OCIPs and Professional Responsibility

Transcription

1 OCIPs and Professional Responsibility Rosary A. Hernandez Wood Smith Henning & Berman LLP 2525 E. Camelback Road, Suite 450 Phoenix, AZ (602)

2 Rosary A. Hernandez, partner at Wood Smith Henning & Berman LLP in Phoenix, focuses on commercial and business litigation, professional liability defense, construction law, and tort defense. She has also assisted clients with risk transfer and management matters. Since 1993, she has represented numerous clients in litigation and arbitrations in Texas, Arizona, and California. Ms. Hernandez has expertise in managing complex matters ranging from catastrophic injury and professional malpractice claims to large commercial and construction-related disputes.

3 OCIPs and Professional Responsibility Table of Contents I. Fact Pattern II. Legal Claims and Ethical Pitfalls A. Wrongful Death B. Polly s Personal Injury C. Time Delays, Costs of Repair, and Breach of Implied Warranty D. Toxin and Pesticide Claims E. Other Model Rules OCIPs and Professional Responsibility Hernandez 243

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5 OCIPs and Professional Responsibility Owner-controlled insurance programs ( OCIPs ), also known as wrap-up policies, were developed to control costs and efficiently resolve construction claims. In the past each party working on a project had to procure its own insurance policy, and contractors built the costs of these policies into their bids. Through an OCIP, insurance for all contractors is centralized in one policy sponsored by the project owner. The OCIP can retain one attorney to represent all of the covered parties. As the following fact pattern illustrates, the OCIP lawyer must be diligent to avoid all of the ethical issues that can arise in a complex construction project. I. Fact Pattern Owner entered into an agreement with ABC Construction, a general contractor, in June 2011 to build a football stadium. ABC Construction hired Reliable Roofers to install a retractable roof in case of inclement weather although Reliable Roofers had no experience with this type of roofing. ABC Construction also hired TurfTown to landscape the field. Owner purchased an OCIP that provided coverage to ABC Construction and all subcontractors on the stadium project. The OCIP was a burning limits policy. In order to draw traffic to the stadium, Owner also contracted with ABC Construction to build a shopping center and condominiums adjacent to the stadium. ABC Construction hired many of the same contractors for this project including TurfTown. ABC Construction also hired Polly s Painters to paint all of the stores and condominiums. Work performed on the property adjacent to the stadium is outside the scope of the OCIP. All parties were required to procure their own insurance policies for this portion of the project. In July 2012, Reliable Roofers installed the retractable roof according to Architect s design specifications. In October, TurfTown employees began work on the field. On October 8 th, the roof collapsed. TurfTown employee John Smith was killed instantly when a roof panel struck him on the head. ABC Construction was so happy with Polly s Painters work on the condominiums that they wanted to hire Polly to paint yard lines on the football field. On October 9 th, Polly arrived at the stadium for a site visit unaware that the accident had occurred. Polly walked onto the field and rolled her ankle on the overturned turf. ABC Construction eventually hired Polly s Painters to work on the stadium, and they were enrolled in the OCIP. The turf and roof had to be replaced setting the project back several months. Despite these setbacks, the football stadium, shopping center, and condominiums opened in time for the 2013 football season. By 2014, football players and condominium residents began experiencing debilitating health problems. These health problems were caused by either toxins in Polly s Painters paint or pesticides TurfTown used to treat its landscaping since both subcontractors worked on the stadium, shopping centers, and condominiums. II. Legal Claims and Ethical Pitfalls A variety of claims arise out of this fact pattern. The OCIP lawyer must defend all covered parties in claims brought within the policy terms and in uncovered claims if they are brought with covered claims. Each party is a client, and often parties will have different interests. So, the OCIP lawyer must be extremely cautious to avoid violating the Model Rules of Professional Conduct. A. Wrongful Death John Smith s widow will bring a wrongful death suit against Reliable Roofers alleging that they constructed the roof negligently and against ABC Construction alleging that they were negligent in hiring an OCIPs and Professional Responsibility Hernandez 245

6 inexperienced subcontractor. The lawyer must defend both covered parties although they have different interests. ABC Construction will want to settle this case. As the general contractor, ABC Construction is likely to be involved in additional cases related to this project, so they will want to preserve the OCIP s policy limits. The defense costs of a wrongful death trial could add up quickly. On the other hand, Reliable Roofers may want to go to trial to clear their business name. Since Reliable Roofers followed the architect s design specifications, which Owner impliedly warrants, the subcontractor may not be liable for defects. Reliable Roofers only worked on one aspect of the project, so they are less concerned with preserving the burning limit. Model Rule 1.2 dictates that the client decides what the objectives of representation are and whether to settle a case. The lawyer is an advisor, not a decision-maker. Here, the lawyer s clients have different objectives in the same matter. These differences could pose an impermissible conflict of interest under Model Rule 1.7. The lawyer s responsibilities to ABC Construction materially limit his representation of Reliable Roofers, and vice versa. This conflict may be permissible if the lawyer can meet the requirements of Model Rule 1.7(b). However, since this OCIP has a burning limits policy it may be difficult to meet the requirement against asserting claims between the two clients. If the defense costs and judgment exceed the policy limits, ABC Construction and Reliable Roofers will likely seek indemnity from one another. The lawyer must also be wary of Model Rules 1.8(f) and 5.4(c). Reliable Roofers may want to enjoin Owner. The lawyer cannot allow Owner s position as sponsor of the OCIP to interfere with his professional judgment or independence. If Owner is enjoined, lawyer cannot represent him because Owner and Reliable Roofers are directly adverse under Model Rule 1.7. The OCIP must hire another lawyer to defend Owner, and this will further deplete the policy. B. Polly s Personal Injury Polly was not yet covered by the OCIP when she fell on the turf, so she will likely bring a tort claim. The lawyer must defend Owner, ABC Construction, Reliable Roofers, and TurfTown against her claims. Polly is covered by the OCIP by the time she brings this lawsuit, so the lawyer must be cautious of his duties to her as a prospective client. Model Rule 1.18 outlines a lawyer s duties to prospective clients. If the lawyer obtained any information from Polly he cannot use or reveal it. Furthermore, if he obtained any information from her that is materially adverse to her interests in this case, the lawyer cannot represent Owner, ABC Construction, Reliable Roofers, or TurfTown unless Polly consents. If Polly is unrepresented, the lawyer should be mindful of Model Rule 4.3. Polly may be confused since she is now part of the OCIP and the lawyer may represent her in other cases, so the lawyer must make his role in this case perfectly clear. The lawyer will have to deal with conflicts between the parties regarding the burning limit again. In addition to differing interests between the parties, here, the lawyer may also feel pressure from the insurance company. Polly s Painters was required to have its own insurance for the condominium complex, so the OCIP insurer may want the lawyer to compel Polly to pursue a workers compensation claim with her own insurance company. The insurer will also want to hire coverage counsel to determine if Polly can be covered by the OCIP s workers compensation policy because her employment on the football stadium project had not commenced at the time of her accident. On the other hand, the insureds may want to settle to preserve the policy limits since her injury was minor. The lawyer must maintain his duty of loyalty to the insureds. 246 Construction Law September 2013

7 The parties will also conflict over who must make the self-insured retention payment in this case. Owners often attempt to shift these costs onto general contractors who, in turn, attempt to shift them onto subcontractors. Subcontractors are not usually in the best position to make these payments. The lawyer will have to careful not to violate his duties to each client when these conflicts arise. C. Time Delays, Costs of Repair, and Breach of Implied Warranty The Owner and other subcontractors will bring these claims against ABC Construction and Reliable Roofers. The lawyer must defend ABC Construction and Reliable Roofers. This case implicates the lawyer s duties to former and current clients. According to Model Rule 1.9, a lawyer cannot represent a client against a former client in substantially related matters. The lawyer previously represented Owner in matters related to the roof collapse, so the lawyer risks violating the rule if he does not obtain Owner s informed consent. However, courts are often reluctant to allow parties to consent when they have previously given the lawyer confidential information that could be used against them. If any of the other cases involving Owner are ongoing, then Owner is a current client, and the lawyer might violate Model Rule 1.7 again. Again, Reliable Roofers may want to enjoin Owner based on the Spearin Doctrine, and then Owner and Reliable Roofers interests will be directly adverse. To avoid these issues, many OCIPs contain general waivers of conflicts; however, the Model Rules do not allow waivers of future conflicts unless they are specific and foreseeable. D. Toxin and Pesticide Claims The condominium residents and football players will bring claims against both TurfTown and Polly s Painters alleging that their health problems stem from exposure inside the football stadium, shopping center, and condominiums. Although only the stadium is covered by the OCIP, the lawyer will have to defend TurfTown and Polly s Painters against all claims and issue reservations of rights for the uninsured claims. TurfTown and Polly s Painters are directly adverse; either TurfTown s pesticides or Polly s Painters toxic paints caused the plaintiffs illnesses. Further conflict arises when there are reservations of rights because the subcontractors will pursue indemnity from one another for the uncovered portions of the claim. By this point, the claims likely exceed what remains of the policy limits, making the subcontractors even more likely to pursue indemnity. The lawyer cannot represent both clients in this matter without violating Model Rule 1.7. E. Other Model Rules In addition to the model rules outlined above, there are many other rules the OCIP lawyer must always be consider. Under Model Rules 1.1 and 1.3, the lawyer must represent all of his clients competently and diligently. His over-commitments and the complexity of the matters above are no excuse for rule violations. He must also balance Model Rule 1.4 s communication requirement with Model Rule 1.6 s confidentiality requirement. The lawyer must keep each of his clients reasonably informed without violating his duty of confidentiality to any other client. Model Rule 1.5 governs fees and requires that they be reasonable. Reasonable fees are particularly important when defense costs deplete their clients available insurance coverage. If an OCIP provides sufficient coverage, it can be an efficient and cost-effective way to handle claims. Costs of litigation are dramatically reduced when one attorney can represent all parties involved. However, the lawyer must be diligent and keep the Model Rules of Professional Conduct in mind every step of the way. OCIPs and Professional Responsibility Hernandez 247

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