Opinion ID: 2514196
Heading Depth: 2
Heading Rank: 2

Heading: Potential and actual conflicts of interest with the insurer as client

Text: ¶ 13 Langerman contends that absent the consent of the insured, a lawyer assigned by an insurer to represent the insured forms an attorney-client relationship only with the insured and never with the insurer. Any contrary conclusion, asserts Langerman, inherently creates a strong potential conflict of interest for the attorney, weakens his undivided allegiance to the insured, and creates situations rife with opportunities for mistrust and second guessing. Petition for Review at 6, 9. ¶ 14 Langerman's concern over conflicts of interest between attorney, insurer, and insured is not unfounded. This case presents the typical situation found when defense is provided by a liability insurer: as part of the insurer's obligation to provide for the insured's defense, the policy grants the insurer the right to control that defense-which includes the power to select the lawyer that will defend the claim. Charles Silver, Does Insurance Defense Counsel Represent the Company or the Insured? 72 TEX. L.REV. 1583, 1594-95 (1994). But the fact that the lawyer is chosen, assigned, and paid by the insurer for the purpose of representing the insured does not automatically create an attorney-client relationship between the insurer and lawyer. See ¶ 10, supra. As comment f to RESTATEMENT § 134 states: It is clear in an insurance situation that a lawyer designated to defend the insured has a client-lawyer relationship with the insured. The insurer is not, simply by the fact that it designates the lawyer, a client of the lawyer. Whether a client-lawyer relationship also exists between the lawyer and the insurer is determined under § 14. ¶ 15 The RESTATEMENT clearly permits a lawyer to represent the insured even though the lawyer is paid by the insurer and his/her professional conduct on behalf of the insured is directed by the insurer. See RESTATEMENT § 134. Thus, because the insured has given the insurer control of the defense as part of the agreement for indemnity, the assigned lawyer more or less automatically becomes the attorney for the insured. But does the assigned lawyer automatically also become the attorney for the insurer in every case? As noted in the preceding paragraph, the RESTATEMENT seems to answer in the negative. Langerman goes further, arguing that even in the absence of actual conflict between the insured and insurer, there is always a great potential for it. And it is this potential, argues Langerman, that prevents the formation of an attorney-client relationship absent the express consent of the insuredthe automatic client. The basic rule prohibiting conflicts reads: Unless all affected clients and other necessary persons consent to the representation... a lawyer may not represent a client if the representation would involve a conflict of interest. A conflict of interest is involved if there is a substantial risk that the lawyer's representation of the client would be materially and adversely affected by the lawyer's own interests or by the lawyer's duties to another current client, a former client, or a third person. RESTATEMENT § 121 (emphasis added). ¶ 16 Is the risk of conflict resulting from the lawyer's duties to the insurer as a potential client or third person so substantial in every case that the lawyer cannot ever be engaged in dual representation? There can be no doubt that actual conflicts between insured and insurer are quite common and that the potential for conflict is present in every case. Conflicts may arise over the existence of coverage, the manner in which the case is to be defended, the information to be shared, the desirability of settling at a particular figure or the need to settle at all, and an array of other factors applicable to the circumstances of a particular case. This is especially true in cases involving medical malpractice claims. [1] We have recognized such tensions, holding in both Barmat and Parsons that when a conflict actually arises, and not simply when it potentially exists, the lawyer's duty is exclusively owed to the insured and not the insurer. Barmat, 155 Ariz. at 517, 747 P.2d at 1216; Parsons, 113 Ariz. at 227, 550 P.2d at 98. Because a lawyer is expressly assigned to represent the insured, the lawyer's primary obligation is to the insured, and the lawyer must exercise independent professional judgment on behalf of the insured. See ARIZONA RULES OF PROF'L CONDUCT (ER) 1.8.(f)(2)-(3), ARIZ. R.SUP.CT. 42. Thus, a lawyer cannot allow an insurer to interfere with the lawyer's independent professional judgment, even though, in general, the lawyer's representation of the insured is directed by the insurer. RESTATEMENT § 134(2)(a). ¶ 17 Langerman cites two opinions of the Arizona State Bar Committee on the Rules of Professional Conduct to support its argument that the Arizona view has always been that a lawyer assigned to represent an insured represents only the insured and never the insurer. See Az. State Bar Comm. on Prof'l Conduct, Formal Op. 99-08 (1999); Az. State Bar Comm. on Prof'l Conduct, Formal Op. 94-03 (1994); see also ER 1.7, ARIZ.R.SUP.CT. 42. Regardless of these opinions' precedential value, they do not support Langerman's interpretation. Rather, they hold only that the lawyer does not automatically represent the insurer. Op. 99-08, at 3 (emphasis added). We have no quarrel with this proposition. In addition, instead of addressing a situation like the one presently before us, Opinion No. 99-08 involved an insurance carrier's attempts to use an audit procedure to force a lawyer to reveal information that was potentially disadvantageous to his client, the insured. We have, in fact, previously held that an attorney assigned to represent an insured cannot supply the insurer with information that either may be or actually is detrimental to the insured's interests. Farmers Ins. Co. v. Vagnozzi, 138 Ariz. 443, 448, 675 P.2d 703, 708 (1983). Vagnozzi and Opinion 99-08, however, are cases of actual conflict as they involved a real or substantial danger of harming the insured. Where a substantial danger of harming the client does not exist, there is no actual conflict of interest-only the potential of a future conflict. ¶ 18 When the potential for a future conflict between insurer and insured is great, restrictions are placed on the lawyer's ability to accept or continue representation of both. Our Rules of Professional Conduct provide: A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer's responsibilities to another client or to a third person, or by the lawyer's own interests, unless: (1) the lawyer reasonably believes the representation will not be adversely affected; and (2) the client consents after consultation. ER 1.7, ARIZ.R.SUP.CT. 42 (emphasis added). What constitutes a material limitation in any particular case depends, of course, on the facts of that case. ¶ 19 We agree with Langerman that the potential for conflict between insurer and insured exists in every case; but we note that the interests of insurer and insured frequently coincide. For instance, both insurer and insured often share a common interest in developing and presenting a strong defense to a claim that they believe to be unfounded as to liability, damages, or both. Usually insured and insurer have a joint interest in finding additional coverage from another carrier. Thus, by serving the insured's interests the lawyer can also serve the insurer's, and if no question arises regarding the existence and adequacy of coverage, the potential for conflict may never become substantial. In such cases, we see no reason why the lawyer cannot represent both insurer and insured; but in the unique situation in which the lawyer actually represents two clients, he must give primary allegiance to one (the insured) to whom the other (the insurer) owes a duty of providing not only protection, but of doing so fairly and in good faith. See Zilisch v. State Farm Mut. Auto. Ins. Co., 196 Ariz. 234, 237-38 ¶ 20, 995 P.2d 276, 279-80 ¶ 20 (2000). ¶ 20 Perhaps recognizing this, the court of appeals determined that the majority rule [2] was in the absence of a conflict, the attorney has two clients, the insurer and the insured. Langerman, 196 Ariz. at 577 ¶ 14, 2 P.3d at 667 ¶ 14; but see Atlanta Int'l. Ins. Co. v. Bell, 438 Mich. 512, 475 N.W.2d 294, 297 (1991) (the relationship between the insurer and the retained defense counsel ... [is] less than a client-attorney relationship); In re Rules of Professional Conduct, 299 Mont. 321, 2 P.3d 806, 814 ¶ 38 (2000) (We hold that under the Rules of Professional Conduct, the insured is the sole client of defense counsel.). We believe the court of appeals' characterization of the majority rule is too absolute. A host of potential problems are created by holding that, as a matter of law, a lawyer hired by the insurer to represent an insured always accepts the responsibilities of dual representation until a conflict actually arisesthus always automatically forming an attorney-client relationship with both the insurer and insured. There are many cases in which the potential for conflict is strong enough to implicate ER 1.7 and RESTATEMENT section 121 from the very beginning. Think, for example, of a claim with questionable liability against an insured covered by limits much lower than the amount of damages. The potential for conflict is quite substantial unless and until the insurer has committed itself to offering or waiving the policy limits. Thus we do not endorse the view that the lawyer automatically represents both insurer and insured until the conflict actually arises. [3] ¶ 21 In situations like the present onein which an insurer assigns an attorney to represent the insuredthe RESTATEMENT has decided against taking a firm position on whether the insurer is automatically and always a client. Compare RESTATEMENT § 134 cmt. f (stating insurer is not a client simply because it designates and pays the attorney to represent the insured) [4] with RESTATEMENT § 14 (attorney-client relationship is formed when person manifests intent that lawyer provide services and lawyer manifests consent to do so). The issue is one we have never before been specifically asked to resolve. And in the present case, with the record before uslacking many details of the factual circumstances of the underlying malpractice claim in Taylor v. Vanderwerf  it would be difficult to do so. Nor do we believe it necessary to even make the attempt. Based on what we do know of the uncontroverted facts, Arizona law and the RESTATEMENT make it unnecessary to tackle the thorny issue of whether the facts of the underlying case permitted both Paradigm and Vanderwerf to be Langerman's clients.