June 9, 1983
A lawyer retained by an insurance company to defend a legal claim under a policy of insurance has an attorney-client relationship with the insured, and is ethically obligated to promptly communicate any significant settlement offer to the insured and otherwise keep the client reasonably informed concerning the progress of the matter.
References: ABA Op 326.
An inside counsel for an insurance company asks whether settlement offers must be brought to the insured or merely conveyed the offers to the insurer.
The inside counsel position is typically a relationship of employer and employee between, e.g., a staff member in the legal department of an organization. In such a situation the lawyer/client relationship runs between the lawyer and the employer. While the inquirer stated he is inside counsel, the letterhead unmistakably declares the existence of an independent law firm practice.
The first question to be considered, therefore, is whether or not a lawyer/client relationship exists between the firm and the insured. Michigan adheres to the view that the lawyer selected by the carrier to represent the insured has a lawyer/client relationship with the insured and not the carrier. The fact that the carrier reserves the right to select the lawyer to represent the insured does not alter the lawyer/client relationship between the lawyer and the insured.
The second question, therefore, becomes to what extent is the lawyer ethically obligated to communicate settlement offers to the insured. The policy of insurance may spell out the lawyer's obligation to the insured in this regard. Since this consideration involves a contract analysis, however, a question of law is presented and the question is beyond the scope of the Committee's jurisdiction.
As to the ethical matter of communicating settlement offers, the guiding principle is that the duty of the lawyer is to inform the client of every settlement offer made by the opposing party. ABA Op 326. This is the lawyer's general obligation. The lawyer has an obligation to reasonably inform the client concerning the progress of a matter, and of any significant settlement offers. Offers which the client has clearly directed the lawyer to reject or proposals which do not make any substantial change in prior offers need not be communicated to the client. The exception to this may be the presence of an insurance contract provision which permits counsel to settle a dispute without first informing the insured unless the offer was beyond policy limits.
Although not specially requested, the Committee feels it appropriate to briefly address the matter of potential conflicts arising from simultaneously representing the insurer and its insured. Liability policies usually provide that the insurance company will indemnify the insured against liability to third persons up to the monetary limits of the policy, and that the company will provide a lawyer (selected and paid by the company) to represent the policy holder in any lawsuit filed against them. For their part, the insured agrees to "cooperate" in defending against claims covered by the policy.
When a claim is brought against the insured under the liability policy, differing interests may arise. The insured wants to dispute settled without liability to them, whatever the cost may be to the insurance company. On the other hand, the company wishes to pay as little as possibly in resolving the case--whether in the form of payment to the opposing party or in its costs of litigation. Despite these potential conflicts, the insurance company's furnishing a lawyer to defend the insured is an essential ingredient of liability insurance and is deemed socially useful. Hence, it is both proper and quite common for the lawyer selected by the insurance company to represent both its interest and that of the policyholder, in defending claims brought against the policyholder. However, the lawyer selected by the company to represent the insured still has a professional obligation to avoid conflicting interests and impaired loyalty. The lawyer may be subject to both disciplinary action and civil liability if they fail to do so.