Client loyalty: Who do you love?

Issue May/June 2017 By Richard P. Campbell and Suzanne Elovecky

While plainly obvious in most engagements, a lawyer representing large institutions and a lawyer hired and paid by third persons to represent other individuals (or corporate entities) immediately confront a fundamentally important task fraught with challenges and risks. A corporate lawyer may find the client's officers and employees assuming that she represents them personally. The flip side is also true. A lawyer hired and paid by a corporation to represent an officer or board member may find the corporation attempting to assert control over the representation.

The most frequent circumstance is the retention of a lawyer by an insurer to defend an insured, particularly in "excess exposure" and "contested coverage" cases. The retained lawyer must answer these questions: Who is the client? And who is not the client? Where does the lawyer's loyalty lie? Can the lawyer compromise her fealty to her client at the direction of a third person who hired her, controls the litigation strategy and decision-making, and pays her fees?

Reflecting on the issue, Bo Didley's classic 1950s rock song comes to mind. Bo Didley sang that he walked "47 miles of barbed wire" and "used a cobra snake for a necktie" to call out to Arlene: "Who do you love?"

The relationship between a lawyer and a client is almost always entirely consensual. The first steps, therefore, in determining who you love are the terms of the retention agreement. Generally, Rule 1.5 (b) (1) mandates that the "scope of the representation" and the client's responsibility for fees and expenses be set forth in a written communication "before or within a reasonable time after commencing the representation." The scope of the lawyer's representation, as set forth by Rule 1.2(a), is the pursuit of "the lawful objectives" of the client "through reasonably available means permitted by law and these rules." In pursuing the client's lawful objectives, the lawyer must represent the client "zealously within the bounds of the law" (Rule 1.3). If the lawyer wishes to limit the representation, she may do so "if the client consents after consultation" (Rule 1.2(c)). Any limits to the scope of representation, therefore, should be spelled out in detail in the written representation agreement.

With regard to a corporate client, the lawyer "represents the organization" (Rule 1.13 (a)). The lawyer may also represent the corporate directors, officers and employees subject to the conflict of interest rule and only after obtaining informed consent by each client (Rule 1.13(g) and Rule 1.7). There are no special exceptions (or "get out of jail free" cards) for lawyers retained and paid by third persons to represent the client.

In some - indeed, perhaps most - circumstances, a lawyer retained by an insurer to represent an insured will have client-like responsibilities to the insurer as well as to the insured (the so-called "tripartite relationship"). If the insurance-retained lawyer plans to limit the scope of her representation of the insured client, she must set forth the details of the limitations in the representation agreement. Excess exposure cases (where the insured client faces the real possibility of a damages award greater in amount than the available indemnity on the insurance contract), reservation of rights or denial of coverage cases, and cases involving "wasting policies" (where the insured's indemnity coverage limits are reduced by litigation fees and costs) put the insurance retained lawyer directly in the cross-hairs. When the lawyer confronts both an "excess exposure" and a "contested coverage" case, the client's interest in ending the lawsuit quickly, efficiently and within the coverage limits is magnified exponentially. Efficient resolution within coverage limits is particularly acute for a financially distressed client in a case of this type.

The standard of care for trial lawyers is founded on the simplest of propositions: "Loyalty is an essential element in the lawyer's relationship to a client" (Comment 1, Rule 1.7, Conflict of Interest: General Rule). Every lawyer must abide by that tenet in all actions relating to a client and at all times during the representation. A lawyer cannot pay homage to it with platitudes or with a wink and a nod and then undertake actions that are in fact disloyal to the client.

Rule 1.7 (a) prohibits representation of a client if doing so is directly adverse to another client and Rule 1.7 (b) bars representation of a client "if the representation of that client may be materially limited by the lawyer's responsibilities to another client or to a third person, or by the lawyer's own interest." The prohibition is unequivocal; viz., "A lawyer shall not." The prohibition may be sidestepped if two conditions are met. First, the lawyer must reasonably believe that the representation will not adversely affect the relationship with the other client. And second, the client consents after consultation. Rule 1.7 (b) goes on to mandate that the consultation with the client "shall include explanation of the implications of the common representation and the advantages and risks involved." Comment [10] explains the requirements for insurance defense cases where there is an imminent coverage dispute: "[W]hen an insurer and its insured have conflicting interests in a matter arising from a liability insurance agreement, and the insurer is required to provide special counsel for the insured, the arrangement should assure the special counsel's professional independence."

"'Each affected client [must] be aware of the material respects in which the representation could have adverse effects on the interests of that client,' and a 'lawyer is responsible for assuring that each client has the necessary information.' A lawyer who does not personally inform the client assumes the risk that the client is inadequately informed and that the consent is invalid." Ellen S. Pryor, Charles Silver, Defense Lawyers' Professional Responsibilities: Part II - Contested Coverage Cases, Georgetown Journal of Legal Ethics, Vol. 15-29, 72 n. 97 (2001), citing RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS §122, cmt. c(i).

"Obviously, an insured would reasonably want to know about alternative arrangements that might be offered if the first offer were rejected. Consequently, an insured would want to know about the duty to provide independent counsel. It is one thing to be left out in the cold after rejecting a standard defense; it is something else entirely to be outfitted with a new lawyer whom one directly controls." Ellen S. Pryor, Charles Silver, Defense Lawyers' Professional Responsibilities: Part II - Contested Coverage Cases, Georgetown Journal of Legal Ethics, Vol. 15-29, 72-73 (2001).

Others have written that an insurance company has such control over an insurance defense law firm that it has an economic incentive "to lick the hand that feeds it." The Court of Appeals for the Eight Circuit put it this way:

"Even the most optimistic view of human nature requires us to realize that an attorney employed by [or retained by] an insurance company will slant his efforts, perhaps unconsciously, in the interest of his real client - the one who is paying his fee and from whom he hopes to receive future business - the insurance company." U.S. Fid. & Guar. Co. v. Louis A. Roser & Co., 585 F. 2d 932, 938 n. 5 (8th Cir. 1978).

Admonitions about conflicts of interests for insurance defense lawyers are manifest and manifold:

"Conflicts of interests in a tripartite relationship often arise when the insurer issues a reservation of rights to deny coverage partially or fully, when claimed damages exceed coverage, when the insurer attempts to limit the costs of the defense to reduce expenses, or when the insurer and insured disagree over whether to settle or litigate the claims." Desmond T. Barry, Jr., Justin M. Schmidt, The Tripartite Relationship and Joint Defense Agreements: Benefits and Pitfalls, American Bar Association, Tort Trial & Insurance Practice Section, Aviation and Space Law Committee Seminar, October 20-21, 2011; see also Douglas R. Richmond, Walking a Tightrope: The Tripartite Relationship Between Insurer, Insured and Insurance Defense Counsel, 73 Neb. L. Rev. 265, 278, N. 2 (1994).

The tripartite relationship among a purchaser of insurance, the provider of insurance coverage and a defense to claims made against the purchaser, and the attorney assigned by the insurer to defend the claim should end when the insurer denies coverage through a reservation of rights. A lawyer operating under such circumstances should be very specific in identifying the client and any limitations to the scope of the representation in the written representation agreement.

Arlene eventually hearkened to Bo Didley, took him by the hand and said: "Ooo-wee, Bo, you know I understand." When you accept an engagement, you must determine who you love, and your client must understand the nature and scope of the relationship.

Richard P. Campbell is a fellow of the American College of Trial Lawyers and a past president of the Massachusetts Bar Association. He founded Campbell Campbell Edwards & Conroy, P.C., a firm with a national practice, in 1983.

Suzanne Elovecky practices at Todd & Weld LLP, where she enjoys a diverse complex commercial litigation practice representing individuals and corporations in contract disputes, employment disputes, automobile dealership matters, shareholder disputes, and trademark, trade secret and copyright disputes. Suzanne is a member of the Women's Bar Association, the Boston Bar Association and the Massachusetts Bar Association (Complex Commercial Litigation Committee; Professional Ethics Committee).

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