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Ethical Issues in the

Tripartite Relationship
Brian S. Jones

The Tripartite Relationship
Who Is The Client?
Independent Counsel

The Tripartite

Unique to insurance defense context

Insurer must defend insured
Insurer retains lawyer to defend insured
Lawyer defends insureds interests, but is
paid by the insurer



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Defense Counsel

Duty of Loyalty


Competing Interests

Resolve litigation as quickly and cheaply as
Obtain information pertaining to coverage
Avoid exposure to bad faith

Obtain as much coverage as possible
Avoid liability
Make the case go away

Defend insureds interests
Fulfill ethical obligations
Get paid in full for work performed

Who Is The Client?

Lawyers duties are always only to the


Cincinnati Ins. Co. v. Willis

Still leading Indiana case
on duties owed in
tripartite relationship
Famously approved of
insurers in-house
counsel and captive
firms defending insureds
Detailed discussion of
tripartite relationship

Court noted extensive debateas to whom the

attorney represents in [the tripartite relationship].
Debate was whether only the insured or both the
insured and the insurer should be viewed as the client.
[It is] unrealistic to ignore the client relationship with both. Joint
representation may become problematic, particularly if issues of
disclosure of confidences arise. For example, the attorney may gain
information from the policyholder-client that may affect the insurer
clients coverage obligation. But that is no basis for prohibiting the
arrangement in all cases. Whatever issues joint representation raises
appear to be wholly independent of the attorneys status as an
employee of the insurer or a member of a law firm. Second, there is
nothing inherently wrong in common representation of two parties
where their interests are aligned. Professional Conduct Rule 1.7
provides direction [w]hen representation of multiple clients in a
single matter is undertaken.... In this respect, the insured and
insurer present no qualitatively different situation from any other
pair of commonly represented clients.

In Indiana, both insurer and insured are

clients of the lawyer
when everything is going well.
But what happens when problems arise?

Interest of Person Paying for a Lawyers Service

[13] A lawyer may be paid from a source other than the client, including a
co-client, if the client is informed of that fact and consents and the
arrangement does not compromise the lawyers duty of loyalty or
independent judgment to the client. See Rule 1.8(f). If acceptance of the
payment from any other source presents a significant risk that the
lawyer's representation of the client will be materially limited by the
lawyer's own interest in accommodating the person paying the lawyer's
fee or by the lawyer's responsibilities to a payer who is also a
co-client, then the lawyer must comply with the requirements of
paragraph (b) before accepting the representation, including
determining whether the conflict is consentable and, if so, that the client
has adequate information about the material risks of the representation.

Siebert Oxidermo, Inc. v. Shields

Default judgment case;
multiple attempts to set
aside default
One basis was alleged
misconduct of carriers
attorney, which was
representing defendant

Company complained its lawyer was employed by the

Company alleged lawyer had incentive to not zealously
Supreme Court adopted Court of Appeals ruling
[W]e point out that on a daily basis defense attorneys employed by
insurance carriers on behalf of policyholders are called upon to deal with
matters in litigation where the interests of the policyholder and the
carrier do not fully coincide. Under such circumstances the
attorney's duty is, of course, to the insured whom he has been
employed to represent. In response the defense bar has exhibited no
inability to fully comply with both the letter and the spirit of Canon 5 of
the Code of Professional Responsibility. If it were otherwise we suspect
the desirability of requiring carriers to supply defense counsel would
have long since disappeared as a term of the policy.

So, both the insurer and insured are clients, but

your duty is, of course, to the insured when
problems arise.

Insurer Litigation

Insurer litigation guidelines were created to

control what defense counsel does
Late 90s: Legal Ethics Committee reviewed
some of the then-prevailing guidelines

identify reimbursable expenses, hourly fees for various levels of

professionals, and permitted activities by each group. It is required that
defense counsel employ a team approach in defending a given insured,
which team includes a senior litigator, an associate, and a paralegal/law
clerk. Unless otherwise approved by the carrier, the senior litigator is
solely responsible for the actual trial of a given case.
Regardless of which member of the team actually provides a given legal
service, only the hourly rate applicable to the least skilled
professional who could have handled such matter will be paid
by the carrier. Further, when two or more members of the team confer
about a given legal matter, a charge for the services may be made only by
the attorney assigned to the matter, unless approved by the claims
representative of the carrier in advance, even though the contract recites
that conferences and strategy sessions may be necessary upon occasion.
The preparation of intra-office memoranda is not regarded as a billable

The carrier expects that to the extent appropriate for the matter at hand,
paralegals, junior associates and/or law clerks will perform any
necessary legal research. Repetitious revisions of documents and
proofreading will not be compensated. Organizing and indexing medical
records (to be obtained in most cases only by the carrier) are defined as
non-billable clerical services. Review and summarization of medical
records (including records produced in medical malpractice litigation) is
to be conducted by paralegals. Time required to travel within the
attorneys assigned geographic territory may not be billed,
and travel time outside the territory may be billed only at a
substantially reduced rate.
In its review of statements for services, the carrier will not pay for
legal services that do not comply with the guidelines. Rather
than making a partial payment, the entire invoice will be returned to
defense counsel unpaid until there is compliance with the prescribed
detailed format and/or the proper documentation is supplied.
The guidelines further recite that should any situation arise that raises
ethics-related questions during the course of the relationship between
the carrier and the defense counsel, counsels concerns should be
expressed directly to the Senior Vice President, Claims.

Guidelines that result in material disincentives to

perform those tasks which, in the lawyers
professional judgment, are reasonable and
necessary to the defense of the insured are
ethically unacceptable.
Ethically impermissible: Guideline that prohibited
another associate from being assigned to work on
the file until approved impaired the responsible
attorneys exercise of professional judgment as to
the assignment of the most effective member of
the litigation team to a given task.

Guideline that appeared to require that the

lawyer rely upon legal research by an
unsupervised paralegal invites legal
malpracticea breach of counsels duty to
the insuredand is intolerable.
Some good news: the days of the truly
draconian guidelines appear to be behind us.


Late 90s: Legal Ethics Committee ruled that

defense counsel cant disclose bills to insurers
outside auditors if bills contained confidential
or privileged information

Pro Tip: Dont put confidential or privileged

information in bills
Assume that all bills will be made public

Modern Problems:
Billing Review Software

Many corporate clients now require bills to be

submitted electronically
Software reviews bills for compliance
Lawyers alter way time is billed to ensure entries
arent rejected


Richey v. Chappell
Court of Appeals:
required insurer to
produce statement made
by the insured to the
insurer five days after
auto accident
Supreme Court: Reversed
based on concerns about
relationship between
insurer and insured

One of the primary duties placed upon insurers by the issuance of a

liability insurance policy is the obligation to defend claims filed by third
persons against the insured. In order to effectively defend the claim, the
insured must be questioned about sensitive matters which may be
embarrassing, incriminating, or detrimental to the insured. The failure to
cooperate may invalidate coverageand even an insured's constitutional
right against self-incrimination may not override the insured's duty to
cooperate with the insurance company. In connection with its obligation
to defend claims, the insurance company retains an attorney, not usually
of the insured's own choosing, to represent the insured. Statements from
the insured are then used by the attorney to assist in the defense of the
insured, just as statements given by plaintiffs to their own attorneys are
used to assist in the prosecution. Uncertainty about whether the
insured's statements are discoverable gives rise to a conflict about
whether a statement should be given at all, and undermines what should
be a cooperative relationship among the insured, insurer and attorney.
An insured's relationship to the insurance company requires
full disclosure by the insured without fear that the statement
may be later obtained by the claimant.

So, "where the policy of insurance requires

the insurer to defend claims against the
insured, statements from the insured to the
insurer concerning an occurrence which
may be made the basis of a claim by a third
party are protected from disclosure."
This makes Indiana somewhat unique.

Independent Counsel

Usually arises when insurer reserves rights

Where claims outside of policy, Indiana gives
insurers two options:
1. File dec action
2. Hire independent counsel and defend
under reservation of rights

Armstrong Cleaners, Inc. v. Erie

Ins. Exchange
Erie defended pollution
claim under reservation
of rights
Denied request for
independent counsel

[N]ot every reservation of rights poses a conflict for defense counsel. If

the coverage dispute turns on issues that are independent of the issues in
the underlying lawsuit, one lawyer selected by the insurer can handle the
underlying litigation, and the insured and insurer can resolve the
coverage dispute separately.
[W]hether 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 insurers coverage dispute, then the conflict may be
sufficient to require the insurer to 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 attorneys relationship with the insurer.

Court was not concerned with reservation

based on pollution exclusion (unenforceable in
Indiana) or generic reservation based on later
discovered facts
But, allocation of liability did raise conflict
warranting independent counsel
"Less than vigorous defense" might strengthen
Erie's coverage defense based on culpability

Takeaway: Independent counsel not required

in every case
Requires examination of how litigation might
play out and parties' incentives
If how insured is defended might affect
coverage, more likely that independent
counsel is needed


Twitter: @brianjoneslaw
LinkedIn: brianjones74