Insurance Law: The Tripartite Relationship

The Tripartite Relationship

When a liability insurer retains defense counsel to represent an insured, the resulting relationship among the three parties is often called a “tripartite relationship.”  This relationship is unique in the insurance context. Georgia, like a majority of states, generally holds that the defense attorney has two clients: the insurance company and the insured. In most situations, the objectives of the insurer and the insured align and the tripartite relationship is beneficial to all parties.  Insurers have an interest in controlling the costs of litigation, which can be done through billing arrangements with appointed counsel.  In turn, defense attorneys receive regular business from their insurance company clients and are generally well compensated for their services.  Meanwhile, the insured is to be provided a defense from competent counsel with expertise in defending against claims brought against the insured.

Nonetheless, any time multiple parties are involved in such a relationship, ethical issues arise.  One court stated that the ethical dilemma created by the tripartite relationship would “tax Socrates, and no decision or authority … furnishes a completely satisfactory answer.” Lawyers appointed by the insurance company may be in-house attorneys, staff counsel, “captive” law firms, or panel counsel.  Regardless of the label, the attorney appointed by the insurance company to represent the insured typically has a business or employment relationship (often a long-standing one) with the insurer.  The laws of human nature attendant to this relationship are difficult to ignore.

Even the most optimistic view of human nature requires us to realize that an attorney employed by an insurance company will slant his efforts, perhaps unconsciously, in the interest of his real client – the one who is paying his fee and from whom he hopes to receive future business – the insurance company.

The close relationship between defense counsel and the insurance company is often a concern of both insureds and the courts. As made clear below, the best practice for avoiding conflict issues in the “tripartite relationship” is prediction of such conflicts and communication when they appear on the horizon.  Counsel could and should evaluate possible ethical issues at the inception of each representation.  As issues arise, the Georgia Rules of Professional Conduct and Formal Advisory Opinions issued by the Georgia Supreme Court address aspects of the tripartite relationship.  Where the Georgia Rules do not address the issues, attorneys should look to the Model Rules of Professional Conduct and the Formal and Informal Advisory Opinions of the American Bar Association (ABA).  With such guidance in mind, the following addresses some common concerns presented by the tripartite relationship.

Who is The Client?

An attorney owes a duty of loyalty to his or her client. This duty is expressed in the obligations to exercise independent professional judgment on behalf of the client, and to decline representation or withdraw if the ability to do so is adversely affected by the representation of another client. An attorney who does not know to whom his highest loyalty should be given – who his client is – is bound to drift into ethical trouble.

In a typical insurance case where coverage is not contested, a policyholder is involved in a potentially covered incident.  The insured tenders the claim to its insurer and requests a defense.  The insurer retains defense counsel to defend the insured.  However, in a case where the interests of the insured and the insurer diverge, to whom does the attorney’s duty of loyalty extend?  Courts take several different views of whether defense counsel represents the insurer, the insured, or both.  These views are called the “two-client”, “one-client”, and “third-party payor” (or “one-and-a-half client”) theories.

Two-client theory

A majority of courts hold that the lawyer has two clients: the insurance company and the insured. Courts that adopt this theory reason that both the insured and the insurer are beneficiaries of the insurance company’s exclusive control over the litigation. These courts also recognize that, in general, “companies and insureds usually enjoy a substantial commonality of interests, even when their interests do not perfectly align.”

In Georgia, whether a lawyer represents a party is a question of fact, not appearances, unless the party knowingly caused the attorney to appear as his agent in that matter. Georgia has not officially adopted the two-client rule in case law, although the Georgia Supreme Court’s Formal Advisory Opinion notes “the attorney for the insured is also the attorney for the insurer”. There may be some circumstances where defense counsel’s duty to the insured makes the insured the “primary” client.  The Opinion addresses the “ethical propriety of the plaintiff’s attorney in a personal injury case writing a letter to the insured defendant which may contain legal advice.” The Supreme Court stated that the appropriate attorney to provide advice regarding the insured’s legal rights is the insured’s attorney.  A potential conflict arises because both the insured and the insurer are the defense counsel’s clients. Interestingly, the Supreme Court appears to switch from a “two-client” theory to a “one-client” theory, stating: “the dilemma is only apparent. [Defense counsel] represents the insured as a client and has a duty to keep the insured fully informed by virtue of the rules of ethics…[Defense counsel] has a duty to inform the insured not only of any offer of settlement…but also of the potential tial liability of the insurer for a bad faith refusal to accept any reasonable offer within the policy limits.”

One-client theory

Although still the minority view, there is an increasing judicial trend toward holding that defense counsel’s only client is the insured.

In Atlanta International Ins. Co. v. Bell, the Michigan Supreme Court held that no attorney-client relationship existed between an insurance company and defense counsel.  Atlanta filed a malpractice suit against the attorneys that it retained to represent Atlanta’s insured in a premises liability case, claiming that the attorneys failed to raise a particular defense. Whether Atlanta had the standing to sue the attorneys depended upon the existence of an attorney-client relationship between the insurer and the attorneys it hired to represent the insured. Stating that “courts have consistently held that the defense attorney’s primary duty of loyalty lies with the insured, and not the insurer,” the court allowed the insurer to proceed pursuant to the doctrine of equitable subrogation. The court noted that

To hold that an attorney-client relationship exists between insurer and defense counsel would indeed work mischief, yet to hold that a mere commercial relationship exists would work obfuscation and injustice.  The gap is best bridge by resort to the doctrine of equitable subrogation to allow recovery by the insurer.  Equitable subrogation best vindicates the attorney-client relationship and the interests of the insured, properly imposing the social costs of malpractice where they belong.  Allowing the insurer to stand in the shoes of the insured under the doctrine of equitable subrogation best serves the public policy underlying the attorney-client relationship.

Third-party payor theory

The third-party payor or “one-and-a-half client” theory “advocates that ‘the lawyer be deemed to represent both the insurer and the insured until something goes wrong, at which point the insurer would no longer be a client, at least in the usual sense.” The theory considers that the insurer is often in the best position to manage and control the litigation, but relies on the attorney to protect its economic interests.  If the attorney can do so without compromising the loyalty the attorney owes to the insured, then the insurer also owes a duty of care to the insurer.  Since the insurer relies upon the attorney’s representation of the insured, the insurer is permitted to insure the attorney who acts negligently. It is important to note, though, that although this theory allows insurers control over the costs of litigation, the control is limited and insurers are not necessarily able to enjoy the full range of benefits or rights of control that they desire.