CBA Record April_May 2016

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CBA RECORD 47
(W.D.N.C. Dec. 11, 2015).
Illinois defense counsel should be aware
of this potential pitfall and consider the
option of openly discussing and memorial-
izing the scope of defense counsel’s duties
with respect to insurance matters prior
to the commencement of representation.
These types of limitations are permitted
under Rule 1.2, and could include the
scope of defense counsel’s duties to inves-
tigate other available insurance, as well as
counsel’s inability to advise the insured on
possible actions against the insurer. For
these matters, the insured should then be
advised to consult independent outside
counsel if the insured so desires. Without
such limitations, however, defense counsel
should be cognizant of his or her potential
coverage-related obligations to the insured.
Duty to Identify and Advise on Settlement
and Trial Strategy Conflicts
A third common ethical dilemma of the
tripartite relationship arises when the
insurer and insured differ on whether and
how the underlying case should be tried
or settled. In such cases, Illinois holds that
defense counsel must notify the insured
of a potential conflict of interest and the
opportunity to retain independent counsel.
On the one hand, the insurer may
encourage expeditious settlement in an
attempt to minimize defense expenses and
resolve the case, while the insured may
want to protect and restore his or her busi-
ness reputation by winning the case at trial.
For example, in Rogers v. Robson, Masters,
Ryan, Brummand & Belom, 407 N.E.2d
47 (Ill. 1980), defense counsel retained
by the insurer settled a claim without
proper disclosure to the insured and over
the insured’s known objection. Defense
counsel was then sued by the insured
and ultimately found liable for damages.
Notably, the insurer was not found liable
for damages because its policy allowed it
to settle without the insured’s consent,
thereby leaving counsel solely responsible
for his or her arguably good intention.
The Illinois Supreme Court noted that,
although defense counsel was employed
by the insurer, the insured was also a client
and, therefore, entitled to full disclosure of
the intent to settle the litigation contrary to
his express instructions. The Court found
that defense counsel’s duty to make such
disclosure stemmed from the attorney-
client relationship and was not affected
by the insurer’s own authority to settle
without plaintiff’s consent.
More often than not, however, the
insured is interested in quickly settling
the underlying case within the policy
limits to avoid the publicity of trial and
the uncertainties of litigation, while the
insurer is primarily interested in avoiding
potential multi-million dollar liability.
In the California Appellate Court case of
Betts v. Allstate Ins. Co., 154 Cal. App. 3d
688 (1984), the insurer refused to settle an
underlying civil case even though it had
knowledge of unfavorable evidence con-
cerning its insured’s liability. Additionally,
defense counsel failed to keep the insured
appraised of all settlement demands and
court-ordered pretrial settlement confer-
ence. Pursuant to the insurer’s directives,
defense counsel repeatedly encouraged
the insured to adopt a “no-settlement”
position, which improperly exposed the
insured to serious risk of excess personal
liability. After trial, a judgment was entered
that exceeded the policy limits and the
insured sued both the insurer and defense
counsel for bad faith and negligent inflic-
tion of emotional distress. The trial court
held, and the Appellate Court agreed, that
defense counsel had clearly breached its
duty to the insured on several grounds,
including failing to disclose a conflict of
interest and for favoring the interests of
the insurer to the insured’s detriment.
Conclusion
Ultimately, defense counsel operating
within the tripartite relationship, with an
insurer and insured, faces unique ethical
dilemmas and very few easy answers on
how to maintain the peace. It is important
to remember, however, that most seri-
ous ethical issues can be identified and
potentially avoided entirely by open and
continuous communications with both
clients. Being stuck in the middle of the
volatile insurer-insured relationship can
be far less frustrating and intimidating so
long as defense counsel maintains a high
degree of transparency, remains cognizant
of coverage issues, identifies available
benefits, and promptly addresses any
competing interests that may be revealed
as the case progresses.
Phillip Skaggs is an associate attorney at
Traub Lieberman Straus & Shrewsberry
LLP. His practice focuses primarily on insur-
ance coverage, excess monitoring, professional
liability and general liability. He is co-chair
of the YLS Professional Responsibility Com-
mittee, and was previously vice-chair of the
YLS Insurance Coverage Committee.