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And Then There Were Three – the Tripartite Relationship in Insurance Liability Claims and What It Means for You

In prior blogs, I have discussed liability insurance, including the application of the insuring agreement and exclusions to the existence of coverage, as well as litigating insurance coverage disputes.  A related issue involves the rights of the insured and insurer when the insurer retains counsel for the insured when a covered or potentially covered claim or lawsuit is brought against the insured.  This is known as the “tripartite relationship” — the relationship between (1) the insurance company, (2) its insured and (3) the attorney retained by the insurance company to defend the insured pursuant to the insurance policy.

Most surveys of state law find that somewhere between 30-35 states follow the “dual-client” approach, with both insurer and insured being clients of the insurer-retained defense attorney.  A few states label the insured as the “primary client”, which implies that the attorney owes some duty to the insurer as well (the “secondary client” perhaps?)  And finally, very few states view the insured as the attorney’s only client, rejecting the tripartite relationship entirely.

In the tripartite relationship, there are three separate (and sometimes competing) interests at play – the terms of the insurance policy itself, the attorney’s professional responsibility obligations, and the strategy involved in defending and possibly settling a lawsuit brought against an insured. Most insurance policies give the insurer the right to control the defense and settlement of a lawsuit, even when defending under a reservation of rights. And therein lies the rub.

What are the responsibilities and duties of an insurer and its retained defense counsel toward an insured when coverage issues exist?  Several states have ruled that when an insurance company is operating under a reservation of rights, it has an enhanced obligation of good faith toward its insured in conducting the defense. Moreover, counsel retained to defend the insured under a reservation of rights owes a duty of full and ongoing disclosure to the insured.  The failure of the insurer or the retained defense counsel to keep the insured informed as to the status of the litigation could constitute a failure to meet the enhanced obligation.

So, what are some best practices for the insurer and its retained defense counsel conducting a defense of the insured under a reservation of rights?  Here are some humble suggestions from your author:

Insurer’s duties:

  1. Thoroughly investigate the cause of the incident involving the insured and the nature and severity of the plaintiff’s injuries.
  2. Retain competent defense counsel for the insured.
  3. Both the retained defense counsel and the insurance company must understand that the insured is also the client of the defense counsel.
  4. Fully inform the insured, not only of the reservation of rights but of all developments concerning coverage and the progress of the lawsuit.
  5. The insurance company must disclose all settlement offers made by the insurance company.
  6. The insurance company must refrain from engaging in any action which would demonstrate a greater concern for the insurance company’s monetary interest than for the insured’s financial risk.

Defense counsel’s duties:

  1. Defense attorney must understand that the attorney has a duty of loyalty to the insured as his client.
  2. Defense attorney must fulfill a duty owed to the insured of full and ongoing disclosure to the insured.
  3. Potential conflicts of interest between the insurance company and the insured must be fully disclosed and resolved in favor of the insured.
  4. All information relevant to the insured’s defense, including a realistic and periodic assessment of the insured’s chances to win or lose the pending lawsuit, must be communicated to the insured.
  5. All offers of settlement must be disclosed to the insured as those offers are presented.

The takeaway?  Full and open communication and disclosure with the insured is the key. Following these suggestions will go a long way to complying with any enhanced duty of good faith that may apply.  These suggestions should also operate to protect the rights of the insured as well as the insurer.