Insurance Law: Ethics And Multiple Insureds

Multiple Insureds

Where multiple insureds are entitled to a defense under the same policy for the same claim, the insurer often assigns the same defense counsel to defend the insureds, creating potential conflicts.  For example, a passenger in a car may sue both the driver and the owner of the car after a wreck.  An owner and a driver are typically entitled to a defense under the same policy.  However, the driver and the owner may have conflicting interests if, for example, the owner asserts that the driver was operating the car without permission.

If hired to represent multiple insureds under the same policy, defense counsel should, at the inception of the representation

  • analyze the potential conflicts among the insureds
  • disclose these potential conflicts in writing to each insured and the insurer

obtain valid conflict waivers from all parties.Even after these initial disclosures, defense counsel should continue to monitor potential conflicts,   as they may ultimately require defense counsel to withdraw.

 Coverage Defenses

Georgia Rule of Professional Conduct 1.6(a) states:

A lawyer shall maintain in confidence all information gained in the professional relationship with a client, including information which the client has requested to be held inviolate or the disclosure of which would be embarrassing or would likely be detrimental to the client, unless the client consents after consultation, except for disclosures that are impliedly authorized in order to carry out the representation, or are required by these rules or other law, or by order of the Court.

In the course of a representation of an insured, defense counsel may learn of information supporting a coverage defense.  Regardless of whether the attorney learns of the information through independent investigation and activities, or whether the insured informs the attorney of the information, defense counsel is generally barred from disclosing the information to the insurer.

Parsons v. Continental National American Group

A famous case illustrating this conflict is Parsons v. Continental National American Group. The Parsons were violently assaulted by Michael Smithey, the 14-year-old son of CNA’s insureds.  CNA appointed counsel to defend the Smitheys in the resulting lawsuit.  During the lawsuit, the attorney informed CNA of a confidential file on Michael Smithey from a psychiatric institution that treated him.  Counsel reported that the confidential file showed that the boy knew what he was doing was wrong. Counsel further reported to the insurer that “the assault [Michael] committed on claimants can only be a deliberate act on his part.”  After receiving this letter, CNA sent a reservation of rights to the Smitheys warning that Michael’s act might have been an intentional act excluded from coverage.  In preparation for trial, defense counsel interviewed Michael and wrote to CNA: “[Michael’s] own story makes it obvious that his acts were willful and criminal.”  At trial, the court granted the Parson’s motion for a directed verdict on the issue of Michael’s liability, and a judgment was entered against him for $50,000.

The Parsons then garnished the CNA policy and offered to settle for the limits of $25,000.  CNA rejected the offer.  Instead, CNA defended the garnishment action by claiming that the intentional acts exclusion applied.  The same law firm and attorney that had represented Michael represented CNA in the garnishment action.  The Parsons contended that CNA was estopped to deny coverage and had waived the intentional acts exclusion because the company exploited the relationship between its appointed defense counsel and the Smithey’s son.  The Arizona Supreme Court agreed.  After noting that defense counsel obtained confidential and privileged information by virtue of the attorney-client relationship:

[W]e hold that such conduct constitutes a waiver of any policy defense, and is so contrary to public policy that the insurance company is estopped as a matter of law from disclaiming liability under any exclusionary clause in the policy.
Accordingly, CNA was liable for the entire $50,000 judgment.

Three years before Parsons, the Texas Supreme Court held that an insurer was estopped from denying coverage due to the insured’s late notice where the defense counsel hired by the insurance company to represent the insured “actively work[ed] against [the insured] in developing evidence for [the insurer] on the coverage question.”  The Texas Supreme Court stated that “[a]n attorney employed by an insurer to represent the insured simply cannot take up the cudgels of the insurer against the insured…”.  An attorney’s actions against his client in this manner violates the rules of professional conduct.  An attorney should not act as both defense counsel for the insured and coverage counsel for the insurer.

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