Practical Problems In Lawyer Conduct Litigation Against Insurance Defense Counsel

Bruce A. Campbell.

The frequency of claims against insurance defense counsel has risen substantially during the last five years.

For approximately 30 years, carriers have written claims-made legal malpractice policies. During that period, the number of claims asserted against insurance defense counsel has been low. In the last five years, however, the frequency of claims against insurance defense counsel has risen substantially.

Just who is bringing these claims against insurance defense counsel? The answer is broader than one might suspect. Claimants have included insureds, carriers, excess carriers, reinsurers, and a variety of third parties, including former opposing counsel and opposing parties. But the most common group of claimants appears to be insureds, followed by carriers. Given the present claims environment, insurance defense counsel should not be surprised at how few friends they really have. Most defense counsel will suggest that their
"Cheetah" © Bruce A. Campbell performance can only be measured by assessing what another reasonably prudent defense counsel would do under me same or similar circumstances. Unfortunately, the troubling reality is that a claim against a defense counsel will be brought in large part on 20/20 hindsight—and will have to be vigorously defended. ¹

This article explores some of the practical problems that arise when the defender of others becomes the target of litigation and offers some tips to avoid potential liability.

Is the Carrier Also the Client?

To confound matters, no uniform answer exists among the 50 states about whether, in addition to the insured, the carrier is also the client of the insurance defense lawyer. ²  Further, it is possible, even in states in which an attorney-client relationship ordinarily is not created between the carrier and the insurance defense counsel, that such a relationship can arise based upon the conduct of the parties.

If we assume that the carrier is allowed to assert a claim, another difficult issue arises: What information relating to the defense lawyer's representation of the insured can be used by that lawyer to defend himself or herself? Everything that a lawyer learns when representing the insured is confidential or privileged and cannot, as a general rule, be disclosed.

For instance, Texas Disciplinary Rule of Professional Conduct 1.05(b) provides that "a lawyer shall not knowingly… reveal confidential information of a client or a former client." Rule 1.05(c) permits disclosure of confidential information under certain circumstances, including "…(5) to the extent reasonably necessary to enforce a claim or establish a defense on behalf of the lawyer in a controversy between the lawyer and the client" (emphasis added). The problem with this disclosure exemption is that it only applies to situations involving a controversy between a lawyer and a client. Thus, if the plaintiff is not the insured. Rule 1.05(c)(5) would seem to provide no relief to the lawyer, and the lawyer would be barred from disclosing the information unless another exemption is available.

On the other hand, under Rule 1.05(d) a lawyer may reveal client information "(1) When the lawyer has reason to believe it is necessary to do so in order to… (ii) defend the lawyer or the lawyer's employees or associates against a claim of wrongful conduct…"

"Zebra" © Bruce A. Campbell So we have two questions. First, when can a lawyer reasonably believe it necessary to reveal unprivileged information? And, second, what information can be released? If a claim or grievance is leveled against a defense lawyer, it would seem that unprivileged material could be disclosed so that the lawyer could defend himself or herself. In all probability, the lawyer will need to carefully weigh the information he or she discloses, so that only information necessary to the defense is revealed. Nevertheless, no matter how narrowly the circle is drawn around what information is revealed, the former insured may well object that the information falls within the scope of privileged information and, as such, should not have been disclosed. It certainly would be an untoward result for the lawyer to be advised that he could use certain unprivileged information to defend a tort claim against him only to wind up with a subsequent grievance because some or all of the information he used was privileged and not properly disclosed. What will be treated as privileged and what nonprivileged is beyond the scope of this article, and readers are encouraged to closely inspect the rules within their jurisdictions.

A related problem can arise if both the carrier and the insured are jointly represented. The question becomes, Has the lawyer fulfilled his ethical obligations under the joint representation rules? Are the carrier and the insured aware that anything that is disclosed to the lawyer in a joint representation can be shared by the lawyer with the other client? Furthermore, does a conflict of interest exist between the carrier's interests and the insured's ethics? These potentially difficult questions can arise when the insured and the carrier are both treated as clients of the insurance defense counsel.

Consequences of the Insured's Testimony

If the insured testifies that the insurance defense counsel performed admirably, the claim against the lawyer, if made by the carrier or a third party, should be substantially weakened, if not destroyed. But that is not always the case. For instance, the insured may believe that defense counsel did a great job by keeping certain instructions out of the jury charge. Yet these same instructions, if included in the charge, might help the carrier, for instance, on a coverage defense that the carrier might otherwise assert against d1e insured. The defense lawyer's obligation, in a single-client jurisdiction, is to defend the insured, and the carrier will have to take steps to protect itself. The position taken by the insurance defense lawyer, however, can become very murky if the carrier is also considered a client of that lawyer or if the lawyer invites reliance on his representation by the carrier. Under these circumstances, the defense lawyer can inadvertently walk into a conflict of interest and be put in a position where he or she can be sued by either client-and possibly both.

Conversely, what if the insured testifies that defense counsel performed inadequately? Is that testimony relevant if the legal malpractice claim is brought against the lawyer by the insurance carrier that originally appointed counsel to defend the insured? Although one can probably argue in most legal malpractice claims that the testimony should be disregarded because the client is ordinarily not an expert and the issue is one that requires expert testimony, that is not always the case in a missed deadline-type scenario or a case involving an alleged conflict of interest. In such cases, plaintiffs often argue that people without a law license can easily understand that a missed deadline or a conflict of interest falls below the standard of care for a lawyer.

Admissibility in Claims against the Lawyer

Defense lawyers are no more immune from the filing of a grievance or bar complaint against them than any other lawyers. The stakes can be quite high. A malpractice claim, even if established, is simply about money. However, if established, a bar complaint may foreclose a lawyer's law license and prevent the lawyer from pursuing his or her chosen profession. Some courts have looked upon the mere filing of a bar complaint as evidence of a breach of the standard of care. When defending lawyers, I regularly argue, based upon the preamble to the Texas Disciplinary Rules of Professional Conduct, that the disciplinary rules should not be admissible in a malpractice claim against the lawyer. In Texas, as in many states, the courts have struggled with this issue. If evidence of the alleged disciplinary rule violation is admitted, contesting the accusation that the lawyer's conduct fell below the standard of care is very difficult. Further, there may also be some preclusive effects in the malpractice case if the disciplinary claim is tried first.

Third-Party Claims

"Duel" © Bruce A. Campbell Lawyers can also be held responsible for negligent misrepresentations to third parties. Although some courts have been reluctant to apply Section 552 of the Restatement of Torts to lawyers, that is changing. Even in Texas, one of the last bastions upholding the privity rule, courts have now recognized the applicability of the negligent misrepresentation claim by a third parry against a lawyer.

Section 552 of the Restatement (Second) of Torts provides that:

[o]ne who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplied false information (or the guidance of others in their business transactions, is subject to liability (or pecuniary loss caused to them by their justifiable reliance upon the intonation, if he fails to exercise reasonable care or competence in obtaining or communicating the information.

Section 552 has been applied to litigators who have been accused of making erroneous statements that were justifiably relied upon by the other side. For instance, in McCamish v. F.E. Appling interest, ³  as part of a settlement of a lawsuit the borrower agreed to sign the settlement agreement only if the attorney for the savings and loan affirmed that the requirements of 12 U.S.C. § 1823(e) had been met. The board of directors of the savings and loan approved the settlement, and the settlement was signed by the borrower. However, several weeks before the board approved the settlement, the board adopted a resolution placing the institution under voluntary supervision by the state banking commissioner. The commissioner did not rarify the settlement, the institution failed, and the settlement was unenforceable under federal law.
The borrower then sued the savings and loan's attorney for negligent misrepresentation and fraud. In recognizing the applicability of Section 552 to lawyers, the Texas Supreme Court noted that it had already adopted the tort of negligent misrepresentation as described by Section 552 and that eight lower court decisions had recognized a Section 552 claim against other professionals, including accountants, ⁴  auditors, ⁵  physicians, ⁶  real-estate brokers, ⁷  securities placement agents, ⁸  surveyors, ⁹  and a title insurer. ¹⁰  The court could perceive no reason why such a claim should not apply to attorneys.

The court found nothing in the language of Section 552 that warranted an exception for attorneys. It said that allowing a negligent misrepresentation claim by a nonclient did not implicate the policy concerns behind the court's strict adherence to the privity rule in legal malpractice cases. The court looked to Section 73 of the Restatement (Third) of the Law Governing Lawyers, which sets forth certain circumstances under which an attorney may owe a duty of care to a nonclient as support for the application of Section 552 to an attorney when the attorney invites a nonclienr's reliance. The court note that the typical negligent misrepresentation case involves one party to a transaction receiving and relying on an evaluation, such as an opinion letter, prepared by another party's attorney. The court stated that Texas Disciplinary Rule 2.02 provided safeguards against a lawyer's exposure to conflicting duties and ensures that the client made the ultimate decision of whether to provide such an evaluation to another party.

"Wildebeest" © Bruce A. Campbell The court further stressed that Section 552 did not threaten lawyers with, unlimited liability because it requires justifiable reliance on the alleged negligent misrepresentation. The court found that liability is limited to the loss suffered by the person or a limited group of persons for whose benefit and guidance one intends to supply the information or knows that the recipient intends to supply it. Thus, there may only be liability if the information is transferred by an attorney to a known party for a known purpose. The court explained that a lawyer may minimize the risk of liability to a nonclient, by setting forth the limitations on the persons the opinion is directed to, the scope and accuracy of the information or assumptions, or the scope of the representation itself.

The Texas Supreme Court also carved out from potential liability attorney statements communicating a client's negotiation position. Such negotiation statements, the court concluded, were not statements of material fact. The court stressed that the justifiable reliance element of such a claim will not always be present one must consider the nature of the relationship between the attorney, client, and nonclient. The court pointed out that reliance is nor justified when the representation rakes place in an adversarial context, acknowledging that the adversarial concept is not limited to litigation. Instead, the same policy considerations present in litigation may apply to business and commercial transactions. The adversarial concept reflects that an attorney hired by a client for the benefit and protection of the client's interest must pursue those interests with undivided loyalty within the confines of the Disciplinary Rules of Professional Conduct. Whether a situation is adversarial or nonadversarial is a determination that should be guided at least in part by the "extent to which the interest of the client and me third party are consistent with each other." ¹¹

Settlement negotiations or efforts to settle a claim are common areas that can create third-party exposure. Oftentimes, the defense lawyer is put in a position of inviting reliance by a third party. For example, exposure can arise in a roundtable evaluation of a claim between the lawyer, the carrier, and excess carriers. If the lawyer agrees to tell the excess carrier if any settlement offers are made, he has potentially invited reliance by the excess carrier. The defense lawyer can then have exposure for a claim by the excess carrier if the lawyer fails to disclose a settlement offer.

Conclusion

The risks of exposure to tort and disciplinary claims against defense counsel are continuing to evolve. Defense lawyers in multiple client states are perhaps at the greatest risk because of the risk of the potential conflicts of interest. Nevertheless, all defense counsel would do well to endeavor to avoid claims by trying to identify carefully who their client is and avoiding conduct that would extend the attorney-client relationship to others.

¹ One court has succinctly pointed out that allowing carriers and excess carriers to sue defense attorneys would encourage them to sue "whenever they are disgruntled by having to pay within limits of policies to which they contracted and for which they received premiums. Were this to occur, we believe that defense attorneys would come to fear attacks, and the attorney-client relationship [with the insured] would be put in jeopardy." Cont'l Cas. Co. v. Pullman, Conley, Bradley & Reeves, 929 E2d 103,107 (2d Cir. 1991).

²  See, e.g., Safeway Managing Gen. Agency v. Clark & Gamble, 985 S.W.2d 166 (Tex. Civ. App.-San Antonio, 1998) (no anomey-client relationship between insurer and law firm retained to defend insurer). Gen. Sec. Ins. Co. v. Jordan, Coyne & Savits, L.L.P., 357 F. Supp. 2d 51, 956 (E.D. Va. 2005) (insurer is not the client of the law firm but allowed a claim to proceed on an intended beneficiary theory); cf. Con't Ins. Co, 929 E 2d 103 (disallowed a direct action for malpractice against defense counsel).

³ 991 S.W.2d 787 (Tex. 1999).

⁴  Shatterproof Glass Corp. v. James, 466 S.W.2d 873, 880 (Tex. Civ. App.—Fort Worth 1971, writ ref'd n.r.e.); Blue Bell v. Peat, Marwick, Mitchell & Co., 715 S.W.2d 408, 411-12 (Tex. App.-Dallas 1986, writ ref'd n.r.e.)

⁵  Steiner v Southmark Corp., 734 F.Supp. 269, 279-80 (N.D. Tex. 1990).

⁶   Smith v. Sneed, 938 S.W.2d 181, 185 (Tex. App.—Austin 1997, no writ).

⁷  Hagans v. Woodruff, 830 S.W.2d 732,736 (Tex. App.—Houston 1992, writ granted w.r.m.).

⁸   Lutheran Bhd. v. Kidder Peabody & Co., 829 S.W.2d 300, 309 (Tex. App.-Texarkana 1992, writ granted w.r.m.).

⁹  Cook Consultants, Inc. v. Larson, 700 S.W.2d 231, 234 (Tex. App.—Dallas 1985, writ ref'd n.r.e.).

¹⁰   Great Am. Mortgage Investors v. Louisville Title Ins. Co., 597 S.W.2d 425,429-30 (Tex. Civ. App.—Fort Worth 1980, writ ref'd n.r.e.).

¹¹  McCamish v. F.E. Appling Interest, 991 S.W.2d 787, 794

This article was published in The Brief, Winter 2006. Photos © 2008 Bruce A. Campbell.

Bruce A. Campbell is a shareholder with the law firm of Campbell & Chadwick, P.C.  He is a member of the College of the State Bar of Texas. He has defended lawyers and other professionals on a variety of malpractice and other tort claims for the past 25 years. He has defended claims totaling more than $2 billion. Mr. Campbell is admitted to practice in all courts in the State of Texas and in all federal courts in the State of Texas. He is admitted to the Fifth Circuit Court of Appeals in New Orleans and the United States Supreme Court.

Mr. Campbell is the former Co-Chair of the Dallas Bar Ethics Committee and former Chair of the Steering Committee for the Professional Liability Underwriting Society. He is a member of the Association of Professional Responsibility Lawyers. He is a Life Member of Kingston's National Registry of Who's Who.

He successfully prosecuted a six-figure case dispositive sanctions award against a plaintiff who filed a frivolous lawsuit against one of the firm's clients.

Bruce is an avid photographer—all of the photos in the accompanying article were taken by Bruce. He also enjoys traveling and scuba diving.