When an insurance company hires a lawyer to defend its insured and the policy lets the insurer settle within limits in its sole discretion, can the lawyer settle the case if the insured objects?

Plain-English summary

The committee addressed the common triangular relationship in insurance defense: an insurer hires a lawyer to defend its insured under a policy that authorizes the insurer to control the defense and to settle within policy limits in its sole discretion, without consulting the insured. The opinion identified three questions: whether the lawyer has obligations to the insured under the Model Rules, what disclosures the lawyer must make to proceed at the insurer's direction, and what the lawyer can do when the insured objects to a settlement the insurer and plaintiff both accept.

The committee declined to resolve the debate over whom defense counsel represents, observing that "nothing fundamental turns on whether the lawyer represents the insured alone or both the insurer and the insured." Its premise was that so long as the insured is a client, "the Rules of Professional Conduct, and not the insurance contract, govern the lawyer's obligations to the insured." Reading Rule 1.2, the opinion held the lawyer must apprise the insured of the limited nature of the representation and the insurer's right to control the defense, "preferably early in the representation," and that "[a] short letter clearly stating that the lawyer intends to proceed at the direction of the insurer" satisfies Rule 1.2 without extended discussion or formal written consent. Having accepted the insurer-offered defense after that disclosure, the insured manifests consent to the limited representation.

The committee held that the insured nonetheless "retains the power to reject the defense offered by the insurer under the policy and to assume the risk and expense of his own defense" under Rule 1.16. In the unusual case where the lawyer knows the insured objects to a within-limits settlement, the lawyer "must give the insured an opportunity to reject the defense offered by the insurer." If that rejection ends the representation, Rule 1.9 then bars the lawyer from participating in the settlement for the insurer alone without the former-client insured's consent. The opinion added that, as a practical matter, an insurer with contractual settlement authority may still settle and obtain a release through its own claims agent or separate counsel, and that absent bad faith the insured is unlikely to suffer cognizable injury. The lawyer may also advise a court of the dispute, but "may not make that determination on behalf of either the insured or the insurer."

Currency note

This opinion was issued in 1996, before the American Bar Association's adoption of the 2002 (Ethics 2000) revisions to the Model Rules of Professional Conduct. Subsequent rule amendments and later opinions may have changed the analysis, including the "informed consent" framework that replaced "consultation." Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Does the insurance policy or the Rules of Professional Conduct govern the lawyer's duties to the insured?

A: The opinion concluded that whenever the insured is the lawyer's client, the Rules of Professional Conduct, not the insurance contract, govern the lawyer's obligations to the insured.

Q: What disclosure did the opinion require before the lawyer could proceed at the insurer's direction?

A: The committee held that the lawyer must apprise the insured of the limited nature of the representation and the insurer's right to control the defense and settlement, and stated that a short letter sent early in the representation is sufficient, with no oral discussion or signed consent required.

Q: Could the lawyer settle when the lawyer knew the insured opposed the settlement?

A: No. The opinion concluded that where the lawyer knows the insured objects to a within-limits settlement, the lawyer must first give the insured the chance to reject the insurer's defense and take over the defense at the insured's own expense.

Q: What happened if the insured then rejected the insurer-funded defense?

A: The opinion concluded that the representation ended and Rule 1.9 barred the lawyer from participating in the settlement for the insurer alone without the consent of the insured, now a former client, though the insurer could still settle through other counsel or a claims agent.

Background and rules framework

The opinion interpreted Rule 1.2 (scope of representation; the client's authority over settlement and the limiting of objectives by consent after consultation), Rule 1.4(b) (communication sufficient for informed decisions), Rule 1.7 (concurrent conflicts, when the insurer and insured disagree), Rule 1.9 (duties to a former client once the insured rejects the defense), Rule 1.16 (the insured's power to discharge counsel and the lawyer's withdrawal), and Rule 4.3 (dealings with an unrepresented person, if the insured is not a client). Because the ABA interprets the Model Rules directly, there is no state-rule analogue.

Citations and references

Rules of Professional Conduct:

• MR 1.2 (scope of representation; client controls settlement; limiting objectives by consent)
• MR 1.4(b) (communication)
• MR 1.7 (conflict of interest; current clients)
• MR 1.9 (duties to former clients)
• MR 1.16 (declining or terminating representation)
• MR 4.3 (dealing with unrepresented person)

Cases:

• Rogers v. Robson, Masters, Ryan, Brumund and Belom, 407 N.E.2d 47 (Ill. 1980), defense counsel's duty stemmed from the attorney-client relationship with the insured, not the insurer's settlement authority
• Caplan v. Fellheimer, 68 F.3d 828 (3d Cir. 1995), insurer's exercise of contractual settlement rights
• Moritz v. Medical Protective Co., 428 F. Supp. 865 (W.D. Wis. 1977), insured's tender of the defense and consent to insurer control

Other opinions cited:

• ABA Formal Op. 282 (1950): the lawyer employed by an insurer represents the insured with undivided fidelity

See also

• ABA Formal Op. 05-435: Lawyer adverse to an insured of a client-insurer
• ABA Formal Op. 03-430: Insurance staff counsel representation and naming
• ABA Formal Op. 01-421: Lawyer working under insurance company guidelines
• RI EAP Op. 2008-02: Insurer-Retained Defense Counsel's Duty to Withdraw When the Insured Client's Account Is Contradicted by the Evidence

Source

• Landing page: ABA Formal Ethics Opinions index
• Original PDF: 96-403.pdf