Bringing Counsel in from the Cold: Reconciling Ethical Rules with the Quagmire of Insurance Defense Practice

Our case study is an ethical dilemma faced by insurance defense attorneys daily. An attorney is hired by Insurance Company A to defend an insured who is in a lawsuit over a car accident. Insurance Company A is one of the attorney\u27s best clients, from whom he receives a steady stream of cases. Our attorney\u27s investigation reveals good news-another driver not yet a party to the lawsuit may have contributed to the accident. This revelation has the potential to shift the blame, and all or part of the financial responsibility, onto the shoulders of the new potential party and his insurer. But, only after joining the new party to the lawsuit as a third-party defendant does our defense counsel learn that the insurer footing the bill on the other side is his second-best client, Insurance Company B. That seems like a problem: two major clients with two sets of diverging interests in this case. Does counsel have a conflict? Technically, Insurance Company B is not a party to the case, so our attorney\u27s client is not directly adverse to Insurance Company B. But at the same time, he is pursuing a claim against Company B\u27s insured, which means this insurer will foot the bill, initially for the defense, and possibly later for indemnity. Does that make his client\u27s interests adverse to those of Insurance Company B? And if that alone does not create a conflict, what if during settlement negotiations, Insurance Company B fails to step up and adequately contribute, thereby forcing the case to trial and exposing both carriers\u27 insureds to potential liability in excess of their liability limits? Can defense counsel call out Insurance Company B for recklessly exposing its insured? Will defense counsel find himself holding back out of concern he will upset Insurance Company B? What does defense counsel need to reveal about all of this to the insured, Insurance Company A, or even Insurance Company B? Where are the boundaries? Unfortunately, as we will see, even this frequent and not-too- complex scenario is unanswered by existing ethical rules (at least in most jurisdictions)