When a California lawyer is hired by an insurer to defend an insured, who is the client when the lawyer learns information that calls coverage into question, and what must the lawyer do?

State Bar of California COPRAC Formal Opinion 1995-139: Insurance Defense Counsel's Duties to the Insured When Coverage Is in Doubt

Short answer: The opinion concluded that an attorney hired by an insurer to defend an insured owes loyalty to the insured, even where the attorney ordinarily also owes some duties to the insurer. Information learned in defense of the insured that is adverse to the insurer may not be revealed to the insurer under Business and Professions Code section 6068(e), even where the insured has been less than candid with the insurer or the attorney. Where the new information creates a coverage conflict not addressed in any Civil Code section 2860 disclosure and consent, withdrawal may be required under former Rule 3-700, accomplished with court approval, in a manner that does not prejudice the insured and does not reveal the protected information.

Currency note

This opinion was issued in 1995, before the State Bar of California's adoption of the November 1, 2018 revisions to the Rules of Professional Conduct. The opinion interprets former Rules 3-310, 3-500, and 3-700, together with Business and Professions Code section 6068(e) and (m) and California Civil Code section 2860 (the Cumis statute on independent counsel). The substance of the rules is now distributed across current Rules 1.4, 1.6, 1.7, 1.16, but the opinion's analysis is rooted in the former framework. Subsequent rule amendments and later opinions, as well as the developing tripartite-relationship case law (e.g., Gulf Insurance Co. v. Berger, Kohn, and successor opinions to Cumis), may have shifted aspects of the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule reference.

Disclaimer: This is an advisory ethics opinion. Advisory opinions are not binding; they interpret the State Bar of California's rules of professional conduct and are persuasive authority. This summary is for research purposes only and is not legal advice. Verify current rules before acting on any specific guidance.

About this page: The plain-English summary and Q&A below were written by Ezel based on the official opinion. The opinion text is reproduced at the bottom; the official source (linked) controls.

View original opinion

Plain-English summary

The opinion took up two situations in which an insurance defense attorney, retained by the insurer to defend the insured on the merits, learns either that the insured has or may have no coverage, or that the insured has perpetrated a fraud to obtain coverage. The committee analyzed the lawyer's duties to insurer and insured in the "tripartite" insurance defense relationship, the application of former Rule 3-310, and the operation of confidentiality and withdrawal rules when coverage-adverse information emerges.

On the relationship, the committee opined that in most insurance-defense engagements the interests of insurer and insured align in the speedy and successful resolution of the claim (American Mutual Liability Ins. Co. v. Superior Court (1974) 38 Cal.App.3d 579). Case law predating former Rule 3-310 treats the insurance contract itself as adequate disclosure for joint representation. The committee opined that compliance with this opinion's protections for the insured suffices in lieu of separate Rule 3-310 disclosures, for two reasons: (1) the contract of insurance, drafted by the insurer, supplies adequate disclosure under 3-310(B)(3) to the insurer; and (2) case law resolves any potential conflict in favor of the insured (LACBA Formal Opinion 464), so the 3-310(C)(1) "potential conflict" trigger is never pulled in the ordinary case.

On Cumis counsel, the committee opined that where a known conflict exists, the insured may be entitled to independent counsel (San Diego Federal Credit Union v. Cumis Insurance Society, Inc. (1984) 162 Cal.App.3d 358; California Civil Code section 2860), and independent counsel owes fiduciary duties entirely to the insured and maintains decision-making control on the insured's behalf.

On communications and confidentiality, the committee opined that the lawyer must keep the insured "reasonably informed" under former Rule 3-500 and section 6068(m), and must disclose "all facts and circumstances necessary to enable each of his clients to make free and intelligent decisions" (Lysick v. Walcom (1968) 258 Cal.App.2d 136). The duty to preserve client secrets under section 6068(e) means that information from the insured intended not to be shared with the insurer cannot be communicated to the insurer (American Mutual, 38 Cal.App.3d at p. 592). The same analysis applies to any secrets of the insured learned during the representation.

The committee opined that the loyalty owed to the insured is paramount, even when the lawyer has an ongoing business relationship with the insurer. If the lawyer learns information that demonstrates the insured is not entitled to coverage, the lawyer cannot reveal it to the insurer. The same applies where the insured fraudulently created the appearance of coverage (for example, claiming to have been driving when an uninsured friend was actually driving); section 6068(e) protects material harmful to the insured even in those circumstances (Price v. Giles; Pennix v. Winton).

On withdrawal, the committee opined that in coverage-question situations where there has not been a Civil Code section 2860 disclosure and consent, or where new information has come to light affecting coverage, the lawyer may be required to withdraw under former Rule 3-700. Litigation withdrawals require court permission under 3-700(A). Withdrawal is best viewed as mandatory under 3-310(C)(2) where new information creates conflicting interests not contemplated by the initial joint representation. Where the insured has acted to damage the insurer (fraudulent assertions or concealment of material facts), withdrawal is required under former Rules 3-700(B)(1) and (B)(2), because failure to withdraw would involve the lawyer (billing the insurer) in perpetuating the insured's fraudulent efforts to have the insurer pay defense costs. Withdrawal must be accomplished with court approval (3-700(A)(1)), without prejudice to the insured (3-700(A)(2)), and without revealing the very information that triggered withdrawal in the first place.

Common questions

Q: Who is the lawyer's client in a typical insurance defense engagement?

A: Per the opinion, the lawyer owes loyalty to the insured. Case law sometimes refers to the insurer as a client, but the committee read those references as dicta and treated them as a way of emphasizing the protections that must be afforded the insured.

Q: Can the defense lawyer tell the insurer the insured has no coverage?

A: Per the opinion, no. Section 6068(e) bars disclosure to the insurer of information from the insured or learned in the course of representation that would be harmful to the insured, even where the insured is not entitled to coverage. The lawyer must instead consider whether withdrawal is required.

Q: What if the insured committed fraud to get coverage?

A: Per the opinion, the lawyer still cannot disclose this to the insurer (Price v. Giles; Pennix v. Winton). However, when the insured has acted to damage the insurer (fraudulent assertions or concealment), withdrawal is required under former Rules 3-700(B)(1) and (B)(2), and continuing to bill the insurer would involve the lawyer in perpetuating the insured's fraud.

Q: Must the lawyer get separate written consent under former Rule 3-310 in every insurance-defense engagement?

A: Per the opinion, no. The committee opined that the insurance contract supplies adequate disclosure under 3-310(B)(3), and because California case law resolves any potential conflict in favor of the insured, 3-310(C)(1)'s "potential conflict" trigger is not pulled. Where the lawyer's role is limited to substantive defense and not coverage advice, additional 3-310(B) compliance is not required.

Q: How is withdrawal handled when the lawyer cannot continue?

A: Per the opinion, withdrawal must comply with former Rule 3-700, including court permission under 3-700(A)(1) and avoidance of prejudice to the insured under 3-700(A)(2). The lawyer must take care not to reveal in the withdrawal process the information that triggered the withdrawal.

Q: When does the insured get independent counsel?

A: Per the opinion, where a known conflict exists, the insured may be entitled to independent counsel under Cumis and Civil Code section 2860. Independent counsel owes duties entirely to the insured; if both insurer and insured have separate counsel, they must "cooperate fully in the exchange of information that is consistent with each counsel's ethical and legal obligation to the insured" (Civ. Code section 2860(f)).

Background and rules framework

The opinion interprets former California Rules 3-310 (avoiding the representation of adverse interests; particularly 3-310(B)(3), (C)(1), and (C)(2)), 3-500 (client communication), and 3-700 (termination of employment; particularly 3-700(A), (A)(1), (A)(2), (B)(1), and (B)(2)). It also addresses Business and Professions Code section 6068, subdivisions (e) and (m), and California Civil Code section 2860 (the Cumis statute). The substance of the rules is now distributed across current California Rules 1.4, 1.6, 1.7, and 1.16, but the opinion's analysis is rooted in the former framework. The opinion's conclusions apply generally to in-house defense counsel retained to defend an insured, though additional considerations may also apply.

Citations and references

Rules of Professional Conduct (former, in effect at time of opinion):

• Former California Rule 3-310, particularly 3-310(B)(3), 3-310(C)(1), and 3-310(C)(2)
• Former California Rule 3-500
• Former California Rule 3-700, particularly 3-700(A), 3-700(A)(1), 3-700(A)(2), 3-700(B)(1), and 3-700(B)(2)

Statutes:

• California Business and Professions Code section 6068, subdivisions (e) and (m)
• California Civil Code section 2860, particularly section 2860(b) and 2860(f)

Cases:

• American Mutual Liability Insurance Co. v. Superior Court (1974) 38 Cal.App.3d 579, tripartite relationship
• San Diego Federal Credit Union v. Cumis Insurance Society, Inc. (1984) 162 Cal.App.3d 358, right to independent counsel
• McGee v. Superior Court (1985) 176 Cal.App.3d 1265, narrower view of Cumis
• Betts v. Allstate Insurance Co. (1984) 154 Cal.App.3d 688, dual loyalties cannot diminish duty to insured
• Anderson v. Eaton (1931) 211 Cal. 113
• Klemm v. Superior Court (1977) 75 Cal.App.3d 893
• Lysick v. Walcom (1968) 258 Cal.App.2d 136, duty to inform insured of policy-limits demand
• Price v. Giles (1987) 196 Cal.App.3d 1469, confidentiality bars disclosure of insured fraud
• Pennix v. Winton (1943) 61 Cal.App.2d 761

Other opinions cited:

• California State Bar Formal Opinion 1987-91: tripartite relationship
• California State Bar Formal Opinion 1980-52: definition of "secrets"
• Los Angeles County Bar Association Formal Opinion No. 456: definition of "secrets"
• Los Angeles County Bar Association Formal Opinion No. 464: resolution of conflicts in favor of insured

See also

• CA COPRAC Op. 1999-153: Joint Representation of Corporation and Shareholder
• CA COPRAC Op. 1996-146: Lawyer's Duties on Ongoing Client Fraud
• CA COPRAC Op. 2015-192: Withdrawal and Client Confidences

Source

• Landing page: https://www.calbar.ca.gov/legal-professionals/ethics-compliance-practice-resources/ethics/ethics-opinions
• Original HTML: https://www.calbar.org/ethics/Opinions/1995-139.htm

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

THE STATE BAR OF CALIFORNIA

STANDING COMMITTEE ON

PROFESSIONAL RESPONSIBILITY AND CONDUCT

FORMAL OPINION NO. 1995-139

ISSUE:

To whom does an attorney owe duties when he or she acts as insurance defense counsel and is hired by an insurer to represent an insured in the substantive defense of the insured's case? Specifically, to whom are the duties owed: (a) where counsel discovers information that demonstrates the insured has or may have no coverage; or (b) where the attorney learns the insured has perpetrated a fraud for the purpose of obtaining coverage?

DIGEST:

The attorney owes his or her loyalty to the insured, even where there are duties which are ordinarily owed by the attorney to the insurer. This means that in situations where matters adverse to the insurer are discovered, even where the insured has failed to be candid with the insurer or the attorney, the attorney may not reveal these matters to insurer, and may be required to withdraw.

AUTHORITIES INTERPRETED:

Rules 3-310, 3-500 and 3-700 of the California Rules of Professional Conduct.

Business and Professions Code section 6068, subdivision (e) and 6068, subdivision (m).

Civil Code section 2860.

DISCUSSION

Representation of an insured by an attorney hired by the insurer is a common litigation event. In most of these cases, no overt conflict of interest exists between insurer and insured. In State Bar Formal Opinion No. 1987-91, this committee quoted from American Mutual Liability Insurance Co. v. Superior Court (1974) 38 Cal.App.3d 579, 592 [113 Cal.Rptr. 561, 571]:

In such a situation, the attorney has two clients whose primary, overlapping and common interest is the speedy and successful resolution of the claim and litigation. Conceptually, each member of the trio . . . has corresponding rights and obligations founded largely on contract, and as to the attorney, by the Rules of Professional Conduct, as well.

Case law predating rule 3-310 of the California Rules of Professional Conduct assumes, as the above quote indicates, that the insured may ordinarily be represented without a separate, specific written disclosure to insurer and insured, or a written consent from insurer and insured, other than the insurance contract itself. Rule 3-310(B)(3), however, requires written disclosure to all clients where, inter alia, "[t]he member has or had a legal, business, financial, professional, or personal relationship with another person or entity the member knows or reasonably should know would be affected substantially by resolution of the matter." Moreover rule 3-310(C)(1) requires that the informed written consent of each client be obtained where there is ". . . representation of more than one client in a matter in which the interests of the clients potentially conflict."

Rule 3-310 may seem at odds with some case law dicta. Clearly, insurer is denominated a "client" by case law, albeit in dicta as discussed infra, and is substantially affected by the insured's matter. But while insurer is indeed a client in some respects, the ongoing relationship with the member, the payment of fees, etc., it is a client whose rights under case law are clearly limited.

Where a member complies with the mandates of this opinion to protect the interests of the insured, his or her additional compliance with rule 3-310 is not necessary for two reasons: First, given the unusual, perhaps unique, interrelationship of insurer, insured and counsel, the contract of insurance itself, drafted by the insurer for its own benefit, provides more than adequate disclosure under rule 3-310(B)(3) to the insurer. Second, the "potential conflict" trigger of rule 3-310(C)(1) is never pulled because, as seen infra, when such a conflict manifests itself, case law resolves any potential conflict in that matter by mandating a resolution in favor of the represented insured and against the non-represented, non-party insurer. Put another way, case law instructs that ultimately, there can be no conflict between insurer and insured since, as discussed infra, the insured will always prevail where an issue is created between them. (See L.A. Cty. Bar Formal Opn. No. 464.) Thus, the notice to and waiver by the insured is superfluous.

Where a known conflict of interest does exist, the insured may be entitled to independent counsel. (San Diego Federal Credit Union v. Cumis Insurance Society, Inc. (1984) 162 Cal.App.3d 358 [208 Cal.Rptr. 494].) Civil Code section 2860 dictates guidelines for when an insurer owes a duty to an insured to provide independent counsel. When there are separate, independent counsel for both insurer and insured, they "shall cooperate fully in the exchange of information that is consistent with each counsel's ethical and legal obligation to the insured." (Civ. Code, § 2860 (f).) But the insured's independent counsel, freed from serving two clients, owes his or her fiduciary duties entirely to the insured and should maintain decision-making control over the litigation on the insured's behalf. (See L.A. Cty. Bar Formal Opn. No. 464.)

The issue is more complex in evaluating the responsibilities of a lawyer where a conflict between insurer and insured arises, and there is not independent counsel for both insurer and insured. This can occur, inter alia, where a coverage problem is known to exist, or where counsel becomes aware of problems during the course of the representation.

Although insurance defense counsel's representation of divergent interests can be attempted "provided there is full disclosure and consent," this dual role cannot diminish counsel's responsibility to the insured. (Betts v. Allstate Insurance Co. (1984) 154 Cal.App.3d 688, 715-716 [201 Cal.Rptr. 528].) The attorney is obligated at all times to protect the insured/client and may not act in any way which prevents "devoting his entire energies to his client's interest." (Ibid. quoting from Anderson v. Eaton (1931) 211 Cal. 113, 116 and Klemm v. Superior Court (1977) 75 Cal.App.3d 893, 901-902 [142 Cal.Rptr. 509].)

It is the obligation of any attorney to keep clients "reasonably informed about significant developments" relating to the case. (Rule 3-500; Bus. & Prof. Code, § 6068, subd. (m).) For the insurance defense counsel, this communication must include a duty to disclose "all facts and circumstances . . . necessary to enable each of his clients to make free and intelligent decisions regarding the subject matter of the representation." (Lysick v. Walcom (1968) 258 Cal.App.2d 136, 151 [65 Cal.Rptr. 406] [criticizing a lawyer who communicated a third party demand in excess of policy limits only to insurer, and not to insured].)

It is also the duty of any attorney to maintain inviolate the confidences of a client and to preserve at every peril to himself or herself the client's secrets. (Bus. & Prof. Code, § 6068, subd. (e).) Thus, if an insured reveals matters to the attorney in confidence, and these matters are not intended to be heard by the insurer, the attorney may not reveal them to the insurer, regardless of the relationship between them. (American Mutual Liability Insurance Co. v. Superior Court, supra, 38 Cal.App.3d at p. 592.) The same analysis applies to any secrets of the insured/client learned by the attorney during the course of the representation.

This means that, even where the attorney has a close ongoing relationship with an insurer, and from a business perspective considers insurer an important "client," in any particular representation it is the obligation to protect the insured's confidences and secrets which is paramount. Thus, if, for example, the attorney gains information during the course of representation which the attorney believes demonstrates that the insured is actually not entitled to coverage, the attorney nevertheless owes a duty to the insured/client not to reveal this information to the insurer.

This is true even where the attorney comes to believe that the insured has fraudulently created a situation in which coverage appears to exist where it actually does not. For example, an insured might claim to be driving a vehicle when the actual driving was done by a friend or family member who was not insured. Even in these relatively extreme situations, the requirements of Business and Professions Code section 6068, subdivision (e) prevent disclosure to anyone, including the insurer, of material harmful to the insured. (Price v. Giles (1987) 196 Cal.App.3d 1469, 1473 [242 Cal.Rptr. 559]; Pennix v. Winton (1943) 61 Cal.App.2d 761 [143 P.2d 940].)

In coverage question situations where there has not been a Civil Code section 2860 disclosure and consent to the representation, or where subsequent to disclosure and consent, new information has come to light which affects the question of coverage, the attorney may be required to withdraw. Such withdrawal is governed by rule 3-700. In any matter which is pending in litigation, permission must be obtained by the tribunal before withdrawal may be accomplished. (Rule 3-700(A).) Depending on the circumstances and the reasons for withdrawal, termination of employment may be permissive or mandatory. The line between mandatory and permissive withdrawal is not always a clear one.

Where insurance defense counsel is confronted by new information which changes the apparent coverage situation of insurer in a way not contemplated in an initial disclosure and consent between insurer and insured, continued representation may place counsel in the position of representing conflicting interests. This may best be understood if counsel evaluates the information he or she cannot reveal to insurer from the point of view of that insurer, that is, is the information something which counsel devoted to insurer's interests would ordinarily be obligated to reveal, but for the dual loyalties involved? Withdrawal in such situations is best viewed as being mandatory, as continued representation would place counsel in the position of representing conflicting interests in violation of rule 3-310(C)(2).

Where counsel learns that the intentional wrongful acts of insured have damaged insurer, such as where insurer has accepted coverage based on insured's fraudulent assertions, or where the insured has concealed material facts from the insurer, not only does a conflict of interest exist, but the member has learned that the insured/client has acted in a manner injurious to the insurer. When these circumstances are viewed together, withdrawal is required. (Rules 3-700(B)(1) & 3-700(B)(2).) Moreover, in such circumstances, failure to withdraw would involve the lawyer, who is billing the insurer, in the perpetuation of insured's fraudulent efforts to have insurer pay defense costs.

Where such withdrawal is necessary, however, it may be done only with express court approval (rule 3-700(A)(1)), and only where it is accomplished in a manner which does not prejudice the rights of the insured, while protecting confidential communications. (Rule 3-700(A)(2).) It is imperative that, although withdrawal may be required, assiduous effort be made to accomplish it in such a way as does not disclose the very information which caused the attorney to seek withdrawal in the first place. Moreover, given the ongoing relationship between the attorney and the insurer, special care must be taken by the attorney during the withdrawal process to protect the reasons for withdrawal.

This opinion is issued by the Standing Committee on Professional Responsibility and Conduct of the State Bar of California. It is advisory only. It is not binding upon the courts, the State Bar of California, its Board of Governors, any persons or tribunals charged with regulatory responsibilities, or any member of the State Bar.