Insurance Defense
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Insurance Defense

Ethical . Pitfalls for Counsel and . Claims . Professionals. www.gcandh.com. Expectations. Ethics Generally. Definition of ethics. . noun . 1 . [usually treated as plural] moral principles that govern a person’s or group’s .

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Insurance Defense




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Presentation on theme: "Insurance Defense"— Presentation transcript:

Slide1

Insurance Defense Ethical Pitfalls for Counsel and Claims Professionals

www.gcandh.com

Slide2

Expectations

Slide3

Ethics Generally

Definition of ethics

noun

1

[usually treated as plural] moral principles that govern a person’s or group’s

behavior

Note: the definition does not refer to lawfulness

Slide4

Rationalization

Slide5

Handicap Parking Example

Slide6

Independent Judgment

SCR 3.130(5.4(c))

(c) A lawyer shall not permit a person who recommends, employs, or pays the lawyer to render legal services for another to direct or regulate the

lawyer's professional judgment

in rendering such legal services.

Slide7

Retention by Third Party

S.C.R. 3.130(1.8)(f)

(f) A lawyer shall not accept compensation for representing a client from one other than the client unless:

(1) the client gives informed consent;

(2) there is no interference with the lawyer's independence of professional judgment or with the client-lawyer relationship; and

(3) information relating to representation of a client is protected as required by Rule 1.6.

Slide8

Who Is The Client?

Slide9

The Insured is the Client

Ethics Opinion KBA E-331

This

is so because the insured is defense counsel’s client. The insured is entitled

to competent

and zealous representation, and a defense that is not adversely affected

by prohibited

conflicts of interest.

Slide10

Horns of a Dilemma

Slide11

Reporting to Insurer

Slide12

Reporting to Insurer

Ethics Opinion KBA E-410

An

attorney must be ever vigilant, pursuant to KRPC

1.1 and

1.3, to

identify information

that might be

disadvantageous

to the client Insured and to refrain

From disclosing

such information absent fully informed client consent. If

the attorney

is competent and diligent in this regard and yet forwards to the

Insurer information

not known to the attorney to be damaging, no unethical conduct

has occurred

.

Slide13

Reporting to Insurer

Ethics Opinion KBA

E-410

The contract of insurance between the Insurer and the Insured pursuant to which

the Insurer

provides the defense commonly allows the

Insurer

to have some measure of

control regarding

the defense provided and commonly requires that the Insured cooperate in the

defense. Such

is a matter of contract and may govern the rights of the Insurer and the Insured as to

each other

.

Slide14

Reporting to Insurer

Ethics Opinion KBA

E-410

The contract of insurance does not, however, define the ethical duties an attorney

hired by

an Insurer to defend an Insured owes to the client Insured. KRPC 1.4 states that the

attorney should

keep the client “reasonably informed” and that the attorney should “explain a matter

to the

extent reasonably necessary to permit the client to make informed decisions regarding

the representation

.” Thus, the attorney hired by the Insurer to defend the Insured should, at

the beginning

of the client-lawyer relationship, explain to the client the nature and requirements

of the

Insurer and Insured contract.

Slide15

Reporting to Insurer

Ethics Opinion KBA E-340

An insurer may have every right to conduct such investigation as it sees fit,

and may

deal with its insured in a manner permitted by the terms of the insurance contract

. On

the other hand, it is not necessarily entitled to the assistance of the

lawyer representing

the insured. Defense counsel’s relationship with the insured is not

governed by

the insured-insurer contract, but is instead governed by the Rules of

Professional Conduct

.

Discussions with a client may reveal facts affecting coverage (may

suggest coverage

defenses)

. Counsel should resist any ‘demand’’ that might put the insured

at risk

. It is also clear that any intrusion into the attorney/client sanctum should be

permitted only

with the informed consent of the client.

Slide16

Reservation of Rights

Slide17

Reservation of Rights

Ethics Opinion KBA

E-410

. . . the

attorney must be ever mindful that with regard to this

tripartite relationship

the attorney’s client is the Insured and not the Insurer. As part of the duties

of competence

and diligence and the duty to communicate with the client discussed above,

the attorney

should explain the nature of a defense under reservation of rights to the client.

When the

Insurer provides the defense under a reservation of rights, the possibility exists that

an impermissible

conflict of interest is created.

Slide18

Reservation of Rights

Ethics Opinion KBA

E-410

When an attorney represents an Insured and the Insurer is providing the defense under

a reservation

of rights, the attorney must analyze the situation under the general conflict of

interest rule

, KRPC 1.7(b). KRPC 1.7(b) states that a ‘lawyer shall not represent 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 interests, unless” two conditions are satisfied

.

First, the lawyer must “reasonably believe that the representation will not be adversely affected

.”

Second, the client must consent after consultation.”

Slide19

Bad Faith Claims

Slide20

Bad Faith Claim

Ethics Opinion KBA

E-378

May a lawyer paid by insurer to defend an insured in a personal injury action

in which

claims are also made against the insurer

under

the UCSPA represent

both the

insured and the insurer

?

It is the Committee’s position that defense counsel should be free to abide by

the insured’s

decisions concerning the objectives of the litigation and settlement, should be

not subjected

to competing loyalties that may compromise the lawyer’s ethical obligation to

hold inviolate

confidential information of the client, and should not be required by an insurer to

seek the

consent of the insured to dual representation.

Slide21

Cost Control and Independence

Slide22

The Insurer’s Perspective

Slide23

The Attorney’s Perspective

Slide24

Cost Control and Independence

A typical liability policy may contain language such as this:

We will have the right and duty to defend the insured against any "suit" seeking those damages. However, we will have no duty to defend the insured against any "suit" seeking damages for "bodily injury", "property damage", "personal injury", or "advertising injury" to which this insurance does not apply, We may at our discretion, investigate any "occurrence" and settle any claim or "suit" that may result.

Slide25

Cost Control and Independence

Inherent in all of these potential conflicts is the fear that the entity paying the attorney, the insurer, and not the one to whom the attorney is obligated to defend, the insured, is controlling the legal representation.

American Ins.

Ass'n

v. Kentucky Bar

Ass'n

, 917 S.W. 2d 568, 573 (Ky. 1996)

Slide26

Cost Control and Independence

American Ins.

Ass'n

was not the first time we rejected a "rule [that] would be inimical to the preservation of traditional and longstanding concepts associated with attorney-client relationship, as recognized by Kentucky law." [Citation omitted].

Our courts simply cannot ignore Kentucky's consistent refusal to allow the insurer any right to control the attorney's independent manner of representing its insured.

That independence has a long history.

Cincinnati Insurance Company v.

Hofmeister

, 2004-CA-002296-MR (

Ky.App

. 2008).

Slide27

Restrictions on Tasks

Slide28

Restricting Tasks

Ethics Opinion KBA E 416

May the lawyer accept representation under guidelines that:

Require approval by the insurer

before the lawyer undertakes any discovery, conducts any legal research, or files any motion?

Answer:

No

. The lawyer may agree, however, to guidelines setting a reasonable, tentative budget and providing a process for ongoing consultation.

Slide29

Restricting Tasks

Ethics Opinion KBA E 416

May the lawyer accept representation under guidelines that:

b. Require all

investigative work or all records review

to be performed only by the insurer’s employees or, if performed by the lawyer’s firm, to be billed only at a paralegal rate?

Answer:

No.

The lawyer may agree, however, to guidelines establishing

an

appropriate allocation of lawyer and non-lawyer/paralegal tasks, or setting a reasonable tentative budget for investigative work or document review, and providing a process for ongoing consultation.

Slide30

Restrictions on Budget

Slide31

Restrictions on Budget

Ethics Opinion KBA E 331

A restricted budget for the defense can pose an ethical dilemma for defense counsel. This is so because the insured is defense counsel’s client. The insured is entitled to competent and zealous representation, and a defense that is not adversely affected by prohibited conflicts of interest.

At some point, carrier imposed restrictions may threaten counsel’s ability to provide such representation and impact on the lawyer’s ability to bring to bear his independent professional judgment on behalf of the insured. Occasions may arise in which the insurer’s budgetary restrictions will justify, or require, withdrawal.

Slide32

Restrictions on Budget

Ethics Opinion KBA E 331

We are not suggesting that counsel has carte blanche to needlessly run up a bill. Such conduct would be just as reprehensible as yielding professional control of his or her work to an adjuster or claims manager. Nor are we suggesting that costs and expenses are not a legitimate concern of the insurer. Conflicts are not inevitable, or irreconcilable.

Presumably these matters can be resolved amicably and responsibly in the great majority of cases.

Slide33

Stealing is Stealing

Slide34

Third Party Audits

Slide35

Third Party Audits

Ethics Opinion KBA E-404

Question 1: Would Law Firm’s submitting its Insurance Company bills directly

to Audit

Company, rather than to Insurance Company, without the law

firm’s obtaining

the fully informed consent of the insured, violate the

Kentucky Rules

of Professional Conduct?

Answer

: Yes

Slide36

Third Party Audits

Ethics Opinion KBA E-404

Question 2: Would the Law Firm’s submitting other clients’ bills to Audit

Company violate

the Kentucky Rules of Professional Conduct?

Answer

: Yes

Slide37

Third Party Audits

Ethics Opinion KBA E-404

The Committee agrees with the views expressed in South Carolina Bar Op.

97-22 that

a lawyer may submit his or her bills directly to a third-party auditing firm

only

with the

informed consent of the insured as well as the insurer

, and only so long as the

lawyer reasonably

believes that doing so will not substantially and adversely affect

the representation

of the insured client.

Slide38

Third Party Audits

Ethics Opinion KBA E-409

Question: If an attorney is defending an Insured with the defense being provided by

an Insurer

pursuant to an insurance contract between the Insurer and the Insured,

and if

that attorney is aware that the attorney’s legal bills sent to the Insurer

are forwarded

to an outside auditing firm, what do the Kentucky Rules

of Professional

Conduct require of the attorney?

Answer

:

The attorney must obtain fully informed consent

from the Insured, the client

, before

forwarding legal billing information to the Insurer

if the attorney

knows

the

Insurer will send the billing information to an outside auditor.

Slide39

Third Party Audits

Ethics Opinion KBA E-409

The attorney should explain

the implications

of such a procedure to the client and obtain the client’s fully informed

consent before

providing the Insurer with detailed billing information.

In so doing, the attorney

should also

discuss with the Insured client the implications, with regard to the insurance

contract between

the Insurer and the Insured, that may flow from the Insured’s failure to consent to

the release

of legal billing information.

Slide40

Third Party Audits

Ethics Opinion KBA E-409

If the

attorney counsels

the client Insured about the

possible consequences of the disclosure of the legal

billing information

and the client consents to the disclosure, the attorney must follow the instruction

of the

client Insured and disclose the information. If the attorney believes disclosure to be

contrary to

the best interests of the client Insured, the attorney should counsel the client as to

the attorney’s

belief. If the client consents to the disclosure contrary to the attorney’s advice, the attorney may seek a permissive withdrawal from the representation pursuant to KRPC 1.16(b).

Slide41

Third Party Audits

KRE 503

(2) “Representative of the client” means:

(A) A person having authority to obtain professional legal services, or to act on advice thereby rendered on behalf of the client; or

(B) Any employee or representative of the client who makes or receives a confidential communication:

(

i

) In the course and scope of his or her employment;

(

ii) Concerning the subject matter of his or her employment;

and

(

iii)

To effectuate legal representation for the client.

See Asbury v.

Beerbower

, 589 S.W.2d 216 (Ky. 1979)

Slide42

Insurer Guidelines

Slide43

Paying Bills

Slide44

Insurer Guidelines

Ethics Opinion KBA E 416

Question 1: In general, may an insurance defense lawyer agree to abide by

insurer-prescribed case

handling guidelines in representing the insured?

Answer:

A lawyer may not agree

to abide by such guidelines

unless

:

a) the lawyer determines that

the guidelines will not interfere

with

the lawyer’s

independent professional judgment and other duties owed to

the insured

under the Kentucky Rules of Professional Conduct; and

Slide45

Insurer Guidelines

Ethics Opinion KBA E 416

Question 1: In general, may an insurance defense lawyer agree to abide by

insurer-prescribed case

handling guidelines in representing the insured

?

Answer:

A lawyer may not agree

to abide by such guidelines

unless

:

b) the lawyer

discloses the guidelines’ existence to the insured

,

and

provides

a practical explanation

of their import, at the outset of

the representation

and as may become necessary in specific

situations thereafter

, and

the insured consents after consultation to any guideline

that materially

limits the representation

; and

Slide46

Insurer Guidelines

Ethics Opinion KBA E 416

Question 1: In general, may an insurance defense lawyer agree to abide by

insurer-prescribed case

handling guidelines in representing the insured

?

Answer:

A lawyer may not agree

to abide by such guidelines

unless

:

c)

the lawyer

, upon undertaking the representation,

performs

all

duties imposed

by the Rules,

regardless of compensation

under the guidelines,

so long

as the representation continues.

Slide47

Insurer Guidelines

Ethics Opinion KBA E 416

The

lawyer-insurer relationship contemplates a

process for

ongoing consultation

. Such consultation must be genuine, with the lawyer

basing each expenditure

or activity request on the needs of the insured, and the insurer giving each

request careful

consideration in light of the lawyer’s independent professional judgment. If the

insurer’s guidelines

do not provide such a process, the lawyer should decline a proffered representation

. In

any event,

the lawyer must not undertake, and an insured client cannot be asked to accept,

a representation

so limited in scope that it abridges the client’s rights, or narrows the

lawyer’s duties

, under the Rules.

See

Comment 5 to Rule 1.2. After the representation of a client

has begun

-- and continuously thereafter until the representation concludes or is properly

terminated under

Rule 1.16 --

the lawyer must perform

his or her professional duties fully, and

must exercise

independent professional judgment in loyalty to the client,

regardless of

limitations imposed

by the insurer.

Slide48

Just Talk

Slide49

Alternative Fee Arrangements

Slide50

AFAs

Ethics Opinion KBA E 368

Question: May

a lawyer enter into a contract with a liability insurer in which the

lawyer or

his firm agrees to do all of the insurer’s defense work for a set fee.

Answer

:

No.

American Ins.

Ass’n

v. Kentucky Bar

Ass’n

, 917 S.W.2d 568 (1996)

Slide51

AFAs

Ethics Opinion KBA E 368

Yet, here

the insurer

wants to continue to promise the insured a defense in the contract of insurance,

while limiting

the extent of its undertaking in a side contract between the insured’s lawyer and

the insurer

to which the insured is not a party. Compare E-331 (1988). Furthermore, the lawyer

is placed

, by the insurer (a third person paying for the lawyer’s services), in a position of

conflict

vis

-a-

vis

the insured client.

To some extent the lawyer becomes the insurer; and lawyer stands

to gain

by limiting the services rendered to the client.

See Rules 1.1 and 1.2, as well Rule 1.7(b

). Admittedly

, a potential for similar conflict is inherent in other lawyer-client arrangements;

but here

the insured client will have no control over the choices that will be made.

Slide52

AFAs

American Ins.

Ass’n

v. Kentucky Bar

Ass’n

, 917 S.W.2d 568 (1996)

Respondent was able to cite to nineteen such conflicts, including representation of the insured which becomes

more complex than anticipated

, resulting in financial hardship for the attorney;

policy and/or coverage defenses

asserted by the insurer against the insured; and

disagreement between the insured and the insurer with regard to settlement negotiations

. Moreover, we do not believe that in most instances the interests of the insured and the insurer are alike, but are more apt to agree with Respondent’s contention that while the insured and the insurer may share some common interests, the two parties are subject to complete divergence at any time.

Inherent in all of these potential conflicts is the fear that the entity paying the attorney, the insurer, and not the one to whom the attorney is obligated to defend, the insured, is controlling the legal representation.

Slide53

Good Ethics is a Habit

Slide54

Let’s Be Ethical

Slide55

Insurance Defense Ethical Pitfalls for Counsel and Claims Professionals

www.gcandh.com

Slide56

Slide57

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