LLP 445 Dexter Ave Suite 9075 Montgomery, AL Phone (334) Fax (334) C. Michael McInnish C. Michael McInnish P.O. Box 194 Montgomery, AL California Paul Caleo Burnham Brown P.O. Box 119 Oakland, CA Phone (510) Fax (510) Charles A. Chuck Stewart, III is a partner in the Montgomery office of Bradley Arant Boult Cummings LLP. His litigation practice includes the defense and trial of national and international corporations in product liability, employment and toxic tort matters, as well as commercial and intellectual property disputes. He is licensed in both Alabama and Tennessee. He is active in several defense trial organizations. Mr. Stewart served on the Board of Directors of the Defense Research Institute from 2002 through He is a Past President of the Alabama Defense Lawyers Association and a former member of its Board of Directors. Mr. Stewart is listed in The Best Lawyers in America and he is listed in Alabama Super Lawyers. Mr. McInnish specializes in public housing issues and consulting for housing authorities and housing organizations. He has presented over 40 HTVN segments on new rules, commissioner training, and other PHA topics. He also provided training for national, state, and local organizations on new HUD policies, PHA issues, and legal issues relating to the public housing field. He is currently a City Attorney for Montgomery, AL. Paul has practiced law with extensive experience in complex tort, personal injury and large loss cases involving claims of products liability, premises liability & construction site accidents. Paul has substantial trial experience and has also practiced law in his native Australia for four and one half years as a criminal defense attorney. Paul provides risk management and strategic advice and counsel to clients on litigation avoidance and Medicare reimbursement claims. Kevin K. Cholakian Cholakian & Associates 400 Oyster Point Blvd Suite 415 San Francisco, CA Phone (650) Fax (650) [email protected] Kevin K. Cholakian heads an AV-rated, nineattorney civil defense firm with offices in San Francisco, Sacramento, and Fresno that represents government entities and commercial landlords in major catastrophic injury, products liability, employment, and environmental litigation cases. Twice the recipient of the Farmers-Zurich Gladiator of the Year trial lawyer award, he has been a national panelist on product and fire liability issues and is regularly brought in to defend many of the highest exposure commercial and tort liability cases in Northern and Central California. Mr. Cholakian s trial record where liability has been disputed is He is the President of the San Francisco Defense Association, San Francisco s oldest civil defense association.

6 State Name Firm Contact Info Other Joseph L. Stark Joseph L. Stark & Associates Avenue Stanford Suite 160 Valencia/Santa Clarita, CA Phone (661) Fax (661) Emphasis on public agency defense (labor/employment; general liability/premises; police and auto) with 20 years experience. Serving the Santa Barbara, Ventura, Los Angeles, Orange, Riverside and San Bernardino Counties. For more information visit Sage R. Knauft Randall J. Lee Laurie E. Sherwood Mary Watson Fishrer Walsworth Franklin Bevins & McCall, LLP One City Boulevard West, 5th Floor Orange, CA Phone (714) Fax (714) Montgomery Street, 9th Floor San Francisco, CA Phone (415) Fax (415) WFB&M s Municipal Law/Public Entity Practice includes a broad range of matters handled on behalf of numerous public entities and municipalities. We are critically aware of the many concerns facing public entities, in particular, their financial burdens. We therefore strive to achieve the best, yet most economical, results for our clients. We emphasize early and thorough investigation of the facts and circumstances of each case, and focus on a legal approach that is aggressive, yet incorporates sound business judgment. Connecticut Kevin A. Coles Coles, Baldwin & Kaiser, LLC 1261 Post Road Fairfield, CT Phone (203) Fax (203) [email protected] Donn A. Swift Lynch, Traub, Keefe & Errante 52 Trumbull Street P.O. Box 1612 New Haven, CT Phone (203) Fax (203) [email protected] Coles, Baldwin & Kaiser, LLC, is a CT law firm with a national experience base. Our attorneys have represented some of the largest corporations in America in complex litigation and general corporate counseling. At the same time, CBK lawyers have mastered the critical skill of representing individuals and smaller businesses in claims they have for a variety of civil matters across CT. Mr. Coles has represented Housing Authorities at all levels for almost 30 years. Mr. Swift has been affiliated with the firm since Mr. Swift is a trial lawyer who regularly practices in federal and state courts in the fields of products liability, personal injury law and negligence law. He is a member of the CT Academy of Certified Trial Lawyers, CT Defense Lawyers Association, Defense Research Institute, CT and American Bar Associations. Frank J. Szilagyi Szilagyi and Daly 118 Oak St Hartford, CT Phone (860) Fax (860) Cell (860) [email protected] Mr. Szilagyi joined the firm in Mr. Szilagyi s practice is concentrated in the areas of civil and commercial litigation. He has represented numerous financial institutions and municipal and state employees. He currently serves as General Counsel to the Hartford Police Union

7 State Name Firm Contact Info Other Connecticut Con t James Williams Williams Walsh & O Connor 110 Washington Avenue, 2nd Floor North Haven, CT Phone (203) Fax (203) [email protected] Our Connecticut attorneys are ready to put in the time and effort to assist in the success of your case. We feel each client is important, and we bring a personalized approach to the practice of law. Our attorneys are AV rated and licensed to practice in state and federal courts, as well as the U. S. Supreme Court. District of Columbia Al Scanlan Jackson & Campbell PC Lafayette Center th Street N.W. 3rd Floor South Tower Washington, DC Phone (800) Fax (202) [email protected] Mr. Scanlan has focused his practice on civil trial and appellate litigation. He has litigated on behalf of large multinational corporations, domestic corporations, large and small, businesses, partnerships, and individuals Lee Reno General Counsel (HAI Group) Reno & Cavanaugh Suite Eye Street, NW Washington, DC Phone Fax [email protected] Lee Reno is founding member of Reno & Cavanaugh. His experience in housing development began in Lee has practiced extensively in the affordable housing field during his legal career, with a special emphasis on public housing and rural housing. He serves as General Counsel to the Housing Authority Insurance Group. Georgia Dana Braun Callaway, Braun, Riddle, and Hughes, P.C. 301 West Congress Street PO Box 9150 Savannah, GA Phone (912) Fax (912) [email protected] Dana Braun practice areas are general civil trial practice including insurance, construction, commercial and employment litigation, housing and housing authority law, and commercial transactions. He is a member of the Savannah and American Bar Associations, State Bar of Georgia, Georgia Defense Lawyers Association and the Defense Research Institute. Tom Brennan Fain Major & Brennan P.C. 100 Glenridge Point Pkwy Suite 500 Atlanta, GA Phone (404) [email protected] To date, Tom has been lead counsel in over 100 jury trials in both Federal and State Courts defending injury and death claims resulting from product, premises, construction, vehicle, and trucking accidents. Tom also litigates insurance coverage and bad faith claims and has been retained as an expert in bad faith litigation as well.

8 State Name Firm Contact Info Other Georgia Con t John C. Daniel Martin Snow, LLP 240 Third Street P.O. Box 1606 Macon, GA Phone (478) Fax (478) [email protected] Martin Snow, LLP has represented individuals, businesses, and governmental agencies in all types of litigation matters for over 100 years. The firm is currently engaged in a broad litigation practice, representing clients in all state and federal courts in the middle and south Georgia area. In addition to a wide range in insurance defense practice, the firm also handles all types of business and commercial litigation. Illinois James W. Springer Kavanagh, Scully, Sudow, White & Frederick 301 S.W. Adams Street, Suite 700 Peoria, IL Phone (309) Fax (309) [email protected] Mr. Springer s areas of practice are state and federal civil litigation and worker s compensation. He is a member of the Illinois State Bar Association and the Peoria County Bar Association, which awarded him it s Pro Bono Lawyer of the Year Award in Andrew Kopon, Jr. Rachel Yarch Kopon Airdo, LLC 233 South Wacker Dr Suite 4450 Chicago, IL Phone (312) Direct (312) [email protected] [email protected] Mr. Kopon s extensive trial work has been in a variety of matters, including wrongful death cases, product liability, insurance coverage and employment law. Mr. Kopon s trial experience includes the defense of serious injury and wrongful death cases in a variety of matters. Ms. Yarch s emphasis is on Employment Litigation, Counseling on Employment Law Matters, Drafting Employment Practices and Training on Employment Law Issues. Indiana Joseph Stalmack Joseph Stalmack & Associates 5253 Hohman Avenue Hammond, IN Phone (219) [email protected] Mr. Stalmack is the primary trial attorney and principal of the firm. Mr. Stalmacks cases have involved wrongful death, personal injury and property damage matters. He specializes in complex litigation and serious accident cases. He also has broad experience resolving insurance coverage questions and authoring opinions on coverage.

9 State Name Firm Contact Info Other Kansas Jennifer Kyner Kyner Law, P.C Rainbow, Suite 200 Westwood, KS Phone: (913) Fax: (913) Kyner Law, P.C. represents businesses, insurance companies, governmental entities and individuals in Kansas and Missouri. The firm s principal, Jennifer Kyner, is AV rated and has over 32 years of experience trying cases before state and federal court juries and judges. Ms. Kyner is a trained arbitrator and mediator and serves on the American Arbitration Association s panel of arbitrators. Bill Sanders Jason Roth Sanders Warren & Russell LLP 9401 Indian Creek Pkwy Suite 1250 Overland Park, KS Phone: (913) Fax: (913) Sanders Warren & Russell LLP is a mid-sized law firm with offices in Kansas City, Missouri and Overland Park, KS. We represent over 50 different insurance carriers and a specialization of the firm s attorneys for many years has been representing governmental entities in all types of actions, including 42 USC 1983, Tort Claims Act, land use and employment matters. Louisiana Edward Trapolin Gus Fritchie Irwin Fritchie Urquhart & Moore LLC 400 Poydras Street Suite 2700 New Orleans, LA Phone (504) Fax (504) [email protected] [email protected] Mr. Trapolin concentration is Products Liability, Casualty, Insurance, Labor & Employment, Professional Liability, Business Litigation & Premises Liability. Ed is affiliated with Louisiana State Bar, New Orleans Bar, Mississippi Bar and Federal Bar Associations. Mr. Fritchie defends a wide range of professional liability claims asserted against lawyers, insurance agents and brokers, real estate agents, brokers & accountants. Gus also defends claims asserted against public entities, businesses, and their insurers, including claims based on alleged civil rights violations and employment practices. Maryland Carrie Blackburn Riley Stacie Farley Blackburn Riley, LLC 828 Dulaney Valley Rd Suite 4 Baltimore, MD Phone (410) Fax (410) [email protected] [email protected] Civil practice consisting mainly of insurance defense and coverage matters. Practice areas include: general liability, premises and premises security liability, products liability and employment discrimination and fair housing claims Admitted: Maryland and District of Columbia.

10 State Name Firm Contact Info Other Massachusetts Gerard T. Donnelly David F. Hassett Hassett & Donnelly, P.C., 446 Main Street, 12th Fl. Worcester, MA Phone (508) Fax (508) Our firm specializes in civil litigation/insurance defense including but not limited to general liability, premises liability, products liability, worker's compensation, employment discrimination, coverage opinions, etc. Mr. Hassett is an accomplished trial lawyer with more than 22 years of courtroom experience. Mr. Donnelly brings to our firm eleven years of experience as a claims adjuster and manager in addition to his more than 22 years of litigation experience. John Egan Rubin and Rudman, LLP Attorneys at Law 50 Rowes Wharf Boston, MA Phone (617) Fax (617) [email protected] John is a senior litigation partner experienced in the defense of personal injury, wrongful death, property damage, and other tort claims, including product liability, exposure to toxic substances, premises liability, professional liability, consumer protection claims, and related appellate work. He has been practicing law for over 30 years, has tried over 75 cases to verdict, and is admitted to practice in MA and the District of Columbia. Michigan Matthew A. Brauer Rutledge, Manion, Rabaut, Terry & Thomas P.C Penobscot Bldg. Detroit, MI Phone (313) Fax (313) [email protected] Minnesota Mark J. Peschel Johnson & Lindberg, P.A. 780 Northland Plaza 3800 American Boulevard West Minneapolis, MN Phone (952) Fax (952) [email protected] Mr. Brauer has over 20 years of success and experience as defense counsel in civil litigation matters involving governmental liability and immunity, premises liability, public housing and federal regulations, fires and explosions, employer s liability, civil rights and contract claims. He regularly provides advice and counsel to housing authorities, employers and insurers on a variety of matters. He is admitted to practice in all Michigan state and federal courts, as well as the U.S. Sixth Circuit Court of Appeals and the U.S. Supreme Court. Mr. Peschel s civil litigation practice areas include governmental liability, construction defects, products liability, toxic torts, premises liability, personal injury and wrongful death, subrogation, and insurance law. Mr. Peschel also serves as a mediator. He is admitted to practice in state and federal courts in Minnesota, Wisconsin, and North Dakota.

11 State Name Firm Contact Info Other Mississippi Walter W. Dukes Matthew M. Williams Dukes, Dukes, Keating & Faneca, P.A th Street Sixth Floor Gulfport, MS Phone (228) Dukes, Dukes, Keating & Faneca, P.A. provides a full range of legal services to businesses, corporations, insurance companies, governmental entities and individuals throughout Mississippi. Their dynamic, versatile attorneys handle a wide range of issues, such as: Insurance Defense, Employment Law, Governmental R & C Issues, 1983 Governmental Liability, premises security litigation and investigation. Missouri Jennifer Kyner Kyner Law, P.C Rainbow, Suite 200 Westwood, KS Phone: (913) Fax: (913) [email protected] Kyner Law, P.C. represents businesses, insurance companies, governmental entities and individuals in Kansas and Missouri. The firm s principal, Jennifer Kyner, is AV rated and has over 32 years of experience trying cases before state and federal court juries and judges. Ms. Kyner is a trained arbitrator and mediator and serves on the American Arbitration Association s panel of arbitrators. Bill Sanders Jason Roth Sanders Warren & Russell LLP 1411 East 104th Street, Suite 100 Kansas City, MO Phone (816) Fax (816) [email protected] [email protected] Sanders Warren & Russell LLP is a mid-sized law firm with offices in Kansas City, Missouri and Overland Park, KS. We represent over 50 different insurance carriers and a specialization of the firm s attorneys for many years has been representing governmental entities in all types of actions, including 42 USC 1983, Tort Claims Act, land use and employment matters. New Jersey Gerald Helfrich Gerald J. Helfrich, Attorney at Law 3125 Rt.10 East Suite 2D Denville, NJ Phone: (973) Fax: (973) Cell: (973) [email protected] Mr. Helfrich has represented HARRG Insurance for eighteen years specializing in civil litigation with concentration in insurance defense and coverage. Jeffrey L. Shanaberger Gerard H. Hanson Hill Wallack 202 Carnegie Center Princeton, NJ Phone (609) Fax (609) [email protected] [email protected] Mr. Shanaberger has a practice concentration in trial and appellate practice, emphasizing insurance coverage and defense in matters of governmental, public entity rights and products liabilities.mr. Hanson has a practice concentration representing insurance companies in coverage disputes as well as in defense of diverse claims, including, but not limited to: catastrophic personal injury, property damage and economic loss.

12 State Name Firm Contact Info Other New York Anthony J. Colucci, III John J. Marchese Gillian Brown Ryan Gellmen Colucci & Gallaher, P.C Liberty Building 424 Main Street Buffalo, NY Phone (716) Mr. Colucci divides his professional time between counseling businesses and litigating matters on behalf of firm clients. Over more than two decades in private practice, Tony has successfully defended privately held and publicly traded firms as well as governmental entities in a variety of legal matters. Mr. Marchese devotes most of his practice to litigating municipal liability and complex environmental matters. John also has extensive experience litigating business and commercial disputes, construction accident litigation and product liability claims. Mr. Brown concentrates his practice in Housing and Development Law, Construction Law, Landlord - Tenant Law and Municipal Law. Gillian joined the firm in 2008 with 20 yrs of experience. Mr. Gellman concentrates his practice on defending lawsuits involving personal injuries and commercial disputes. He has been defending municipal liability cases for nearly 20 years. Relevant experience includes cases involving premises liability, toxic torts including asbestos and lead paint, contracts including lease disputes and construction. He handles all aspects of litigated matters including trials, appeals, mediations and arbitrations. Mark Cipolla Alan Kaminsky Lewis Brisbois Bisgaard & Smith LLP 199 Water Street 25th Floor New York, NY Phone (212) (212) (212) Fax (212) [email protected] [email protected] [email protected] Lewis Brisbois Bisgaard & Smith LLP is a 500 attorney national law firm with offices located in Chicago, Las Vegas, Lafayette, Los Angeles, New York, Orange County, Phoenix, Sacramento, San Bernardino, San Diego, San Francisco and Tucson. The law firm was ranked by the National Law Journal as the 73rd largest law firm in the nation and named the sixth largest law firm in the State of California by California Lawyer. Each of these offices includes partners, associates and a professional staff dedicated to achieving the objectives of our clients. Mr. Kaminsky serves as Vice-Chair of the firm-wide general liability department. He specializes in defending clients against high exposure personal injury lawsuits. He is recognized by New York Magazine as one of the Top Personal injury trial lawyers in New York (8/2005).

13 State Name Firm Contact Info Other New York Con t Stephen J. Rehfuss John Liguori Rehfuss & Liguori & Assoc. P.C. 40 British American Blvd. Suite 219 Latham, NY Phone (518) Fax (518) [email protected] [email protected] The law firm of Rehfuss, Liguori & Associates, P.C. engages in a sophisticated, wide-ranging litigation practice in all courts of record throughout New York State. The firm represents a large and varied multinational, corporate, municipal and individual clientele in State and Federal Courts and handles trial and arbitration proceedings as well as appeals. Counsel to the Albany Housing Authority and Litigation Counsel for public housing authorities throughout Upstate New York. Litigation practice with an emphasis on municipal and Title VII defense Kevin A. Lane Barbara Sherk Michael Coutu Sliwa & Lane 840 Main Seneca Building Buffalo, NY Phone (716) x 208 Fax (716) [email protected] [email protected] [email protected] Mr. Lane is the Chair of The Insurance Coverage Committee of the New York State Bar Association s TICL Section and the recipient of its award for Outstanding Contribution to Practice of Law in the Field of Insurance. Mr. Coutu concentrates his practice on the representation of transportation companies, and the defense of corporations and individuals in tractor trailer, complex motor vehicle, product liability and construction related litigation. Ms. Sherk is admitted to practice in the New York State Courts and the United States District Court for the Western District of New York. She is the Co-Chair of the Ethics and Professionalism Sub Committee of the American Bar Association s Insurance Coverage Litigation Committee. Ohio Lewis W. Adkins, Jr. Roetzel & Andress One Cleveland Center, 10th Fl 1375 E. Ninth St. Cleveland, OH Phone (216) Main (216) Direct Fax (216) [email protected] Mr. Adkins practices in the areas of public law, litigation, labor and employment. He serves Counsel to numerous large public and private entities throughout Northeast Ohio. He has also been lead counsel for several multiple million dollar development projects throughout Northeast Ohio. His clients have included public and private entities. He has obtained numerous judgments, on behalf of clients, involving complex pieces of litigation in Federal and State courts in Ohio.

14 State Name Firm Contact Info Other Ohio Con t Hilary Taylor Weston Hurd, LLP The Tower at Erieview 1301 East 9th Street, Suite 1900 Cleveland, OH Phone (216) Direct (216) Fax (216) [email protected] Mr. Taylor practices in the areas of employment, governmental liability, insurancegeneral defense and toxic tort, and he has represented several Housing Authorities based in the State of Ohio. He s a member of the Cleveland Bar Association, American Bar Association, Norma S. Minor Bar Association, National Bar Association, International Association and Ohio Association of Chiefs of Police. He published an article entitled Civil Rights: Jails and Justice. He is a life member of the United States Court of Appeals Sixth Circuit Judicial Conference and appointed as a representative of the Life Member Committee. He is an adjunct professor at Case Western Reserve University School of Law teaching courses in Trial Tactics and Core Lawyering Skills Ernest L. Wilkerson Jr. Wilkerson & Associates LPA 1422 Euclid Ave, Ste 248 Cleveland, OH Phone (216) Fax (216) Ernest L. Wilkerson Jr. founded the firm in The firm provides a broad range of specialized legal services to governmental agencies and corporate, banking and business institutions from its offices in Cleveland and Columbus, Ohio and Washington, DC. Aubrey Willacy Tim Marcovy Willacy, LoPresti & Marcovy 700 Western Reserve Building 1468 West Ninth Street, Suite 700 Cleveland, OH Phone (216) Fax (216) [email protected] WL&M has extensive litigation and consulting experience in an array of practice areas. The firm is a general practice, defense litigation law firm which represents business, governmental and corporate entities of all sizes and types in a variety of subject areas. Aubrey is a member of the Cleveland, Ohio State and National Bar Associations; Norman S. Minor Bar Association. Oklahoma Tom Cordell Frailey, Chaffin, Cordell, Perryman, Sterke McCalla & Brown LLP 201 North 4th Street Chickasha, OK Phone (405) Fax (405) [email protected] Tom Cordell was admitted to practice law in Oklahoma in He continues to practice as a senior partner in the Chickasha, Oklahoma law firm of Frailey, Chaffin, Cordell, Perryman, Sterkel, McCalla & Brown in all facets of tort litigation, focusing on complex tort and commercial litigation, as well as products liability, auto liability, oil and gas litigation, premises liability, bad faith, and insurance defense and coverage litigation. He is a member of the Order of the Barristers. He is a recipient of the Maurice Merrill Golden Quill Award given by the OBA annually for the outstanding published article in the Oklahoma Bar Journal. He currently serves on the Board of the USAO Foundation.

15 State Name Firm Contact Info Other Pennsylvania David Bateman Craig Caliendo Bateman & Caliendo LLC 470 Dresher Road Horsham, PA Phone (215) Fax (215) Mr. Bateman and Mr. Caliendo have been handling HARRG Insurance defense matters for the Philadelphia Housing Authority since Bethann R. Lloyd Holly M. Whalen Grogan Graffam, P.C. 4 Gateway Center, 12th Floor Pittsburgh, PA Phone (412) Fax (412) [email protected] [email protected] Grogan Graffam, P.C. is a mid-sized law firm located in downtown Pittsburgh concentrating in insurance defense and general defense. GGPC is a member of the International Society of Primerus Law Firms and are 2014 A.M. Best s Recommended Insurance Attorneys. Bethann and Holly are both shareholders. Both have been repeatedly named Pennsylvania Super Lawyers, including for In addition to representing housing authorities in various contexts for many years, Bethann and Holly also defend cases involving claims of professional liability, employment practices, commercial litigation, civil rights and insurance coverage. Bethann Naples Naples Law Firm, LLP 1515 Market St. Suite 1200 Philadelphia, PA Phone (215) Fax (215) [email protected] Bethann Naples has concentrated her practice in civil litigation and workerscompensation. She has handled defense liability and automobile accident cases and worker s compensation claims. Ms. Naples also served as an arbitrator for Public Housing grievances. Janice Kolber Susanna Randazzo Kolber & Randazzo 1616 Walnut Street, Suite 2000 Philadelphia, PA Phone (215) Fax (215) [email protected] [email protected] Ms. Kolber is a founding partner and has concentrated her practice in civil trial advocacy for more than twenty years. Ms. Randazzo is a partner of the firm whose practice concentration is in civil litigation and employment. Rhode Island Rajaram Suryanarayan Brenda Harrigan Gunning & LaFazia, Inc. 33 College Hill Rd, Suite 25B Warwick, RI Phone (401) Fax (401) [email protected] [email protected] The attorneys at Gunning & LaFazia handle matters in state and federal courts in Rhode Island and Massachusetts. Over the past 50 years Gunning and LaFazia attorneys have tried hundreds of cases with excellent results. Gunning & LaFazia is committed to continuing to provide superior legal services for individuals and companies. Brenda Harrigan also handles Family Court matters, including custody, child support, and divorce, as well as the defense of discrimination claims filed with the EEOC and the Rhode Island Commission for Human Rights. Rajaram Suryanarayan's practice includes professional liability policy defense, as well as commercial litigation.

16 State Name Firm Contact Info Other Tennessee James. D Lawson Law Offices of William M Jeter, PLLC 35 Union Ave Suite 300 Memphis, TN Phone (901) Fax (901) [email protected] Licensed and practicing in both AR and TN. Admitted to Arkansas Bar in 1986; also admitted to practice in U.S. District Courts, U.S. Court Of Appeals for the 8th Circuit, and U.S. Supreme Court. Member of the Pulaski County, Arkansas and American Bar Associations as well as DRI. Texas Jonathan M. Spigel Cowles & Thompson, P.C. 901 Main St Suite 3900 Dallas, TX Phone (214) Fax(214) [email protected] Jonathan currently serves as the Section Head for the firm s Tort and Insurance Litigation Practice Group. Mr. Spigel s litigation practice consists primarily of general insurance defense, transportation defense, products and premises liability defense, professional liability defense and employment and commercial litigation. He was admitted to the State Bar of TX in 1989 and is also admitted to practice before the U.S. Court of Appeals for the Fifth Circuit. William M. McKamie Charles Sierra McKamie Krueger, LLP 941 Proton Road San Antonio, TX Phone (210) Fax (210) [email protected] [email protected] Mr. McKamie practices municipal litigation, land use, constitutional law, Fair Housing, civil rights, employment law, commercial litigation, business law & general litigation. Mr. McKamie is former two-term Chair of Government Lawyers Section of the Texas State Bar. Mr. Sierra practice areas are municipal litigation, civil practice, employment law, family law and criminal law. He is a member of the State Bar of TX

17 State Name Firm Contact Info Other Vermont Pietro Lynn Lynn, Lynn, Blackman PC 76 St. Paul Street Suite 400 Burlington, VT Phone (802) Fax (802) James L. Chapman, IV is a senior partner with the law firm of Crenshaw, Ware & Martin, P.L.C. and is Chairman of the firm s Litigation Department. He handles a broad range of business issues and complex civil litigation matters in federal and state courts and has substantial jury trial experience. He is listed in Best Lawyers in America and Virginia Super Lawyers. Crenshaw, Ware & Martin, P.L.C. is a multi-disciplined business law firm that represents clients ranging from small businesses to Fortune 500 companies and government agencies. In addition to our extensive litigation experience, the experience of our firm has put our attorneys in the forefront of practice areas such as project finance, complex contracts, railroad law, maritime law, housing authority law, real estate, construction law, creditors' rights, employment law and tax-credit finance. Virginia Jim Chapman Crenshaw, Ware & Martin, PLC 150 West Main St Suite 1500 Norfolk, VA Phone (757) Fax (757) [email protected] James L. Chapman, IV is a senior partner with the law firm of Crenshaw, Ware & Martin, P.L.C. and is Chairman of the firm s Litigation Department. He handles a broad range of business issues and complex civil litigation matters in federal and state courts and has substantial jury trial experience. He is listed in Best Lawyers in America and Virginia Super Lawyers. Crenshaw, Ware & Martin, P.L.C. is a multi-disciplined business law firm that represents clients ranging from small businesses to Fortune 500 companies and government agencies. In addition to our extensive litigation experience, the experience of our firm has put our attorneys in the forefront of practice areas such as project finance, complex contracts, railroad law, maritime law, housing authority law, real estate, construction law, creditors' rights, employment law and tax-credit finance. Washington John P. Hayes Marty Pujolar Forsberg & Umlauf, P.S. 901 Fifth Avenue Suite 1400 Seattle, WA Phone(206) Fax(206) [email protected] [email protected] Mr. Hayes practices include defense of construction defect, employ. & product liability, and commercial contract disputes. He also represents insurance carriers in first and third party marine and commercial general liability coverage and bad faith litigations. Mr. Pujolar practices include insurance coverage, construction and employment litigation, appeals, general liability, auto, UIM, premise & product liability.

18 Winning the Case: Competency, ADA C. Michael ( Mickey ) McInnish

19 C. Michael ( Mickey ) McInnish has been practicing law since 1981, and began representing housing authorities in He retired in 2006 as the Executive Director of the Montgomery Housing Authority. Mr. McInnish has been a member of the Claims and Underwriting Committees for HAI Group. He has taught numerous classes for SERC, NAHRO, PHADA, as well as state and local housing groups. He has done over 100 programs for HTVN. McInnish earned his Bachelor s Degree from Auburn University, his Master s Degree from Southern Baptist Theological Seminary, and his JD from Jones Law Institute. He was a member of the Negotiated Rulemaking Committee for HUD and has been given numerous awards by housing and legal agencies. At present he is the Senior Staff Attorney for the City of Montgomery and specializes in personnel work, business/license taxes, administrative work, city asset recovery, ADA compliance officer and is assigned to the Department of City Investigations. He is a Certified Mediator and Arbitrator by the American Arbtration Association.

20 C. Michael Mcinnish HAI Group SM 189 Commerce Court, Cheshire, CT HAI Group is a registered trademark for a family of affiliated companies which includes Housing Authority Risk Retention Group, Inc.; Housing Authority Property Insurance, A Mutual Company; Housing Enterprise Insurance Company, Inc.; Housing Insurance Services, Inc. (DBA Housing Insurance Agency Services in NY and MI); Housing Authority Insurance, Inc.; Housing Telecommunications, Inc.; Satellite Telecommunications, Inc.; Housing Investment Group, Inc.; and Housing Systems Solutions, Inc. Staff training and sensitivity The application process Proper notices Explanation Be able to prove it!!! Annual HADA Seminar 2014: C. Michael ( Mickey ) McInnish

21 Application Notices Tenant selection Application offices accessible Sight/hearing disabled No discrimination Must come to the office. NO Taking applications from those unable to come to office MUST inform all applicants, residents, or members of the public of alternative forms of communications, and how to request Sign language, oral explanation, bold print, audio cassette, mail applications, alternative sites for applications Annual HADA Seminar 2014: C. Michael ( Mickey ) McInnish

22 Require applicants to provide or pay for his/her own sign language interpreter or other alternative Maintain adequate pool of units for disabled persons Build waiting list: print media, advocacy groups, social service agencies TRAIN STAFF and be able to prove it Annual HADA Seminar 2014: C. Michael ( Mickey ) McInnish

23 Have a policy about reasonable accommodations Notify everybody of Right to request On application If rejected, notification letter must give outline for requesting a hearing and requesting reasonable accommodation At application At orientation At re-certification At eviction/termination of tenancy Annual HADA Seminar 2014: C. Michael ( Mickey ) McInnish

24 Right to request accommodation PHA must provide accommodations, even through the termination process and lease enforcement Including: cognitive disability Notice of charges Opportunity to respond ABILITY TO UNDERSTAND violation, consequences, right to hearing Look at your grievance policies/procedures Annual HADA Seminar 2014: C. Michael ( Mickey ) McInnish

25 The policy The process Procedures explained They knew what could happen They understood all of this Can we prove it? Issue not only the violation and whether we can prove it Issue is mental disability Question at this point: can we proceed, how do we proceed, and can we win? Give the notice: can we prove tenant understood what was wrong and consequences? Annual HADA Seminar 2014: C. Michael ( Mickey ) McInnish

26 Does tenant understand the process? Was notice of reasonable accommodation given? Can the tenant comprehend: the lease, violations, grievance process, fair hearing requirements, consequences of violation? Be prepared to go back to application and orientation These probably will cost you attorney fees Due Process/14 th Amendment Section 42 USC 1983 ADA (Americans with Disabilities Act) Rehabilitation Act Fair Housing Act Combination of the above Annual HADA Seminar 2014: C. Michael ( Mickey ) McInnish

27 Can be done at any stage Hopefully at an early step in the process By PHA, friend, guardian, attorney Insulate yourself by putting comments into the record and being able to document everything Attorney to represent? Guardian ad Litem? Custodian/guardian Who pays? Who gives notice to court? Annual HADA Seminar 2014: C. Michael ( Mickey ) McInnish

28 Orientation: understand the lease/grievance? Move-in: understand the process? Signs that put you on alert!! Notate file and watch out... Receiving SSI (Supplemental Security Income)? Have a guardian? Don t look like they understand Cannot answer questions about procedure NOTATE FILE and seek help as needed Annual HADA Seminar 2014: C. Michael ( Mickey ) McInnish

29 Not enough: be able to prove applicant/tenant knew who to contact if any questions about lease/procedures Have this in the record SO: tape record everything, but be careful about privacy issues Tenant must understand what is a lease violation Must understand how they must comply with lease Must understand how to request reasonable accommodation Must know how to access the grievance process Annual HADA Seminar 2014: C. Michael ( Mickey ) McInnish

30 Participated in the above AND We can prove it??? THEN WE AUTOMATICALLY WIN: LOL Establish and implement policies Train staff Give notice to appropriate parties of terminations Train grievance officers and staff to notate mental issues or absence of issues Notify judge if cognitive defect suspected Annual HADA Seminar 2014: C. Michael ( Mickey ) McInnish

31 Tenant did not report income Tenancy terminated, attorney present Tenant kept good financial records, had bank account Attorney: she did not understand she had to report income PHA: could not prove she knew or understood Federal case filed Bad housekeeping Informal conference, grievance Eviction won and appealed Tenant s attorney raised incompetency and lack of knowledge of lease violation AND that she could be evicted Annual HADA Seminar 2014: C. Michael ( Mickey ) McInnish

32 Of any suggestion of any kind Document telling tenants and applicants at every opportunity about ability to request reasonable accommodation Help is easier to get earlier than later Try to get tenant attorney to state on the record the tenant understands the lease and violation Alert hearing officer Have hearing officer training Let him/her ascertain if tenant understand nature of proceeding and notate the same on the record and decision Document findings Annual HADA Seminar 2014: C. Michael ( Mickey ) McInnish

33 Ask attorney if client understands: i.e. put the attorney on the record and the tape If any issues raised: notate findings and seek advice Be sure your attorney knows the cognitive issues, if any Be sure you can prove your case Notify court? Annual HADA Seminar 2014: C. Michael ( Mickey ) McInnish

34 This is a big issue: legally, administratively Many different laws apply Make your record and be able to prove it Conduct training: observations and reports Dot your I s and cross your T s Annual HADA Seminar 2014: C. Michael ( Mickey ) McInnish

35 Jane Doe 1234 Commerce Dr. Apt. #100 Anywhere, AL February 21, 2012 RE: GRIEVANCE HEARING Dear Ms. Doe: Your grievance hearing was scheduled at 1:00pm,, 2012, at the Housing Authority. You failed to appear for your grievance hearing. In rendering a decision, it is my responsibility as the Hearing Officer to evaluate the following matters: 1. Whether or not the grounds for denial were stated factually in the notice. 2. The validity of grounds for denial of assistance. 3. The validity of the evidence. The Housing Authority is required to follow all Rules and Regulations of the Public Housing Program. These rules are listed in their Admissions and Continue Occupancy Guidebook. In this guidebook it states that no resident's lease shall be terminated except in compliance with HUD regulations, the lease terms, and state law. On 12/29/2011 a wage verification form was submitted indicating the Ms. Williams was employed with Plamastic LLC beginning 12/02/2011. On 01/30/2012 a Lease Termination Notice was sent to Ms. Williams stating her lease was terminated due to her violating her lease, primarily for not reporting income in a timely manner on this and three (3) prior occasions. On 01/31/2012 Ms. Williams requested an informal hearing with Ms. Walters. On 02/07/2012 an informal hearing was held with Ms. Williams concerning the termination of her lease. The decision was to continue with the lease termination. On 02/13/2012 Ms. Williams requested a formal hearing. On 02/14/2012 a notice was sent to Ms. Williams scheduling the formal hearing on 1:00pm. WITNESSES: - Public Housing Authority Property Manager - Assistant Public Housing Authority Property Manager TESTIMONY: - Stated that Ms. Williams failed to report her income with in the 10 day time frame as established by HUD regulations and the Housing Authority Lease. This is at least the third time Ms. Williams has failed to report income in the established time frame since 2009: 03/31/2009- failed to report income from wages. 11/19/2010- failed to report income from child support. 12/29/2011- failed to report income from wages. 1 Annual HADA Seminar 2014: C. Michael ( Mickey ) McInnish

36 Ms. testified that these are just a few of the times she has failed to report income and each time they have agreed to continue her assistance and/or lease. Laura - no testimony given DOCUMENTS: : 1. Wage Verification form dated 12/29/2011 noting Ms. Williams hire date as 12/02/ Lease Termination Notice dated 01/30/2012, effective 02/14/2012, for failing to report income in the established time frame. 3. A handwritten notice from Ms. Williams requesting a hearing, dated 01/31/ Notice sent to Ms. Williams indicating the Housing Authority s decision to continue with the termination of her lease. 5. A Handwritten letter from Ms. Williams requesting a Formal Hearing, dated 02/13/ A notice sent to Ms. Williams scheduling the Formal hearing on 1:00pm at the Housing Authority, dated 02/14/ A Residential Counseling Report documenting the grievance hearing request. 8. An to scheduling the Formal Hearing. 9. Housing Authority Briefing Certificate for Public Housing. 10. Housing Authority Lease agreement with Ms. Williams 11. A Notice to all residents implementing a tenant repayment policy. 12. Housing Authority s Tenant Repayment Policy. FINDINGS: Since you have failed to meet your scheduled appointment, the hearing was held in your absence. After reviewing all the documentation and the testimony during the grievance hearing, I hereby find that the termination of your lease agreement sent to you was based on reliable information. Therefore, it is my decision that the termination of your lease is appropriate and in accordance with set protocols and procedures prescribed by the Housing Authority s rules and regulations. My decision is in favor of the Housing Authority s termination of your Lease Agreement. GREIVANCE HEARING OFFICER: DATE MAILED: 2 Annual HADA Seminar 2014: C. Michael ( Mickey ) McInnish

37 DUE PROCESS HEARING DO S AND DON TS. Give proper written notice to all interested parties Don t rely on phone or oral notice Give specific time, location, date and time. Give procedural rules. If hearing is rescheduled, notify all. If place changed, have someone at original site to direct to new one. Know the procedure and be familiar with the facts of the case. Follow the protocol. Don t change without notice to all. Don t meet with the parties prior to the hearing. Don t wing it. Record the entire proceeding. State on the record all relevant information: date, time, participants, etc Swear in the witnesses. Reinforce by follow up: You ve already been sworn to tell the truth: correct? Follow the script. Conflict of interest? Be sure all parties are heard fairly. Give proper decision and mail. Notate date of mailing. Be sure someone reviewing the record has pertinent information. If you forget to swear witness in, testimony could be disregarded Procedure same for all hearings. Don t proceed if potential or actual conflict of interest. Don t cut off a witness. But watch for repetitive testimony. Is there anything else? Don t relay information by phone. Don t rely on some else to mail. Inform of any appeal. Retain records: PHA, hearing officer. Annual HADA Seminar 2014: C. Michael ( Mickey ) McInnish

38 GRIEVANCE HEARING SCRIPTS Introduction Is the tape recorder on? Hello my name is. I have been appointed by the Housing Authority to serve as the hearing officer for today s hearing. My desire is to hear the positions of both parties and make an impartial decision based on the hearing today. I will only consider relevant evidence, statements, or documents presented at this hearing. AFTER THIS HEARING HAS BEEN CONCLUDED, I WILL NOT TAKE ANY FURTHER TESTIMONY, EVIDENCE OR RECEIVE ANY FURTHER DOCUMENTATION. This hearing will be conducted in a professional and respectful manner. Disorderly behavior will not be tolerated. Anyone acting disorderly will forfeit the right to have this hearing conducted. I would like to remind everyone that this is not a court hearing. The case is relating to the housing authority of the city of and. The date is: The time is: The place of the hearing is: The hearing will be recorded so that I can review it to refresh my memory when I am making my decision later on. If you wish to have a recording of the hearing, I can make a copy available to you upon request & at your expense. Would each of you introduce yourself and your reason for being here. Are there any witnesses that will be testifying today other than yourselves? Identify any witnesses. WITNESSES SIGN IN AND INTRODUCE THEMSELVES. Page 1 of 5 Annual HADA Seminar 2014: C. Michael ( Mickey ) McInnish

39 I AM NOW GOING TO SWEAR IN ALL OF THE WITNESSES. SWEAR ALL WITNESSES: DO EACH OF YOU SWEAR OR AFFIRM THAT THE TESTIMONY YOU GIVE TODAY IS THE TRUTH? (EXPLANATION OF THE RULE:) THE PHA AND THE TENANT/PARTICIPANT HAVE THE RIGHT TO HAVE ALL WITNESSES OTHER THAN THE ONE TESTIFYING AND THE REPRESENTATIVE BE EXCLUDED FROM THE ROOM. DOES EITHER THE PHA OR THE TENANT/PARTICIPANT WANT TO INVOKE THIS PROVISION? (IF SO, EXCUSE ALL WITNESSES EXCEPT THE PARTICIPANT AND THE PHA REPRESENTATIVE.) ADDRESS COMPLAINANT: PLEASE STATE YOUR NAME FOR THE RECORD. ARE YOU REPRESENTED? ASK OTHERS TO INTRODUCE THEMSELVES (HA s ALLEGATIONS/CHARGES/RULE VIOLATIONS OR INFRACTIONS FOR THE RECORD:)) Please read to me what the allegations, charges, rule violations, and/or the infractions are and what the Housing Authority s recommendations are for this case. READ THE PHA RECOMMENDATION INTO THE RECORD. Competency questions: a. Do you understand why you are here today? b. Do you understand the reason for your lease termination c. Do you need anyone to be with you to help and assist you with this hearing? Page 2 of 5 Annual HADA Seminar 2014: C. Michael ( Mickey ) McInnish

40 d. Are you ready to proceed with the hearing? THE BURDEN OF PERSUASION: The party having the burden of persuasion, otherwise known as the burden of proof, will present their case first. Then the other side will present their case followed by the party having the burden of proof. AFTER EACH WITNESS FINISHES HIS/HER TESTIMONY, THE OTHER SIDE WILL HAVE THE RIGHT TO CROSS-EXAMINE OR ASK THEM QUESTIONS ABOUT THE CASE. Section 8 Procedure: HA has burden of Persuasion & should and must initially present sufficient evidence to establish a Prima Facie case that benefits should be terminated. The Participant (tenant/applicant) has the burden of production to show that benefits should be continued. PH Procedure: The Participant (Tenant/applicant) must proceed first, has burden of Persuasion & should and must initially present sufficient evidence to establish a Prima Facie case that benefits should not be terminated. If the tenant has met these requirements then the HA has the burden of production to show that benefits should not be continued. The decision will be reached based upon a preponderance of the evidence. The party having the burden of proof or persuasion must meet this presumption to show that the facts happened, but does not have to prove the facts beyond a reasonable doubt. I WILL NOW ASK EACH PARTY IF HE/SHE WANTS TO MAKE A BRIEF OPENING STATEMENT. BEGIN THE TESTIMONY WE ARE NOW READY TO PROCEED. ARE THERE ANY QUESTIONS? Page 3 of 5 Annual HADA Seminar 2014: C. Michael ( Mickey ) McInnish

41 PARTY WITH BURDEN OF PROOF GOES FIRST. CROSS EXAMINATION OTHER PARTY CROSS EXAMINATION CONCLUDE WITH PARTY WITH BURDEN OF PROOF. ENDING THE TESTIMONY DOES EITHER SIDE HAVE ANYTHING FURTHER TO PRESENT? DOES EITHER SIDE WANT TO MAKE A BRIEF CLOSING STATEMENT? THANK YOU FOR PRESENTING YOUR CASES. I WILL REVIEW ALL OF THE EVIDENCE AND TESTIMONY AND THEN MAKE MY REPORT. THE DECISION WILL BE MAILED WITHIN 10 DAYS TO THE TENANT/PARTICIPANT AND A COPY SENT TO THE PHA REPRESENTATIVE. WHAT IS YOUR CORRECT MAILING ADDRESS? ARE THERE ANY QUESTIONS? THIS CONCLUDES THIS HEARING. THE TIME IS. Page 4 of 5 Annual HADA Seminar 2014: C. Michael ( Mickey ) McInnish

42 Requirements of Decision 1. Date: 2. Time: 3. Place: 4. Attendees: 5. Testimony: 6. Documents: 7. Date notice was given: 8. Request for hearing date: 9. Representative: 10. Synopsis of facts: 11. Decision: 12. Signature 13. Date of Mailing Annual HADA Seminar 2014: C. Michael ( Mickey ) McInnish

43 CASE: DATE: WITNESS LIST Name Address Signature Phone Name Address Signature Phone Name Address Signature Phone Name Address Signature Phone Name Address Signature Phone Annual HADA Seminar 2014: C. Michael ( Mickey ) McInnish

44 Reasonable Accommodations and Medical Marijuana John Eagan

45 John Eagan Practice Areas Litigation Bar Admissions Massachusetts District of Columbia U.S. District Court, District of Massachusetts First Circuit Court of Appeals American Bar Association Massachusetts Bar Association Boston Bar Association Defense Research Institute Massachusetts Defense Lawyers Association Contact Direct #: (617) Fax #: (617) Litigation: Trial attorney with over 30 years experience in a wide variety of product liability, toxic tort, asbestos, personal injury, property damage, fire, professional liability, housing and employment discrimination, insurance coverage and bad faith, and other claims. Has tried over 75 cases to verdict and has briefed and argued over 30 appeals. Professional and Community Involvements Arbitrator, Massachuestts Bar Association Fee Arbitration Board Former Moderator and Chairman of Board of Trustees, Melrose Highlands Congregational Church Various alumni activities, Bates College and Catholic University Law School Education Catholic University of America, J.D., 1981 Bates College, B.A., 1974

46 HAI Group SM 189 Commerce Court, Cheshire, CT HAI Group is a registered trademark for a family of affiliated companies which includes Housing Authority Risk Retention Group, Inc.; Housing Authority Property Insurance, A Mutual Company; Housing Enterprise Insurance Company, Inc.; Housing Insurance Services, Inc. (DBA Housing Insurance Agency Services in NY and MI); Housing Authority Insurance, Inc.; Housing Telecommunications, Inc.; Satellite Telecommunications, Inc.; Housing Investment Group, Inc.; and Housing Systems Solutions, Inc. Sally is a long-term, responsible tenant in public housing development. Recently diagnosed with cancer. Treatment includes aggressive radiation and chemotherapy. Side effects of treatment include nausea, loss of appetite, and insomnia. Sally experiences all three. Annual HADA Seminar 2014: John Eagan

47 Sally lives in Vermont, which has legalized use of marijuana for medical purposes. Sally s doctor advises that ingesting marijuana may help alleviate side effects of her therapy. Sally doesn t smoke and finds tobacco smoke irritating and aggravating to her symptoms. Her doctor advises purchasing ingestible marijuana (cookies, tincture) from a licensed dispensary. Sally follows her doctor s advice, purchases cookies at a licensed dispensary, and experiences significant relief from symptoms. Sally is a happy tenant. Sally comes in for her annual re-certification. She itemizes the expense of her marijuana purchases and claims it as a medical off-set in calculating her annual income. Annual HADA Seminar 2014: John Eagan

48 PHA management advises Sally that she cannot claim the cost of purchasing marijuana as a medical expense because it is an illegal drug under the U.S. Controlled Substances Act. In fact, Sally is advised that she must stop using marijuana, as it a violation of her lease to be using illegal drugs, or face possibility of eviction. Sally asks management for a reasonable accommodation, permitting her to use marijuana for medical purposes. What does the housing manager do? Annual HADA Seminar 2014: John Eagan

49 As of September 2014, 23 states and the District of Columbia have enacted laws to legalize the sale, purchase, and use of medical marijuana. Alaska Arizona California Colorado* Connecticut District of Columbia Delaware Hawaii Illinois Maine Maryland Massachusetts Annual HADA Seminar 2014: John Eagan

50 Michigan Minnesota Montana Nevada New Hampshire New Jersey New York Oregon Rhode Island Vermont Washington* Characteristics of Medical Marijuana Laws: Decriminalization for sale/use in connection with a doctor s prescription ; Regulation of role of caregiver in procuring/providing marijuana to patient; Various documentation/licensing requirements; Cultivation/sale/possession limitations. Annual HADA Seminar 2014: John Eagan

51 Marijuana is a Schedule I drug under the United States Controlled Substances Act. Growing, selling, buying, or using marijuana is a crime under Federal drug law. 42 U.S.C. 841(a)(1), 844(a), 812(b)(1)(A)-(C). There is no Federal carve-out for the sale, purchase, or use of marijuana that is prescribed for medical use by a physician. Period. Annual HADA Seminar 2014: John Eagan

52 The funding, management, and administration of public housing authorities in the United States is largely a matter of federal law: The Fair Housing Act Quality Housing and Work and Responsibility Act Rehabilitation Act Americans with Disabilities Act Etc. Many provisions of federal law make it explicitly clear that the use of illegal drugs in public, or publiclyassisted housing cannot be tolerated. Annual HADA Seminar 2014: John Eagan

53 For example: 42 USC 13661(b)(1): PHA... shall prohibit admission to... any household with a member who... is illegally using a controlled substance. 24 C.F.R (a)(2)(i): same, specifically with regard to public housing. 24 C.F.R (a)(1)(ii)(A): same, specifically with regard to Section 8 participation. Also: 42 U.S.C (a)(1): PHA [may] terminate tenancy or assistance for any household with a member... using a controlled substance. 24 C.F.R (b)(1)(i)(A): same, specifically with regard to Section 8 participation. 24 C.F.R (l)(5)(i)(B): same, specifically with regard to public housing. Annual HADA Seminar 2014: John Eagan

54 On the other hand... Fair Housing Act requires reasonable accommodations... when such accommodations may be necessary to afford such person equal opportunity to use and enjoy a dwelling. 42 U.S.C. 3604(f)(3)(B). State anti-discrimination laws are similar. A reasonable accommodation is required: Disabled tenant/participant; Nexus between disability and accommodation; Tenant/participant requests accommodation; and Accommodation is reasonable ; Annual HADA Seminar 2014: John Eagan

55 An accommodation is reasonable if: Does not impose undue financial or administrative burdens on the PHA, or Requires substantial changes to existing programs, or Requires fundamental alterations in the nature of the program. So, wouldn t it be reasonable to accommodate Sally s medical needs by allowing her to use medicallyprescribed marijuana, despite various federal proscriptions against using illegal drugs or engaging in drug-related criminal activity? Annual HADA Seminar 2014: John Eagan

56 There is a nexus between her disability (cancer) and the accommodation she is seeking (permission to use marijuana). The accommodation imposes no financial or administrative burden on the PHA. The accommodation does not substantially modify or fundamentally alter the nature of the public housing program. (Or does it?) Opinion Letter from HUD General Counsel (January 20, 2011). Two Basic Rules: 1. Mandatory denial of admission for new applicants who are currently using medical marijuana. 2. Permissive termination of assistance for existing tenants/participants who are currently using medical marijuana. Annual HADA Seminar 2014: John Eagan

57 The prohibition against marijuana as a Controlled Substance is inviolable. No federal exemption for medical use. Disability does not include illegal use of drugs. Accommodations for use of medical marijuana are not reasonable because: Would constitute a fundamental alteration in the nature of federal housing operations. Multiple statutory and regulatory proscriptions against drug use. Toleration of illegal drug use, even for medical reasons, at the risk of losing federal funding, is not reasonable. Annual HADA Seminar 2014: John Eagan

58 Federal Pre-emption Even if PHAs were determined to be required by state antidiscrimination laws to agree to the accommodation of permitting medical marijuana use, federal laws regarding drug use in public housing would pre-empt state law and control. So, why the difference between applicants for housing assistance and current tenants or recipients of assistance? Admission to a program is subject to different rules from those applying to termination. Annual HADA Seminar 2014: John Eagan

59 Why the difference? Admission standards are mandatory. PHA shall prohibit admission to any household with a member who is illegally using a controlled substance. 42 U.S.C (b)(1)(A) 24 C.F.R (a)(2)(i)(public housing) 24 C.F.R (a)(1)(ii)(A)(Section 8 housing). Why the difference? Termination standards are permissive. PHA may terminate assistance for any household with a member who is using a controlled substance. 42 U.S.C (a)(1). 24 C.F.R (l)(5)(i)(B)(public housing) 24 C.F.R (b)(1)(i)(A)(Section 8 housing) Annual HADA Seminar 2014: John Eagan

60 Factors to be Considered in Termination/Eviction Cases PHAs have discretion, case-by-case, to determine propriety of eviction/termination, including: Health of tenant/participant. Other housing options for tenant/participant. Benefit to the PHA of strict enforcement. See, e.g., 24 C.F.R (c)(2)(i); 966.4(l)(5)(vii)(B)(other mitigating circumstances). HUD historically defers to PHA s judgment. Factors to be Considered in Termination/Eviction Cases PHA decision not to evict/terminate is not to be considered a reasonable accommodation as understood by the Fair Housing Act. Don t call it one. Instead, it is an exercise of the PHA s discretion not to evict or terminate assistance, permissible by statute and regulations. Annual HADA Seminar 2014: John Eagan

61 February 10, 2011 HUD Memorandum: PHAs in states that have enacted laws legalizing the use of medical marijuana must establish a standard and adopt a written policy regarding whether or not to allow continued occupancy or assistance for residents who are medical marijuana users. Banking Schools/colleges Hospitals Criminal Prosecution Annual HADA Seminar 2014: John Eagan

62 REASONABLE ACCOMMODATIONS AND THE EVOLVING WORLD OF MEDICAL MARIJUANA As of September 2014, twenty-three states and the District of Columbia have enacted laws to legalize the production, sale, purchase and use of marijuana for medical purposes. The states that have passed legislation so far are: Alaska Michigan Arizona Minnesota California Montana Colorado * Nevada Connecticut New Hampshire District of Columbia New Jersey Delaware New York Hawaii Oregon Illinois Rhodes Island Maine Vermont Maryland Washington * Massachusetts Although the laws of the states listed above vary in their particulars, they all share some essential similarities. They decriminalize the growth, production, transportation, sale, purchase, or use of marijuana, or other cannabis-containing products derived from marijuana, when done in connection with a prescription from a physician. 1 The state laws also typically regulate the role of the caregiver in procuring and providing marijuana to a patient for whom it has been medically prescribed. The various state laws also contain a wide variety of licensing requirements for those individuals who are involved in producing, procuring, and providing * The states of Colorado and Washington have enacted laws that legalize marijuana for recreational purposes as well. The laws of those two states therefore also contemplate the use of marijuana for medical purposes. For purposes of this article, the laws of Colorado and Washington will be considered only insofar as they contemplate the use of marijuana for medical care or treatment. 1 Most, if not all, of the states laws do not use the terminology of prescription to describe the role of the physician, perhaps because marijuana is not yet an FDA-approved pharmaceutical that is available only by prescription from a licensed medical provider. Instead, the states use terms such as recommendation, suggestion, or otherwise, to describe the role of the physician in identifying marijuana as a palliative therapy for patients suffering from a variety of illnesses _1-1- Annual HADA Seminar 2014: John Eagan

63 marijuana to patients with medical needs. And finally the states laws typically contain various restrictions and limitations on the amount of marijuana that may be cultivated, sold, purchased, or possessed at any one time. For purposes of this paper, the incremental differences among the state laws on these issues are not particularly important. Although the medical science is not yet fully developed, there is at least some developing consensus that the use of marijuana may help to alleviate symptoms of nausea, loss of appetite, insomnia, and other painful side effects of chemotherapy or other aggressive pharmacological treatments for cancer or other serious illnesses, and may also provide relief from glaucoma, muscle spasms caused by multiple sclerosis or other neurological diseases, seizure disorders, Crohn s disease, and perhaps other illnesses. Although the typical manner of ingesting marijuana is to smoke it, it may also be eaten when baked into cookies, bread, or brownies, and can also be consumed either in liquid form as a tincture, or in candies such as gum drops, lollypops, etc. As the science develops, and as the states continue to experiment with varying degrees of legalization, it seems almost certain that the number of states to enact medical marijuana laws will only increase. At the federal level, however, essentially nothing has changed. As a matter of law, marijuana is a Schedule I drug under the United States Controlled Substances Act, and the growing, selling, buying, or using of marijuana, for any purpose, is a crime. 21 U.S.C. 841(a)(1), 844(a), 812(b)(1)(A)-(C). Under federal law there is no exemption or carve-out for the sale or use of marijuana for medical reasons, with or without a doctor s prescription. It is simply illegal. The conundrum for public housing authorities is how to navigate the use of medical marijuana by public housing tenants or Section 8 participants, in states where medical marijuana _1-2- Annual HADA Seminar 2014: John Eagan

64 has been legalized, in circumstances where housing authorities are required under both state and federal laws (42 U.S.C. 3604(f)(3)(B)) to make reasonable accommodations to its disabled tenants and other recipients of housing assistance, but where the use of marijuana for any purpose remains a felony under federal law. Moreover, numerous provisions of federal housing law make the illegal use of a controlled substance an absolute disqualification when it comes to eligibility for public housing or housing assistance. See, e.g., 42 U.S.C (b)(1); 24 C.F.R (a)(2)(i) (public housing) and (a)(1)(ii)(A) (Section 8). The inconsistencies and contradictions between and among state medical marijuana laws, state and federal reasonable accommodation requirements, and federal criminal drug laws, pose an obvious and seemingly irreconcilable dilemma for public housing administrators trying in good faith to comply with everything. This paper will attempt to provide some assistance in that regard. A somewhat over-simplified description of reasonable accommodation law begins with the Fair Housing Act, which states that prohibited discrimination includes the refusal to make reasonable accommodations in rules, policies, practices, or services, when such accommodations may be necessary to afford [a disabled or handicapped] person equal opportunity to use and enjoy a dwelling. 42 U.S.C. 3604(f)(3)(B). The determination of whether a requested accommodation is reasonable is fact-specific, and a tenant or other recipient of housing assistance who alleges discrimination based on a PHA s failure reasonably to accommodate his/her disability has the burden of proving that the proposed accommodation was reasonable. An accommodation is not reasonable if it imposes undue financial and administrative burdens on the PHA, or requires changes, adjustments, or modifications to existing housing programs that would be substantial or that would constitute fundamental alterations in the nature of such programs. There must also be a nexus between the claimed disability and the accommodation _1-3- Annual HADA Seminar 2014: John Eagan

65 that is sought. That is, the accommodation must be reasonably tailored to the manner in which the plaintiff s disability impacts on his/her equal opportunity to use and enjoy a dwelling. If the accommodation bears no relation to the disability, or if it has no ameliorating effect on the person s inability to use and enjoy a dwelling, then it is, by definition, unreasonable. In the context of a public housing tenant or recipient of public housing assistance seeking to use medically prescribed marijuana, the analysis would presumably go something like this. The tenant has a disability (e.g., cancer) and is undergoing chemotherapy, the effects of which (nausea, loss of appetite, pain) are ameliorated by ingesting marijuana, which is prescribed to the tenant by his/her treating physician. The tenant, knowing that the use of illegal drugs is prohibited by his/her lease and other federal housing requirements, seeks, as a reasonable accommodation, permission to ingest medically prescribed marijuana as part of his/her therapy. In the absence of that accommodation, the tenant would suffer needlessly. Reviewing the tenant s request for reasonable accommodation, the PHA would first determine whether there is a nexus between the disability (here, the debilitating side effects of chemotherapy), and the accommodation sought by the tenant (here, permission to use a therapeutic drug, the possession and use of which is illegal under federal law). Assuming a satisfactory nexus has been determined, the PHA would then determine whether permitting the tenant to use medical marijuana would impose undue financial or administrative burdens on the PHA, or would require substantial modifications to existing housing programs, or would constitute fundamental alterations in the nature of such programs. On the face of it, the accommodation sought by this particular tenant would appear not to impose substantial financial or administrative burdens on the PHA. Moreover, assuming the tenant s procurement and use of medically prescribed marijuana was done in a discreet and responsible way, it is difficult to articulate how such an _1-4- Annual HADA Seminar 2014: John Eagan

66 accommodation could be found to alter fundamentally the nature of public housing. Assuming the marijuana was consumed in a way that did not conflict with the PHA s no smoking policies, that it would require nothing in the way of oversight on the part of the PHA, that it would require no costs to be incurred on the part of the PHA, and that the tenant/participant s consumption of marijuana would be confined to the privacy of his/her residence, there would not appear to be any adverse impacts on the PHA, or any of the housing programs it administers, sufficient to conclude that the accommodation requested was unreasonable. The analysis set forth above, however, is, at present, essentially academic, because HUD has issued an Opinion Letter in the form of a Memorandum that provides guidance as to how PHA s should respond to requests for reasonable accommodation for the use of medical marijuana. Whether, and to what extent, the opinions set forth in the Memorandum would be found by a court of law to be binding, compelling, or merely persuasive, remains to be seen. The issue has not been seriously pressed in any cases known to this writer. But, given that courts are often instructed to give due deference to a federal agency s interpretation of its own regulations, it is probably wise to assume that the HUD Opinion Letter represents the current state of the law, as applied in the courts. The conclusion of the Memorandum, which was issued on January 20, 2011, is in two parts: (1) With regard to persons applying for public housing or housing assistance, PHA s must deny admission to those applicant households with individuals who are, at the time of consideration for admission, using medical marijuana. (2) With regard to existing tenants of public housing or recipients of housing assistance, PHA s may not grant reasonable accommodations that would allow tenants to grow, use, otherwise possess, or distribute medical marijuana, but may exercise their statutorily _1-5- Annual HADA Seminar 2014: John Eagan

67 authorized discretion with respect to evicting or refraining from evicting current residents on account of their use of medical marijuana. There are several reasons, rooted in both law and policy, for this dichotomy in how applicants and present recipients of housing assistance are to be treated when it comes to the use of medical marijuana. First, federal admissions standards are mandatory, while termination standards are permissive. More specifically, provisions of the Quality Housing and Work and Responsibility Act of 1998 [ QHWRA ] require PHAs to prohibit admission to... federally assisted housing for any household with a member who the public housing agency... determines is illegally using a controlled substance. 42 U.S.C (b)(1)(A). As there is no distinction under federal law regarding the use of marijuana for medical reasons, or distinguishing between the use of marijuana and other harder drugs, the possession or use of marijuana by an applicant for housing assistance can only be considered the illegal use of a controlled substance, thus prohibiting the admission of that applicant to any housing assistance program, without exception. See also, 24 C.F.R (a)(2)(i)(public housing) and (a)(1)(ii)(A)(Section 8 housing). By contrast, the termination standards set forth in the QHWRA state that the PHA must be allow[ed]... to terminate the tenancy or assistance for any household with a member who... is illegally using a controlled substance. 42 U.S.C (a)(1). That language, permitting but not requiring, PHAs to evict or terminate assistance to present recipients of federal housing assistance, is mirrored in federal regulations pertaining to those programs. See 24 C.F.R (l)(5)(i)(B)(public housing); and (b)(1)(i)(A)(Section 8 housing). The HUD Opinion Letter emphasizes that, with respect to existing tenants or participants, the law neither requires termination nor affirmatively permits continued participation by medical _1-6- Annual HADA Seminar 2014: John Eagan

68 marijuana users because doing so would divest PHAs... of the very discretion which Congress intended for them to exercise. The question remains, irrespective of whether an existing tenant/participant may be evicted/terminated within the PHA s discretion, can the use of medical marijuana be considered to be a reasonable accommodation under federal law? The short answer is no, for several reasons. Under the Rehabilitation Act and the Americans with Disabilities Act, the term individual with a disability does not include an individual who is currently engaging in the illegal use of drugs, when the [PHA] acts on the basis on such use. 29 U.S.C. 705(20)(C)(i); 42 U.S.C (a). The language of the Fair Housing Act is slightly different. There, the term handicap... does not include current, illegal use of or addiction to a controlled substance. 42 U.S.C. 3602(h). Although the language used in the statutes is slightly different, the effect is essentially the same. That is, a tenant/participant s use of an illegal drug (here, marijuana) cannot lawfully be considered to be the factual basis of that individual s claim of disability or handicap, either because the drug use itself is not considered to be a disability, or because a PHA acting on the basis of such use (by, for example, terminating assistance) cannot be considered to be acting adversely to a disabled person. Finally, HUD has concluded that irrespective of whether the terms disabled or handicapped may include persons who are using marijuana, any accommodation allowing for the use of marijuana for medical purposes in public housing or assisted housing is unreasonable per se. Relying heavily on Congressional policy to provide low-income housing that is decent, safe, and free from illegal drugs, HUD has concluded that accommodations that allow the use of medical marijuana would sanction violations of federal criminal law and thus constitute a fundamental alteration in the nature of the housing operation. Elaborating further, HUD _1-7- Annual HADA Seminar 2014: John Eagan

69 concludes that because they would require that PHAs... condone illegal drug use and would undermine the long-standing programmatic goal of providing a safe living environment free from illegal drug use, accommodations allowing marijuana-related activity constitute a fundamental alteration in the nature of the PHA... operations and are therefore not reasonable. One might wonder at the ipse dixit nature of HUD s reasoning. That is, HUD appears to be saying, essentially, that any accommodation that permits drug use that is illegal under federal law is unreasonable because it would condone illegal drug use, which is unreasonable. The reasoning is somewhat circular, and fails to address the issue at the heart of this controversy, which is whether the condoning of drug use that is concededly illegal as a matter of federal law, but which is legal under state law, done for the purpose of complying with federal and state reasonable accommodation requirements, trumps the federal Controlled Substances Act. If condoning medical marijuana use is unreasonable per se simply because it is illegal under federal law, is not the failure to engage a tenant or recipient of housing assistance in any meaningful way in a dialogue pertaining to his/her request for a reasonable accommodation, equally unreasonable? What is the PHA s higher priority? Enforcing compliance with Federal drug policy, or seeking to achieve meaningful compliance with state and federal reasonable accommodation policy? The answer to that question may not be unambiguously clear, but concluding that any accommodation that condones the use of marijuana is unreasonable because it is... unreasonable, essentially begs the question. It bears emphasizing, however, that even though HUD has stated unequivocally that a tenant s request to accommodate his/her medical marijuana use is unreasonable per se, PHAs do retain the discretion not to evict or terminate the person requesting the reasonable accommodation, even if the individual does not discontinue his/her use of marijuana. That is, _1-8- Annual HADA Seminar 2014: John Eagan

70 even though the PHA may not lawfully consider continuing use of medical marijuana to be a reasonable accommodation it may, in effect, condone such use by exercising its statutory and regulatory discretion not to evict or terminate the marijuana user. In that regard, a follow-up memorandum from HUD, dated February 10, 2011 to All Field Offices and Public Housing Agencies, states the following: PHAs in states that have enacted laws legalizing the use of medical marijuana must therefore establish a standard and adopt written policy regarding whether or not to allow continued occupancy or assistance for residents who are medical marijuana users. The decision of whether or not to allow continued occupancy or assistance to medical marijuana users is the responsibility of PHAs, not of [HUD]. (Copies of the HUD Memoranda of January 20, 2011 and February 10, 2011 are appended to the end of this article.) Although HUD has provided little guidance as to what such a written policy should include, a proposed sample policy is also appended hereto. One final point. HUD has concluded that in the unlikely event that a state antidiscrimination law was construed to require PHAs to accommodate a tenant/participant s request to use medical marijuana, that state s law would likely be pre-empted by Federal housing law and criminal law, specifically, the Fair Housing Act and the Controlled Substances Act. As there is no express pre-emption clause in either statute, any such pre-emptive effect would have to be implied, which can sometimes be a daunting task for a court. To this writer s knowledge, no court has yet attempted the effort. It is difficult to imagine the discrepancies between state and federal law on medical marijuana continuing indefinitely. It is also difficult to imagine HUD s legal opinion on reasonable accommodations in this area not being revised to at least some extent as the number of states enacting medical marijuana laws continues to increase. For the time being, however, the rules of engagement are reasonably clear. Applicants for housing assistance who are _1-9- Annual HADA Seminar 2014: John Eagan

71 currently using medical marijuana must be denied admission to any federally assisted program. With regard to existing tenants or participants, a PHA may not lawfully agree to medical marijuana use as a reasonable accommodation, but may, in effect, condone such use by electing not to terminate housing assistance in the exercise in its statutory and regulatory discretion. John Egan RUBIN AND RUDMAN LLP 50 Rowes Wharf Boston, MA (617) (ph.) (617) (fax) [email protected] _1-10- Annual HADA Seminar 2014: John Eagan

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96 Navigating Representation of PHAs John Marchese

97 John Marchese John Marchese, a Shareholder at the Buffalo law firm of Colucci & Gallaher, P.C., devotes most of his practice to litigating municipal liability and sports, entertainment and recreation liability matters. Additionally, John handles complex construction and environmental litigation and has defended municipalities from civil rights and constitutional tort claims.he has counseled municipalities and other businesses in commercial matters and has litigated commercial disputes, construction accident and product liability lawsuits, as well. John counsels several municipal clients and governmental entities regarding risk management and other legal and legislative issues and regularly counsels Western New York s largest hospital regarding risk management and administrative and regulatory matters. John has argued extensively in federal, state and administrative trial courts and before appellate courts throughout New York State and Pennsylvania.

98 NAVIGATING REPRESENTATION OF PUBLIC HOUSING AUTHORITIES Board of Commissioners, Executive Directors, Employees, Contractors... The Tripartite Relationship and the Life of a Litigation Action John J. Marchese, Esq. Jennifer Albrecht COLUCCI & GALLAHER, P.C Liberty Building 424 Main Street Buffalo, New York (716)

99 NAVIGATING REPRESENTATION OF PUBLIC HOUSING AUTHORITIES The Tripartite Relationship and the Life of a Litigation Action I) Who is the client What is the tripartite relationship? a. Who retains counsel i. Is the party retaining counsel considered client? ii. Is the public housing authority the only client? iii. Is the public housing authority insurance considered a client? b. When does the attorney client relationship get established i. What defines the start of the attorney-client relationship? ii. Who handles any questions or doubts to the existence of an attorney-client relationship? II) Attorney s duty to protect client a. What duty does the attorney have to the insurer i. What is the attorney s role with representation of the insurer client? ii. What are the insurers rights? b. What duty does the attorney have to the insured public housing authority i. What is the attorney s role with representation of the insured? ii. Is the attorney s role different from the representation of the insurer? iii. What are the insureds rights? III) Does a conflict of interest exist a. What is a conflict of interest i. What defines a conflict of interest? ii. What are the different types of conflicts of interest? b. How does the conflict occur i. What types of situations lead to possible conflicts of interest?

100 ii. How to recognize when a party in a tripartite relationship may be creating a conflict of interest c. Ethical issues raised when a conflict between an insurer and insured exists i. What ethical standards does the attorney have to follow? d. How does the attorney approach the conflict between insurer and/or insured i. How does the attorney discuss the conflict of interest with the insurer and insured? ii. Can the attorney continue to provide legal advice to an insurer or insured public housing authority once a conflict of interest is recognized? IV) How do conflicts affect future litigation a. Does this affect amount of additional lawsuits i. Do conflicts between insurer and insured increase the chance for additional future lawsuits? b. Does this affect amount of case settlements and/or jury verdicts i. Can conflicts between insurer and insured cause the settlement amount to vary? ii. Can a conflict between an insurer and insured change the amount awarded by jury verdict? V) How do we minimize conflicts of interest a. Determine who is the applicable source for specific information i. How is the case relevant information prepared on the part of the insurer? ii. How is the case relevant information prepared on the part of the insured public housing authority? b. Determine most effective way to communicate between parties i. How is information being shared between the insurer, the insured and the attorney? ii. Is there difficulty with a specific type of communication? iii. What are some different methods of communication we can use going forward?

101 VI) Reporting of accident/incident a. Who is first point of contact i. Who is the first person aware of an accident or incident? ii. Who are the individuals that must be made aware of an accident or incident? iii. Is there a timeframe for notifying the relevant parties? iv. How is the timeframe established for specific cases? b. How does pertinent information pass to additional members i. How do the relevant parties obtain the accident or incident information? ii. Are there any problems with the way the information is forwarded to relevant parties currently? iii. What can each party do to improve the way information is passed to relevant parties? VII) Gathering initial case facts a. Communicating between insurer and insured i. How does the attorney obtain case facts from the insurer? ii. How does the attorney obtain case facts from the insured public housing authority? b. What documents are relevant i. How are relevant documents identified by the insured public housing authority? ii. How are relevant documents identified by the attorney? c. Determine who is the applicable source for relevant materials i. How does the attorney determine who would be the most applicable source for specific information? ii. Is there a preferred method for obtaining the relevant information? VIII) Initial assessment of the case a. Determination of liability

102 i. How does the attorney determine liability early in litigation? b. Determination of possible damages i. How are possible damages determined early in litigation? IX) In-depth case assessment a. Review of relevant client file materials i. What is involved in the review process? b. Interviews with insured clients i. Under what circumstances would the attorney need to interview a client? ii. How are client interviews conducted? iii. What to expect from an attorney client interview? c. Discovery between parties i. How is discovery conducted between parties? ii. What documents are discoverable? iii. Can discovery be challenged and when is that necessary? d. Research of damages i. What is involved in researching possible damages? ii. How does the attorney investigate the validity of the plaintiff s claims? e. Determine if any additional client file materials are relevant i. How does the attorney determine if they have everything they need to successfully resolve the case? X) Reporting case assessment a. When does reporting occur i. When is the initial reporting prepared by the attorney ii. At what times throughout the litigation does the attorney report to the clients? b. Who does the attorney report to i. Does the attorney report to the insurer or insured public housing authority? ii. What information is important to each party?

103 XI) The common goal What is the common goal in the tripartite relationship? a. Work to lessen the amount of time spent gathering pertinent information i. What are some things each party can do to expedite the process of sharing information? b. Develop strategies for effectively communicating between parties i. Are there ways that each party can communicate differently throughout the span of the litigation? c. Determining when actions and/or inactions may trigger a conflict of interest i. How can each party recognize when conduct may lead to conflict?

104 SELECTED READINGS

105 ABA Section of Litigation 2012 Insurance Coverage Litigation Committee CLE Seminar, March 1-3, 2012: Insurer Litigation Guidelines Insurer Litigation Guidelines: Ethical Issues for Insurer-Selected and Independent Defense Counsel 1 William T. Barker SNR Denton, US., LLP Chicago IL [email protected] Gregory D. Miller Podvey, Meanor, Catenacci, Hildner, Cocoziello & Chattman, P.C. Newark, NJ [email protected] Cynthia R. Koehler Liberty Mutual Group Boston, MA [email protected] Catherine Kassenoff Building Materials Corp. of America Wayne, NJ [email protected] Joseph D. Jean Lowenstein Sandler, PC New York, NY [email protected] 1 Cynthia R. Koehler and Catherine Kassenoff provided valuable comments but did not prepare any part of this paper. The paper is a joint product and none of the authors agree with everything that is said in it. Moreover, none of it represents the views of their firms or their clients. DC:

106 I. Background: Relationships Between Insurers and Defense Counsel 2 A. Insurer Rights To Control the Defense Many courts hold and insurers generally take the position that, in the absence of a coverage question or conflict of interest affecting the defense, a standard liability policy provision regarding the insurer s right and duty to defend gives the insurer the right to control the defense of the claim and the insured has no right to interfere with the insurer s control of the defense. 3 Where the insured has no personal exposure, that control is virtually absolute. 4 Ordinarily, the law in most jurisdictions recognizes both insurer and policyholder as clients of defense counsel. 5 But the insurer s right to select counsel and to control the defense is sometimes overridden in situations where the law entitles the insured to independent counsel; such independent counsel cannot represent or be directed by the insurer. 6 2 This topic is treated at greater length in JEFFREY E. THOMAS & FRANCIS J. MOOTZ, III, THE NEW APPLEMAN ON INSURANCE LAW, LIBRARY EDITION, (chapter by Paul E.B. Glad, William T. Barker & Ronald D. Kent), from which some of the material here is drawn. Copyright 2011 LexisNexis. Adapted with permission. All rights reserved. A pdf of that section is available as a free download at :// file.ashx/ key/communityserver.components.sitefiles/documents.ilc+documents/new-appleman-on- Insurance-Law-Library-Edition-Section Tripartite-Insured-Insurer-Insurer-Directed-Def-Counsel.pdf 3 Safeco Ins. Co. v. Superior Court, 84 Cal. Rptr. 2d 43, 45 (Cal. Ct. App. 1999). Related material from WILLIAM T. BARKER & RONALD D. KENT, NEW APPLEMAN INSURANCE BAD FAITH LITIGATION, SECOND EDITION (Copyright 2011 LexisNexis; all rights reserved) is available for free download at file.ashx/ key/communityserver.components.sitefiles/documents.ilc+documents/new-appleman- Insurance-Bad-Faith-3.06-Defense-Counsel-Partial-Coverage.pdf and file.ashx/ key/communityserver.components.sitefiles/documents.ilc+documents/new-appleman- Insurance-Bad-Faith-3.07-Insurer-Liability-Improper-Defense.pdf See also: Davenport v. St. Paul Fire & Marine Ins. Co., 978 F.2d 927, (5th Cir. 1992) (policy invest[s] the insurer with the complete control and direction of the defense... to the exclusion of the insured ) (collecting authorities); Unauthorized Practice of Law Comm. v. Am. Home Assurance Co., 261 S.W.3d 24, 26 (Tex. 2008) ( The right to defend in many policies gives the insurer complete, exclusive control of the defense ). 4 Davenport, 978 F.2d at (where policy covered two insureds, with possible cross-claims between them, insurer with full coverage for both could use common attorney to present a common defense). See also State Farm Mut. Auto. Ins. Co. v. Fed. Ins. Co., 86 Cal. Rptr. 2d 20, 25 (Cal. Ct. App. 1999) ( it is customary for the insurer to control the defense it provides ); Spindle v. Chubb/Pacific Indem. Grp., 152 Cal. Rptr. 776, 781 (Cal. Ct. App. 1979). 5 JEFFREY E. THOMAS & FRANCIS J. MOOTZ, III, THE NEW APPLEMAN ON INSURANCE LAW, LIBRARY EDITION, [2] (describing the basis for that rule). A table of jurisdictions accepting or rejecting that rule is contained in Appendix 16-A to that chapter. 6 See text at notes 8-48, infra. 2

107 B. Policyholder Rights to Independent Counsel 7 1. Defense Counsel Must Be Loyal to the Policyholder, and This Sometimes Requires Independent Counsel Because the policyholder is a client (and regardless of whether the insurer is also a client), defense counsel owes the policyholder undivided loyalty. 8 In ordinary cases this presents no problem, for the insurer s interests will be fully consistent with those of the policyholder. While the normal case involves only common interests of the insurer and the policyholder, defense counsel must be alert for interest conflicts that may exist in particular cases. The duty of undivided loyalty forbids defense counsel from handling any defense-related matter in a way that injures an insured client without that client s informed consent. 9 Coverage issues inherently involve conflicts between the insurer and the policyholder. So, insurer-appointed defense counsel must avoid any involvement in those issues. In particular, defense counsel must not assist the insurer in defeating coverage, as such assistance would breach defense counsel s duty of loyalty to the policyholder. 10 But conflicts must be considered even before undertaking a defense representation. The first question that any lawyer must answer when asked to undertake a representation is whether the representation will involve a conflict of interest. Insurance defense counsel is no different from any other lawyer in this respect. If representing the policyholder and the insurer jointly would create a conflict of interest, then joint representation is impermissible, absent informed consents by both the insurer and the policyholder. The fact that joint representation is impermissible does not excuse the insurer s duty to defend, but requires that the duty be discharged in a different manner. Independent counsel, representing only the policyholder, must be paid by the insurer. Otherwise, the policyholder would be put at risk that assigned counsel s advice about the representation might be affected by assigned counsel s loyalty to the insurer or personal interest in cultivating the insurer s favor. Essentially the same analysis would apply to preclude insurer direction even if applicable law did not consider an unconflicted insurer to be a co-client. A conflict that would preclude joint representation would also preclude, absent informed consent by the policyholder, acceptance of insurer direction by counsel. 11 And if counsel had a regular ongoing relationship with the insurer, 7 Material in this subsection is adapted from the forthcoming THE PROFESSIONAL RESPONSIBILITIES OF INSURANCE DEFENSE COUNSEL by Prof. Silver and Mr. Barker, to be published later this year by LexisNexis. Copyright 2012 LexisNexis. Adapted with permission. All rights reserved. 8 E.g., RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS 16 & cmt. e (perm. vol. 2000) (describing duty); Cinema 5, Ltd. v. Cinerama, Ltd., 528 F.2d 1384, 1386 (2d Cir. 1976) (attorney owes undivided loyalty to every client). 9 RESTATEMENT 16, cmt. e (duties of loyalty prohibit the lawyer from harming the client); Ellen S. Pryor & Charles Silver, Defense Lawyers Professional Responsibilities: Part I Excess Exposure Cases, 78 TEX. L. REV. 599, (2000); Charles Silver & Kent Syverud, The Professional Responsibilities of Insurance Defense Lawyers, 45 Duke L.J. 255, (1995). 10 See, e.g.: Parsons v. Continental Nat l Am. Group, 113 Ariz. 223 (Sup. Ct. 1976) (disclosure to insurer of confidential information indicating that insured s actions were intentional rather than negligent); Betts v. Allstate Ins. Co., 154 Cal. App 3d 688 (1984) (defense counsel encouraged insured to adopt no-settlement position which improperly exposed insured to serious risk of personal liability); Fidelity & Cas. Co. v. McConnaughy, 228 Md. 1, 9-14 (1962) (taking deposition to establish lack of cooperation); Employers Cas. Co. v. Tilley, 496 S.W.2d 552 (Tex. 1973) (exploitation of position as defense counsel to develop late notice defense on behalf of insurer). 11 See, e.g., MODEL RULES OF PROFESSIONAL CONDUCT, Rules 1.8(f), 5.5(c) (ABA 2011). 3

108 the lawyer s personal interest in pleasing the insurer could create a conflict in the same way that a legal duty of loyalty would. If there were a conflict of interest, the defense lawyer retained by the insurer sometimes could have incentives to favor the insurer, whether or not the insurer is a co-client. It is the insurer who selects counsel and pays the fee, thereby earning a measure of gratitude not shared by the policyholder. More importantly, it is to the insurer, rather than the policyholder, that counsel looks for future referrals: [t]he attorney s relationship with the insurer is usually ongoing, supported by a financial interest in future assignments, and, like other long-term relationships, sometimes strengthened by real friendship. 12 Thus, it is all too easy for defense counsel to wish to protect the insurer from fraud or lack of cooperation by the policyholder or even to aid it in coverage disputes with the policyholder, forgetting the loyalty owed to the policyholder. As a result, before the use of independent counsel became common, some courts found it necessary to condemn such acts of disloyalty and to allow appropriate remedies against counsel or the insurer whose interests counsel sought to advance to the detriment of the client policyholder. 13 When a conflict precludes a lawyer from agreeing to represent a policyholder subject to an insurer s direction, insurance law requires the insurer to pay for independent counsel, who will represent the policyholder without any duties to or other relationships with the insurer that would create a conflict of interest. 14 In some jurisdictions, insurance law goes further and requires the insurer to provide independent counsel in circumstances where no conflict of interest exists A Disabling Conflict Exists When Insurer and Policyholder Have Divergent Interests in the Way the Case Is Defended a) Coverage Related Conflicts (1) General Principles The governing standard is stated in ABA Model Rule 1.7, which is substantively identical on this point to the law in all states. (a) Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if: (1) the representation of one client will be directly adverse to another client; or (2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer s responsibilities to another client, a former client or a third person or by a personal interest of the lawyer. A material limitation (as that term is used in paragraph (a)(2) of the rule) exists when there is a significant risk that a lawyer s ability to consider, recommend or carry out an appropriate course of action for the client will be materially limited because of the lawyer s other responsibilities or 12 See 4 RONALD E. MALLEN & JEFFREY M. SMITH, LEGAL MALPRACTICE, 30:3, at 150 (2010 ed.). 13 See, e.g., cases cited in note 11, supra. 14 See text at notes 17-48, infra. 15 See text at note 49, infra. 4

109 interests. 16 In applying this standard to insurance representations, courts have demanded special sensitivity to any situation where the choices made by defense counsel could benefit the insurer at the policyholder s expense. Where the existence of divergent interests in the conduct of the defense is inherent in the case, the conflict of interest rules require that representation on behalf of the insurer be declined, unless all affected clients give informed consent. 17 A leading legal malpractice treatise agrees: Objectively, a conflict exists when the issue upon which the clients' interests diverge is within the scope of the attorney's retention. The dilemma is that competent representation of one client on the issue necessarily will be adverse to the interests of the other. A coverage issue rarely presents an objective conflict of interests if counsel's retention is limited to defending the liability claim. 18 The scope of representation determines the objectives of the representation and the range of services defense counsel is obliged to provide. The scope thus determines the set of actions (or possible actions) defense counsel must be able to provide without conflict. However, the scope of the representation does not limit the range of interests which defense counsel must avoid injuring. A lawyer must respect all interests a client has, including primary interests that relate to the agreed goal of a representation and secondary interests that do not. A policyholder's interest in preserving coverage and a carrier's interest in defeating it are secondary interests. They are not the interests defense lawyers sign on to advance. But they are interests nonetheless. Consequently, when acting within the scope of a defensive representation, defense lawyers must respect them. When defending liability suits, they must not knowingly act in ways that endanger clients' coverage-related interests without informing clients and obtaining consents. (2) Examples (a) Coverage Issues That May Not Create Conflicts Whether a coverage dispute creates an interest conflict depends on the nature of the coverage issue. In other words, the mere existence of a question as to coverage (and a corresponding reservation of rights) may not always entail a disabling ethical conflict. 19 Some courts rest this conclusion, in part, on the assumed integrity of counsel: Public policy requires the insurer to act with the utmost good faith. As long as this standard is observed, the Court may not interfere with the terms of the parties' agreement. To hold 16 MODEL RULES OF PROFESSIONAL CONDUCT, RULE 1.7, cmt. [8] (ABA 2011). 17 See William T. Barker, Sonnenschein Nath & Rosenthal, LLP on New York Marine & General Insurance Co. v. Lafarge North America, Inc.: Independent Counsel Rights Under New York Law, LEXISNEXIS EMERGING ISSUES ANALYSES, 2010 Emerging Issues 5166 (discussing application of this principle under New York law and criticizing cases that imposed a broader right to independent counsel) RONALD E. MALLEN & JEFFREY M. SMITH, LEGAL MALPRACTICE, 30:21, at 331 (2011 ed.). 19 E.g. Trinity Univ. Ins. Co. v. Stevens Forestry Serv., 335 F.3d 353, 356 (5th Cir. 2003); Twin City Fire Ins. Co. v. Ben Arnold-Sunbelt Bev. Co., 433 F.3d 365, (4th Cir. 2005) (SC law; collecting cases on both sides of that issue); Unauth. Prac. of Law Comm. v. Am. Home Ins. Co., 261 S.W.3d 24, 43 (Tex. 2008); 5

110 that the insurer who, under reservation of rights, participates in selection of counsel, automatically breaches its duty of good faith is to indulge the conclusive presumption that counsel is unable to fully represent its client, the insured, without consciously or unconsciously compromising the insured's interests. The Court is unable to conclude that [the] law professes so little confidence in the integrity of the bar of this state. 20 While the integrity of counsel is one protection for the policyholder, there is no need to rely on that unless counsel would have some opportunity to benefit the insurer, at the policyholder s expense, by the way counsel handles the defense. It is the existence of such an opportunity that creates a ethical conflict of interest entitling the policyholder to independent counsel. 21 In the absence of such an opportunity, there is no ethical conflict and no need to rely on counsel to resist a nonexistent temptation to favor the insurer. Some courts treat the prospect of future employment by the insurer as a potential conflict of interest. 22 But this often misses the central question, which is whether a particular case involves any concrete prospect that defense counsel would have an opportunity to favor the insurer at the expense of the policyholder. Only if the manner of handling the policyholder s defense could affect the determination of coverage or otherwise benefit the insurer at the policyholder s expense does an ethical conflict exist, 23 and many coverage questions are unrelated to the matters at issue in the tort action. Ordinarily, actions reasonably calculated to minimize the expected loss in the liability action could only make both insurer and policyholder better off, regardless of any collateral dispute they may have regarding coverage. The reason for this is that the coverage dispute will determine whether the insurer or the policyholder bears the loss, and the loser, whoever it turns out to be, will be better off if the loss is smaller rather than larger. As long as there is no opportunity for defense counsel to shift liability between covered and noncovered grounds by defending the case one way rather than another, most cases do not regard mere lack of a duty to indemnify against some or all claims asserted in the suit as creating a conflict. 24 Example: Assigned counsel is asked to defend a case involving an auto accident in which the policyholder s cousin was injured when the car operated by the policyholder ran into a tree. The cousin had been living with the policyholder while attending a nearby school, but has returned to his parents home after being 20 Ben Arnold-Sunbelt Bev. Co., 433 F.3d at 373, quoting and following Fed. Ins. Co. v. X-Rite, Inc., 748 F. Supp. 1223, 1229 (W.D. Mich. 1990). An unreported Arizona decision apparently took this view, concluding that the insured s interests are sufficiently protected by the fact that a conflict precludes dual representation, so that counsel is obliged to act solely in the insured s interest. Mirage Homes Constr., Inc. v. Auto-Owners Ins. Co., 1 CA-CV (Ariz. Ct. App. Feb. 9, 2006), relying on Paradigm Ins. Co. v. Langerman Law Offices, P.A., 200 Ariz. 146, 16, 18 (Sup. Ct. 2001). Paradigm Insurance addresses the duties of defense counsel selected by the insurer but does not consider whether or when an insured might have the right to independent counsel. 21 See text at notes 38-48, infra. Some courts recognize a right to independent counsel even in the absence of an ethical conflict for assigned defense counsel. See text at note 49, infra. 22 E.g., Chi of Alaska, Inc. v. Employers Reins. Corp., 844 P.2d 1113, (Alaska 1993) ( Where there is a conflict between insurer and insured, appointed counsel may tend to favor the interests of the insurer primarily because of the prospect of future employment ). 23 RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS 123, cmt. c(iii) (general antagonism between clients not conflict, so long as conflicting interests not implicated in particular representation). 24 Pekin Ins. Co. v. Home Ins. Co., 134 Ill. App. 3d 31, 35 (1985) (policy exhausted, but duty to defend not terminated; no right to independent counsel). 6

111 released from the hospital. The claim representative assumes the policyholder s defense, but reserves the right to deny coverage under the policy s exclusion for injuries to relatives residing in the policyholder s household. Coverage counsel brings a declaratory judgment action to resolve that issue. Because the resident relative issue does not overlap with the issues in the tort action, courts have found that it does not create any conflict of interest, and assigned counsel may undertake the defense. 25 Policyholders also argue that the insurer may not have the incentive to fund a full and vigorous defense of a claim that, if established, will not be covered (even though the insurer would not benefit from a finding for plaintiff on that claim). 26 But insurers respond that a defending insurer is obliged to provide a proper defense for even a noncovered claim. (By analogy to the law governing an insurer s duty to settle, 27 this should be a defense as vigorous as that would be provided by an insurer liable for the entire amount recovered.) Policyholders typically disagree because it is they, and not the insurer, that suffer the stigma and lasting impact of the adverse verdict. Insurers rejoin that liability insurance is insurance against loss in the form of defense costs, settlements or judgments, rather than against stigma or other lasting effects. The insurer can be liable for any damage resulting from failure to provide an adequate defense. 28 Both the propriety of any alleged skimping on the defense and the causal relation of any impropriety to any resulting noncovered liability are likely to be decided, after a bad result and in hindsight, by a jury unlikely to be sympathetic to the insurer. Insurers see this as an ample safeguard against skimping on defense funding. Policyholders also argue that a conflict could also arise if, when handling the defense, defense counsel would gain access to confidential information which defense counsel would be obliged to disclose to the insurer and which the insurer would find useful in asserting its coverage defenses. 29 But defense counsel would not be obliged to disclose (and would actually be prohibited from disclosing) confidential information that was not relevant to the actual defense of the case. 30 Consequently, as long as the defense issues and the coverage issues do not overlap, insurers would argue that theoretical possibility ordinarily should not matter. A merely theoretical possibility is not enough to create a conflict, absent some concrete prospect that adverse disclosure might occur in the matter at hand McGee v. Superior Ct., 176 Cal. App. 3d 221, (1985). See Blanchard v. State Farm Fire & Cas. Co., 2 Cal. Rptr. 2d 884 (Cal. Ct. App. 1991) (reservation of right to deny coverage for damage to policyholder s own work arising out of the work did not create conflict); Dynamic Concepts, Inc. v. Truck Ins. Exch., _71 Cal. Rptr. 2d 882, (Cal. Ct. App. 1998) (same). 26 E.g., Chi of Alaska, Inc. v. Employers Reins. Corp., 844 P.2d 1113, 1116 (Alaska 1993). 27 See WILLIAM T. BARKER & RONALD D. KENT, NEW APPLEMAN INSURANCE BAD FAITH LITIGATION, SECOND EDITION 2.03[[2][D]. 28 WILLIAM T. BARKER & RONALD D. KENT, NEW APPLEMAN INSURANCE BAD FAITH LITIGATION, SECOND EDITION Chi of Alaska, Inc., 844 P.2d at William T. Barker, Confidentiality Obligations of Insurance Defense Counsel, COVERAGE, vol. 21, # 2, at 1, 10 (Mar.-Apr. 2011). 31 RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS, 121, cmt. c(iii) (perm. vol. 2000) ( There is no conflict of interest unless there is a substantial risk that a material adverse effect will occur. In this context, "substantial risk" means that in the circumstances the risk is significant and plausible, even if it is not certain or even probable that it will occur. The standard requires more than a mere possibility of adverse effect. ). 7

112 Additionally, it is sometimes suggested that if there are several theories of recovery, at least one of which is not covered under the policy, the insurer might conduct the defense in such a manner as to make the likelihood of a plaintiff's verdict greater under the uninsured theory. 32 If the different theories of recovery are alternate claims for the same injury (e.g., intentional v. negligent), that would involve a conflict, because the insurer might then recommend a defense calculated to increase the likelihood that a verdict adverse to the policyholder would be based on the uncovered theory (here, intent). 33 But suppose the policy were an auto insurance policy and the complaint alleged both bodily injury and defamation in connection with an auto accident. Ordinarily, insurers would argue that there would be no plausible way to reduce the covered bodily injury liability by inflating the noncovered defamation claim. On that premise, a reservation of the right to deny coverage for the latter would not create a conflict of interest. In sum, a reservation of rights can create a conflict of interest, but the particular facts of a given case must be examined to determine whether a actual conflict exists. (b) Conflict-Creating Coverage Issues The defense may affect a coverage determination if the same facts are implicated both in fixing liability and in determining coverage (such a fact being known as a pivotal fact ). To be sure, the policyholder could not be estopped by an adverse determination if the litigation were controlled by an insurer with an adverse interest on that issue. 34 But counsel would need to develop the evidence bearing on that issue, including the knowledge of the policyholder, would need to communicate with both insurer and insured about defense of the issue and evaluation of the prospects on it, and would need to present the evidence and argue it to the factfinder. Witness testimony may be shaped to some degree by the way the witness is prepared and questioned, and the shaping of the first presentation may affect the later testimony of the witness. Findings in the underlying case may affect the coverage case, even if they do not control that case. And a joint representation might give the insurer access to information from the policyholder that would otherwise be confidential. So, if the case involves a pivotal fact, then there typically will be an irreconcilable conflict. Counsel must advocate a position and attempt to shape the evidence regarding the pivotal fact and any position will be contrary to the interests of one client or the other. By shaping the defense, counsel could thus shift liabilities found by the court between covered and non-covered status. Where the coverage issues present such an opportunity, the policyholder is entitled to independent counsel unless the policyholder gives informed consent to the conflict. For example, if the policyholder is sued on alternative theories of negligence and battery, the former will typically be covered but the latter will not. Of course, the insurer and the 32 Chi of Alaska, Inc., 844 P.2d at See, e.g., Boyles v. Kerr, 855 S.W.2d 593, (Tex. 1993) (concurring op.). Plaintiff sued for intentional invasion of privacy, intentional infliction of emotional distress, and negligent infliction of emotional distress, based on defendant s conduct in covertly videotaping her having sexual intercourse with him and then showing the tape to his friends. At the close of trial, plaintiff moved to drop the claims of intentional wrongs and defense counsel moved to dismiss the claim of negligent infliction of emotional distress on the ground that no such claim was recognized. Plaintiff s motions were granted and a verdict for plaintiff returned, but the Texas Supreme Court agreed that there was no general claim for negligent infliction of emotional distress. Had the defense motion been granted and the case gone to verdict on the claims of intentional injury, that would have been injurious to defendant s interests. The case does not indicate whether defense counsel was independent or whether the defendant gave informed consent to the defense strategy adopted. 34 See RESTATEMENT (SECOND) OF JUDGMENTS, 58(1)(b) (1982) (indemnitor not estopped by judgment against indemnitee on issues where there is conflict of interest between them). 8

113 policyholder share an interest in defeating the suit entirely and in minimizing any judgment. But if liability is found, the policyholder would prefer that it be based on (covered) negligence, while the insurer s interest would be served if it were based on (noncovered) battery. That is, in such a case, the insured s intent is a pivotal fact. Because the way in which the case is defended has a real possibility of affecting the basis on which any liability would be found, this divergence of interest creates a conflict of interest for any defense counsel seeking to advance the insurer s interest as well as that of the policyholder. 35 In addition to the alternative allegations of negligent and intentional conduct already noted, such conflict-creating issues have been found in a number of other situations. Examples include whether or not the policyholder complied with applicable safety regulations relied upon in defining coverage; 36 whether products liability results from a design defect or a manufacturing error; 37 whether liability of an attorney trustee was based upon erroneous legal judgment or bad business judgment; 38 whether the injured claimant was an employee or an independent contractor; whether or not the subject property was damaged while in the policyholder s possession, custody and control. 39 Because a plaintiff s pleadings do not bind an insurer, a reservation of rights can issue even when a complaint asserts only covered allegations. This may happen, for example, when a plaintiff sues only for negligence but the alleged misconduct by the policyholder may have been intentional. Recognizing that the plaintiff may obtain a judgment based on negligence, the insurer may want to preserve its ability to contend that the injury was really intentional in later coverage litigation, and may issue a reservation of rights letter for this reason. In crafting a negligence defense in this situation, counsel would necessarily be exposed to confidential information about the policyholder s conduct, information that might be relevant to settlement evaluation or, possibly, even to defense against the negligence allegation. Accordingly, defense counsel could not engage in the free exchange of all defense-related information which is the norm for assigned counsel. That means that independent counsel can sometimes be required even where the complaint makes no allegation of noncovered liability. 35 E.g.: San Diego Federal Credit Union v. Cumis Ins. Soc y, 162 Cal. App. 3d 358, 365 (1984) (suit for both negligent and intentional injuries); Maryland Casualty Co. v. Peppers, 64 Ill. 2d 187, (1976) (same); Brohawn v. Transamerica Insurance Co., 276 Md. 396, (1975) (same). 36 See, e.g.: Executive Aviation, Inc. v. National Ins. Underwriters, 94 Cal. Rptr. 347 (Cal. Ct. App. 1971); Prashker v. United States Guar. Co., 154 N.Y.S.2d 910, 136 N.E.2d 871 (N.Y. 1956). 37 See, e.g., United States Fid. & Guar. Co. v. Louis A. Roser Co., 585 F.2d 932 (8th Cir. 1978) (UT law). 38 Transamerica Ins. Co. v. Keown, 451 F. Supp. 397, 405 (D.N.J. 1978). 39 E.g.: Manzanita Park, Inc. v. Ins. Co. of N. Am., 857 F.2d 549, , 555 (9th Cir. 1988); Northland Ins. Co. v. Heck s Serv. Co., 620 F. Supp. 107, 108 (E.D. Ark. 1985); Prahm v. Rupp Constr. Co., 277 N.W.2d 389, 391 (Minn. 1979); Steel Erection.Co. v. Travelers Indemn. Co., 392 S.W.2d 713, 716 (Tex. Ct. Civ. App. 1965). 9

114 (c) Cross-Insureds or Inconsistent Defenses Problems can arise in situations where two of the insurer s policyholders assert covered claims against one another based on the same incident 40 or where two insured defendants have inconsistent defenses. 41 Typically, such situations require independent counsel. Another type of conflict occurs when policyholders have inconsistent defenses. A leading case is Murphy v. Urso. 42 Murphy was injured when the van in which she was riding struck several parked cars while traveling at excessive speed. The van was driven by James Clancey and owned by Marilyn Urso, owner of a pre-school and primary school. Urso maintained that Clancey had been fired as an employee of the schools and had no permission to use the van. Travelers defended Urso and refused to defend Clancey, who suffered a default judgment of $750,095. Murphy then brought this garnishment action against Travelers. The circuit court held that Clancey did not have permission to use the van (resulting in summary judgment for Urso), but that Travelers had breached its duty to defend Clancey and was estopped to deny coverage. The Illinois Supreme Court held that Travelers owed a duty to defend, but was excused from defending by the existence of a conflict of interest. There was clear coverage for Urso and the schools and the contested issue of permission to use the van left a potential for coverage of Clancey, so there was a duty to defend both insureds. But the interests of the insureds conflicted: An analysis of the possibilities reveals the dilemma in which Travelers found itself. It controlled both defenses. To best defend the preschool, it would try to show that Clancey did not have permission to use the bus at the time of the accident. To do this, it had to show either that he had been discharged or in any event was not operating within the scope of his employment, or that he had no explicit or implicit approval to use the bus. This would sever any connection between the preschool and Clancey, place all the liability on Clancey, and exonerate the school. But to best serve Clancey, Travelers had to try to show that he did have permission to use the bus. This would spread the liability to the schools. It was in Clancey's interest, then, to show that he had not been fired and that his use of the bus was within the scope of his employment, or that he had received approval for the use of the bus to help Ms. Murphy move. 43 This conflict excused Travelers duty to defend (though not its duty to fund a defense) and obviated any estoppel E.g.: Joseph v. Markovitz, 27 Ariz. App. 122, (1976); O Morrow v. Borad, 27 Cal. 2d 794 (1946); Moeller v. Am. Guar. & Liab.Ins. Co., 707 So. 2d 1062, 1072 (Miss. 1996). 41 E.g.: Metlife Capital Corp. v. Water Quality Ins. Syndicate, 100 F. Supp. 2d 90, & n. 3 (D.P.R. 2000); Murphy v. Urso, 88 Ill. 2d 444, (1981). 42 Murphy v. Urso, 88 Ill. 2d 444 (1981) Ill. 2d at 453. In fact, Clancey had no tort-law interest in inculpating the schools: if he were acting within the scope of an agency, he would still be obliged to indemnify his principal against liability for his own negligence. But, showing permission to use the van was essential to obtaining insurance coverage, so his interests were still inconsistent with the schools defense. And his coverage interests did create a defense-related conflict with Travelers Ill. 2d at See: Twin City Fire Ins. Co. v. Ben Arnold-Sunbelt Bev. Co., 433 F.3d 365, (4th Cir. 2005) (inconsistent defenses entitled one defendant to independent counsel, but defendant forfeited that right by breaching duty to cooperate); Metlife Capital Corp. v. Water Qual. Ins. Syndicate, 100 F. Supp. 2d 90, 93 10

115 Other types of conflicts also exist, but these illustrations are enough for this paper.. 3. Minority Rule: Right to Independent Counsel Whenever Coverage Disputed (Reject the Defense Rule) Some states authorize the policyholder to reject the insurer s defense whenever there is a reservation of the right to deny indemnification. 45 In jurisdictions which follow this rule, the policyholder is never obliged to accept a defense under reservation of the insurer s rights to deny indemnification for any judgment rendered. Under this view, the policyholder s rejection of a defense under reservation may require the insurer either to affirm coverage unconditionally and defend or to disclaim coverage and refuse to defend, at the risk of breaching the policy if there actually was a duty to defend. Some jurisdictions permit the insurer to avoid the latter risk by agreeing to pay for a defense conducted by counsel selected and controlled by the policyholder. But none of the jurisdictions adhering to this rule permit the insurer, over the policyholder s objection, to control the defense when there is any question of coverage for the liabilities asserted in the action to be defended. The insurer s role is limited to payment of counsel who represents and is directed by the policyholder alone. 4. New Jersey Holds that a Conflict Converts the Duty to Defend to a Duty to Reimburse New Jersey, uniquely, holds that, unless the policyholder agrees to a defense under reservation, a conflict converts the duty to defend into a duty to reimburse, after coverage is determined. 46 This essentially forces the policyholder to fund the defense until coverage is determined. That denies the policyholder the full benefit of the duty to defend. n.3 (D.P.R. 2000) ( One of the most common conflicts of interest presented in the context of liability insurance is when the insurer insures two or more insureds with adverse interests. In such cases, it is generally accepted that in order to comply with its duty to defend the insured, the insurer must either retain or authorize the insured to retain independent counsel at the expense of the insurer. (citations omitted)). Note that there would be no conflict on the permissive use issue if that issue were not contested. Allied Am. Ins. Co. v. Ayala, 616 N.E.2d 1349, 1358 (Ill. App. Ct. 1993). 45 E.g.: Boise Motor Car Co. v. St. Paul Mercury Indem. Co., 112 P.2d 1011, 1016 (Idaho 1941); Med. Prot. Co. v. Davis, 581 S.W.2d 25, 26 (Ky. Ct. App. 1979); Three Sons, Inc. v. Phoenix Ins. Co., 257 N.E.2d 774, (Mass. 1970); Moeller v. Am. Guar. & Liab. Ins. Co., 707 So. 2d 1062, 1069 (Miss. 1996); State Farm Mut. Auto. Ins. Co. v. Ballmer, 899 S.W.2d 523, 527 (Mo. 1995); Merchants Indem. Corp. v. Eggleston, 37 N.J. 114, (1962); Nat l Mort. Corp. v. Am. Title Ins. Co., 255 S.E.2d 622, (N.C. Ct. App. 1979), rev d on other grounds, 299 N.C. 369, 261 S.E.2d 844 (1980); Connolly v. Std. Cas. Co., 73 N.W.2d 119, 122 (S.D. 1955) (dictum); Kansas Bankers Sur. Co. v. Lynass, 920 F.2d 546, 548 (8th Cir. 1990) (SD law; relying on Connelly to find insurer guilty of bad faith for attempting to retain control of defense after reserving rights, even though insurer later affirmed coverage unconditionally and settled case); Empl. Cas. Co. v. Tilley, 496 S.W.2d 552, 559 (Tex. 1973) (approving quotation from secondary authority obliquely addressing issue not presented in case itself); YMCA v. Comm l Std. Ins. Co., 552 S.W.2d 497, (Tex. Civ. App. Ft. Worth 1977), writ refused no reversible error, 563 S.W.2d 246 (Tex. 1978) (following Tilley dictum); Ranger Ins. Co. v. Robertson, 707 S.W.2d 135, 143 (Tex. Ct. App. Austin 1986). See: Cont l Ins. Co. v. Bayless & Roberts, Inc., 608 P.2d 281, 288 (Alaska 1980) (as to certain kinds of reservations); FLA. STAT (1984) (requiring that insurer and insured agree upon counsel if insurer reserves rights). Cf. Tank v. State Farm Fire & Cas. Ins. Co., 105 Wn. 2d 381, 383 (1986) (finding a right to independent counsel in a case where there was a conflict of interest (allegations of assault and negligence), but stating duty as applicable to all case where insurer defends under reservation). 46 Burd v. Sussex Mut. Ins. Co., 56 N.J. 383, 390 (1970). 11

116 II. Defense Counsel Must Communicate With the Policyholder About the Representation An important duty whose ramifications are not well understood by all defense counsel is the duty to communicate with the policyholder. Yet this duty may be one of counsel s most important duties from the standpoint of the policyholder. Most policyholders are completely unfamiliar with litigation. Many are anxious about it, even if there is no reason why they should be. They look to their lawyer for reliable information about the process. Providing them with the information they want (and information they need, but don t know to want) is a critical part of the relationship. It builds trust, thereby facilitating an effective defense. Communication is also an ethical duty. Model Rule 1.4 requires that: (a) A lawyer shall keep a client reasonably informed about the status of a matter and promptly comply with reasonable requests for information. (b) A lawyer shall explain a matter to the extent reasonably necessary to permit a client to make informed decisions regarding the representation. Finally, communication is critical for defense counsel to learn of situations in which the interests of the policyholder may diverge from those of the insurer. Detection of such situations is the necessary first step in addressing them in ways that protect the interests of all concerned, possibly including provision of independent counsel. A. Relationship with the Insurer A particularly important time for communication is at the outset of the representation, when the insured does not know what to expect. One subject is defense counsel s employment relationship with the insurer. Where an insurer assigns its own employees, known as staff counsel, it is well settled that the employment relationship must be disclosed to the policyholder. 47 But this requirement may not be limited to staff counsel. Outside counsel with a regular relationship with the insurer, should disclose that fact. In addition to avoiding misunderstandings, disclosure on this point may be required by Model Rule 1.8(f). Model Rule 1.8(f) provides that [a] lawyer shall not accept compensation for representing a client from one other than the client unless (1) the client gives informed consent. Obviously, the insurer compensates defense counsel for representation of the policyholder. Of course, when requesting a defense from the insurer, the policyholder probably expected that the lawyer would be paid by the insurer. Even so, the fact of payment must be disclosed to the policyholder, and any regular relationship should be disclosed for reasons similar to those requiring disclosure of staff counsel s employment relationship. Model Rule 1.8(f) also requires that the payment of fees by one other than the client must result in no interference with the lawyer s independence of professional judgment. Model Rule 5.4(c) similarly provides that: A lawyer shall not permit a person who recommends, employs, or pays the lawyer to render legal services for another 47 E.g., ABA STANDING COMM. ON ETHICS & PROF. RESP, FORMAL OP , Propriety of Insurance Staff Counsel Representing the Insurance Company and Its Insureds; Permissible Names for an Association of Insurance Staff Counsel (JULY 9, 2003). 12

117 to direct or regulate the lawyer s professional judgment in rendering such legal services. An employment relationship gives the insurer rights whose exercise could impact staff counsel s professional judgment. Similarly, a regular relationship involving repeated retentions could give the insurer the ability to impact outside counsel s professional judgment. The policyholder should be alerted to either. B. Counsel s Acceptance of Direction Insurer-selected defense counsel typically works closely with the claim representative in handling a suit, and the claim representative may give directions on certain issues (e.g, to settle the case within limits or to limit the expense incurred for expert witnesses). (Independent counsel is not subject to direction in the same ways as an insurer s regular insurance defense, so some of this analysis does not apply to independent counsel.) In many circumstances, such directions are authorized by the insurance policy, but the policyholder may not realize what role the claim representative will play in defense decisionmaking. An advisory opinion of the ABA Standing Committee on Ethics and Professional Responsibility has pointed out the need to inform the policyholder on this subject ABA Opinion The opinion assumes that an insurer has issued a policy which authorizes it to settle claims against the policyholder in its sole discretion and without consulting the policyholder. It inquires whether counsel designated by the policyholder to defend the insured may follow the insurer s instructions to settle without first consulting the policyholder. What disclosures to the insured are required if the lawyer expects to follow such instructions? How should counsel respond if the insurer proposes to settle but the policyholder objects? 49 The opinion treats the question of settlement authority as one of defining the objectives of the representation. 50 That is, is the attorney employed simply to seek resolution of the matter at the least cost (as the insurer presumably desires) or is the attorney also to consider reputational and other interests of the policyholder which might be injured by what the policyholder might consider an improvident settlement. If only the monetary stakes are to be considered, that is a representation whose objectives are limited. Model Rule 1.2(a) requires a lawyer to follow client decisions about the objectives of the representation, including acceptance of settlements. 51 But limitations of the objectives require not 48 ABA STANDING COMMITTEE ON ETHICS AND PROFESSIONAL RESPONSIBILITY, OP (1996). 49 OP , at 1-2. The opinion construed the version of the Model Rules then in effect, which called for client consents to be given after consultation. The Model Rules have been revised to require informed consent. But the substance of the requirement is unchanged. 50 OP , at (a) A lawyer shall abide by a client s decisions concerning the objectives of representation, subject to paragraph[] (c)..., and shall consult with the client as to the means by which they are to be pursued. A lawyer shall abide by a client s decision whether to accept an offer of settlement of a matter.... * * * (c) A lawyer may limit the objectives of the representation if the client consents after consultation. MODEL R. PROF. COND

118 only client consent, but prior consultation," 52 in which the client must receive information sufficient to permit the client to appreciate the significance of the matter in question." 53 (1) Manner of Required Disclosure So, [i]f the lawyer is to proceed with the representation of the insured at the direction of the insurer, the lawyer must make appropriate disclosure sufficient to apprise the insured of the limited nature of his representation as well as the insurer s right to control the defense...." 54 Even though the insurer s rights to control the defense and settle at its discretion are set forth in the insurance policy, the opinion found that the lawyer cannot assume that the insured understands or remembers, if he ever read, the insurance policy, or that the insured understands that his lawyer will be acting on his behalf, but at the direction of the insurer without further consultation with the insured." 55 Accordingly, these points must be covered in the lawyer s consultation with the policyholder. The opinion expressed the view that this disclosure need not be unduly formal, presumably because it thought that in the vast majority of cases the insured will have no objection to proceeding in accordance with the terms of his insurance contract." 56 Specifically, it concluded that the necessary information could be communicated in a short letter. 57 In its view, [t]he insured manifests consent to the limited representation by accepting the defense offered by the insurer after being advised of the terms of the representation offered." 58 The letter contemplated by the opinion would state that the lawyer intends to proceed at the direction of the insurer in accordance with the terms of the insurance contract and what this means to the insured." 59 All that is necessary is that the insured be clearly apprised of the limitations of the representation offered by the insurer and that the lawyer intends to proceed in accordance with the directions of the insurer." 60 (2) Timing of Required Disclosure A prudent lawyer hired by an insurer to defend an insured will communicate with the insured concerning the limits of the representation at the earliest practicable time." 61 The opinion suggests that some information reasonably could be incorporated as part of any routine notice to the insured from the lawyer advising the insured that the lawyer has been retained to represent him." 62 But, if reasonably prompt, the lawyer may wait until there is some other reason for communicating with the insured in connection with the claim, such as developing relevant facts, answering a complaint, responding to interrogatories, or scheduling a deposition." 63 But, as the opinion notes, delay in providing this information and obtaining the policyholder s consent to the terms of the representation is dangerous: 52 MODEL R. PROF. COND. 1.2(c). 53 MODEL R. PROF. COND. Definitions. 54 OP , at OP , at OP , at OP , at OP , at OP , at OP , at OP , at OP , at OP , at 5. 14

119 Failure to make the appropriate disclosures near the outset of the representation may generate wholly unnecessary, but difficult, problems for the insured, the insurer, and the lawyer. Thus, if the lawyer fails to advise the insured of the limited nature of the representation and his intention to proceed in accordance with the directions of the insurer early in the representation, the lawyer may find himself trying to advise the insured of a proposed settlement at the last minute under short time constraints, when the insured will have little practical opportunity to reject the defense offered by the insurer and assume responsibility for his own defense. 64 The opinion does not point out, but might have, that these problems may be especially difficult for the lawyer. The lawyer may have duties to the insurer (e.g., to disclose information concerning the representation) which cannot be carried out without violating duties to the policyholder. Had the policyholder been properly advised earlier, then either consent could have been obtained or the policyholder s refusal to consent would have triggered a dispute between insurer and policyholder, with the representation placed on hold pending resolution of that dispute. Consequently, early disclosure to the policyholder is a critical means of keeping defense counsel from being caught in the middle of such disputes when there is no longer a way to obtain timely resolution. To avoid such risks, it is a good idea that all known essential information about the nature and scope of the representation be included in correspondence at the outset of the representation. 2. Direction on Subjects Other Than Settlement The Restatement has generalized the requirements of Opinion , conditioning counsel s acceptance of insurer direction on virtually any subject on the policyholder s acquiescence after receiving a short informative letter explaining the relationship. 65 C. Lack of Representation on Affirmative Claims Unless the insurer and the policyholder agree otherwise, the only role an insurer s regular defense counsel can properly play in the lawsuit is to defend the policyholder against the plaintiff s claims. But the policyholder may have affirmative claims. The insurer is not obliged to prosecute such claims or to pay defense counsel to do so. If the policyholder is willing to pay for such prosecution, defense counsel could do that if the insurer is agreeable. Otherwise, affirmative claims can only be prosecuted by other counsel (or by the policyholder pro se). Most jurisdictions will treat them as compulsory counterclaims and bar them if not asserted in the original action. Unless the policyholder is told that defense counsel will do nothing to present affirmative claims (absent a specific agreement to do so), the policyholder may rely on defense counsel to do so. If such a claim is then lost, either to the statute of limitations or by dismissal of the original action, the policyholder may have a malpractice action against defense counsel (and the Insurer). To protect the policyholder s rights, defense counsel must explain the need to join related claims in the original action, the existence of time limits for doing so, and the fact that defense counsel will not be representing the policyholder with respect to such claims (absent a specific agreement to 64 OP , 65 RESTATEMENT(THIRD) OF THE LAW GOVERNING LAWYERS 134, cmt. f. (perm. vol. 2000). Florida and Ohio now have rules requiring assigned defense counsel to provide insured clients with a specified Statement of Insured Client s Rights. FLA. S. CT. R (j); OHIO R. PROF. COND., Rule 1.8(f)(4).. 15

120 do so). 66 This should be explained in every case where there is any substantial possibility that the policyholder may have suffered an injury, regardless of apparent liability. Counsel should not be making the decision whether to assert a claim that even might be viable. The limitations period applicable to any affirmative claims is not a subject pertinent to the defense of the claims made against the policyholder. Accordingly, it is outside the scope of a defense representation of the policyholder (unless there has been an agreement to expand the scope of the representation), and defense counsel ought not to advise the policyholder on what the applicable period is. But it is appropriate (and sometimes necessary) to warn the policyholder that the period may be about to expire or of a date by which it might expire, so that the policyholder appreciates the need to act promptly in retaining other counsel if the policyholder desires to pursue affirmative claims. Such a warning is especially necessary if expiration of limitations may be imminent when counsel receives the suit against the policyholder. Once defense counsel has explained the limits of the defense representation, there should be no duty to explore possible affirmative claims that the policyholder might have. But, if defense counsel notices reasons to believe that the policyholder might have a claim worth asserting but has neither asserted it nor retained personal counsel, it is good practice for defense counsel to remind the policyholder of the possible utility of seeking personal counsel. Occasionally, a policyholder may be involved in criminal or quasicriminal proceedings based on the same incident as the suit (e.g. a traffic ticket). If such proceedings are pending when the representation by defense counsel begins or are brought later, defense counsel should inform the policyholder that defense counsel cannot represent the policyholder in those proceedings. (This warning is not necessary if the policyholder already has counsel for those proceedings, unless the policyholder requests defense counsel to assume that defense.) If doing so will assist in defending the action against the policyholder, defense counsel may work with other counsel or with the policyholder, appearing pro se, in connection with such collateral proceedings. D. Sharing of Information In a representation with only one client, all information concerning the representation is presumptively confidential, while a joint representation of two clients normally entails full sharing with both clients of all information received by the lawyer concerning the representation. Of course, even confidential information may be disclosed when impliedly authorized in order to carry out the representation. 67 But sharing among joint clients may extend beyond that authorization. So, if the insurer is a co-client, the insured must be informed of this deviation from the rule applicable to sole representation. 68 Even if the insurer is not a co-client, it still has insurance policy rights to information about the representation, including information necessary to make settlement decisions and to manage the representation or consult with regard to it. Unless providing such information may be injurious to the policyholder or the policyholder has forbidden its disclosure, doing so is impliedly authorized to carry out the representation. 69 Nonetheless, because the policyholder may expect absolute confidentiality, the expectation of information sharing should be disclosed. Disclosure regarding information sharing may be even more important when considering joint representation of two policyholders. For example, where the defendants are employer and 66 See Prevratil v. Mohr, 678 A.2d 243 (N.J. 1996). 67 Model Rule 1.6(a). 68 RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS 122, cmt. c(i) (perm. vol. 2000). 69 William T. Barker, Confidentiality Obligations of Insurance Defense Counsel, COVERAGE, vol. 21, # 2, at 1, 9 (Mar.-Apr. 2011). 16

121 employee, the insurance may protect both from liability. But the employer might use information derived from the lawsuit as a basis for discipline of the employee. The employee must be advised of this possibility, so the employee can decide whether to proceed with a joint representation and what the employee will tell counsel. E. Existence and Implications of Excess or Noncovered Exposure But any allegation of liability in excess of policy limits or outside of policy coverage, even if factually insubstantial, must be discussed with the policyholder, so the policyholder can decide whether to retain personal counsel, watch the case more closely, or take some other action with respect to that exposure. Indeed, the policyholder is likely to inquire in many cases as to the meaning and implications of any reservation of rights letter or excess letter received from the claim representative. In such discussions, it is appropriate to explain that the insurer is obliged (and that defense counsel personally is committed) to provide a full defense appropriate to the liabilities asserted, regardless of whether those liabilities are covered. It is also appropriate, where true, to note the apparent lack of factual basis for the allegations of excess or noncovered liability or the limited prospects for such liability to be proven. But it must also be noted that new evidence can always turn up to bolster what first seem unsupported allegations. Assigned defense counsel must take care not to understate the risks facing the policyholder. The policyholder must be told that personal counsel can be useful in advising the policyholder on settlement issues or even in bringing further insights to the defense. Assigned defense counsel should not advise a policyholder against retaining personal counsel, and should emphasize that this is a decision the policyholder must make, in light of the policyholder s own weighing of the costs and benefits. Even if the policyholder initially decides not to retain personal counsel, the policyholder must be informed of any new indications that the risks of excess or noncovered exposure are greater than they seemed before. This allows the policyholder to reconsider any actions to respond to those risks. In making the decision whether to retain personal counsel at the outset, the policyholder should be assured that any new information will be called to the policyholder s attention. III. Dealing With Insurer Litigation Guidelines In selecting defense counsel, the insurer may seek to impose requirements regarding the conduct of the defense or require prior approval before counsel may undertake certain defense actions. Litigation management guidelines generally include a statement of the insurer s goals; a breakdown of the respective duties of the claims professional and the attorney; and standard procedures for handling lawsuits, including required periodic consultations with the claims manager to permit the insurer to direct the case. Such guidelines also may include a delineation of tasks which requires the insurer s prior approval, including selection and retention of investigators and experts; filing of motions; discovery; performance of computer research; in-firm conferences; travel; and multi-lawyer attendance at hearings, depositions, and trial. Additionally, the insurer may impose staffing guidelines and limitations, including guidelines that require significant work to be done by the lawyer to whom the insurer assigns the case, rather than by associates or paralegals with whom the lawyer works. Insurers normally have fee arrangements with their regular defense counsel calling for conformance with guideline requirements. They may also seek such agreements with independent counsel. Often such guidelines will attempt to regulate the conduct of defense counsel by emphasizing what the insurance company will not pay for. For instance, the guidelines may provide that the insurance company will not pay for: (i) more than one attorney to attend a court conference or 17

122 deposition; (ii) any internal conferences between defense counsel; or (iii) any research unless prior approval is obtained from the insurance company. As a result of such restrictions, defense counsel must conduct the litigation under the watchful eye of the insurer, taking care to mount the best possible defense while simultaneously keeping costs down and the insurer happy. Similar requirements are sometimes imposed by self-insured clients managing their own defense. Insurers frequently justify these guidelines by arguing that they help insurers make certain that defense counsel are providing the policyholder with a competent and economical defense. Indeed, managed litigation guidelines can establish deadlines by which depositions are taken, fact investigation and paper discovery are initiated, as well as how decisions are made regarding the filing of dispositive motions. Nonetheless, insurer-imposed defense guidelines could hamper defense counsel s ability to effectively represent the policyholder and could pose ethical issues for defense counsel. And policyholders may have very real concerns regarding the defense that the insurer is providing and whether the insurer is fulfilling its duty to defend. A. Guidelines and Insurer-Assigned Counsel Both the Restatement and the ABA have examined the ethical obligations of insurer-assigned defense counsel in dealing with insurer guidelines and direction (both concluding that it makes little difference whether the insurer is considered a co-client). Some issues require little analysis. If requested by the insurer (as it usually will be), counsel may and should consult with the claim representative about any investigation that appears necessary or desirable. Consultation may cover investigation already done or in progress, the timing of further investigation, whether the investigation should be conducted by the insurer or outside investigators, and any expense to be incurred. This topic preferably should be addressed as soon as practicable after assignment of the case. Similarly, counsel may and should consult with the claim representative about strategy and tactics, including pleadings, discovery, and motion practice. Consultation may cover timing of various actions (e.g. possible deferral of depositions pending efforts to settle) and the expense to be incurred (e.g. for travel or expert witnesses). After advising the claim representative on counsel s recommendations and the pros and cons of various courses, (under the Restatement and ABA view) counsel may defer to the claim representative s preferences, so long as doing so does not appear to involve any substantial risk to any interest of the policyholder. The Restatement considers this sort of situation as follows: Insurer, a liability insurance company, has issued a policy to Policyholder under which Insurer is to provide a defense and otherwise insure Policyholder against claims covered under the insurance policy. A suit filed against Policyholder alleges that Policyholder is liable for a covered act and for an amount within the policy s monetary limits. Pursuant to the policy s terms, Insurer designates Lawyer to defend Policyholder. Lawyer believes doubling the number of depositions taken, at a cost of $5000, would somewhat increase Policyholder s chances of prevailing and Lawyer so informs Insurer and Policyholder. If the insurance contract confers authority on Insurer to make such decisions about the expense of defense, and Lawyer reasonably believes that the additional depositions can be foregone without violating the duty of competent representation owed by Lawyer 18

123 to Policyholder, Lawyer may comply with Insurer s direction that taking the depositions would not be worth the cost. 70 If the course preferred by the claim representative creates no substantial risk to any interest of the policyholder, following that course cannot violate the duty of competent representation owed to the policyholder. If counsel concludes that such a risk would result, counsel should so advise the claim representative, and elaborate the reasons for counsel s recommendation and the reasons why the claim representative s preference would create a substantial risk for the policyholder. If the claim representative adheres to the preference that appears to pose such a threat, the policyholder must be promptly advised of that risk and consulted about its effect. The insurer is not obliged to approve all recommendations of defense counsel, even where disapproval may entail some risk to the policyholder. Insurance law and insurance contract interpretation determine the extent to which the insurer is obliged to protect the policyholder s interests (by settling or commiting extra funds in support of the defense, e.g., by hiring experts). Authority to commit the insurer s funds does not rest with counsel. If claims personnel decide that the protection of the policyholder recommended by defense counsel is not due, then the policyholder must be notified and allowed to make informed decisions about the representation. An insurer-assigned lawyer s duties in dealing with insurer guidelines requiring the insurer s approval for various litigation activities were in American Bar Association ethics opinion That opinion assumes that the insurer has directed the lawyer to proceed in a particular way, rather than merely declining to pay for services the lawyer has recommended. First, in an elaboration of Opinion , the ABA Opinion concluded that the insurer and policyholder must be advised about how the representation will be conducted. Counsel must tell the insurer that counsel may not be able to follow insurer directions if they would harm the interests of the policyholder. Counsel must also tell the policyholder about the insurer s normal practices in directing representations: If the lawyer is hired to defend an insured pursuant to an insurance policy that authorizes the insurer to control the defense and, in its sole discretion, to settle within policy limits, the lawyer must communicate these limitations on his representation of the insured to the insured, preferably early in the representation. The lawyer should "make appropriate disclosures sufficient to apprise the insured of the limited nature of his representation as well as the insurer's right to control the defense in accordance with the terms of the insurance contract... No formal acceptance or written consent is necessary. The insured manifests consent to the limited representation by accepting the defense offered by the insurer after being advised of the terms of the representation being offered. 72 The Tennessee Bar offered similar advice on the initial consultation with the policyholder: It is not proper to call upon the insured to make a decision about the directives in question (to always appeal adverse general sessions verdicts, to never agree to mediation and to never waive 70 RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS 134 cmt. f, Illus. 5 (perm. vol. 2000). 71 AMERICAN BAR ASS N STANDING COMMITTEE ON ETHICS & PROFESSIONAL RESPONSIBILITY, FORMAL OPINION (Ethical Obligations of a Lawyer Working Under Insurance Company Guidelines and Other Restrictions). 72 ABA , at 3. 19

124 the right to a jury) at the outset of the representation, at a time when it is unclear that any of these situations are likely to occur and at a time when the insured cannot readily assess what interests she might have that could be affected by those decisions. Rather, the insured should be informed at the outset that the insurer ordinarily issues such directions. Counsel may further explain that, in light of the insurance policy and the insured s tender of defense, counsel assumes that such directions should be followed unless counsel identifies some reasonable probability that following the directive might differ from an interest of the insured (such as by exposing her to or increasing her exposure to liability in excess of limits). But if counsel identifies a reasonable possibility of an interest being advanced that differs from that of the insured, counsel will consult with the insured about the decision at the time it is to be made and in light of all the circumstances then prevailing. 73 On this view, counsel may then proceed so long as there appears to be no threat to the policyholder s interests from any direction the insurer gives. This ordinarily means that ethical problems cannot arise unless there is some question as to coverage or the suit presents a genuine possibility of liability in excess of policy limits. 74 If counsel believes that some insurer decision poses a substantial risk to the policyholder, counsel should point that out to the insurer and request reconsideration. 75 If the insurer will not reconsider, then counsel must inform the policyholder, fully describe the risks and benefits, and inquire whether the policyholder will consent to having counsel proceed on the basis the insurer requests. The Tenneesee Bar describes such a consultation as follows: Counsel should describe the decision and its risks and benefits from the standpoint of the insured. Of course, these will include whatever risks to the insured that counsel believes might result from the compliance. But objection to the insurer s directive would also have risks and therefore, where appropriate, counsel should point out that the insurer might take the position that any unjustified refusal to permit counsel to follow its direction would breach the insurance contract. If the insurer were correct in so contending an objection would endanger the insured s coverage. On the other hand, if the insured permits counsel to follow the insurer s directive, the insured could also reserve the right to hold the insurer responsible for any resulting damage to the insured. (The insurer would be liable if the directive were found to breach its duties under the insurance policy.) The insured should be advised of the utility of obtaining independent counsel, 73 TENN. BD. OF PROF. RESP., FORMAL ETHICS OP F-145, 2000 WL , at *3. 74 In some special circumstances, as with a doctor sued for malpractice, the insured may have reputational or other collateral interests beyond avoiding any personal payment. Where such interests are implicated, the lawyer would treat them in the same way as the more common financial interests, by implementing the procedures described here. 75 The procedures approved in ABA Opinion for handling particular conflicts in insurance defense representations appear to have been first recommended in Ellen S. Pryor & Charles Silver, Defense Lawyers Professional Responsibilities: Part I Excess Exposure Cases, 78 TEX. L. REV. 599, 644 (2000). But, under the view taken by the ABA, those procedures are logically implied by the conflicts rules applicable to all representations involving duties to multiple persons. 20

125 at the insured s own expense, in considering whether to acquiesce in the insurer s directive (perhaps under protest). If the insured acquiesces, after being properly advised, counsel may comply with the insurer s directive. 76 If the policyholder refuses to consent, then counsel cannot proceed in the way the insurer requests. If the insurer will not rescind the disputed decision, counsel must then withdraw. 77 The ABA Opinion reached a similar conclusion: If the lawyer reasonably believes her representation of the insured will be impaired materially by the insurer s guidelines or if the insured objects to the defense provided by a lawyer working under insurance company guidelines, the lawyer must consult with both the insured and the insurer concerning the means by which the objectives of the representation are being pursued. "If the lawyer is to proceed with the representation of the insured at the direction of the insurer, the lawyer must make appropriate disclosure sufficient to apprise the insured of the limited nature of his representation as well as the insurer's right to control the defense in accordance with the terms of the insurance contract."[ 78 ] If the insurer does not withdraw or modify the limitation on the lawyer s representation and the insured refuses to consent to the limited representation, the resulting conflict implicates Rule 1.7(b) and unless the lawyer is willing to represent the insured without compensation from the insurer, requires the lawyer to terminate the representation of both clients.[ 79 ] Insurers would argue that the procedure described by these opinions fully protects policyholders in what they say would be the infrequent cases where insurer guidelines or direction might create problems, while allowing such guidelines and direction to operate in the multitude of cases where they do not cause problems. 80 That procedure was subsequently approved by the Pennsylvania Bar Association. 81 It is also approved by an opinion of Professor Geoffrey C. Hazard, Jr., the Reporter for the Model Rules and a leading academic authority on professional responsibility TENN. BD. OF PROF. RESP., FORMAL ETHICS OP F-145, 2000 WL , at *3. 77 A request to withdraw will necessarily involve the court, which may resolve any dispute between insurer and insured. [The footnotes to this quotation are original, but renumbered to fit this paper.] 78 Id. See also Rule 1.8(f)(2); Board of Professional Responsibility of the Supreme Court of Tennessee Ethics Op F-145, 2000 WL (Sept. 8, 1999). 79 ABA Op , at The ABA had previously reached similar conclusions regarding defense counsel s acceptance of insurer instructions regarding settlement. AMERICAN BAR ASS N STANDING COMMITTEE ON ETHICS & PROFESSIONAL RESPONSIBILITY, FORMAL OPINION (1996), at 2 (defense counsel may accept insurer instructions regarding settlement so long as insured acquiesces in insurer direction). 81 PENNSYLVANIA BAR ASS N COMM. ON LEGAL ETHICS AND PROF. RESP., FORMAL OP Opinion of Geoffrey C. Hazard, Jr.,, at 4-5 &13-23, In re Rules of Prof. Cond., 2 P.3d 806, 2000 MT 110 (Mont. 2000). Prof. Hazard did not analyze the full set of preliminary steps that attempt to resolve the conflict, as described in ABA Opinion He simply approved the adequacy of the means available to the lawyer to comply with ethical duties if the conflict could not be resolved: either perform the services and seek payment later or, to avoid the risk of nonpayment, withdraw. Dean Syverud concurs. Kent D. Syverud, The Ethics of Insurer Litigation Management Guidelines and Legal Audits, 21 INS. LITIG. RPTR. 180, 188 (1999) 21

126 Policyholders argue that a defense attorney cannot be bound to an insurance company s imposition of guidelines that interfere with the attorney s effective representation of the client. Indeed, in New Jersey the duty of an attorney hired by the insurance company runs to the policyholder and the fact that the attorney is to be paid by the carrier does not dilute that duty. 83 Furthermore, Ohio has held that it is improper under [Disciplinary Rule] 5-107(B) for an insurance defense attorney to abide by an insurance company s litigation management guidelines in the representation of an insured when the guidelines interfere with the professional judgment of the attorney. 84 Similarly, New York holds that while an insurance contract between the insurance company and the insured often gives the insurer a limited right to participate in the insured s defense [, t]he consent of the insured to such participation does not entitle the carrier to impose conditions that would lead to inadequate representation or constrain the lawyer s independent professional judgment on behalf of the client. 85 As a result of such rules, insurer-imposed billing guidelines have been criticized and even rejected by many states. Policyholders also argue that courts have heavily weighed in on the issues posed by insurer-imposed defense guidelines. In light of such opinions, it is clear that insurance counsel is required to represent the insured s interest as if the insured hired counsel directly. 86 For example, in DHA v. Northland Insurance Co., in response to a claim, the insurer issued a reservation of rights letter, which created a potential conflict of interest. 87 The court held that when the facts to be adjudicated in the liability lawsuit are the same facts upon which coverage depends, the conflict of interest will prevent the insurer from conducting the defense. 88 Courts have also held that insurer-imposed restrictions in litigation costs may violate an insurer s duty to defend and an attorney s ethical responsibilities to exercise independent professional judgment. 89 Indeed, an attorney s loyalty to his or her client cannot be compromised by allegiance to others or by the attorney s personal interests. 90 Insurers do not disagree with the policyholder s right to an adequate defense or to defense counsel s undivided loyalty. Rather, they argue that, where there is no ethical conflict in undertaking the representation, insurer-assigned counsel can comply with all ethical duties by following the procedure outlined in Opinion Those objecting to insurer direction usually rely on the lawyer s duty to exercise independent judgment on behalf of each client, and in particular on behalf of the policyholder. This ignores the protections provided by the conflict rules, as just described. If the lawyer consults with the policyholder about a decision that presents risks to him or her, the claim representative s directions cannot control counsel s actions unless the policyholder gives informed consent. If the policyholder does give informed consent, N.J. ADV. COMM. PROF. ETH., OP. 502 at *1 (Sept. 23, 1982). 84 SUPREME COURT OF OHIO BD. OF COMM RS ON GRIEVANCES & DISCIPLINE, OP (June 1, 2003). 85 N.Y.S.B.A. ETHICS OP. 721 (1999). 86 Montanez v. Irizarry-Rodriguez, 641 A.2d 1079, 1084 (N.J. Super. Ct. App. Div. 1994). 87 DHA v. Northland Ins. Co., 333 F. Supp. 2d 595 (N.D. Tex. 2004) F. Supp. 2d at 601. That conclusion accords with the analysis of the right to independent counsel set forth in text at notes 17-48, supra. Insurers would argue that it has little bearing on the ethical obligations of insurer-assigned counsel in cases where there is no such conflict. 89 See, e.g., In re Rules of Prof. Conduct, 2 P.3d 806 (Mont. 2000); Dynamic Concepts Inc. v. Truck Ins. Exch., 61 Cal.App.4 th 999 (Cal. Ct. App. 1998). 90 Smoot v. Lund, 369 P.2d 933, 936 (Utah 1962); see also Continental Cas. Co. v. Pullman, Comley, Bradley & Reeves, 929 F.2d 103, 108 (2d Cir. 1991) (holding that attorney owes duties and allegiances to the policyholder, not to the insurer); Lieberman v. Employers Ins. of Wasau, 419 A.2d 417, 424 (N.J. 1980) (holding defense counsel retained to represent the policyholder owed his sole duty to the policyholder). 91 An insured giving such consent may, of course, reserve the right to hold the insurer responsible if the insurer directive leads to a bad result for the insured. This option is one the insured would consider in deciding whether to consent. 22

127 defense counsel can treat the direction as coming from the policyholder. If the policyholder objects, then either the insurer s acquiescence in the policyholder s wishes or counsel s withdrawal will likewise prevent the insurer from controlling the policyholder s representation. The authorities that policyholders rely upon to argue that defense counsel cannot accept insurer guidelines never addressed the adequacy of such a procedure to satisfy ethical requirements. B. Guidelines and Independent Counsel 1. Even with Independent Counsel, Insurers Argue That They Are Entitled To Advance Consultation About Defense Expenditures and Activities Once counsel has been selected, [t]he Cumis rule requires complete independence of counsel. 92 Cumis counsel represents solely the insured. 93 The insurance contract does not govern the relationship between the insurer and defense counsel. But counsel (especially counsel representing and answerable solely to the policyholder) could injure the policyholder s coverage by failing to act in accordance with the policyholder s duties under the policy (e.g., by failing to communicate information the insurer is entitled to receive). At least so long as consulting with the insurer does not entail any substantial risk of harm to the policyholder, counsel s duties to the policyholder require counsel to engage in such consultation (if requested by the insurer) to avoid any risk of injuring the policyholder s coverage interests. Moreover, disclosure to the insurer of information relating to the representation is impliedly authorized to the extent necessary to avoid the risk of breaching the insurance policy, so long as disclosure does not endanger any policyholder interests and so long as the policyholder has not directed that such information be kept confidential. California Civil Code 2860 codifies some of these obligations and imposes them directly on defense counsel: (d) When independent counsel has been selected by the insured, it shall be the duty of that counsel and the insured to disclose to the insurer all information concerning the action except privileged materials relevant to coverage disputes, and to timely inform and consult with the insurer on all matters relating to the action. Insurers argue that these duties to disclose relevant information and to consult with the insurer are especially well founded in the insurance contract. While a conflict of interest denies the insurer the right to direct counsel, 94 to receive information prejudicial to the policyholder on the subject of the conflict, and to impede actions beneficial to the policyholder on that issue, it does not eliminate the insurer s interest in the defense. The insurer still desires the most effective and efficient defense, as the insurer is still obliged to pay defense costs and may be required to pay any judgment or settlement. The policyholder is still bound by the contractual duty of cooperation except insofar as that duty is excused by the conflict. Moreover, the insurer retains 92 State Farm Fire & Cas. Co. v. Superior Ct., 265 Cal. Rptr. 372, 374 (Cal. Ct. App.1989); Moiser v. Southern Cal. Physicians Ins. Exch., 74 Cal. Rptr. 2d 550, 564 (Cal. Ct. App.1998) Cal. Rptr. 2d at 564; Employers Ins. Co. v. Albert D. Seeno Constr. Co., 692 F. Supp. 1150, (N.D. Cal. 1988); Assurance Co. of America v. Haven, 38 Cal. Rptr. 2d 25, 31 (Cal. Ct. App.1995). 94 See Hartford Cas. Ins. Co. v. A & M Assocs., Ltd., 200 F. Supp. 2d 84, 90 (D.R.I. 2002) (explaining that the insurer cannot control the litigation); Jacob v. W. Bend Mut. Ins. Co., 553 N.W.2d 800, 805 (Wis. Ct. App. 1996) (explaining that unless the insurer is willing to accept coverage, it has no authority to affect independent counsel s defense of the insured). 23

128 the right to settle at its own expense and the right to deny payment of any settlement not approved by it. Exercise of these rights requires full and timely information, so the insurer can consider settlement opportunities and actions that may be necessary to fulfill any duty to the policyholder to accept reasonable settlement demands. Moreover, insurers claim, the insurer should at least be entitled to make suggestions on defense options and decisions and to have the information necessary to do so. While the policyholder and defense counsel are not bound by any such suggestions, they cannot be harmed and may be helped by receiving them. As Dean Syverud observed with respect to common defense counsel guidelines, [t]he advance consultation by defense counsel contemplated by the guidelines is as minimal a form of cooperation as one can imagine." 95 Consultation is valuable, in and of itself, in achieving an economical defense. Lawyers make money by delivering services. Their incentive is, therefore, to maximize service levels, which is antithetical to minimizing costs. Even a lawyer who aims to provide only worthwhile defense efforts can subconsciously resolve doubts in favor of doing more, and so earning more." 96 In insurers view, consultation, even without required approval, tends to restrain inefficient efforts: The lawyer s evaluation is sharpened by responding to the adjuster s comments and questions. Consultation also allows the claims staff to consider with counsel whether the effort proposed could safely be postponed, particularly when there is still a possibility of settlement. 97 In short, consultation is valuable to the insurer and cannot be prejudicial to the policyholder (so long as any confidential information bearing on coverage is withheld from the insurer, as all agree it must be). Moreover, [t]o the extent that such consultation avoids unnecessary discovery or motion practice, it also benefits the judicial system." 98 Even in the case which most severely restricts insurer use of prior approval requirements, it was conceded that requirements of advance consultation are permissible. At oral argument, Justice Gray had the following exchange with one of Petitioners counsel, Robert James: Mr. James: Rule 1.8 is fairly straight forward. A lawyer shall not accept compensation for representing a client from one other than the client unless there is no interference with the lawyers independence of professional judgment. Rule 5.4 is very similar. It essentially says the same thing. A lawyer shall not permit a person who recommends, employs or pays the lawyer to render legal services for another to direct or regulate the lawyer s professional judgment. When the billing rules say that we need pre-approval to hire experts to conduct research to file a motion, to file pleadings, to engage in trial preparation or to decide how to staff a case we simply can t agree to do so. Why? Our position is that the plain and ordinary meaning of these ethical rules prohibit us from allowing an insurance 95 Kent D. Syverud, The Ethics of Insurer Litigation Management Guidelines and Legal Audits, 21 INS. LITIG. RPTR. 180, 188 (1999). 96 Opinion of Geoffrey C. Hazard, Jr., In re Rules of Prof. Cond., 2 P.3d 806 (Mont. 2000) ( Hazard Op. ), Hazard Op. 15; see Hazard Op. at (expanding on the point) 98 Hazard Op. at 4. 24

129 company from directing and regulating our judgment to do so. It s just that simple. Justice Gray: Counsel, if the billing rules said consult instead of approve, would they still violate the rules? Mr. James: No, I think that we consult with the insurance company all the time with insurance adjusters and tell them here s what we think should be done so I think that one of the things that the insurance companies can expect defense counsel to do is to consult with them and find out what our thinking is, why we are thinking and in many cases an adjuster may say let me question you about that. Maybe this isn t a good thing at this particular time and maybe you will agree or maybe you will disagree. 99 Advance consultation on substantial expenses may also lead the insurer to settle to avoid that cost or to withdraw its reservation of rights to regain control of the defense. Either of these results would be beneficial to the policyholder. Were the insurer unaware that independent counsel was representing only the insured, the provision of legal advice to the carrier could result in creation of an attorney-client relationship not intended by the lawyer 100 (and creating the very conflicts that the counsel s independence was intended to avoid). But that could occur only if the insurer had a reasonable belief that the lawyer was acting on its behalf, and the process by which independent counsel was retained ordinarily should negate any such expectation. 101 Any communication or consultation between independent counsel and the insurer is purely informational. 102 If there is any doubt about the lawyer s relationship with the insurer, the lawyer should clarify that the insurer is not a client. And, in some jurisdictions, the fact that the lawyer is independent counsel will automatically preclude existence of any attorney-client relationship with the insurer, without regard to the insurer s belief Even with Independent Counsel, Insurers Argue That They Are Entitled To Challenge Defense Expenditures and Activities That They Regard as Inappropriate and To Withhold Payment for Costs and Services They Have Not Approved Even where there is a conflict of interest, an insurance policy is not a blank check, requiring payment for whatever work defense counsel chooses to do. An insurer is entitled not to pay for 99 Transcribed from tape of argument, In re Rules of Prof. Cond., 2 P.3d 806 (Mont. 2000). 100 RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS, 14 (perm. vol. 2000). 101 See Mosier v. S. Cal. Physicians Ins. Exch., 63 Cal. App. 4 th 1022, (1998) (quoting First Pac. Networks, Inc. v. Atl. Mut. Ins. Co., 163 F.R.D. 574, 579 (N.D. Cal. 1995)) Cal. App. 4 th at 1043 (quoting First Pac. Networks, Inc. v. Atl. Mut. Ins. Co., 163 F.R.D. 574, 579 (N.D. Cal. 1995)); seebell Lavalin, Inc. v. Simcoe & Erie Gen. Ins. Co., 61 F.3d 742, 748 (9th Cir. 1995) (status reports and confidential information about defense provided by independent counsel do not create any duty of loyalty to insurer). 103 Swiss Reins. Am. Corp. v. Roetzel & Andress, 163 Ohio App. 3d 336, (2005) (concluding that conflict of interest precluded existence of attorney-client relationship between insurer and lawyer that it hired to defend insured). 25

130 services that are overpriced or inappropriate to the case. 104 The provider of services is not the sole judge of their necessity. 105 Insurers must also be able to review all legal bills, including those submitted by independent counsel, to protect against fraud. For example, they must be able to determine that all services billed were actually performed, that lawyers are not turning expense items into profit centers by tacking surcharges onto them, etc. So, sooner or later, a representative of the insurer must decide whether particular services are appropriate and should be paid for. Insurers argue that a preapproval requirement simply requires that question to be addressed before the services are rendered instead of afterwards. Consequently, the insurer is entitled to challenge defense activities and expenditures it thinks excessive or inappropriate, and do so before they are executed, to the point of warning that it will not voluntarily pay for them. Accordingly, even where the policyholder is represented by independent counsel, insurers argue that they are still entitled to apply billing Guidelines for purposes of obtaining the most effective, professional and efficient defense possible for their insureds. 106 Of course, the insurer s refusal to pay does not end the matter. The policyholder can direct counsel to execute the disputed recommendations for expenses or activities, and counsel will be obliged to do so. Either before or after that is done, the policyholder or counsel can seek to collect from the insurer for those expenses or services. If a court or arbitrator finds the expenses or services appropriate, the insurer will have to pay. Otherwise, the policyholder will have to pay, unless the inappropriateness of the expenses or services prevents counsel from collecting from anyone. In short, neither party may sit as judge in its own case. If disputes cannot be compromised, they must be submitted to an outside adjudicator. Both sides must take account of the likely rulings of such an adjudicator on the facts presented, and disputes are unlikely to be pressed unless the parties have very different predictions about such a ruling. Outright refusal to pay has significant risks for the insurer. If held to be incorrect, it is likely to be deemed a breach of the duty to defend, freeing the policyholder from policy restrictions on refusal to settle. 107 To avoid these risks, an insurer may wish to advance the disputed funds, while reserving the right to seek to recoup them. 108 But the ability to recoup may be problematic where the policyholder is impecunious, and counsel may have defenses to recoupment not available to the policyholder. If recoupment is to be sought, the insurer should either (1) obtain an agreement that the advances will be returned if the insurer prevails in later litigation or (2) seek prompt adjudication of the propriety of the expenses or services in question. Failure to do one or the other may prevent recoupment even if the expenses or services might be found beyond the insurer s obligations to pay. 104 See, e.g., Center Found. v. Chicago Ins. Co., 227 Cal. App. 3d 547 (1991) (challenge to fees of Cumis counsel upheld in case where conflict of interest divests insurer of right to control defense); Caiafa Prof. Law Corp. v. State Farm Fire & Cas. Co., 15 Cal. App. 4th 800 (1993) (same). 105 Sarchett v. Blue Shield, 233 Cal. Rptr. 76, 80-82, 729 P.2d 267, (Cal. 1987) (medical insurance, requiring payment for all necessary services) (collecting cases from other jurisdictions). 106 Kent D. Syverud, The Ethics of Insurer Litigation Management Guidelines and Legal Audits, 21 INS. LITIG. RPTR. at 187; accord Hazard Op., See JEFFREY E. THOMAS & FRANCIS J. MOOTZ, III, THE NEW APPLEMAN ON INSURANCE LAW, LIBRARY EDITION, 17.02, 20.04[2][b]. 108 Buss v. Superior Court, 65 Cal. Rptr. 2d 366, 939 P.2d 766 (Cal. 1997); WILLIAM T. BARKER & RONALD D. KENT, NEW APPLEMAN INSURANCE BAD FAITH LITIGATION, SECOND EDITION,

131 Apart from the possibility of freeing the policyholder to settle, an unreasonable refusal to pay could be the basis of a bad faith claim, as defense costs are a form of first-party benefit Insurers Argue That the Montana Supreme Court s Rejection of Prior Approval Requirements Is Unlikely To Be Applied in an Independent Counsel Context The Montana Supreme Court has held that any requirement of prior approval impermissibly interferes with a lawyer s obligation to exercise independent judgment on behalf of the policyholder. 110 The decision was rendered with respect to insurer-assigned defense counsel, and insurers argue that the concern that motivated it does not justify an extension of the holding to representations in which independent counsel represent policyholders. This is so because independent counsel recommend options to policyholders and follow policyholders instructions. They do not follow insurers instructions and, therefore, are not subject to insurers prior approval. They may learn that an insurer will not willingly pay for a defense-related service they believe should be employed, but they are nonetheless entirely free to recommend the service to the policyholder, to perform it at the policyholder s request, to bill for it, and to help the policyholder sue for reimbursement. As insurers view the matter, independent counsel thus stands in the same position as any other lawyer whose client has arguable contractual rights against another party which the latter disputes. The propriety of this conclusion is arguably supported by the similarity of the procedure to that approved by the ABA Standing Committee on Ethics for cases in which counsel is not independent. ABA Opinion assumes that the insurer has directed the lawyer to proceed in a particular way, rather than merely declining to pay for services the lawyer has recommended. Because actual direction of the lawyer creates no insurmountable problem, insurers argue that a mere threat to withhold payment can hardly do so. With insurer-assigned counsel, disagreement between insurer and policyholder about proposed defense activities can make it necessary for counsel to withdraw. 111 In an independent counsel situation, there will be no possible need for withdrawal and no need to get the insurer s consent for proposed activities or expenses. The lawyer and the policyholder need only discuss whether to assume the risk of nonpayment and the burden of litigating for payment. If the policyholder is willing to advance the necessary funds or if the lawyer is willing to extend credit (possibly on a nonrecourse basis), they may proceed and pursue the insurer later. In the meantime, the insurer remains obligated to continue funding agreed expenses and activities. While the Montana Supreme Court presumably would reject the ABA analysis, insurers would argue that its opinion is both distinguishable when the problem is presented in an independent counsel context and should be rejected by other courts even where it is not distinguishable E.g., Tibbs v. Great Am. Ins. Co., 755 F.2d 1370 (9th Cir. 1985); Continental Cas. Co. v. Royal Ins. Co., 268 Cal. Rptr. 193 (Cal. Ct. App. 1990); Smith v. Am. Family Mut. Ins. Co., 294 N.W.2d 751 (N.D. 1980). WILLIAM T. BARKER & RONALD D. KENT, NEW APPLEMAN INSURANCE BAD FAITH LITIGATION, SECOND EDITION, 3.08[3]. 110 In re Rules of Prof. Cond., 2 P.3d 806, (Mont. 2000). 111 See text at notes 81-83, supra. 112 On the latter point, see William T. Barker, Insurer Litigation Guidelines: What Now? (Part II), 23 INS. LITIG. RPTR. 529 (2001). 27

132 4. Even with Independent Counsel, Insurers Argue That They Are Entitled To Pay No More Than Market Rates for the Type and Quality of Service Reasonably Necessary to the Defense of the Case In a few states, statutes limit the fees insurers must pay independent counsel. Thus, in California, [t]he insurer s obligation to pay fees to the independent counsel selected by the insured is limited to the rates which are actually paid by the insurer to attorneys retained by it in the ordinary course of business in the defense of similar actions in the community where the claim arose or is being defended. 113 Absent such a statute, lawyers are still limited to charging fees permissible under the applicable Rules of Professional Conduct. Most such rules are based on ABA Model Rule 1.5. Insurers, of course, argue that a reasonable fee for defense services is established by the rates charged by lawyers from whom the insurers regularly purchase similar services. In their view, the cost of defending the insured ought not to be increased by the fortuitous existence of circumstances entitling the insured to independent counsel. But lawyers not regularly retained by the insurer obliged to pay for independent counsel will resist accepting payment at the rates that insurer normally pays for similar services. Insurers are able to provide their regular counsel with a volume of work warranting a significant discount in the rates charged for that work. Independent counsel do not receive a similar volume of work. If they have adequate business at rates not affected by such a discount, they have no incentive to accept the discounted rates charged by firms the insurer regularly retains. If the insurer were obliged to pay no more than its customary discounted rates, a policyholder seeking independent counsel might find it necessary to supplement the insurer s payments to obtain comparable counsel or accept the services of less able (and therefore less expensive) counsel than would normally be retained for the particular case. Accordingly, policyholders would argue that the insurer s customary discounted rates are not adequate or reasonable for independent counsel. The policy promises the policyholder an adequate and appropriate defense to any suit seeking any relief that, if established, would be covered. 114 This is promised at no cost to the policyholder. To fulfill this promise, policyholders argue that the insurer must be obliged to pay independent counsel fees equal to the prevailing market rates in the relevant community for the type and quality of services reasonably necessary to defense of the particular lawsuit. 115 The market rate will typically reflect the factors enumerated in Model Rule 1.5. The market rate may or may not be the customary rate charged by the lawyer(s) the insured has chosen to retain, depending on whether they are appropriate to the case. If a policyholder chooses to use more capable attorneys than the case requires, insurers argue that the policyholder may have to pay the extra cost beyond what would be required for less capable, but adequate attorneys. And disputes regarding the required level of capability (and the corresponding reasonable rate) may need to be adjudicated. Pending adjudication, insurer, policyholder, and lawyers need to have some agreement on payment of fees as the litigation proceeds. 113 CAL. CIV. CODE 2860(c); see also ALASKA STAT (d) (similar provision). 114 JEFFREY E. THOMAS & FRANCIS J. MOOTZ, III, THE NEW APPLEMAN ON INSURANCE LAW, LIBRARY EDITION, 17.01; WILLIAM T. BARKER & RONALD D. KENT, NEW APPLEMAN INSURANCE BAD FAITH LITIGATION, SECOND EDITION, 3.02[1]-[4]. 115 Blum v. Stenson, 465 U.S. 886, 900 (1984) (statutory fees under 42 U.S.C. 1988). 28

133 IV. Dealing with Outside Bill Reviewers At least at one time, many insurers attempted to require defense lawyers (both assigned and independent) to submit detailed bills to outside firms for review before the claim representative would consider them for payment. (These bill reviewers were often referred to as auditors, but many did not make independent review of material beyond the bills themselves, and the authorities addressing the propriety of this practice generally focused on bill review.) As discussed here, many bar ethics committees and at least one court concluded that counsel could not submit detailed bills to outside reviewers without informed consent of the policyholder. While insurers questioned that conclusion, many either moved the review process entirely inhouse or switched to using outside services purely to provide computerized processing of bills, without the actual content of the bills being reviewed by any outside personnel, arguing that this change eliminated any problem identified by opinions critical of outside bill reviewers. A. Confidentiality Generally One of the fundamental duties of attorneys is to maintain the confidentiality of information they acquire in connection with representation of clients. Model Rule 1.6(a) states this duty as follows: A lawyer shall not reveal information relating to representation of a client unless the client gives informed consent, the disclosure is impliedly authorized in order to carry out the representation, or the disclosure is permitted by paragraph (b) [whose terms are not relevant here]. Model Rule 1.8(b) supplements this prohibition on disclosure of information by prohibiting its use to the disadvantage of the client unless the client gives informed consent, [with exceptions not relevant here]. It is important to remember that these limits on use or disclosure of confidential information are not limited to the types of information protected from compelled disclosure by the attorney client privilege. They broadly limit voluntary use or disclosure of any nonpublic information derived from the representation for purposes other than carrying out the representation. That is, confidentiality is broader than privilege. B. Implied Authority To Disclose Implied authority to disclose generally arises when utility to the representation combines with lack of any apparent risk to the interests of the client. 116 Except to the extent that the client's instructions or special circumstances limit that authority, lawyer is impliedly authorized to make disclosures about a client when appropriate in carrying out representation. 117 This standard is taken from the law of agency, under which implied authority is inferred from the nature of the representation, the general usages of similar relationships, and those acts which usually accompany or are reasonably necessary to the representation. 118 For example, attorneys do not ask client consent in sharing their confidential information with non-attorneys within a law firm such as secretaries, copy clerks, and accountants, because such disclosure is a necessary and usual part of any representation. The same is true of potential expert witnesses. ABA Opinion See RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS 61 (perm. vol. 2000) ( RESTATEMENT LGL ). The test stated there has been approved by the ABA as the equivalent of the standard under Model Rule 1.6. ABA Standing Comm. on Ethics and Prof l Responsibility, Formal Op n.25 (2001). 117 MODEL RULES PROF. COND. R. 1.6, cmt RESTATEMENT (SECOND) OF AGENCY (1958). 29

134 extended this reasoning to outside copy services and data processing services used to produce billing statements from firm time records. The authorization for disclosures impliedly authorized in order to carry out the representation most obviously permits disclosure when the lawyer reasonably believes doing so will advance the interests of the client in the representation. 119 Except where there is a right to independent counsel, the insured has contractually committed management of the defense to the insurer, a commitment confirmed when the insured acquiesces in counsel s explanation of the way in which the representation is to be conducted. Moreover, the insurer needs full information about the progress and prospects for the case to perform its duties to the insured regarding settlement. On this basis, disclosure to the claim representative of most information regarding the defense is impliedly authorized unless if bears on an issue where the insurer and the policyholder have conflicting interests. Implied authorization (by the insured) for such disclosure normally would not exist, however, if counsel knows of a reasonable prospect that disclosure could be injurious to the insured or if the insured requested that the information not be disclosed. Based on these principles, ABA Opinion concluded that: Informing the insurer about the litigation through periodic status reports, detailed billing statements and the submission of other information usually is required, explicitly or implicitly, by the contract between the insurer and the insured and also is appropriate in those jurisdictions where the insurer is regarded as a client and there is no conflict between the insurer and insured. The disclosure of such information usually advances the interests of both the insured and the insurer in the representation and such disclosures are, therefore, impliedly authorized to carry out the representation. In those relatively rare situations when the lawyer reasonably believes that disclosure of confidential information to the insurer will affect a material interest of the client-insured adversely, the lawyer may not disclose such confidential information without first obtaining the informed consent of the client-insured. [Footnotes omitted.] 120 On the latter point, the potential for adverse effect on the policyholder may arise when the information to be disclosed jeopardizes the insured s coverage under the insurance policy; reveals extremely sensitive or personal, irrelevant information about the insured; or otherwise implicates a conflict between the insurer and insured. In these relatively infrequent situations, it is essential that the lawyer obtain the informed consent of the client-insured before disclosing the confidential information in question. 121 C. Impact of Attorney-Client Privilege on Implied Authority To Disclose One type of adverse effect that could result from disclosure to a person other than the policyholder would be impairment of the attorney-client privilege for the policyholder s 119 RESTATEMENT LGL AMERICAN BAR ASS N STANDING COMMITTEE ON ETHICS & PROFESSIONAL RESPONSIBILITY, FORMAL OPINION , at 5_. 121 ABA Op , at 7. 30

135 communications to defense counsel. Disclosure to the insurer generally does not create a problem when defense counsel is insurer assigned and or when independent counsel discloses only matters not related to any conflict between insurer and policyholder. One formulation of the scope of the protection is provided by proposed federal rule of evidence 503 on attorney-client privilege. Though never effective, federal courts commonly look to it as a succinct statement of the common law that Rule 501 of the Federal Rules of Evidence makes authoritative in cases where federal law provides the rules of decision. Proposed rule 503(b) provided a privilege for communications among a client, the client s lawyer(s) and representatives of either. Similarly, the Restatement privileges qualifying communications made between privileged persons. Privileged persons are defined to be the client, the client s lawyer, and agents of either. For privilege purposes, the Restatement defines an agent as one whose involvement on behalf of the client is reasonably necessary and whom the client reasonably expects to maintain confidentiality. One type of agent a client may utilize is one who manages the matter on the client s behalf. The Restatement recognizes an insurer as such an agent. Thus, it states that a client need not personally seek legal assistance, but may appoint a third person to do so as the client s agent (e.g. 134, Comment f). The referenced comment states, in pertinent part: It is clear in an insurance situation that a lawyer designated to defend an insured has a lawyer-client relationship with the insured. The insurer is not, simply by the fact that it designates the lawyer, a client of the lawyer. Whether a clientlawyer relationship also exists between the lawyer and the insurer is determined under 14. Whether or not such a relationship exists, communications between the lawyer and representatives of the insurer concerning such matters as progress reports, case evaluations, and settlement should be regarded as privileged and otherwise immune from discovery by the claimant or another party to the proceeding. 122 Moreover, as used in the RESTATEMENT, agents... who facilitate communication include not only true agents of lawyer or client, but also persons who hire the lawyer as an incident of the lawyer s engagement. Thus, the privilege covers communications by a client insured to an insurance company investigator who is to convey the facts to the client s lawyer designated by the insurer, as well as communications from the lawyer for the insured to the insurer in providing a progress report or discussing litigation strategy. 123 These specific statements are reinforced by broad rules permitting sharing of information among co-clients and among other parties of common interest. 124 The relevant interest is one in the matter that is the subject of the representation. 125 But their interests in the matter need not be entirely congruent 126 Joint representation or common interest sharing is permissible for joint 122 RESTATEMENT LGL. 134, cmt. f (emphasis added). 123 Id. (emphasis added). 124 Id. 75, Id Id. cmt e. 31

136 defense or prosecution of a lawsuit, even if the parties may have divergent interests in allocating any resulting recovery or liability. 127 So an insurer who hires the lawyer pursuant to a standard liability insurance policy is a privileged party. This is so regardless of whether it be regarded as a co-client, the insured s agent for managing the representation, or simply a contractually interested third party. Even where defense counsel is independent counsel, the insurer is a person of common interest with respect to matters not implicating any conflict of interest with the policyholder. D. Disclosure of Attorney-Client Privileged Information to Outside Bill Reviewers Is Impermissible Unless the Policyholder Gives Informed Consent While outside bill review was considered in ABA Opinion , that opinion considered a broader range of auditing, which might go well beyond mere bill review: The phrase legal bill audit encompasses a range of services, from an examination of the face of the legal bill for improper charges or errors to a detailed analysis of original time records, attorney work product, expenses and hourly rate benchmarks, and more. 128 The Opinion further explained: An audit may include an examination of hourly rates and background information about the legal matters for which the bill was submitted, including examination of the lawyer's work product and opposing counsel's work product in order to gauge "quality, tactic, strategy, and performance in context. A detailed bill review might include "verification of raw data, interviews of key personnel, examination of firm billing systems, checking the original time records against time entries in invoices, and reconciling receipts for expenses with the bill. 129 Information in detailed billing statements might and the more detailed material described in that passage likely would disclose the contents of privileged communications. While insurers argue that a confidential outside bill reviewer is an agent of the insurer to whom disclosure does not endanger the privilege, at least one court has disagreed. 130 No matter how strong the arguments of insurers to the contrary, that ruling prevents defense counsel from concluding that disclosure of privileged information to the bill reviewer would entail no significant risk to the policyholder. That is the apparent basis of ABA Opinion s conclusion that the lawyer [may not] disclose the insured s confidential information to a third-party auditor designated by the insurer without the insured s informed consent. Unlike the disclosure of the insured s confidential information to secretaries and interpreters, the disclosure of such information to a third-party auditor, a vendor with whom the lawyer has no employment or direct contractual relationship, may not be deemed essential to the representation and may, therefore, result in a waiver albeit unintended of the privilege. Therefore, since such disclosures always involve the risk of loss of privilege, the lawyer must obtain the insured s informed consent before sending bills with 127 See FDIC v. Ogden Corp, 202 F.3d 454 (1 st Cir. 2000) (parties had joint attorney-client relationship for prosecution of insurance claim, despite potential disputes about allocation of proceeds among themselves); information shared was confidential against outsiders, but usable in dispute inter se). 128 ABA Op , at Id. (footnote omitted). 130 In re Rules of Prof l Conduct, 2 P.3d 806, (Mont. 2000). 32

137 such information to a third party hired by the insurer to audit the bills. 131 E. Insurers Argue That Detailed Billing Statements Excluding any Privileged Information May Be Disclosed to Confidential Outside Services That Use Computer Software To Preliminarily Process Bills for Review by In-House Claim Adjusters Some insurers have reacted to the consensus on the impermissibility (absent informed policyholder consent) of disclosure to outside bill reviewers by calling for bills to be submitted to confidential outside data processing services for preliminary processing. Such a service processes the billing information through its proprietary software and presents it for review by the insurer personnel responsible for the matter the lawyer is handling. The service exercises no discretion and makes no decisions regarding the bills submitted. The insurer instructs defense counsel along the following lines regarding billing descriptions: The bill must be prepared with daily entries showing (a) the date the work was performed; (b) the UTBMS task or expense code; (c) the UTBMS activity code; (d) the timekeeper ID; (e) a 131 ABA Op , at _5-6 (footnotes omitted). One of the omitted footnotes cited other authorities supporting that conclusion: A majority of jurisdictions have concluded that it is not ethically proper for a lawyer to disclose billing information to a third-party billing review company at the request of an insurance company unless he has obtained the client's consent. See, e.g., Office of the General Counsel of the Alabama State Bar Op. RO (November 9, 1998); Alaska State Bar Ass'n Ethics Committee Op. No , 1999 WL (October 22, 1999); Arizona State Bar Formal Op (September 1999); Cincinnati, Ohio Bar Association Op (February 1999): Colorado Bar Association Ethics Committee Formal Op.107 (September 18, 1999); Connecticut Bar Association Committee on Professional Ethics Informal Op (Sept. 26, 2000); District of Columbia Legal Ethics Committee Op. No. 290 (April 20, 1999); Florida Bar Professional Ethics Committee Proposed Advisory Op (March 31, 1999); Florida Bar Staff Op (March 9, 1998); Florida Bar Staff Op (December 31, 1997); Georgia State Bar Proposed Advisory Op. No. 99-R2 (January 2000); Hawaii Bar Office of Disciplinary Conduct Op. 36 (March 25, 1999); Idaho State Bar Association Formal Op. 136 (January 2000); Indiana State Bar Association Op (1998); Iowa Supreme Court Board of Professional Ethics and Conduct Op (September 8, 1999); Kentucky Bar Association Op.E-404 (June 1998); Louisiana State Bar Association Ethics Advisory Service Committee Op. 45, as reported in LOUISIANA BAR JOURNAL 438 (February, 1998); Maine Professional Ethics Commission of the Board of Overseers Op. 164 (December 2, 1998); Maryland State Bar Association Committee on Ethics Op. No (January 1999); Massachusetts Bar Association Committee on Professional Ethics Op (September 13, 2000); Mississippi State Bar Association Ethics Op. 246 (April 8, 1999); Chief Disciplinary Counsel of the Supreme Court of Missouri Informal Advisory Op (September 9, 1998); New Mexico State Bar Formal Advisory Op (June 20, 2000); New York State Bar Association Committee on Professional Ethics Op. 716 (March 3, 1999); North Carolina State Bar Proposed Formal Ethics Op.10, 1998 WL (October 16, 1998); Oklahoma Bar Association Board of Governors Legal Ethics Advisory Op. No. 309 (March 27, 1998) (representation of insureds by lawyers who are employees of a liability insurer); Oregon State Bar Association Ethics Op , 1999 WL (June 1999); Pennsylvania Bar Association Committee on Legal Ethics and Professional Responsibility Informal Op. No , 1997 WL (October 7, 1997); Rhode Island Ethics Advisory Panel Op (October 27, 1999); South Carolina Bar Ethics Advisory Committee Op ; 1997 WL (December 1997); State Bar of South Dakota Ethics Op (April 16, 1998); Board of Professional Responsibility of the Supreme Court of Tennessee Ethics Op. 99-F-143, 1999 WL (June 14, 1999); Utah State Bar Ethics Advisory Op. No (April 17, 1998); Vermont Bar Association Ethics Op (October 1998); Virginia Bar Legal Ethics Op (November 23, 1998); Washington State Bar Association Formal Op. 195 (1999); West Virginia Lawyer Disciplinary Board Op. LEI (April 30, 1999); Wisconsin State Bar Ethics Op. E-99-1 (October 1999). 33

138 description of the work performed (single activities must be described such that no client confidential information is contained in written descriptions; entries should be limited to strategic tasks); (f) the actual time in tenths of an hour and (g) line item total. In the event that documentation of lawyer work is necessary to support billing entries, that information will be submitted directly to the insurer by the law firm, and it will not share that information with the processing service. Disclosure of billing statements runs no risk of waiving the privilege if those billing statements are not themselves privileged (at least in part). To be privileged, the billing statements would have to reflect the content of a privileged communication in a way that allowed that to be traced to a privileged person as its expressive source 132 Most bills do not allow such tracing, and deciding whether a particular bill does so requires specific analysis of that bill. As required by the instruction just quoted, a lawyer can exercise care in composing billing descriptions that do not disclose the contents of privileged communications. Neither the Montana case nor any of the bar opinions have considered this method of avoiding the risk they perceived. Most appear to have either expressly or silently presumed that it would not be possible to compose adequately detailed billing statements that did not disclose privileged communications or that the auditor s review would extend to other materials which would disclose the contents of privileged communications. In the context of insurance defense, and even apart from the billing instruction described, bills are particularly unlikely to disclose the contents of privileged communications. The insured s motive in seeking legal counsel is not confidential, but open and obvious: the need to respond to the suit. Much of the activity reflected in the bills will result from the need to respond to actions of the plaintiff (e.g., researching the law on issues raised by the suit) or will result from interactions with witnesses or information sources other than the client. Even if they do reflect communications with the client, it will usually be impossible for an outside observer to determine that, given the other possible sources. And the bills will be directed to an adjuster familiar with the lawsuit and the agreed plan of defense. As a result, what is adequate detail for the adjuster may be relatively uninformative to an outside observer (at least as regards the contents of privileged communications). Indeed, the billing instructions require this, by directing that client confidential information not be included. On this point, such a program is different from the legal auditing that was the subject of ABA Opinion , the Montana case, and the host of other bar opinions. In the legal auditing context, the bills were to be reviewed by an auditor who would generally not be familiar with the case. So the bills would have had to be more detailed to give the auditor a basis to decide whether the work reflected was proper That is also why the auditors might sometimes have found it necessary to go behind the bills and look at the actual work product.. Even if the bills submitted to auditors would necessarily have revealed privileged communications (which insurers would deny), that would not mean that bills in a program such as that described would do so. If the bills do not contain privileged information to begin with, disclosing them cannot implicate the special confidentiality protections for such information and there can be no risk that disclosing them would waive any privilege. 132 RESTATEMENT LGL 69 cmt h. 34

139 F. Even If the Privilege Were Lost (and With Respect To Significant Nonprivileged Material Contained In the Bills), the Protections Of Work Product Immunity Would Be Unaffected By Disclosure To a Confidential Outside Processing Service An insurer would have no occasion to assign counsel to an insured unless the insured had been sued or, at least, was faced with a claim likely to result in a suit (absent a pre-suit settlement). So all of counsel s services will be in anticipation of litigation or for trial. If the litigation is brought in federal court, all documents reflecting counsel s activities (including the bills) will be subject to a qualified immunity from discovery, requiring a showing of substantial need and undue hardship to obtain discovery. 133 Moreover, even if the necessary showing is made to obtain discovery, the court shall protect against disclosure of the mental impressions, conclusions, opinions, or legal theories of an attorney or other representative of a party concerning the litigation. Such opinion work product is given nearly absolute protection. 134 State courts generally provide similar protections. Litigation bills should ordinarily be protected by these immunities, unless they are so general as to be useless. Bills might reveal witness identities, but these are discoverable by interrogatory without requiring any showing of need or hardship. It is hard to see how there could be substantial need for any information shown in the bills that is not either freely discoverable in other ways or almost absolutely protected as opinion work product or its state counterpart. Work product immunity is less easily waived than attorney-client privilege. Work product protection is not waived by disclosure to a third party unless that party is an adversary of the client for whom the work product was generated (or likely to disclose to such an adversary). 135 The processing service is not an adversary of the insured, nor, given its confidentiality obligations, is it likely to disclose to such an adversary. So, even if the attorney-client privilege were waived by disclosure to LexisNexis, the work product immunity would not be affected. Accordingly, under the circumstances described here, insurers would argue that there should ordinarily be no risk to the insured client s interests from disclosing to the processing service information which the lawyer is properly disclosing to the insurer. 133 FED. R. CIV. P. 26(b)(3) CHARLES ALAN WRIGHT, ARTHUR MILLER & RICHARD L. MARCUS, FEDERAL PRACTICE & PROCEDURE 2026 (1994). 135 E.g., Permian Corp. v. U. S., 665 F.2d 1214, 1219 (D.C. Cir. 1981) (only disclosures inconsistent with the adversary system waive work product protection); In re Will of Pretino, 567 N.Y.S.2d 1009, 1012 (N.Y. App. Div. 1991) ( [t]o constitute a waiver, disclosure must be inconsistent with maintaining secrecy as against an adversary and it must significantly increase the possibility that the opposing party will obtain the information ); RESTATEMENT LGL 91(4) & cmt. b. 35

140 16.04 The Tripartite Relationship Among the Insured, the Insurer and Insurer-Directed Defense Counsel [1] Under Standard Policies, and Absent a Conflict of Interest Regarding the Defense, the Insurer Has the Right to Select Defense Counsel for the Insured and to Control the Defense Individuals and businesses purchase insurance to shift financial risk to their insurers. To an insured, the cost of lawyers necessary to defend covered claims is part of the risk to be shifted. To the insurer, defense lawyers are critical to controlling insurance costs by defeating or limiting insureds liability in covered claims. Even so, the cost of defense counsel is a cost ultimately passed on to the insurance-buying public as part of insurance premiums. Thus, it would be wasteful to spend more on defense activities than those activities are expected to yield in reduced indemnity costs, i.e. the cost of judgments or settlements. Both costs are ultimately borne by the insurance-buying public in premiums. Insurers have more expertise than most insureds in managing litigation. They have stronger, more immediate incentives to manage litigation efficiently than would insureds who expect their insurers to pay defense counsel s bills. Thus, most liability insurance markets have settled on contract terms that provide for the insurer to manage the defense, and give it the right and duty to defend. This standard liability policy provision gives the insurer the right to control the defense of the claim and the insured has no right to interfere with the insurer s control of the defense. 1 1 CA-Safeco Ins. Co. v. Superior Court, 84 Cal. Rptr. 2d 43, 45 (Cal. Ct. App. 1999). See also: US/MS-Davenport v. St. Paul Fire & Marine Ins. Co., 978 F.2d 927, (5th Cir. 1992) (policy invest[s] the insurer with the complete control and direction of the defense... to the exclusion of the insured ) (collecting authorities);

141 Where the insured has no personal exposure, that control is virtually absolute. 2 The right to select and direct counsel includes the right to change counsel. 3 Except in the unusual case where insurer and insured have a conflict of interest precluding joint representation (see Section 16.04[4]), the law in most jurisdictions recognizes both as clients of defense counsel. (See Section 16.04[2].) Thus, both as a client and pursuant to the insurance contract, the insurer usually has the right to make expenditure and strategic decisions. This works well for insureds, who typically have no interest in how a claim is defended, so long as the insurer pays any resulting judgment or settlement. The vast bulk of cases defended by insurers are fully covered. 4 And even where there is some risk of personal financial TX-Unauthorized Practice of Law Comm. v. Am. Home Assurance Co., 261 S.W.3d 24, 26 (Tex. 2008) ( The right to defend in many policies gives the insurer complete, exclusive control of the defense ). 2 US/MS-Davenport, 978 F.2d at (where policy covered two insureds, with possible cross-claims between them, insurer with full coverage for both could use common attorney to present a common defense). See also CA-State Farm Mut. Auto. Ins. Co. v. Fed. Ins. Co., 86 Cal. Rptr. 2d 20, 25 (Cal. Ct. App. 1999) ( it is customary for the insurer to control the defense it provides ); Spindle v. Chubb/Pacific Indem. Grp., 152 Cal. Rptr. 776, 781 (Cal. Ct. App. 1979). 3 CT-King v. Guiliani, No. CV S, 1993 Conn. Super. LEXIS 1889, at *25-28 (Conn. Super. Ct. July 27, 1993). 4 Samuel R. Gross & Kent Syverud, Don t Try: Civil Jury Verdicts in a System Geared to Settlement, 44 UCLA L. REV. 1, (1996) (in sample of litigated cases, insurance was involved in 80%, with lawyers on both sides agreeing that the claim was completely covered in 59%, so that just under 75% of the cases where insurance was involved were fully covered). Of the remainder, some may have involved either Cumis counsel or indemnity policies (under which the insured controls the defense as a matter of contract), precluding any tripartite relationship and, so, any possible problems arising from that relationship. Additionally, lawyers are more likely to mention doubts about adequacy of coverage when such doubts are objectively insubstantial than they are to omit mention of doubts that are objectively substantial. So the 75% figure is probably a significant understatement of the fraction of tripartite relationship claims where coverage is, objectively speaking, both clear and clearly adequate. And even when there is a genuine risk of exposure beyond the policy s coverage, cases are normally resolved without any payment by the insured.

142 exposure to an insured, the latter typically relies willingly on the insurer to manage the defense. This is not surprising. The insured has significant protections in situations where the claim is not fully covered. These protections include (1) the insurer s obligation to pay covered settlements or judgments, (2) its duty to accept reasonable settlement demands within policy limits, and (3) its responsibility for any increased liability of the insured resulting from an inadequate defense. 5 [2] In the Great Majority of Jurisdictions, the Insurer Retaining Defense Counsel for the Insured May Choose to Be a Co-Client [a] Client Status Depends on Intent at the Time Counsel Is Retained Except in the unusual case where insurer and insured have a conflict of interest precluding joint representation (see Section 16.04[4]), the law in most jurisdictions recognizes both as clients of defense counsel. 6 But few cases on either side of this issue explain how that defense counsel s clients are to be determined. Under ordinary principles governing formation of attorney-client relationships, that depends on the manifested intent of the parties at the time the attorney is retained. The most concise and authoritative statement of the relevant general principles is found in the Restatement (Third) of the Law Governing Lawyers. The Restatement says that it is a question of fact whether the lawyer appointed by the insurer to defend the insured in a given case also represents the insurer: It is clear... that the lawyer designated to defend the insured has a client-lawyer relationship with the insured. The insurer is not, simply by the fact that it designates the lawyer, a client of the lawyer. Whether a client-lawyer relationship also 5 See William T. Barker, The Tripartite Relationship And Protection Of The Insured: Is There A Problem?, 21 INS. LITIG. RPTR. 533, , (1999). 6 See Appendix 16-A at the end of this chapter.

143 exists between the lawyer and the insurer is determined under Section 14, in turn, prescribes the following test: A relationship of client and lawyer arises when: (1) a person manifests to a lawyer the person s intent that the lawyer provide legal services for the person; and either (a) the lawyer manifests to the person consent to do so; or (b) the lawyer fails to manifest lack of consent to do so, and the lawyer knows or reasonably should know that the person reasonably relies on the lawyer to provide the services. 8 [b] Ordinarily, the Insurer Intends to Be a Client and the Lawyer Does Not Refuse to Represent It In the normal course of events, the attorney-client relationships are formed as a result of the insured tendering the defense to the insurer and the insurer retaining counsel pursuant to that tender. The insured s tender authorizes the insurer to retain counsel on behalf of the insured. 9 Of course, the insurer could ask the lawyer to provide legal services only for the insured, in which case it would not be a client. But the insurer s own interests are at stake in litigation of a claim where it may be called upon to indemnify, so it has reason to want the lawyer to perform legal services for itself as well. Insurers whose policies entitle them to control the defense 7 RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS 134, cmt. f (perm. vol. 2000). 8 RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS See, e.g.: US/WI-Moritz v. Med. Prot. Co., 428 F. Supp. 865, (W.D. Wis. 1977); NY-Countryman v. Breen, 263 N.Y.S. 603, (N.Y. Sup. Ct. 1933), rev d on other grounds, 271 N.Y.S. 744 (N.Y. App. Div. 1934), aff d, 198 N.E. 536 (N.Y. 1935). See also: Charles Silver & Kent Syverud, The Professional Responsibilities of Insurance Defense Lawyers, 45 DUKE L.J. 255, (1995); Charles Silver, Does Insurance Defense Counsel Represent the Company or the Insured?, 72 TEX. L. REV (1994); AMERICAN BAR ASS N COMM. ON PROF. ETHICS & GRIEVANCES, FORMAL OP. 282 (1950).

144 generally wish to exercise that right, and that exercise is facilitated if the insurer is also a client. In particular, there would at least be a question whether communications between insurer and attorney would be privileged if the insurer were not a client, while there would be no doubt if the insurer were a client. When an insurer with these interests calls upon a lawyer to defend an insured, one would expect that the insurer desires legal services for itself as well as for the insured. Doubts as to the existence of an attorney-client relationship are generally construed against the attorney, who bears the burden of clarifying ambiguity. 10 So even if it is not explicit that the insurer intends to be a client, that should be the result unless either the insurer or the lawyer specifically indicates otherwise. Defense lawyers rarely tell the insurer that they wish to represent only the insured, so the insurer would ordinarily be a client under the Restatement test. In a 2008 appellate opinion on the subject, the Texas Supreme Court devoted a paragraph to the issue of who qualifies as a client of insurance defense counsel: The Committee argues that under Texas law insurance defense counsel represents only the insured, not the insurer, and that staff attorneys who necessarily represent the insurer cannot defend insureds without violating this rule. But we have never held that an insurance defense lawyer cannot represent both the insurer and the insured, only that the lawyer must represent the insured and protect his interests from compromise by the insurer. And we have noted that an insurer s right of control generally includes the authority to make defense decisions as if it were the client where no conflict of interest exists. Rule 1.06 of the Texas Disciplinary Rules of Professional Conduct allows a lawyer to represent more than one client in a matter if not precluded by conflicts between them. Whether defense counsel also represents the insurer is a matter of contract between them See, e.g, RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS 14(1)(b). 11 TX-Unauthorized Practice of Law Comm. v. Am. Home Assurance Co., 261 S.W.3d 24, 42 (Tex. 2008) (footnotes omitted).

145 The last sentence cited a law review article by Prof. Charles Silver, Does Insurance Defense Counsel Represent the Company or the Insured? 12 That article applies the legal standard governing formation of attorney-client relationships in other contexts, the very approach approved by the RESTATEMENT (after Prof. Silver wrote). Florida has a rule requiring that this issue be addressed explicitly at the outset of every insurance defense representation: Representation of Insureds. Upon undertaking the representation of an insured client at the expense of the insurer, a lawyer has the duty to ascertain whether the lawyer will be representing both the insurer and the insured as clients, or only the insured, and to inform both the insured and the insurer regarding the scope of the representation. All other Rules Regulating the Florida Bar related to conflicts of interest apply to the representation as they would in any other situation. 13 [c] No Special Consent from the Insured Should Be Required, Absent Some Conflict of Interest Regarding the Defense It has been argued that the lawyer may not undertake a joint representation without first having the informed consent of both clients. Neither the insurance policy nor the tender of the defense assures that the insured has consented to a joint representation or that any such consent is informed. Moreover, it is suggested, once properly informed, the insured ought normally to refuse consent, thereby preventing the insurer from being a co-client TX-Unauthorized Practice, 261 S.W.3d at 42 n.78, citing Charles Silver, Does Insurance Defense Counsel Represent the Company or the Insured?, 72 TEX. L. REV. 1583, (1994). 13 FL-Fla. Sup. Ct. R (e). 14 This argument is developed in Stephen L. Pepper, Applying the Fundamentals of Lawyers Ethics to Insurance Defense Practice, 4 CONN. INS. L.J. 27 ( ).

146 There is a two-step response to that argument. 15 First, the proposition that informed consent is required before commencement of the representation is incorrect. Suppose an insured tenders defense of a claim to an insurer on the eve of a potential default. The insurer calls a lawyer seeking to have an appearance entered to prevent a default. The lawyer sees a potential for conflict which would arise upon filing an answer. But there is no conflict as to the filing of the appearance itself. Surely, the lawyer could properly undertake a joint representation of insurer and insured (if that were requested), so long as the insurer were advised of the problem and of the potential need for substitution of other counsel if the conflict problem is not resolved prior to the time at which an answer must be filed. 16 After the appearance is filed, the problem could be explored and, if it proved genuine, both clients could be consulted about any necessary consent (if consent were otherwise appropriate). If consent were necessary and not available, the joint representation could be terminated and new counsel obtained. Second, the insured is not free (once consultation about the risks of joint representation does occur) to refuse that consent, except at the cost of jeopardizing the right to indemnification. The insurer s promise of indemnification is based on the insured s cession of the right to control the defense and agreement to cooperate with that defense. Joint representation facilitates the insurer s exercise of these rights. At least unless joint representation endangers some interest of the insured which the insured has not agreed to forego, refusal of consent breaches both the 15 This response is developed at length in William T. Barker, Insurance Defense Ethics and the Liability Insurance Bargain, 4 CONN. INS. L.J. 75 ( ), prepared as a commentary on Prof. Pepper s article. 16 In the example given, joint representation is probably unnecessary in terms of either protecting the insured or minimizing claim costs. But if professional responsibility rules do not forbid such representation, it should not matter that it is not strictly necessary. Besides, the example is deliberately unrealistic, and more complicated examples could be constructed where (initial) joint representation would serve claim cost minimization purposes.

147 express terms of the contract and the insured s duty of good faith, not to gratuitously render the insurer s performance more difficult or expensive. On the latter point, the Restatement takes no position. It properly points out that it addresses only the law governing a lawyer representing an insured person, not the law governing the relationship between insurer and insured. 17 Of equal importance, that is not an issue on which counsel representing the insured could take a position adverse to the insured s possible interest in withholding the consent, if one were required. But the Restatement does say: The lawyer s acceptance of direction from the insurer is considered in [other provisions]. With respect to client consent... in insurance representations, when there appears to be no substantial risk that a claim against a client-insured will not be fully covered by an insurance policy pursuant to which the lawyer is appointed and to be paid, consent in the form of acquiescence of the client-insured to an informative letter to the client-insured at the outset of the representation should be all that is required. The lawyer should either withdraw or consult with the client-insured when a substantial risk that the client-insured will not be fully covered becomes apparent. 18 The requirement for consent concerns the insurer s exercise (or potential exercise) of control. So it does not apply to the mere formation of the attorney-client relationship, which necessarily occurs before any such exercise. The reference to acquiescence in an informative 17 RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS 134, cmts. a, f. This point is an important one. Many of the problems in dealing with the tripartite relationship stem from an misconceived effort to protect insureds against all forms of mishandling of the defense of claims against them through the law of professional responsibility, when many of those problems are better handled by insurance law. See William T. Barker, The Tripartite Relationship and Protection of the Insured: Beyond Professional Responsibility, 18 INS. LITIG. RPTR. 528 (1996). And, as explained in the preceding paragraph, insurance law may solve some of those problems by obliging the insured to give some of the consents required by the law of professional responsibility. 18 RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS 134, cmt. f. (cross-references omitted).

148 letter was designed to codify one aspect of ABA Formal Opinion Early drafts of the RESTATEMENT had problematic language stating that the insured s informed consent is a precondition to the representation. 20 With the removal of this language, the Restatement analysis is now fully consistent, on this point, with the analysis here. The Minnesota Supreme Court has imposed special requirements that must be satisfied before defense counsel can treat the insurer as a co-client with the insured. 21 The court recognized that under the usual rules governing formation of attorney-client relationships, the insurer would almost always be a co-client, absent a conflict of interest precluding joint representation of insurer and insured. 22 It also recognized that a few courts have held that an insurer may never be a co-client with the insured. 23 The court declined to adopt so extreme a rule. 24 But it did conclude that the risks of conflicts of interest posed by dual representation were so great as to justify imposing special requirements of consultation and consent. 25 So, to permit dual representation, there must be both an absence of conflict and an express consent by the insured after consultation with counsel ABA STANDING COMMITTEE ON ETHICS AND PROFESSIONAL RESPONSIBILITY, OP (1996). 20 RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS 215, cmt. c (Tent. Dr. No ). 21 MN-Pine Island Farmers Coop v. Erstand & Riemer, 649 N.W.2d 444 (Minn. 2002). 22 MN-Pine Island, 649 N.W.2d at 451. See Charles Silver, Does Insurance Defense Counsel Represent the Company or the Insured, 72 TEX. L. REV (1994). 23 MN-Pine Island, 649 N.W.2d at MN-Pine Island, 649 N.W.2d at MN-Pine Island, 649 N.W.2d at MN-Pine Island, 649 N.W.2d at 451.

149 The express consent requirement, despite absence of a conflict, seems misguided. The basis of the court s concern is not any perception that conflicts are common, and conflicts are actually uncommon. The concern is that, were a conflict to arise, the temptation to favor the insurer would be strong. 27 But the temptation to favor one client is likely to be present in many conflicts. That is why the law requires a lawyer, absent informed consent to a conflict, to decline a conflicted dual representation and to withdraw from dual representation if an unexpected conflict arises. That requirement should prevent defense counsel from ever having any opportunity to favor one client at the expense of the other. The court offers no reason for thinking that insurance defense counsel are any more likely than other lawyers to disobey this rule. Yet, if they comply, there is no special risk to support the special requirement for an express consent. Having said that, there is no reason to believe that getting an express consent would be difficult. In most cases where there is no conflict evident at the outset, there will be very little risk that an unexpected conflict will arise. Counsel can explain that to the insured. Counsel can also provide assurance that counsel will always be alert to any possible conflict that might arise and will promptly bring that to the insured s attention if it occurs. If any conflict cannot be satisfactorily resolved, then it will be eliminated by withdrawal of counsel form the dual representation. Most insureds, are unlikely to see much of a problem with dual representation and will likely give the consent if it is requested. [d] Prof. Hazard Interprets the Restatement 27 MN-Pine Island, 649 N.W.2d at

150 Prof. Geoffrey C. Hazard, Jr., Director of the American Law Institute when the Restatement was adopted and Reporter of the Model Rules of Professional Conduct, provided an expert opinion analyzing the effect of the Restatement: The Restatement takes the position that the insurer may or may not be a client, depending on the facts surrounding the creation of the attorney client relationship. Given the facts [of the typical insurance representation], in my opinion the Restatement standard would produce the same result as current Montana law [which had treated the insurer as a client]. 28 [3] In the Great Majority of Jurisdictions, the Insurer May Use Its Own Employee Counsel to Defend the Insured [a] A Corporation May Use Employee Counsel with Respect to Its Own Interests Liability insurers must hire lawyers to perform the contractual duty to defend insureds. Based on decades of experience, insurers have found that they can obtain equally good results with full-time employee lawyers as with lawyers in conventional law firms. 29 By using the more economical employee lawyers, insurers can supply insurance at lower cost to insureds and improve their own competitive positions. There is no evidence that use of employee lawyers, as 28 MT-Opinion of Geoffrey C. Hazard, Jr. ( Hazard Op. ) 11-12, In re Rules of Prof l Conduct, 2 P.3d 806 (Mont. 2000) (footnote omitted). In the omitted footnote, Professor Hazard cites RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS 215, cmt. f (Prop. Final Dr. No ). Section 215 of the draft [was] amended before being approved [and renumbered as 134], but the amendment did not affect this point. Hazard Op. n.6. The (former) Montana law referenced by Prof. Hazard is Palmer v. Farmers Ins. Exch., 861 P.2d 895, 905 (Mont. 1992) (insurer employs the attorney to represent the interests of both the insured and the insurer ); State ex rel. U.S. Fid. & Guar. Co. v. Mont. Second Jud. Dist. Court, 783 P.2d 911, 914 (Mont. 1989) ( Absent a conflict of interest, the attorney hired by the insurance company to defend its insured, represents both ); Safeco Ins. Co. v. Ellinghouse, 725 P.2d 217, (Mont. 1986) (same). Those principles are still the law in most jurisdictions, even though the Montana Supreme Court repudiated them in the case where Prof. Hazard gave his opinion. 29 Charles Silver, Flat Fees and Staff Attorneys: Unnecessary Casualties in the Continuing Battle Over the Law Governing Insurance Defense Lawyers, 4 CONN. INS. L.J. 205, 237 ( ).

151 opposed to outside counsel, to defend insureds has ever caused harm to any insured. 30 Nonetheless, insurers and their employee lawyers regularly face challenges to use of such lawyers. Fortunately, most courts addressing such challenges have upheld the propriety of using employee lawyers to defend insureds. The few courts that have held otherwise have relied either on purely formalistic directives of local legislation or on unsupported and implausible speculation about the risk of harm to insureds. The most common basis for attacks on use of employee lawyers to defend insureds has been the prohibitions on unauthorized practice of law. These are relevant to individual lawyers because lawyers are forbidden to assist a person who is not a member of the bar in the performance of an activity that constitutes the unauthorized practice of law. 31 All American jurisdictions forbid those not admitted to the bar to engage in the practice of law. 32 The purpose of these prohibitions is to protect individuals and the public from the mistakes of the untrained and the schemes of the unscrupulous, who are not subject to the judicially imposed disciplinary standards of competence, responsibility, and accountability. 33 Corporations cannot be admitted to practice law, and a corporation cannot do so indirectly by furnishing lawyers to provide legal services to the corporation s own customers in matters where the corporation has no interest in the outcome, as opposed to a mere interest in providing 30 This is not to say that staff counsel are any more immune to negligent errors and omissions than outside counsel. Rather, the point is that their status as employees creates no special risks. But even if negligence does occur, the cost almost always falls on staff counsel s employer, either pursuant to the insurance policy or pursuant to respondent superior. 31 Model Rule 5.5(b). 32 See Deborah L. Rhode, Policing the Professional Monopoly: A Constitutional and Empirical Analysis of Unauthorized Practice of Law Prohibitions, 34 STAN. L. REV. 1 (1981). 33 TX-Am. Home Assurance Co. v. Unauthorized Practice of Law Comm., 121 S.W.3d 831, 833 (Tex. App. 2003), aff d, 261 S.W.3d 24 (Tex. 2008).

152 customer service. 34 But corporations can employ in-house lawyers to protect their own interests. 35 An insurer that has promised to defend and indemnify against a lawsuit has a direct interest in the outcome of that lawsuit. This permits it to use an employee lawyer to defend its insured and, thereby, itself: [T]he insurance company has a right to protect that pecuniary interest, and has a right to do so by attorneys of its own choosing; that such procedure is not the practice of law in any sense of the word. The company is simply protecting its own rights in that litigation by having counsel of its own choosing represent it... [S]o long as the company does not employ laymen to do any of the acts, it is not engaged in the practice of law. The company is defending against claims and lawsuits in which it is directly and financially interested See, e.g.: IN-Groninger v. Fletcher Trust Co., 41 N.E.2d 140, (Ind. 1942) (trust company may use employee attorneys in preparation of trust instruments, even though persons other than company also rely on attorney s representation); TX-Hexter Title & Abstract Co. v. Grievance Comm., 142 Tex. 506, 518 (1944) (title company may not use employee attorneys to draft instruments for potential buyers of title insurance, because company not interested in the transaction implemented by instruments). See also CHARLES W. WOLFRAM, MODERN LEGAL ETHICS, 15.1, at 840 (1986). 35 See TX-Am. Home Assurance Co. v. Unauthorized Practice of Law Comm., 121 S.W.3d 831, 839 (Tex. App. 2003), aff d, 261 S.W.3d 24 (Tex. 2008) (collecting cases). See also CHARLES W. WOLFRAM, MODERN LEGAL ETHICS, (1986). 36 OH-Strother v. Ohio Cas. Co., 1939 Ohio Misc. LEXIS 1184, at *10-11 (Ohio C.P. Jan. 3, 1939), reaffirmed by Dowling v. Ins. Co. of N. Am., No (Ohio Ct. App. Nov. 16, 1973). Accord: FL-In re Rules Governing Attorneys, 220 So. 2d 6, 8 (Fla. 1969); IN-Cincinnati Ins. Co. v. Wills, 717 N.E.2d 151, 155 nn. 4-5 (Ind. 1999) (18 of 20 jurisdictions addressing the issue had either a reported judicial opinion or a bar opinion concluding that use of employee lawyers is proper) (joining that majority). See also AMERICAN BAR ASS N COMM. ON PROF. ETHICS & GRIEVANCES, FORMAL OPINION NO. 282 (1950), reaffirmed in ABA STANDING COMMITTEE ON ETHICS AND PROFESSIONAL RESPONSIBILITY, Op (2003).

153 The Texas Supreme Court recently agreed with this view: a liability insurer s interest in avoiding its indemnity obligation gives it a direct, financial, and substantial interest in defending a claim against its insured. If the claim is defeated, the insurer benefits. 37 As the Indiana Supreme Court put the point: Given that the attorney s representation of the insureremployer is lawful, the representation of a policyholder whose interests are essentially aligned with the insurer s does not inherently result in unauthorized practice by either the insurer or the attorney. 38 By focusing on the alignment of interests between insurer and insured, the Indiana court found the issue equivalent to the conflict of interest analysis that would govern whether the insured were defended by employee counsel or outside counsel. This conclusion follows from the primary reason for forbidding corporations to use employees to represent most third parties: interjection of an employer between lawyer and client tends to divert the lawyer s loyalty from the client to the employer. 39 If (1) the employer is directly interested, as a liability insurer is, and (2) the interests of the employer and the other client are sufficiently aligned that there is no conflict of interest concerning the lawyer s services, then there is no more reason to fear effects of the lawyer s loyalty to the employer/insurer than there would be if outside counsel represented both insurer and insured. An insurer can have a direct interest even if it has reserved the right to deny coverage for some or all of the liabilities alleged against the insured: an 37 TX-Unauthorized Practice of Law Comm. v. Am. Home Assurance Co., 261 S.W.3d 24, 38 (Tex. 2008). 38 IN-Cincinnati Ins. Co. v. Wills, 717 N.E.2d 151, 160 (Ind. 1999). 39 US/DC-Merrick v. Am. Sec. & Trust Co., 107 F.2d 271, 276 (D.C. Cir. 1939). Accord IN-Groninger v. Fletcher Trust Co., 41 N.E.2d 140, (Ind. 1942). See CHARLES W. WOLFRAM, 15.1, at 840 (corporate practice prohibition is essentially a conflict of interest rule).

154 effective defense benefits it as to any liabilities not covered by the reservation and, even as to those within the reservation, if the employer s coverage analysis on those was incorrect. Of the 24 states that have addressed the question, courts in 14 and ethics committees in eight others have agreed that a liability insurer defending its insured with employee counsel does not engage in unauthorized practice of law. 40 The American Bar Association, starting in its Opinions 282 and 1476, concluded that, so long as employee counsel maintains fidelity to the insured and the insured agrees to accept defense by employee counsel, there is no ethical impropriety in employee counsel representing an insured. 41 The North Carolina Supreme Court deliberately adopted a divergent position, based on a local statute that it construed to express a strong policy in favor of personal representation, a policy not necessarily endorsed by other states 42 As construed by the court, the statute turned entirely on formalities. While recognizing that insurance companies have an interest in the outcome of litigation when the damages sought are covered by their policies, the insurers were not entitled to use employee lawyers to protect that interest if they were not formally parties to the litigation. 43 On the other hand, it was entirely permissible for insurers to retain outside 40 These authorities are collected in TX-Unauthorized Practice of Law Comm. v. Am. Home Assurance Co., 261 S.W.3d 24, (Tex. 2008). 41 AMERICAN BAR ASS N COMM. ON PROF. ETHICS & GRIEVANCES, FORMAL OPINION NO. 282 (1950) and INFORMAL OP (1981), reaffirmed in AMERICAN BAR ASS N COMM. ON ETHICS & PROF. RESP., FORMAL OPINION NO (2003) (association of insurance staff counsel free to use trade name designating it as a law firm, so long as staff counsels relation to the insurer is explained to the insured). 42 NC-Gardner & Nationwide Mut. Ins. Co., 341 S.E.2d 517, (N.C. 1986). The court specifically pointed to companion statutes requiring that nonemployee counsel be utilized to certify real estate titles and to represent corporate fiduciaries in the execution of their duties, tasks that in other states can lawfully be performed by nonlawyer title insurers or by lawyers employed by the corporate fiduciaries. 43 NC-Gardner, 341 S.E.2d at 520.

155 counsel to represent insureds and, in doing so to exercise certain contractual rights, supported by its pecuniary interest, to select th[e] attorney and to have some control over the suit. 44 Even if the North Carolina court correctly interpreted the local statute, there is no reason for other jurisdictions to adopt a rule based on no considerations of substance, and none has yet done so. [b] Employee Lawyers Face the Same Ethical Issues as Outside Lawyers It cannot be denied that counsel defending insureds on behalf of insurers sometimes encounter situations where the interests of insurer and insured diverge. In this, they are no different from any lawyers who undertake to represent multiple parties, whose interests seem consistent at the outset. If the clients interests do diverge, there are regular requirements to inform them and to avoid action benefiting one at the expense of another. So long as these requirements are observed, all parties can have their rights fully protected. Critics of employee counsel fear that such counsel will instead act to protect their employers, at the expense of the insureds. But conflicts do not arise in every case, or even in very many cases. Even where it exists, the mere potential for conflict is not disqualifying: even absent an informed consent, only a reasonable probability of conflict precludes joint representation. 45 Broad prohibitions are unnecessary. As the Indiana Supreme Court explained: [A] vast number of claims have been and presumably will be handled with no significant issue between the insurer and the policyholder. Interests of economy and simplicity dictate that this be permitted to continue. Any abuses can be handled on a case-by 44 NC-Gardner, 341 S.E.2d at RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS 123, comment c(iii) (Main vol. 2000).

156 case basis, rather than by adoption of the broad prohibition [plaintiffs] seek. 46 By looking at each case on its own facts, conflicts limit use of employee counsel only in the infrequent cases where they occur. They do not limit use of employee counsel any differently than they limit use of outside panel counsel, because the conflict problems faced by employee counsel are not really different from those faced by outside panel counsel. 47 For the latter, the insurer is typically a source of repeat business, and may well be the dominant source of the business of the law firm or the particular attorney. Both employee and outside counsel are obliged to provide insureds with undivided loyalty, and there is no basis for imposing different rules on one than on the other: Employed attorneys are bound by the same rules of professional conduct as are independent practitioners. If a conflict appears, the lawyer, employed or retained, must immediately resolve it by terminating representation of one or both parties. If the client suffers damage because his attorney represents conflicting interests, a civil action is available. If the attorney is an employee, the employer is undoubtedly liable, jointly and severally, which would not be the case if an independent contractor were retained. The lawyers involved are also subject to professional discipline. There is no basis for a conclusion that employed lawyers have less regard for the rules of professional conduct than private practitioners do IN-Cincinnati Ins. Co. v. Wills, 717 N.E.2d 151, 161 (Ind. 1999). 47 See AMERICAN BAR ASS N COMM. ON ETHICS & PROF. RESP., FORMAL OPINION NO (2003) ( We do not view the employment status of insurance staff counsel as itself creating a conflict between the insurance company and the insured when they are both represented by insurance staff counsel in a lawsuit ). 48 MO-In re Allstate In. Co., 722 S.W.2d 947, 953 (Mo. 1987) (emphasis added). Accord: IN-Cincinnati Ins. Co. v. Wills, 717 N.E.2d 151, (Ind. 1999); TN-In re Youngblood, 895 S.W.2d 322, 328 (Tenn. 1995). See also TX- Am. Home Assurance Co. v. Unauthorized Practiceof Law Comm., 121 S.W.3d 831, 836 (Tex. App. 2003), aff d, 261 S.W.3d 24 (Tex. 2008). An employee lawyer is not subject

157 The New Jersey Supreme Court has also rejected any contention that employee counsel are less worthy than outside counsel: These are not second-class lawyers; they are first class lawyers who are delivering legal services in an evolving format. If this form of practice results in lower legal costs, the public has an interest in seeing that able attorneys continue to be attracted to it. 49 [4] When There Is a Conflict of Interest Regarding the Defense, the Insured Is Entitled to Independent Counsel [a] The Rules of Professional Conduct Preclude a Conflicted Representation Because the insured is a client (and regardless of whether the insurer is also a client), defense counsel owes the insured undivided loyalty. 50 In ordinary cases this presents no problem, for the insurer s interests will be fully consistent with those of the insured. As a California court has explained: In the insured insurer relationship, the attorney characteristically is engaged and paid by the carrier to defend the insured. The insured and the insurer have certain obligations each to the other, as previously noted, arising from the insurance contract. Both the insured and the carrier have a common interest in defeating or settling the third party s claim. If the matter reaches litigation, the attorney appears of record for the insured and at all times represents him in terms measured by the extent of his employment. In such a situation, the attorney has two clients whose primary, overlapping and common interest is the speedy and successful resolution of the claim and litigation. Conceptually, each member of the trio, attorney, client insured, and client insurer to employer direction regarding the lawyer s exercise of independent judgment and the duty of loyalty to the employer cannot override the duty of loyalty to an insured client. 49 NJ-In re Weiss, Healy & Rea, 536 A.2d 266, (N.J. 1988). 50 See, e.g., US-Cinema 5, Ltd. v. Cinerama, Ltd., 528 F.2d 1384, 1386 (2d Cir. 1976) (attorney owes undivided loyalty to every client). See also RESTATEMENT (THIRD) OF LAW GOVERNING LAWYERS 16 & cmt. e (perm. vol. 2000) (describing duty).

158 has corresponding rights and obligations founded largely on contract, and as to the attorney, by the Rules of Professional Conduct as well. The three parties may be viewed as a loose partnership, coalition or alliance directed toward a common goal, sharing a common purpose which lasts during the pendency of the claim or litigation against the insured. Communications are routinely exchanged between them relating to the joint and common purpose the successful defense and resolution of the claim. Insured, carrier, and attorney, together form an entity the defense team arising from the obligations to defend and to cooperate, imposed by contract and professional duty. This entity may be conceived as comprising a unitary whole with intramural relationships and reciprocal obligations and duties each to the other quite separate and apart from the extramural relations with third parties or with the world at large. Together, the team occupies one side of the litigating arena. 51 While the normal case involves only commonality of interests between the insurer and the insured, defense counsel must be alert for divergences of interests that may occur in particular cases. The duty of undivided loyalty means that defense counsel may do nothing that injures interests of an insured client without informed consent of that client. 52 Because coverage issues inherently involve conflicts between the insurer and the insured, defense counsel must avoid any involvement in those issues. In particular, defense counsel must not assist the insurer in defeating coverage, as such assistance would breach the duty of loyalty to the insured CA-Am. Mut. Liab. Ins. Co. v. Superior Court, 113 Cal. Rptr. 561, 571 (Cal. Ct. App. 1974). 52 RESTATEMENT (THIRD) OF LAW GOVERNING LAWYERS 16, cmt. e (duties of loyalty prohibit the lawyer from harming the client); Ellen S. Pryor & Charles Silver, Defense Lawyers Professional Responsibilities: Part I Excess Exposure Cases, 78 TEX. L. REV. 599, (2000); Charles Silver & Kent Syverud, The Professional Responsibilities of Insurance Defense Lawyers, 45 DUKE L.J. 255, (1995). 53 See, e.g.: AZ-Parsons v. Cont l Nat l Am. Group, 550 P.2d 94 (Ariz. 1976) (disclosure to insurer of confidential information indicating that insured s actions were intentional rather than negligent);

159 But conflicts must be considered even before undertaking a defense representation. The first question that any lawyer must answer when asked to undertake a representation is whether that representation will involve a conflict of interest. Insurance defense counsel is no different from any other lawyer in this respect. If representing the insured and the insurer jointly would create a conflict of interest, then joint representation is impermissible, absent informed consents by both. Independent counsel, representing only the insured, must be paid by the insurer to discharge its duty to defend. Otherwise, the insured would be put at risk that counsel s advice about the representation might be affected by counsel s loyalty to the insurer. Essentially the same analysis applies even if local law does not consider the insurer to be a co-client. If there is a conflict that would preclude joint representation, that conflict would also preclude, absent informed consent by the insured, acceptance of insurer direction by counsel. 54 And if counsel has an ongoing relationship with the insurer, the lawyer s personal interest in pleasing the insurer may a conflict in the same way that a legal duty of loyalty does. The governing standard is stated in ABA Model Rule 1.7, which is substantively identical on this point to the law in all states. That rule provides that: (a) Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if: (1) the representation of one client will be directly adverse to another client; or CA-Betts v. Allstate Ins. Co., 201 Cal. Rptr. 528 (Cal. Ct. App. 1984) (defense counsel encouraged insured to adopt no-settlement position which improperly exposed insured to serious risk of personal liability); MD-Fid. & Cas. Co. v. McConnaughy, 179 A.2d 117, (Md. 1962) (taking deposition to establish lack of cooperation); TX-Employers Cas. Co. v. Tilley, 496 S.W.2d 552 (Tex. 1973) (exploitation of position as defense counsel to develop late notice defense on behalf of insurer). 54 See, e.g., ABA MODEL RULES OF PROFESSIONAL CONDUCT, Rules 1.8(f), 5.5(c).

160 (2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer s responsibilities to another client, a former client or a third person or by a personal interest of the lawyer. 55 A material limitation (as that term is used in paragraph (a)(2) of the rule) exists when a lawyer cannot consider, recommend or carry out an appropriate course of action for the client because of the lawyer s other responsibilities or interests. 56 In applying this standard to insurance representations, courts have demanded special sensitivity to any situation where the choices made by defense counsel could benefit the insurer at the insured s expense. Where the existence of divergent interests in the conduct of the defense is inherent in the case, the conflict of interest rules require that the representation be declined, unless all affected clients give informed consent. The most common types of conflict are described in Section 16.04[4][b]. [b] A Disabling Conflict Exists When Insurer and Insured Have Divergent Interests in the Way the Case Is Defended [i] Coverage Related Conflicts The primary example in insurance representations occurs when some factual issue bearing on the insured s liability also bears on existence of coverage. A fact of this sort has been described as a pivotal fact, 57 whose existence is the most common source of conflicts requiring independent counsel. For example, if the insured is sued on alternative theories of negligence and battery, the former will typically be covered but the latter will not. Of course, the insurer and the insured share an interest in defeating the suit entirely and in minimizing any judgment. But if liability is found, the insured would prefer that it be based on (covered) negligence, while 55 ABA MODEL RULES OF PROFESSIONAL CONDUCT, Rule 1.7(a). 56 ABA MODEL RULES OF PROFESSIONAL CONDUCT, Rule 1.7, cmt. [8]. 57 The term is that of Ronald Mallen. See Ronald Mallen, A New Definition of Insurance Defense Counsel, 53 INS. COUN. J. 108, (1986).

161 the insurer s interest would be served if it were based on (noncovered) battery. Because the way in which the case is defended has a real possibility of affecting the basis on which any liability would be found, this divergence of interest creates a conflict of interest for any defense counsel seeking to advance the insurer s interest as well as that of the insured. 58 More complicated examples must also be considered. 59 But the mere existence of some question as to coverage does not create a conflict. Only if the way in which the insured s defense is handled would affect the determination of coverage does a conflict exist, 60 and many coverage questions are unrelated to the matters at issue in the tort action. For example, counsel may be asked to defend a case involving an auto accident in which the insured s cousin was injured when the car operated by the insured ran into a tree. The cousin had been living with the insured while attending a nearby school for a semester, but has returned to his parents home after being released from the hospital. The claim representative assumes the insured s defense, but reserves the right to deny coverage under the policy s exclusion for injuries to relatives residing in the insured s household. Coverage counsel brings a declaratory judgment action to resolve that issue. Because the resident relative issue does not overlap with the issues in the tort action, it does not create any conflict of interest, and independent counsel is 58 See, e.g., CA-San Diego Fed. Credit Union v. Cumis Ins. Soc y, 208 Cal. Rptr. 494, 496 (Cal. Ct. App. 1984) (suit for both negligent and intentional injuries) Accord: IL-Md. Cas. Co. v. Peppers, 355 N.E.2d 24, (Ill. 1976); MD-Brohawn v. Transamerica Ins. Co., 347 A.2d 842, (Md. 1975). 59 See William T. Barker, Insurer Control of the Defense: Reservations of Rights and the Right To Independent Counsel, 71 DEF. COUN. J. 16, (2004). 60 See RESTATEMENT (THIRD) OF LAW GOVERNING LAWYERS 123 cmt. c(iii) (general antagonism between clients not conflict, so long as conflicting interests not implicated in particular representation).

162 not required. 61 (Moreover, because the insured s residence is irrelevant to the tort action, counsel is under no duty to disclose information on that subject to the claim representative, even if unfavorable to the insured. Any such disclosure would breach the duties of loyalty and confidentiality owed to the insured.) Excess exposure, standing alone does not create a conflict for defense counsel: defense counsel seeks to do either of two things: either win the case or keep the damages as low as possible. Everything he does in fulfillment of either objective must of necessity benefit both clients. 62 But insurer and insured do have differing interests regarding settlement whenever the insured has excess exposure (see 16.05[8]), and counsel must act carefully in dealing with that subject. But, if the case involves a pivotal fact, there will typically be an irreconcilable conflict. Counsel must advocate a position regarding the pivotal fact and any position will be contrary to the interests of one client or the other. By shaping the defense, counsel could thus shift liabilities found by the court between covered and non covered status. Where the coverage issues present such an opportunity, the insured is entitled to independent counsel unless the insured gives informed consent to the conflict. [ii] Cross-Insureds or Uninsured/Underinsured Motorist ( UM/UIM ) Claims Some courts have concluded that conflicts of this sort can also arise in auto accidents where the insured has a claim that the other party is (1) at fault and (2) either uninsured or underinsured. Because the UM or UIM claim could give the insurer an interest in establishing the insured s contributory or comparative fault, there could be an incentive to defend the claim 61 CA-McGee v. Superior Ct., 221 Cal. Rptr. 421, (Cal. Ct. App. 1985). 62 MS-Hartford Accident & Indem. Co. v. Foster, 528 So. 2d 255, 269 (Miss. 1988).

163 against the insured less vigorously. 63 Similar problems can arise in situations where two of the insurer s insureds assert covered claims against one another based on the same incident 64 or where two insured defendants have inconsistent defenses. 65 The facts in each case must be carefully analyzed to determine whether there is any substantial basis for concluding that the insurer has an interest that could be served by an impaired defense. If so, independent counsel should be provided. [iii] Illustrative Case: Applying Traditional Principles to Environmental Claims [A] Key Question: Is There a Reasonable Possibility that the Manner in which the Insured Is Defended Could Affect the Outcome of the Coverage Dispute? In Armstrong Cleaners, Inc. v. Erie Insurance Exchange, 66 the Indiana Department of Environmental Management determined that a dry cleaning operation was a potential source of cleaning solvents in groundwater. The facility was owned by Mary Ivey, who had leased it to Richard and Betty Armstrong and their corporation from 1989 to 1996 and had leased it to Ronald and Carolyn Ray both before and after the lease to the Armstrongs. Erie Insurance Company had insured the Armstrongs during their tenure as lessees. 67 The Department notified Ivey and the Rays that they were potentially responsible parties ( PRPs ) for cleaning up the pollution. Ivey sued her insurer, State Farm for coverage, and State Farm sued the Rays, the Armstrongs, and their insurers. Erie assumed the defense, while reserving its right to deny coverage if it were determined (1) that the contamination were not an 63 MD-Nationwide Mut. Ins. Co. v. Webb, 436 A.2d 465, (Md. 1981). 64 CA-O Morrow v. Borad, 167 P.2d 483 (Cal. 1946). 65 IL-Murphy v. Urso, 88 Ill. 2d 444, (Ill. 1981). 66 US/IN-Armstrong Cleaners, Inc. v. Erie Ins. Exch., 364 F. Supp. 2d 797 (S.D. Ind. 2005). 67 US/IN-Armstrong Cleaners, 364 F. Supp. at

164 occurrence (that is, an accident ) or (2) if the Armstrongs expected or intended the contamination. Erie also reserved its rights under its pollution exclusion. 68 When Erie refused to pay the Armstrongs independent counsel, they brought this action to establish their right to independent counsel and recover fees they had incurred for such counsel. In addressing this issue, the court recognized that whether the insured is entitled to independent counsel is governed at its core by the Rules of Professional Conduct that address conflicts of interest where an attorney has multiple clients or where a third party is paying the attorney to represent a client (such as the insured). 69 In cases where the handling of the underlying litigation may affect whether the claim is covered or not covered, the conflict of interests may be sufficiently clear and immediate that one attorney cannot represent the interests of both the insurer and the insured. 70 But applying this standard requires case-by-case, fact-specific analysis: Under this standard, parties and courts cannot resort to easy rules of thumb. There is no talismanic rule that allows a facile determination of whether a disqualifying conflict exists. Instead, [t]he potential for conflict requires a careful analysis of the parties respective interests to determine whether they can be reconciled or whether an actual conflict of interest precludes insurerappointed defense counsel from presenting a quality defense for the insured. Whether the potential conflict of interest is sufficient to require the insured s consent is a question of degree that requires some predictions about the course of the representation. If there is a reasonable possibility that the manner in which the insured is defended could affect the outcome of the insurer s coverage dispute, then the conflict may be sufficient to require the insurer to 68 US/IN-Armstrong Cleaners, 364 F. Supp. at Erie admitted that the pollution exclusion is unenforceable under current Indiana case law. See, e.g., IN-Am. States Ins. Co. v. Kiger, 662 N.E.2d 945 (Ind. 1996). 69 US/IN-Armstrong Cleaners, 364 F. Supp. at US/IN-Armstrong Cleaners, 364 F. Supp. at 806.

165 pay for counsel of the insured s choice. Evaluating that risk requires close attention to the details of the underlying litigation. The court must then make a reasonable judgment about whether there is a significant risk that the attorney selected by the insurance company will have the representation of the insureds significantly impaired by the attorney s relationship with the insurer. 71 [B] Whether There Is a Conflict Depends on the Relationship of the Coverage Issues to Those in the Underlying Action Under the standard thus articulated, the court agreed that the reservation under the pollution exclusion did not create any conflict, nor did a generic reservation of the right to deny coverage if some new facts implicated a coverage defense. 72 The prospect of unknown facts turning up did not pose a significant risk to the representation and the pollution exclusion was both unenforceable and unrelated to the issues presented in the defense of the case. The occurrence requirement and the expected/intended exclusion raised essentially the same questions for purposes of conflict analysis. Liability issues in the underlying action did not pose any conflict, because they turned only on whether the Armstrongs caused or contributed to the release of a hazardous substance. Culpability, even to the extent of negligence, is not an issue in the underlying action, so there would be no overlap with the coverage issues. 73 But the court s analysis did not stop with the liability issues. When it came to allocation of liability among those contributing to the contamination, issues of culpability and degree of care would be at issue. Thus, State Farm and the Rays, would have powerful incentives to show culpability by the Armstrongs in order to maximize the Armstrongs share of the total 71 US/IN-Armstrong Cleaners, 364 F. Supp. at 808 (emphasis added, citations omitted). 72 US/IN-Armstrong Cleaners, 364 F. Supp. at US/IN-Armstrong Cleaners, 364 F. Supp. at 811.

166 liability. 74 The law on allocation invite[s] evidence on the Armstrongs knowledge, intent and degree of care. 75 Moreover, findings of fact and explanations of decisions about allocation might well address issues of knowledge and intent. 76 [C] A Conflict Can Be Created If the Coverage Issues Pose Risks to the Representation in the Underlying Action The question under Rule of Professional Conduct 1.7(a)(2) is whether there is a significant risk that an attorney selected by the insurer and subject to its direction would be materially limited in representing the Armstrongs by a relationship with the insurer. 77 If the Armstrongs were found to be contributors to the contamination, Erie s interests might be served by a less than vigorous defense on the allocation issues if findings of culpability might aid its coverage defense. 78 Moreover, defense counsel would need to investigate facts and conduct discovery on the remedial issues and would need to advise Erie on the results of that investigation and discovery so that Erie could take it into account in making decisions about settlement or defense strategy. 79 Such information could easily work to the detriment of the Armstrongs in the coverage dispute with Erie. 80 Moreover, Erie apparently felt it had sufficient information about the situation at the Tillotson location to reserve its rights based on the expected or intended exclusion and the definition of occurrence. The prominence of those same factual and legal issues in the remedial 74 US/IN-Armstrong Cleaners, 364 F. Supp. at US/IN-Armstrong Cleaners, 364 F. Supp. at US/IN-Armstrong Cleaners, 364 F. Supp. at US/IN-Armstrong Cleaners, 364 F. Supp. at US/IN-Armstrong Cleaners, 364 F. Supp. at US/IN-Armstrong Cleaners, 364 F. Supp. at US/IN-Armstrong Cleaners, 364 F. Supp. at

167 portion of the underlying litigation, together with the specific terms of Erie s reservation of rights, means that the undisputed facts show a significant risk that attorneys selected by the insurer would be materially limited in their representation of the Armstrongs. 81 The court emphasized that it was not adopt[ing] a per se rule. 82 Rule 1.7(a)(2) requires a close look at the conflicting interests, the issues in the underlying litigation, and the risk that that the attorney s relationship with the insurer will materially limit his representation of the insured. 83 While Erie had divided the claim file, with different adjusters for defense and coverage, that did not obviate the conflict. To the extent that the concern was disclosure or use of the insured s confidential information, supervisors with responsibility for both files could make use of such information. Moreover, the defense adjuster knew the terms of the reservation of rights and would therefore be able to identify aspects of the case where Erie s coverage interests would be implicated by defense decisions the adjuster would make. 84 [D] Identification of Conflicts Requires Consideration of All Aspects of the Likely Litigation Armstrong Cleaners calls attention to the need to consider aspects of the likely litigation beyond simply the elements of the plaintiff s claim. Conflicts may arise from litigation with codefendants, so the issues which might arise with the co-defendants must be considered in deciding whether there is a conflict requiring independent counsel. If a reservation has been asserted, defense counsel should assume that there is a significant risk that some evidence might 81 US/IN-Armstrong Cleaners, 364 F. Supp. at US/IN-Armstrong Cleaners, 364 F. Supp. at US/IN-Armstrong Cleaners, 364 F. Supp. at US/IN-Armstrong Cleaners, 364 F. Supp. at 817.

168 support that reservation. If that would create a conflict, it may be necessary for the insured to have independent counsel, unless the insurer will withdraw the reservation. [c] Most Jurisdictions Allow the Insured to Select and Direct Independent Counsel, to Be Paid by the Insurer In most jurisdictions, the insured is entitled (at least in the absence of any contrary policy provision) to select independent counsel. 85 In some the insurer is entitled to approve the insured s selection of counsel, approval not to be unreasonably withheld. 86 In a few jurisdictions, the insurer is entitled to select independent counsel, subject to an enhanced duty of good faith in doing so. 87 Where the insured is entitled to make the selection, the insurer has a right to have the insured do so in accordance with the contractual duty of good faith and fair dealing. As explained in Center Foundation v. Chicago Insurance Co.: 88 the duty of good faith imposed upon an insured includes the obligation to act reasonably in selecting as independent counsel an attorney qualified to present a meaningful defense and willing to engage in ethical billing practices at a standard stricter than that of the marketplace. Conduct arguably acceptable in the ordinary attorney-client relationship where the latter pays the former from 85 See, e.g.: CA-San Diego Fed. Credit Union v. Cumis Ins. Soc y, 208 Cal. Rptr. 494, 496 (Cal. Ct. App. 1984); IL-Md. Cas. Co. v. Peppers, 355 N.E.2d 24, (Ill. 1976); MD-Brohawn v. Transamerica In. Co., 347 A.2d 842, 854 (Md. 1975). 86 RI-Employers Fire Ins. Co. v. Beals, 240 A.2d 397, (R.I. 1968). 87 AL-L & S Roofing Supply Co. v. St. Paul Fire & Marine Ins. Co., 521 So. 2d 1298, 1304 (Ala. 1987). See also: HI-Finley v. Home Ins. Co., 975 P.2d 1145, (Haw. 1998); WA-Tank v. State Farm Fire & Cas. Co., 715 P.2d 1133, 1138 (Wash. 1986). 88 CA-Ctr. Found. v. Chicago Ins. Co., 278 Cal. Rptr. 13, 21 (Cal. Ct. App. 1991).

169 his own pocket is not necessarily appropriate in the tripartite context created when independent counsel undertakes to represent the insured at the expense of the insurer. 89 Though not applicable in Center Foundation (which arose before its enactment), California Civil Code 2860(c) codifies (subject to any differing contractual provisions addressing the subject) certain insurer rights with respect to independent counsel, some or all of which might be adopted by courts elsewhere under the insured s duty of good faith: (c) When the insured has selected independent counsel to represent him or her, the insurer may exercise its right to require that the counsel selected possess certain minimum qualifications which may include that the selected counsel have (1) at least five years of civil litigation practice which includes substantial defense experience in the subject at issue in the litigation, and (2) errors and omissions coverage. The insurer s obligation to pay fees to the independent counsel selected by the insured is limited to the rates which are actually paid by the insurer to attorneys retained by it in the ordinary course of business in the defense of similar actions in the community where the claim arose or is being defended. 90 [2] Some Jurisdictions Grant the Insured a Right to Independent Counsel Whenever the Insurer Reserves the Right to Deny Indemnification A few states authorize the insured to reject the insurer s defense whenever there is a reservation of the right to deny indemnification. 91 In jurisdictions which follow this rule, the 89 CA-Ctr. Found., 227 Cal. App. 3d at CA-Cal. Civ. Code 2860(c). 91 States apparently adhering to this rule include Idaho, Kentucky, Massachusetts, Missouri, New Jersey, North Carolina, South Dakota, and Texas. See: US/SD-Kan. Bankers Sur. Co. v. Lynass, 920 F.2d 546, 548 (8th Cir. 1990) (relying on SD- Connolly v. Standard Cas. Co., 73 N.W.2d 119, 122 (S.D. 1955), to find insurer guilty of bad faith for attempting to retain control of defense after reserving rights, even though insurer later affirmed coverage unconditionally and settled case); ID-Boise Motor Car Co. v. St. Paul Mercury Indem. Co., 112 P.2d 1011, 1016 (Idaho 1941); KY-Med. Prot. Co. v. Davis, 581 S.W.2d 25, 26 (Ky. Ct. App. 1979); MA-Three Sons, Inc. v. Phoenix Ins. Co., 257 N.E.2d 774, (Mass. 1970);

170 insured is never obliged to accept a defense under reservation of the insurer s rights to deny indemnification for any judgment rendered. Under this view, the insured s rejection of a defense under reservation may require the insurer either to affirm coverage unconditionally and defend or to disclaim coverage and refuse to defend, at the risk of breaching the policy if there actually was a duty to defend. Some jurisdictions permit the insurer to avoid the latter risk by agreeing to pay for a defense conducted by counsel selected and controlled by the insured. But none of the jurisdictions adhering to this rule permit the insurer, over the insured s objection, to control the defense when there is any question of coverage for the liabilities asserted in the action to be defended. The insurer s role is limited to payment of counsel who represents and is directed by the insured alone. The doctrine just described is sometimes said to be generally accepted. 92 But that is not so. Several states have explicitly rejected the contention that an insurer s reservation of rights is MO-State Farm Mut. Auto. Ins. Co. v. Ballmer, 899 S.W.2d 523, 527 (Mo. 1995); NJ-Merchants Indem. Corp. v. Eggleston, 179 A.2d 505, (N.J. 1962); NC-Nat l Mortgage Corp. v. Am. Title Ins. Co., 255 S.E.2d 622, (N.C. Ct. App. 1979), rev d on other grounds, 261 S.E.2d 844 (N.C. 1980); SD-Connolly v. Standard Cas. Co., 73 N.W.2d 119, 122 (S.D. 1955) (dictum); TX-Employers Cas. Co. v. Tilley, 496 S.W.2d 552, 559 (Tex. 1973); Ranger Ins. Co. v. Robertson, 707 S.W.2d 135, 143 (Tex. App. 1986). See also: AK-Alaska takes this position as to certain kinds of reservations. Cont l Ins. Co. v. Bayless & Roberts, Inc., 608 P.2d 281, 288 (Alaska 1980). FL-Florida follows a slightly modified rule. Fla. Stat (1984) (requiring that insurer and insured agree on counsel if insurer reserves rights). 92 See, e.g., APPLEMAN, INSURANCE LAW & PRACTICE 4686, at 169 (Berdal rev. 1979). On this basis, federal courts have sometimes suggested that states which have not addressed the issue would adopt this rule. See:

171 ineffective if the insured objects. 93 Moreover, cases adopting the reject the defense rule were mostly decided before development of the more precise conflict of interest rule, so the latter is the clear modern trend. As discussed in Section 16.04[4], most jurisdictions that have addressed the issue consider questions of the right to control the defense in terms of whether there is a conflict of interest, implying that a reservation of rights alone is not enough to deprive the insurer of this right. Finally, even jurisdictions ostensibly adhering to the rule that a reservation of rights is enough to entitle the insured to control the defense have often adopted that rule in cases where there was a conflict and might be persuaded to limit the rule to such cases were the issue presented in a case where there was no conflict. This is particularly so where (as in most of the states at issue) the reject the defense rule was adopted before the conflict-based rule was developed. US/GA-Am. Fam. Life Assurance Co. v. U.S. Fire Co., 885 F.2d 826, 831 (11th Cir. 1989) (characterizing any denial of coverage as creating conflict of interest on basis of statement to that effect in Appleman treatise); US/IA-City of Carter Lake v. Aetna Cas. & Sur. Co., 604 F.2d 1052, 1060 n.7 (8th Cir. 1979) (dictum describing general operation of a reservation of rights); US/CT/NY-Mundry v. Great Am. Ins. Co., 369 F.2d 678, 682 (2d Cir. 1966) (dictum). 93 See, e.g.: US/AL-Am. Home Assurance Co. v. Glenn Estess & Assocs., Inc., 763 F.2d 1237, (11th Cir. 1985); AL-Home Indemn. Co. v. Reed, 381 So. 2d 45, 52 (Ala. 1980); AZ-McGough v. INA, 691 P.2d 738, (Ariz. Ct. App. 1984); HI-Great Sw. Fire Ins. Co. v. H.V. Corp., 658 P.2d 337, 340 (Haw. Ct. App. 1983); OR-Ferguson v. Birmingham Fire Ins. Co., 460 P.2d 342, (Or. 1969). See also US/CA-Walbrook Ins. Co. v. Goshgarian & Goshgarian, 726 F. Supp. 777, 783 (C.D. Cal. 1989) (surveying law and concluding that the modern trend is to find a unilateral reservation is effective without the insured s consent ).

172 New Jersey, uniquely, holds that, unless the insured agrees to a defense under reservation, a conflict converts the duty to defend into a duty to reimburse, after coverage is determined. 94 This essentially forces the insured to fund the defense until coverage is determined. That denies the insured the full benefit of the duty to defend. [3] Absent a Right to Independent Counsel, the Insurer Is Entitled to Require Advance Consultation and Approval Regarding Significant Defense Activities It Will Be Asked to Pay For, But Defense Counsel Counsel s Acceptance of Insurer Direction May Be Limited by Duties to the Insured [a] Consultation With the Claim Representative and Acceptance of Direction Create No Ethical Issues Unless the Direction Would Subject the Insured s Interest to Substantial and Avoidable Risks There was a time when insurers handled the defense simply by assigning counsel and letting counsel handle the case with little or no involvement by insurer claims personnel. That time is long past, as most insurers seek increasingly active involvement in making defense decisions, decisions that typically affect both the amount the insurer will spend on the case and the value of those expenditures in controlling overall claim cost (an amount including the payments to claimants and the allocated cost of the insurer s own claims personnel). Among the tools insurers have used to seek minimization of claim cost have been litigation guidelines and outside bill review. 95 These tools have been very controversial, with defense lawyers claiming impairment of their independent judgment and breach of attorney-client confidentiality in disclosure of billing entries to outside reviewers. The discussion in Section 16.04[6] concerns insurer direction and guidelines; outside bill review is addressed in Section 16.04[7]. 94 NJ-Burd v. Sussex Mut. Ins. Co., 267 A.2d 7, (N.J. 1970). 95 Bill review is frequently referred to as auditing, in part because bill review firms often engage in auditing as part of their overall activities. But most bill review looks only at the information in the bill itself, without checking that information against underlying documents.

173 If the insurer so requests, counsel should consult with the claim representative about any investigation that appears necessary or desirable. Consultation may cover investigation already done or in progress, the timing of further investigation, whether the investigation should be conducted by the insurer or outside investigators, and any expense to be incurred. The best practice is that this topic should be addressed as soon as practicable after assignment of the case. Counsel should consult with the claim representative about strategy and tactics, including pleadings, discovery, and motion practice. Consultation may cover timing of various actions (e.g., possible deferral of depositions pending efforts to settle) and the expense to be incurred (e.g., for travel or expert witnesses). After advising the claim representative on counsel s recommendations and the pros and cons of various courses, counsel may defer to the claim representative s preferences, so long as doing so does not appear to involve any substantial risk to any interest of the insured. The Restatement considers this sort of situation as follows: Insurer, a liability insurance company, has issued a policy to Policyholder under which Insurer is to provide a defense and otherwise insure Policyholder against claims covered under the insurance policy. A suit filed against Policyholder alleges that Policyholder is liable for a covered act and for an amount within the policy s monetary limits. Pursuant to the policy s terms, Insurer designates Lawyer to defend Policyholder. Lawyer believes doubling the number of depositions taken, at a cost of $5000, would somewhat increase Policyholder s chances of prevailing and Lawyer so informs Insurer and Policyholder. If the insurance contract confers authority on Insurer to make such decisions about the expense of defense, and Lawyer reasonably believes that the additional depositions can be foregone without violating the duty of competent representation owed by Lawyer to Policyholder, Lawyer may comply with Insurer s direction that taking the depositions would not be worth the cost RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS 134 cmt. f, Illus. 5 (Main vol. 2000).

174 If the course preferred by the claim representative creates no substantial risk to any interest of the insured, following that course cannot violate the duty of competent representation owed to the insured. [b] If the Course Preferred by the Insurer Entails Substantial and Avoidable Risks to the Insured s Interests, Defense Counsel Must Consult With the Insured If counsel concludes that a substantial risk to the insured s interests would result, counsel should so advise the claim representative, request reconsideration, and elaborate the reasons for counsel s recommendation and the reasons why the claim representative s preference would create a substantial risk for the insured. If the claim representative adheres to the preference that appears to pose such a threat, the insured must be promptly advised of that risk and consulted about its effect. The insurer is not obliged to approve all recommendations of defense counsel, even where disapproval may entail some risk to the insured. Insurance law and insurance contract interpretation determine the extent to which the insurer is obliged to protect the insured s interests (by settling or committing extra funds in support of the defense, e.g., by hiring experts). Authority to commit the insurer s funds does not rest with counsel. If claims personnel decide that the protection of the insured recommended by defense counsel is not due, then the insured must be notified and allowed to make informed decisions about the representation. A lawyer s duties in dealing with insurer guidelines requiring the insurer s approval for various litigation activities were examined in American Bar Association Opinion That opinion assumes that the insurer has directed the lawyer to proceed in a particular way, rather than merely declining to pay for services the lawyer has recommended. First, in an elaboration of Opinion , the ABA Opinion concluded that the insurer and insured must be advised about how the representation will be conducted. Counsel must tell the insurer that counsel may not be able to follow insurer directions if they would harm the

175 interests of the insured. Counsel must also tell the insured about the insurer s normal practices in directing representations: If the lawyer is hired to defend an insured pursuant to an insurance policy that authorizes the insurer to control the defense and, in its sole discretion, to settle within policy limits, the lawyer must communicate these limitations on his representation of the insured to the insured, preferably early in the representation. The lawyer should make appropriate disclosures sufficient to apprise the insured of the limited nature of his representation as well as the insurer s right to control the defense in accordance with the terms of the insurance contract... No formal acceptance or written consent is necessary. The insured manifests consent to the limited representation by accepting the defense offered by the insurer after being advised of the terms of the representation being offered. 97 The Tennessee Bar offered similar advice on the initial consultation with the insured: It is not proper to call upon the insured to make a decision about the directives in question (to always appeal adverse general sessions verdicts, to never agree to mediation and to never waive the right to a jury) at the outset of the representation, at a time when it is unclear that any of these situations are likely to occur and at a time when the insured cannot readily assess what interests she might have that could be affected by those decisions. Rather, the insured should be informed at the outset that the insurer ordinarily issues such directions. Counsel may further explain that, in light of the insurance policy and the insured s tender of defense, counsel assumes that such directions should be followed unless counsel identifies some reasonable probability that following the directive might differ from an interest of the insured (such as by exposing her to or increasing her exposure to liability in excess of limits). But if counsel identifies a reasonable possibility of an interest being advanced that differs from that of the insured, counsel will consult with the insured about the decision at the time it is to be made and in light of all the circumstances then prevailing. 98 Counsel may then proceed so long as there appears to be no threat to the insured s interests from any direction the insurer gives. This ordinarily means that ethical problems cannot 97 ABA Op TN-Tenn. Bd. of Prof. Resp., Formal Ethics Op F-145.

176 arise unless there is some question as to coverage or the suit presents a genuine possibility of liability in excess of policy limits. 99 If counsel believes that some insurer decision poses a substantial risk to the insured, counsel should point that out to the insurer and request reconsideration. 100 If the insurer will not reconsider, then counsel must inform the insured, fully describe the risks and benefits, and inquire whether the insured will consent to having counsel proceed on the basis the insurer requests. The Tennessee Bar describes such a consultation as follows: Counsel should describe the decision and its risks and benefits from the standpoint of the insured. Of course, these will include whatever risks to the insured that counsel believes might result from the compliance. But objection to the insurer s directive would also have risks and therefore, where appropriate, counsel should point out that the insurer might take the position that any unjustified refusal to permit counsel to follow its direction would breach the insurance contract. If the insurer were correct in so contending an objection would endanger the insured s coverage. On the other hand, if the insured permits counsel to follow the insurer s directive, the insured could also reserve the right to hold the insurer responsible for any resulting damage to the insured. (The insurer would be liable if the directive were found to breach its duties under the insurance policy.) The insured should be advised of the utility of obtaining independent counsel, at the insured s own expense, in considering whether to acquiesce in the insurer s directive (perhaps under protest). If the insured acquiesces, after being properly advised, counsel may comply with the insurer s directive In some special circumstances, as with a doctor sued for malpractice, the insured may have reputational or other collateral interests beyond avoiding any personal payment. Where such interests are implicated, the lawyer would treat them in the same way as the more common financial interests, by implementing the procedures described here. 100 The procedures approved in ABA Opinion for handling particular conflicts in insurance defense representations appear to have been first recommended in Ellen S. Pryor & Charles Silver, Defense Lawyers Professional Responsibilities: Part I Excess Exposure Cases, 78 TEX. L. REV. 599, 644 (2000). But those procedures are logically implied by the conflicts rules applicable to all representations involving duties to multiple persons. 101 TN-Tenn. Bd. of Prof. Resp., Formal Ethics Op F-145.

177 If the insured refuses to consent, then counsel cannot proceed in the way the insurer requests. If the insurer will not rescind the disputed decision, counsel must then withdraw. 102 The ABA Opinion reached a similar conclusion: If the lawyer reasonably believes her representation of the insured will be impaired materially by the insurer s guidelines or if the insured objects to the defense provided by a lawyer working under insurance company guidelines, the lawyer must consult with both the insured and the insurer concerning the means by which the objectives of the representation are being pursued. If the lawyer is to proceed with the representation of the insured at the direction of the insurer, the lawyer must make appropriate disclosure sufficient to apprise the insured of the limited nature of his representation as well as the insurer s right to control the defense in accordance with the terms of the insurance contract. 103 If the insurer does not withdraw or modify the limitation on the lawyer s representation and the insured refuses to consent to the limited representation, the resulting conflict implicates Rule 1.7(b) and unless the lawyer is willing to represent the insured without compensation from the insurer, requires the lawyer to terminate the representation of both clients. 104 This procedure fully protects insureds in the infrequent cases where insurer guidelines or direction might create problems, while allowing such guidelines and direction to operate in the multitude of cases where they do not cause problems. 105 That procedure was subsequently approved by the Pennsylvania Bar Association. 106 It is also approved by an opinion of Professor 102 A request to withdraw will necessarily involve the court, which may resolve any dispute between insurer and insured. 103 See ABA MODEL RULES OF PROFESSIONAL CONDUCT, Rule 1.8(f)(2); Board of Professional Responsibility of the Supreme Court of Tennessee Ethics Op F-145 (Sept. 8, 1999). 104 ABA Op The ABA had previously reached similar conclusions regarding defense counsel s acceptance of insurer instructions regarding settlement. AMERICAN BAR ASS N STANDING COMMITTEE ON ETHICS & PROFESSIONAL RESPONSIBILITY, FORMAL OPINION (1996) (defense counsel may accept insurer instructions regarding settlement so long as insured acquiesces in insurer direction). 106 PA-Pa. Bar Ass n Comm. on Legal Ethics and Prof. Resp., Formal Op

178 Geoffrey C. Hazard, Jr., the Reporter for the Model Rules and a leading academic authority on professional responsibility. 107 Bar opinions questioning the propriety of prior approval requirements have not addressed this means of reconciling such requirements with the lawyer s ethical duties to the client insured. Those objecting to insurer direction usually rely on the lawyer s duty to exercise independent judgment on behalf of each client, and in particular on behalf of the insured. This ignores the protections provided by the conflict rules, as just described. If the lawyer consults with the insured about a decision that presents risks to him or her, the claim representative s directions cannot control counsel s actions unless the insured gives informed consent. If the insured does give informed consent, 108 defense counsel can treat the direction as coming from the insured. If the insured objects, then either the insurer s acquiescence in the insured s wishes or counsel s withdrawal will likewise prevent the insurer from controlling the insured s representation. Of course, the insured does not have total freedom to withhold consent to the insurer s instructions. The insured has a duty under standard insurance policies to cooperate with the insurer s defense of claims against the insured. While there would be no duty to cooperate with a defense that itself breached the insurer s obligations under the policy, the insured would have 107 Opinion of Geoffrey C. Hazard, Jr., at 4-5 & Prof. Hazard did not analyze the full set of preliminary steps that attempt to resolve the conflict, as described in ABA Opinion He simply approved the adequacy of the means available to the lawyer to comply with ethical duties if the conflict could not be resolved: either perform the services and seek payment later or, to avoid the risk of nonpayment, withdraw. Dean Syverud concurs. Kent D. Syverud, The Ethics of Insurer Litigation Management Guidelines and Legal Audits, 21 INS. LITIG. RPTR. 180, 188 (1999). See also MT-In re Rules of Prof l Conduct, 2 P.3d 806 (Mont. 2000). 108 An insured giving such consent may, of course, reserve the right to hold the insurer responsible if the insurer directive leads to a bad result for the insured. This option is one the insured would consider in deciding whether to consent.

179 to consider the possibility that the insurer might be within its rights. If so, refusal to consent to the direction could breach the duty of cooperation and put the insured s coverage at risk. A lawyer representing both insurer and insured would have a conflict of interest precluding provision of advice on that subject, in which they have adverse interests. It is also outside the scope of any defense representation that the insurer has undertaken to pay for, even if the insurer is not a client. Certainly, the lawyer cannot adjudicate any such dispute between insurer and insured. So, the insured should be advised that there is some risk and to consult personal counsel if evaluation of that risk is desired. 109 [c] Involvement of the Claim Representative Neither Interferes With Counsel s Independent Judgment Nor Relieves Counsel of the Obligation to Exercise That Judgment Model Rule 5.4(a) provides that [a] lawyer shall not permit a person who recommends employment or pays the lawyer to render legal services for another to direct or regulate the lawyer s professional judgment in rendering such service. Model Rule 1.8(f) has similar terms. A lawyer defending lawsuits exercises independent judgment by advising clients of options they have and of the advantages and disadvantages of each option. The lawyer exercises independent judgment by making recommendations of the options the lawyer sees as best serving the objectives the lawyer has been retained to advance. But, especially where the options involve expenditure of additional money, the lawyer cannot decide to spend clients funds if the clients choose to reserve those funds for other purposes. The distinction here is one between freedom of judgment, which lawyers must always preserve, and freedom of action. Budgetary decisions constrain lawyers actions. They do not 109 See: MA-Mass. Bar Op (Use of Outside Legal Auditors); TN-Tenn. Formal Ethics Op A-145.

180 prevent lawyers from considering options or recommending them. Consequently, they do not interfere with lawyers ability to give independent advice. 110 The lawyer s duty to exercise independent professional judgment does not limit a client s freedom to decide which of a lawyer s recommendations to fund. 111 The protection for an insured is not some power of counsel to decide what insurance contract requires the insurer to do. Rather, that protection is the obligation of counsel to alert the insured of any decision by the claim representative that creates some substantial risk to the insured s interests. If the insured then wishes to dispute the propriety of the decision, the insured may retain other counsel for that purpose or may discharge counsel and assume the defense personally (perhaps reserving the right to hold the insurer responsible for the cost). [d] In re Rules of Professional Conduct Refused to Consider Relevant Facts and Erred in Its Legal Analysis [i] The Case In re Rules of Professional Conduct 112 was an extraordinary case. Montana defense lawyers filed an ex parte petition for the court to exercise original jurisdiction and opine on two questions: 1. May an attorney licensed to practice law in Montana, or admitted pro hac vice, agree to abide by an insurer s billing and practice rules which impose conditions limiting or directing the scope and extent of the representation of his or her client, the insured? 2. May an attorney licensed to practice law in Montana, or admitted pro hac vice, be required to submit detailed descriptions of professional services to outside persons or entities without first 110 Ellen S. Pryor & Charles Silver, Defense Lawyers Professional Responsibilities: Part I Excess Exposure Cases, 78 TEX. L. REV. 599, 647 (2000). 111 Pryor & Silver, 78 TEX. L. REV. at MT-In re Rules of Prof l Conduct, 2 P.3d 806 (Mont. 2000).

181 obtaining the informed consent of his or her client and do so without violating client confidentiality? 113 The court granted the petition and directed insurer respondents selected by petitioners to file copies of their litigation guidelines. The court inquired whether the parties thought it necessary to develop a factual record. Petitioners urged that the issues be addressed in a factual vacuum (apart from the filed copies of the guidelines). The insurers asserted that factual proceedings were essential and stated an intent to prove that insureds usually do not have personal interests at stake in insured litigation, that insurers interests in defending such litigation are almost always closely aligned with the insureds interests, and that the guidelines were administered in ways that protect insureds from any risk of harm to personal interests they may have. The court refused to consider the evidence the insurers sought to present. 114 The insurers were permitted to file one expert opinion, and submitted one by Prof. Geoffrey C. Hazard, Jr. 115 As part of the basis of that opinion, the insurers provided Prof. Hazard factual materials about the use of the guidelines, the manner in which they are administered, and the way in which bill reviews are conducted (with specific protections of confidentiality of the information reviewed). This factual material was filed with Prof. Hazard s opinion. Petitioners moved to strike those exhibits to his opinion. The court did not strike the exhibits, but indicated displeasure at their submission. Its opinion took no account of those exhibits. The central feature of all but one of the sets of guidelines was a requirement that counsel obtain prior approval from the claim representative before engaging in any of a wide range of 113 MT-In re Rules of Prof l Conduct, 2 P.3d at MT-In re Rules of Prof l Conduct, 2 P.3d at Prof. Hazard, Trustee Professor of Law at the University of Pennsylvania, is probably the leading academic authority on the law of lawyering, was the Director of the American Law Institute during its preparation of the RESTATEMENT, and was the Reporter for the ABA Commission that drafted the Model Rules.

182 defense activities. Failure to obtain such approval (and to so state on the bill) would result in nonpayment for the unapproved activities. The one exception was Allstate s set of guidelines. Allstate required that counsel consult with the claim representative before conducting various activities, but left all decisions about them to counsel once the consultation had occurred. All of the guidelines required detailed descriptions of the services rendered. Most of them required submission of the bills to outside reviewers. The court began with an extended analysis in which it concluded that an insurer was never a co-client of defense counsel, despite prior Montana law to the contrary. 116 Nor could it be regarded as an agent of the insured, entitled to direct the defense unless and until the insured directed otherwise. 117 Any requirement of prior approval impermissibly interfered with the lawyer s obligation to exercise independent judgment on behalf of the insured. 118 Nor could an attorney submit bills to outside reviewers without the insured s informed consent. 119 [ii] Critique As to Outside Counsel Guidelines 120 [A] The Montana Court Refused to Consider Actual Facts and Relied on a Factual Premise Without Any Record Support The insurers sought to make a factual record in support of the propriety of their practices, but the court refused to consider any facts. The insurers sought to show that they did not require prior approval in the expectation of refusing approval for many recommended activities. 116 MT-In re Rules of Prof l Conduct, 2 P.3d at MT-In re Rules of Prof l Conduct, 2 P.3d at MT-In re Rules of Prof l Conduct, 2 P.3d at MT-In re Rules of Prof l Conduct, 2 P.3d at This discussion draws on a more extended critique in William T. Barker, Insurer Litigation Guidelines and Outside Bill Review: What Now?, Part I: The Montana Supreme Court Speaks, 23 INS. LITIG. RPTR. 485 (2001); Part II: A Critique of the Montana Supreme Court s Litigation Guideline Ruling, 23 INS. LITIG. RPTR. 529 (2001); Part III:A Critique of the Montana Supreme Court s Bill Review Ruling, 23 INS. LITIG. RPTR. 561 (2001).

183 Adjusters are usually not lawyers and, so, cannot make case-specific legal judgments about what is and is not necessary to defense of an action. 121 Insurers hire lawyers whose competence and judgment they trust and rely heavily on the advice of those lawyers. Moreover, if the case involves the potential for exposure in excess of limits or noncovered liability, the insurer would face a serious bad faith risk were it to reject counsel s recommendation and the insured later suffer a judgment imposing personal liability. (If the insured s interests were not at risk, the consequences of any short-sighted refusal to approve would fall solely on the insurer itself.) The insurers sought to prove that, when particular services are recommended by a lawyer retained by an insurer, approval for those services is rarely, if ever, denied. They explained that the primary purpose of prior-approval requirements was to require the lawyer and the adjuster to discuss the case and the way in which the proposed activities relate to the strategy for the case before incurring significant expenses. Adjusters see a great many cases and may have insights and perspectives that can inform the lawyer s thinking about a case. In considering whether to fund particular activities at a particular time, the adjuster can also revise the adjuster s own strategy for trying to settle the case. If new settlement efforts are indicated, then expensive defense activities may be deferred until the results of those efforts are known. Perhaps the most important benefit sought from the consultation required by priorapproval requirements was to force the lawyer to think harder about the need for particular services. Lawyers paid by the hour make more money by rendering more services. Being human, they have a tendency to see benefits in additional services that they would like to render 121 Adjusters, or claims managers, may be able to make generalized judgments that, for example, pleading motions are rarely cost-effective in auto collision cases. Such cases depend primarily on facts and any success on a motion would likely only result in an amended pleading, with no ultimate benefit to resolution of the case.

184 and to discount the costs of those services to the client. That tendency, if unchecked, would inflate defense costs beyond what a lawyer with no self interest would prescribe. The need for the lawyer to justify recommendations and to discuss them with the adjuster forces the lawyer to examine those recommendations more carefully and critically, in terms of the value to the case of doing that work and doing it now, as opposed to deferring it. None of that resolves the ethical questions the lawyer must address. But a court or committee considering an abstract or hypothetical question about prior approval is likely to look at such a question differently if it fails to understand why such requirements are imposed and how they are administered. Most of the opinions rendered on that subject suggest that those rendering the opinions did not have such a factual understanding, just as they failed to understand the legal analysis set forth in Section 16.04[6][a]-[c]. Not only did the Montana court refuse to allow insurers to offer proof of these facts, it essentially accepted unproven factual assertions by the lawyers challenging the prior approval requirements. The underlying premise for the ruling is an empirical proposition: Respondents argue vigorously that the interests of an insurer and an insured usually coincide and that most litigation is settled within an insured s coverage limits. These arguments gloss over the stark reality that the relationship between an insurer and insured is permeated with potential conflicts MT-In re Rules of Prof l Conduct, 2 P.3d at 813 (emphasis added). The court goes on to say that, [i]n cases where an insured s exposure exceeds his insurance coverage, where the insurer provides a defense subject to a reservation of rights, and where an insurer s obligation to indemnify its insured may be excused because of a policy defense, there are potential conflicts of interest. (In re Rules of Prof l Conduct, 2 P.3d at 813.) So there are. But the court says nothing about how frequent such situations are (or why they should dictate handling of situations where those problems don t arise). Nor does the court consider whether there may be ways to manage such conflicts that fully protect the insured without always divesting the insurer of what even the Montana court apparently conceded is a contractual right of control.

185 The last sentence effectively asserts that conflicts are so pervasive that it is hopeless to try to deal with them on a case-by-case basis: only a categorical provision can adequately protect insureds. But the supposed pervasiveness of conflicts is a factual statement. The court had before it no record to support such a finding. This was an original proceeding in which the court refused the insurers the opportunity to present evidence on issues including the infrequency of conflicts and the nonexistence of harm to insureds resulting from such conflicts. 123 The court relied on distorted statements from commentators, all of whom recognize that conflicts are the exceptional situation and that such conflicts can be managed within a dualclient relationship. 124 Had the insurers been permitted to do so, they contended that they could have shown that the court s factual assertion is blatantly false. They contend that conflicts are infrequent, are usually managed easily, and rarely (if ever) result in harm to insureds. Because the court was 123 KY-Similar statements were made, also without the benefit of any factual record in Am. Ins. Ass n v. Ky. State Bar, 917 S.W.2d 568 (Ky. 1996), another advisory opinion. 124 Thomas D. Morgan, What Insurance Scholars Should Know About Professional Responsibility, 4 CONN. INS. L J. 1, 7-8 (1997), is quoted as saying that dual clients would routinely create the potential for conflicts. But that is true whenever there are multiple clients. Professor Morgan makes no claim about how frequent conflicts are, and argues that it really makes little difference in addressing any actual problems whether the insurer is a client or not. Kent D. Syverud, What Professional Responsibility Scholars Should Know About Insurance, 4 CONN. INS. L J. 17, (1997), is quoted for the proposition that both insurers and insureds have real stakes and that history suggests that unbridled control of the defense of litigation by either the insurance company or the insured creates incentives for the party exercising control to take advantage of the other. But he makes this point just after saying that, in the vast bulk of cases, insurer control has worked well. 4 CONN. INS. L J. at One avoids insurer abuses by applying special rules, such as Cumis, in situations demanding them, and by enforcing ordinary rules of professional conduct and insurance bad faith that prohibit abuse and make it dangerous and expensive to commit it. Contrary to the Montana court s holding, Dean Syverud urges that professional responsibility law not disrupt relationships created by insurance law to efficiently handle liability risks. 4 CONN. INS. L J. at The RESTATEMENT is quoted on the existence of conflict risks, but its proposals for dealing with such risks are dismissed out of hand. MT-In re Rules of Prof l Conduct, 2 P.3d at 814.

186 acting in an essentially legislative capacity, prescribing a rule for the future, it was not subject to the strict requirements of due process. But courts in other contexts will be subject to those requirements. And even those acting legislatively ought to wish to have the facts before making decisions that will be highly disruptive of an important business, one whose charges are a significant part of both family and business budgets. Insurers claim that, if they are given the opportunity to develop the facts and have them honestly assessed, the factual claim made by the Montana court cannot survive scrutiny. At very least, any court considering following the Montana rule should first inquire about the highly contested factual premise of that rule. [B] The Montana Court s Legal Analysis Was Flawed Not only did the Montana court rely on an unsupported factual premise, but it also departed radically from the mainstream of both judicial and scholarly opinions (including the court s own prior opinions) on many fundamental issues. The mainstream opinions Montana repudiates are well founded and the court offered no sound reasons for departing from them. The court ignored the insurer s contractual right to control the defense (see Section 16.04[1]) and rejected the strong majority view that an insurer is ordinarily a co-client of defense counsel (see Section 16.05[2]). The most hostile scholarly view treats the insurer not as a client, but as an agent for the insured. 125 That view allows the insured to take control, covertly, by instructing defense counsel on some points and telling counsel not to let the insurer know. It also allows the insured to have counsel keep whatever secrets the insured chooses from the insurer. I find this view contrary to the contract between insurer and insured. But the point here is that it allows the insurer to manage the defense, as usual, in all cases where the insured does not choose to interfere with that management. (Of course, counsel would be obliged to point out occasions 125 See, e.g., Stephen L. Pepper, Applying the Fundamentals of Lawyers Ethics to Insurance Defense Practice, 4 CONN. INS. L.J. 27, ( ).

187 when the insured might wish to interfere.) It is this alternative that allows so many commentators to say it really doesn t matter greatly whether the insurer is treated as a client. 126 The Montana court refused even to consider these more moderate ways of protecting insureds within a conventional insurance defense relationship. It appears to constitute the lawyer as a sort of trustee for the insured, charged with doing whatever the lawyer thinks is best for the insured, at least unless the insured happens to instruct otherwise. (It is unclear whether any consultation with the insured is contemplated, unless the insured happens to seek such consultation.) Lawyers are normally considered agents, not trustees. Preexisting Montana law was strong for the proposition that the insurer is a co-client, and one with an absolute right of control. 127 The court dismisses all of it for failure to consider whether an insurer is a client under the Rules of Professional Conduct. 128 But the draftsmen of the Model Rules never intended those rules to address this issue. The Scope statement declares that for purposes of determining a lawyer s authority and responsibility, principles of substantive law external to these Rules determine whether a lawyer-client relationship exists. Whether a client-lawyer relationship exists for any specific purpose can depend on circumstances and may be a question of fact. 129 While Montana did not adopt the Scope statement, it did adopt the text of the Model Rules, which contain no provisions governing the formation of an attorney-client relationship. Those Rules provide no support for jurisdictions other than Montana to adopt the latter s view. The Restatement also looks to the facts of the interaction 126 Thomas D. Morgan, What Insurance Scholars Should Know About Professional Responsibility, 4 CONN. INS. L J. 1, 6-9 (1997). 127 See cases purportedly distinguished in MT-In re Rules of Prof l Conduct, 2 P.3d at MT-In re Rules of Prof l Conduct, 2 P.3d at AMERICAN BAR ASS N, ANNOTATED MODEL RULES OF PROFESSIONAL CONDUCT xvii (3d ed. 1995).

188 between lawyer and putative client, not to any categorical rule, to determine when an attorneyclient relationship arises. (See Section 16.05[2].) The Montana court s sticking point, of course, is Rule 1.8(f), providing that when a lawyer receives payment or direction from one other than the client, the lawyer must remain unfettered in independence of professional judgment. From the standpoint of an insured client, the Montana court thought this inconsistent with any right or attempt by the insurer to direct. If accepted, that logic would preclude any lawyer from ever undertaking to represent two or more clients in the same matter. Each client has a right to direct the lawyer, but each would also have a right that the lawyer be free of direction by the others. Taken in the abstract, as court took the insurance defense relationship, the two sets rights cannot coexist. Of course, the two sets of rights can be reconciled, as explained in Section 16.04[6][a]- [c]. In fact, the normal resolution in dual client representations of all sorts is to warn the clients at the outset of the risk of disagreement between them, but (if they are willing) then to undertake the representation unless and until some disagreement arises. At every stage of the relationship, the lawyer exercises independent judgment in advising the clients of the available options, the risks and benefits of each, and the lawyer s recommendation of which option is preferable. So long as the clients can reach agreement on the instructions to the lawyer (which may be done by their deferring to a single decisionmaker), the lawyer executes the instructions. Even if the instructions differ from the lawyer s recommendation, that does not impair the lawyer s independence of judgment, because that independence was fully exercised in advising the clients. If the clients disagree with one another, the lawyer has a conflict and must withdraw. At least outside of insurance representations, it is never the job of a lawyer to override the desires of one client to serve those of another.

189 The Montana decision ultimately rests on a questionable and unsupported finding of fact. The legal approach taken in reaching the decision is far outside the mainstream of American law. So, it seems highly unlikely that more than a few jurisdictions would follow the Montana court. To date, no jurisdiction has followed Montana on the issues addressed in this case. No jurisdiction should do so. [4] While the Insurer Is Entitled to Share Most Confidential Information Regarding the Defense Representation, Disclosure of Such Information to Outside Bill Reviewers May Be Limited Where Such Disclosure Might Prejudice the Confidentiality of That Information From Third Parties [a] Defense Counsel Must Keep Information Regarding the Representation Confidential, Except As Disclosure Is Expressly or Impliedly Authorized One of the fundamental duties of attorneys is to maintain the confidentiality of information they acquire in connection with representation of clients. Model Rule 1.6(a) states this duty as follows: A lawyer shall not reveal information relating to representation of a client unless the client gives informed consent, the disclosure is impliedly authorized in order to carry out the representation, or the disclosure is permitted by paragraph (b) [whose terms are not relevant here]. Model Rule 1.8(b) supplements this prohibition on disclosure of information by prohibiting its use to the disadvantage of the client unless the client gives informed consent, [with exceptions not relevant here]. It is important to remember that these limits on use or disclosure of confidential information are not limited to the types of information protected from compelled disclosure by the attorney client privilege. They broadly limit voluntary use or disclosure of any nonpublic information derived from the representation for purposes other than carrying out the representation.

190 A lawyer is impliedly authorized to make disclosure when appropriate in carrying out representation, [e]xcept to extent that the client s instructions or special circumstances limit that authority. 130 This authorization most obviously permits disclosure when the lawyer reasonably believes doing so will advance the interests of the client in the representation. 131 This standard is taken from the law of agency, under which implied authority is inferred from the nature of the representation, the general usages of similar relationships, and those acts which usually accompany or are reasonably necessary to the representation. 132 For example, attorneys do not ask client consent in sharing their confidential information with non attorneys within a law firm such as secretaries, copy clerks, and accountants, because such disclosure is a necessary and usual part of any representation. The same is true of potential expert witnesses. The insured has contractually committed management of the defense to the insurer, a commitment confirmed when the insured acquiesces in counsel s explanation of the way in which the representation is to be conducted. (See Section 16.05[6][b].) Moreover, the insurer needs full information about the progress and prospects for the case to perform its duties to the insured regarding settlement. On this basis, disclosure to the claim representative of most information regarding the defense is impliedly authorized. Implied authorization (by the insured) for such disclosure normally would not exist, however, if counsel knows of a reasonable prospect that disclosure could be injurious to the insured or if the insured requested that the information not be disclosed. One context in which existence of implied authorization has been contested concerns disclosure of information in billing statements to outside bill reviewers retain by the insurer. 130 ABA MODEL R. PROF. COND. Rule 1.6, cmt RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS RESTATEMENT (SECOND) OF AGENCY (1958).

191 Lexis.com Search: To find cases discussing the disclosure of personal information, use the Search by Topic feature: Click the Search tab and the Search by Topic or Headnote sub-tab. Click through the following topical hierarchy and select your jurisdiction. Search by Topic: Insurance Law > Industry Regulation > Insurance Company Operations > Personal & Public Information > Consumers' Personal Information. [b] In General, Disclosure of Information to the Insurer Is Impliedly Authorized Because most jurisdictions regard the insurer as a co-client with the insured (absent a conflict requiring independent counsel), this implied authorization analysis is supplemented by special rules governing joint representations. Every client has a right to full information about the representation. 133 Where there are two clients represented jointly, this right is inconsistent with a duty to one client to refrain from disclosures to the other. Thus, the normal rule is that (unless the clients agree otherwise) all information may be shared with both clients. 134 This corresponds with the rule that communications of either client with the attorney are not privileged against the other in any subsequent dispute between the two. 135 This limitation on confidentiality is something that the insured must be told near the outset of the representation. (See Section 16.04[7][b].) In general, this permits disclosure of anything received from the plaintiff or other third parties and anything disclosed to them, in discovery, pleadings or otherwise. Such information is 133 ABA MODEL R. PROF. COND. Rule RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS 60, cmt. l. 135 RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS 76(2).

192 no longer truly confidential, and it necessarily affects the insurer s decisions on handling of the claim. This is so even though, in unusual circumstances, disclosure of such information to the claim representative might adversely affect the insured. For example, the insured s deposition testimony about prior accidents might disclose a misrepresentation of loss history that could be a ground for seeking rescission. The lawyer would usually have no reason to know the contents of the application, so there would be no reason to withhold this information in reporting on the deposition. But, if the lawyer knew of the potential adverse impact on the insured, consultation with the insured should precede any such report. If the insured provides confidential information (directly or by providing consent for a third party, such as a doctor, to disclose it) and disclosure to the claim representative of that information could adversely affect the insured (or the insured requests secrecy), that is a matter of even greater delicacy than when such information comes from a third party or has been rendered nonconfidential by disclosure to the plaintiff or others. Problems of this sort are rare, but they must be handled with extreme care. Doubts should be resolved in favor of protecting the insured by withholding information from the claim representative. But withholding information may create a conflict and require withdrawal from further representation, requiring reassignment of the case to other counsel or even permitting the insured to retain independent counsel. Similar problems can be posed where information received from one insured client (e.g. an employee) could adversely affect that client s relationship with another insured co-client (here the employer). But they are usually less delicate, because the insurer would not benefit from disclosure.

193 Even if the insurer is not a co-client, it still has a need for information about the representation in order to discharge its contractual duties and exercise its contractual rights regarding the handling of the defense and settlement of the case, so disclosure to the insurer is still impliedly authorized, unless defense counsel knows of a substantial risk of adverse effect on the insured from such disclosures. [c] Disclosure to Outside Bill Reviewers May Require Informed Consent of the Insured [i] Permissibility of Disclosure to Outside Bill Reviewers Has Been Contested on the Basis of a Risk to the Attorney-Client Privilege While disclosure to the insurer itself has been uncontroversial, disclosure to outside bill reviewers has been extremely controversial and was held impermissible by In re Rules of Professional Conduct. 136 (See Section 16.04[6][d][i].) Moreover, an American Bar Association Ethics Opinion concluded that a lawyer may not disclose the insured s confidential information to a third-party auditor designated by the insurer without the insured s informed consent. Unlike the disclosure of the insured s confidential information to secretaries and interpreters, the disclosure of such information to a third-party auditor, a vendor with whom the lawyer has no employment or direct contractual relationship, may not be deemed essential to the representation and may, therefore, result in a waiver albeit unintended of the privilege. Therefore, since such disclosures always involve the risk of loss of privilege, the lawyer must obtain the insured s informed consent before sending bills with such information to a third party hired by the insurer to audit the bills. 137 [ii] Even If Disclosure of Privileged Information to an Outside Bill Reviewer Would Waive the Privilege, Use of Outside Bill Reviewers Need Not Involve any Danger to the Insured s Interests 136 MT-In re Rules of Prof l Conduct, 2 P.3d 806 (Mont. 2000). 137 ABA STANDING COMMITTEE ON ETHICS & PROFESSIONAL RESPONSIBILITY, FORMAL OP

194 Even if there is some risk that disclosure of privileged information to a third-party bill reviewer might result in the loss of privilege, that need not prevent disclosure of nonprivileged information. The privilege protects only the contents of privileged communications. 138 Ordinarily, a reasonably careful lawyer ought to be able to compose adequately detailed billing statements that do not disclose the contents of privileged communications. So long as the lawyer is able to do this, there would be no risk of waiver of privilege from disclosing the billing statements to the world, let alone to a confidential outside bill reviewer. Of course, waiver of the attorney-client privilege is not the only risk attending disclosure of billing statements. Such statements reveal such things as identities of witnesses deemed important to the defense 139 and may offer important clues to the defense strategy. Fortunately, information of that sort is protected by the work product immunity to discovery. Unlike the attorney-client privilege, which is lost whenever the information is disclosed to any nonprivileged party, only disclosure to an adversary, real or potential, forfeits work product protection. 140 A confidentiality agreement would protect against any risk that the bill reviewer might disclose to an adversary. Accordingly, there should ordinarily be no risk to the insured client from disclosure to a bill reviewer of any nonprivileged information that counsel can properly disclose to the insurer. If the lawyer exercises appropriate care in composing the information going into the billing statements, this should avoid any risk to the interests of the insured client. Absent such a risk, 138 RESTATEMENT(THIRD) OF THE LAW GOVERNING LAWYERS 68(1) (perm. vol. 2000). 139 Identities of witnesses generally are discoverable, so their disclosure in billing statements would ordinarily have no adverse effect on either the insured or the insurer if the billing statements were discoverable by the adverse party. But the importance attached to the witnesses would not be discoverable. 140 MT-In re Rules of Prof l Conduct, 2 P.3d at 819.

195 utility to the representation (similar to the utility of using data processing services to generate bills) should create implied authority to disclose. The above analysis does not rule out the possibility that some set of facts could arise where disclosure to a bill reviewer could present a confidentiality problem. Should a defense lawyer be presented with such facts, the defense lawyer could not include in billing statements the sensitive information that creates the problem. Perhaps this could be addressed by a separate disclosure to the insurer, not shared with the bill reviewer. But there is no need to decide exactly how to handle such a situation unless and until it presents itself. By avoiding disclosure of the contents of privileged communications and relying on work product protection instead of privilege, any risk that an adversary might be able to gain access to confidential information could be avoided. [iii] It Is Not Defense Counsel s Function to Resolve Questions About Any Risk to the Privilege The ABA Opinion and the Montana Court did not question any of the analysis above. Rather, they say that disclosure of privileged information to outside bill reviewers is not impliedly authorized because it risks prejudice to the insured, potential waiver of the attorneyclient privilege. Neither says that the privilege would be lost, for that is a question turning on particular facts of the specific case. 141 But the mere possibility that it might be lost in some unspecified, hypothetical situation is treated as enough to require that the insured be consulted in every situation. The Montana court stated the question as whether third-party auditors are part of a privileged community or magic circle within which confidential information may be shared 141 MT-In re Rules of Prof l Conduct, 2 P.3d at 821.

196 without waiver of the attorney-client or work product privilege. 142 A key precedent was United States v. Massachusetts Institute of Technology, 143 where disclosure of legal bills to an auditor had waived the attorney-client and work product privileges as to those bills. As the court read MIT, if the client s relationship with the auditor could easily be characterized as adversarial, then the auditor would not be considered to share the sort of common interest necessary to permit sharing or information without waiver of the privilege. 144 Similarly, disclosure to an adversary, real or potential, forfeits work product protection. 145 Applying these rules, the Montana court concluded that a third-party auditor is not within the magic circle or community of interest permitting sharing. 146 A mere common interest in controlling costs to keep future insurance premiums down would not suffice. The auditors are not agents of the insured, but of the insurer. The auditor is a potential adversary because there is always the possibility of disputes between auditors, defense counsel, and their client that could result in litigation. 147 The auditors mission is to find fault with legal charges. As such, third-party auditors stand in potential conflict with the interests of insureds in competent representation by defense counsel who exercise their independent professional judgment MT-In re Rules of Prof l Conduct, 2 P.3d at US-United States v. MIT, 129 F.3d 681 (1st Cir. 1997). 144 MT-In re Rules of Prof l Conduct, 2 P.3d at MT-In re Rules of Prof l Conduct, 2 P.3d at MT-In re Rules of Prof l Conduct, 2 P.3d at MT-In re Rules of Prof l Conduct, 2 P.3d at MT-In re Rules of Prof l Conduct, 2 P.3d at 821.

197 This reasoning can be strongly challenged. 149 But any such challenge must be addressed to courts that can clarify the law and establish that there is no risk to privilege. Neither individual lawyers nor bar committees have that power. They must assess the law as it is and predict what rules will be adopted in areas of uncertainty. Notwithstanding the clarity of the analysis showing that there should be no threat to privilege, the Montana court has said that there is. That pronouncement itself creates such a risk, even if there were none before. Implied authority to disclose would exist only if a lawyer could conclude, based on analysis of local law, that there would be substantial risk that the relevant jurisdiction would find a waiver of privilege. Very few jurisdictions have sufficiently relevant precedents to permit such a conclusion. 150 Unless the lawyer can identify such authority, disclosure of privileged information to an outside bill reviewer is impermissible. [5] Defense Counsel Must Be Especially Cautious in Partial Coverage or Excess Exposure Cases 151 [a] Defense Counsel Must Take Care Never to Injure or Endanger Any Interest of the Insured Without the Insured s Informed Consent As the insured s lawyer, defense counsel owes the insured a duty of loyalty. No decision or recommendation by counsel should injure the insured s interests, and counsel must take care 149 William T. Barker, Insurer Litigation Guidelines and Outside Bill Review: What Now? Part III: A Critique of the Montana Supreme Court s Bill Review Ruling, 23 INS. LITIG. RPTR. 561 (2001). 150 IL-The Illinois Supreme Court s opinion in Waste Mgmt., Inc. v. Int l Surplus Lines Ins. Co., 579 N.E.2d 322, 335 (Ill. 1991), arguably might support such a conclusion in Illinois. 151 This topic is addressed at greater length in Ellen S. Pryor & Charles Silver, Defense Lawyers Professional Responsibilities: Part I Excess Exposure Cases, 78 TEX. L. REV. 599 (2000); Ellen S. Pryor & Charles Silver, Defense Lawyers Professional Responsibilities: Part II, 15 GEO. J. LEGAL ETHICS 29 (2001).

198 to avoid such injury. 152 If the insurer had any incentive to defend the case in a way that would harm the insured s coverage-related interests, the insured would have a right to independent counsel. (See 16.04[4][a].) But counsel must be alert for other ways in which the interests of insurer and insured might diverge in the course of the matter. One much discussed example is the possibility that an insurer may reject counsel s recommendation to conduct certain defense activities that counsel believes would minimize the insured s exposure in the case. 153 Where the suit involves possible liability in excess of policy limits or noncovered liability, the insured s interest in minimizing any verdict can be acute. The insured must be informed at the outset of the representation of the possibility that such an issue might arise. 154 When and if the insurer questions counsel s recommended course of action, counsel should explain the reasons for the recommendation and the risks to the insured client, attempting to persuade the insurer to approve the recommendation. 155 If the insurer still disagrees, counsel should explain the situation to the insured and determine whether the insured will agree to proceed with the defense on the basis the insurer prefers, while reserving the right to hold the insurer responsible if that course produces bad results. 156 If the insured does not agree, counsel must withdraw. 157 If the insurer grants defense counsel discretionary settlement authority, that can create a conflict if there is excess exposure. This is illustrated by Mid-America Bank & Trust Co. v. 152 See RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS 16, cmt. e. (Perm. Vol. 2000). 153 See ABA STANDING COMMITTEE ON ETHICS AND PROFESSIONAL RESPONSIBILITY, OP (2003); 78 TEX. L. REV. at ABA OP ABA OP ABA OP ABA OP

199 Commercial Union Insurance Co. 158 David Struempf suffered brain damage when hit by a truck at age 13. The bank, as administrator of his estate sued the truck driver, whose per person policy limit was $50,000, and demanded that amount in settlement and repeated that demand three years later. Commercial Union gave defense counsel authority to settle for up to $50,000, but apparently suggested that he try to settle for less. 159 He offered $30,000, take it or leave it. 160 The bank withdrew all offers, and rejected a $50,000 offer made six days later, ultimately recovering a judgment of $911, In the bad faith action, defense counsel was held 25% at fault, 162 though a new trial was granted in the case against him, based on evidentiary errors. 163 In trying to save the insurer money by his counter-offer, defense counsel necessarily rejected a policy-limits demand whose acceptance would have shielded the insured from excess liability. Accordingly, the counter-offer endangered the insured s interests, when counsel had authority to protect those interests. Doing so was disloyal. Because insurer and insured had divergent interests regarding the settlement offer, counsel should have advised the insurer that, if granted discretion, he would have to offer the full amount. The insurer would then have had to decide how much it wished to offer, rather than leaving that to counsel s discretion. If the insurer had instructed that only $30,000 be offered, counsel would have had no conflict. He had no control over the insurer s purse-strings, and the insurer would have had sole responsibility for rejecting the demand. 158 IL-Mid-America Bank & Trust Co. v. Commercial Union Ins. Co., 587 N.E.2d 81 (Ill. App. Ct. 1992). 159 IL-Mid-America Bank, 587 N.E.2d at IL-Mid-America Bank, 587 N.E.2d at IL-Mid-America Bank, 587 N.E.2d at IL-Mid-America Bank, 587 N.E.2d at IL-Mid-America Bank, 587 N.E.2d at 84.

200 But the fact that there would have been no conflict would not have eliminated the duty of both insurer and insured to keep the insured informed about the settlement negotiations and the risks of making a counter-offer. 164 Moreover, the insured should be advised, both at the outset of the representation and at the time the specific issue arises of the possible utility of hiring personal counsel, both to advise on settlement issues and to advocate the insured s position to the insurer. [b] Defense Counsel Can and Should Advise Both Insurer and Insured on the Value of the Case, But Should Not Make Recommendations on Settlement Strategy Clients, both insurer and insured, look to defense counsel for information about the value of the case: the liability prospects, the likely size of any verdict, and any indications of the amount likely to be acceptable as a settlement. Defense counsel ordinarily has more information about these things than any other member of the defense team and more expertise in assessing that. But, in opining on such things, counsel may not shade that opinion based on the interests of either party: for counsel to give anything but an honest opinion would be fraudulent. Both insurer and insured are entitled to counsel s evaluation, and that evaluation must be the same for both. 165 While evaluation of a case is an important piece of information in deciding on a settlement strategy, it is not the only consideration. Plaintiffs often demand more than the minimum they will take and both insurers and uninsured defendants often offer less than they are willing to pay, with each leaving room for bargaining. Each hopes to improve on its bottom line. And each has some amount of tolerance for the amount of risk that is worthwhile in seeking an improvement on the bottom line. But the insured s interest is usually just in eliminating any 164 See Ellen S. Pryor & Charles Silver, Defense Lawyers Professional Responsibilities: Part I Excess Exposure Cases, 78 TEX. L. REV. 599, (2000). 165 See 78 TEX. L. REV. at

201 exposure in excess of policy limits, and would usually be best served by an immediate offer of policy limits. Just as defense counsel cannot properly accept discretionary settlement authority (see Section 16.04[8][a]), defense counsel cannot advise on settlement strategy See 78 TEX. L. REV. at ,

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