By Ian Friedman and Andrew Servais
Much has been written about the potential conflict of interest that attends an insurance carrier’s retention of an attorney to represent an insured. It is understood that “where the insurer hires counsel to defend its insured and does not raise or reserve any coverage dispute, and where there is otherwise no actual or apparent conflict of interest between the insurer and the insured that would preclude an attorney from representing both, the attorney has a dual attorney-client relationship with both insurer and insured.” (Unigard Ins. Group v. O’Flaherty & Belgum (1995) 38 Cal.App.4th 1229, 1236–1237.)
Because the so-called “tripartite” attorney-client relationship among insured, insurer and the insurer’s selected attorney is well established, insurers have increasingly been willing to sue the retained attorney for malpractice by claiming the attorney mishandled the insured’s claim and caused the insurer to incur excess legal fees and/or indemnity obligations.
“Barring a conflict between the insurer and its insured, it makes sense to allow an insurance carrier who has retained counsel to defend the interests of its insured as well as the carrier’s own interests, to sue that attorney for malpractice. In that situation, the insurer has retained counsel and is entitled to expect counsel to fulfill the duty it has undertaken to the insurer. The only reason for the qualification that there be no conflict between the insurer and the insured is that the attorney’s primary loyalty must be to the insured it was retained to defend.” (American Casualty Co. v. O’Flaherty (1997) 57 Cal.App.4th 1070, 1076.)
A twist occurs where the attorney retained by an insurer to defend the insured is sued by a third-party insurance carrier, such as a reinsurer of the original insurance carrier or potentially an excess insurer to the original carrier. The third-party insurer has no direct attorney-client relationship with the lawyer retained to defend the insured, but could potentially have incurred financial obligations (e.g., by owing reinsurance payments or paying amounts in excess of a primary insurance policy) that directly flow from the conduct of the lawyer.
Thus, the question presented is whether the lawyer retained to defend the insured has any legal duty to protect the interests of a third-party insurer
It is the general rule that “an attorney will normally be held liable for malpractice only to the client with whom the attorney stands in privity of contract, and not to third parties.” (Borissoff v. Taylor & Faust (2004) 33 Cal.4th 523, 529.) Thus, where an insurance company did not retain and/or pay the attorney upon whom it now claims to have relied, no attorney-client relationship runs from the attorney to the non-retaining third-party insurer. (See Zenith Ins. Co. v. O’Connor (2007) 148 Cal.App.4th 998.)
In Zenith, a reinsurer that reinsured 100 percent of the ceding insurer’s exposure brought a professional negligence action against a law firm retained by the insurer to provide legal services with respect to the defense of the claims. There, the Court considered “the nature and extent of the duty if any, owed to the reinsurer by counsel retained by the ceding insurer to protect the interests of the insured under the underlying policy…. [The Court concluded] that, in the absence of an express agreement between the reinsurer and retained counsel, the general circumstances relied upon here by [the reinsurer] are not sufficient to establish an attorney-client relationship or any duty of care running to the reinsurer.” (Id. at p. 1006.)
The analysis does not change merely because the retained attorney had direct conversations with the third-party insurer. Because the third-party insurer has a right to receive communications from the retained handling attorney, “[t]he fact of such communication can neither destroy an applicable privilege [], nor create an attorney-client relationship.” (Id. at p. 1009–1010 [citing Lipton v. Superior Court (1996) 48 Cal.App.4th 1599, 1618, fn. 19, 56 Cal.Rptr.2d 341)
While case law leads to the conclusion that no attorney-client relationship exists between an attorney retained to defend an insured and a third-party insurer with a financial interest in the result of the litigation, an attorney should nevertheless confirm in writing exactly who he or she represents at the commencement of the engagement. This avoids any implication of a duty being owed to a non-client.
Ian Friedman and Andrew Servais are Partners at Wingert, Grebing, Brubaker & Juskie, LLP.