Risky Business: Attorney Liability in Insurance Defense Litigation-A Review of the Arizona Supreme Court's Decision in Paradigm Insurance Co. V. Langerman Law Offices (2002)

I. INTRODUCTION The unique nature of tripartite relationship, created when an insurer hires a lawyer to represent an insured, has created confusion on part of many insurance defense attorneys.1 In such circumstances, it can be unclear how to ethically proceed with insurance defense litigation in order to avoid pitfalls of malpractice liability. Although intended to simplify ethical dilemmas for lawyers, a tripartite relationship often creates a situation in which lawyer retained by insurer to represent insured does not know who her client is-the insurer, insured, or both.2 Often, divergent interests of insurer and insured magnify attorney's dilemma of loyalty. In absence of concrete and consistent common law decisions regulating procedural aspects of insurance defense, some courts have recently begun to rely heavily upon newly enacted Restatement (Third) of Law Governing Lawyers (Restatement) to determine ethical boundaries of lawyer conduct.3 IMAGE FORMULA3 Unfortunately, inconsistencies among some jurisdictions have only perpetuated problems in this area of law. One prominent author has noted, [t]he rules [surrounding insurance defense litigation] fail to provide clear and defensible answers to most basic questions, such as an attorney-client relationship exists between insurance company and lawyer retained to handle lawsuit against insured.4 Consequently, the obvious danger is that insurance defense lawyers will act improperly, even when they attempt to adhere to law.5 Recently, some courts have unsuccessfully attempted to clarify both procedural standards governing insurance defense litigation and ethical boundaries of attorney-client relationship.6 Paradigm Insurance Co. v. Langerman Law Offices, decided by Arizona Supreme Court in June of 2001, is such a case.7 Although Langerman court may have achieved an equitable result, it failed to advance proper analysis in reaching its result. If inconsistent procedural standards are not clarified, uncertainty and ambiguity regarding duties of insurance defense attorneys will continue to result in inconsistent representation and possible injury to insurer, insured, and especially attorney. Insurance defense lawyers will continue to flounder as to whom they actually represent and where their duties of loyalty lie. Part II of this Note reviews facts and reasoning of court surrounding Langerman decision. Part III discusses history of tripartite relationship between insured, insurer, and lawyer hired to represent insured. In order to elucidate IMAGE FORMULA5 basic procedural standards that should govern this area of law, this Note will discuss origin of tripartite relationship itself, attorney-client privilege, potential conflicts of interest unique to tripartite relationship, and definition of a client. Part IV reviews scholarly thought with regard to attorney liability in insurance defense context, asserting that retainer agreement should define scope of liability for attorney.8 Part V will apply retainer agreement theory and will discuss application of this theory to Langerman. This Note ultimately concludes that retainer agreement should be operative document all parties in tripartite relationship look to for clarification regarding an insurance defense attorney's duties to client. Such a standard is critical in minimizing attorney malpractice liability for lawyers engaged in risky business of tripartite relationship. II. BACKGROUND AND FACTS SURROUNDING LANGERMAN The issue before Arizona Supreme Court in Langerman was whether an attorney may be held liable to an insurer, which assigned him to represent an insured, when attorney's negligence damage[d] only insurer. …