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Should I Stay or Should I Go?

5/27/21

By: Richard Smith

If I go there may be trouble, but if I stay it will be double…

These lyrics from the 80’s song by The Clash does a fairly nice job describing the dilemma that an insurance defense lawyer faces while the carrier that hired him to defend its insured reserves its own coverage defenses.   

Historically, a lawyer defending his client must defend all actions filed against his client in the same action.  When an insurer files a dec action its client must defend himself in order to preserve his coverage interest. By defending the client both on the liability and the coverage the lawyer faces the dilemma of giving advice to his client that may benefit the client’s defense but prejudice the client’s coverage position.  Often if not always these are in contravention to each other. Thus, the conflict.   

Because of the inherent conflict a lawyer cannot defend the insured on both the liability and the coverage issues nor can he limit his representation under informed consent.

The Kentucky Bar Association through its ethics opinion E-452 has provided succinct guidance for the insurance defense lawyer facing this possible dilemma. In a nutshell, the lawyer may defend the insured defendant when the insurer has reserved its coverage defenses in the following three scenarios:

• Only where the declaratory action is filed in a completely different action
• If the declaratory action intervenes in an existing action then it must be bifurcated and stayed while the liability issues are determined, or
• If the insured has his own counsel that is self-selected to defend the coverage action against his insurer

Otherwise, a lawyer must withdraw his representation of the insured that he was hired to represent

….in other words, he must go….

Insurance carriers can eliminate much of these issues by instructing its coverage counsel to file a completely separate action to resolve the coverage issues.   Should the court require the coverage issues to be part of the same action it must bifurcate and stay the coverage issues from the liability issues until all of the liability issues are determined. If neither of these occur the insurer should expect its defense counsel to have to withdraw because of the inherent conflict.   

For more information, please contact Richard Smith at rwsmith@fmglaw.com.