What does a lawyer hired by an insurer to defend the insured owe the insured when there is a coverage dispute under a reservation of rights?

Plain-English summary

A lawyer retained by an insurer to defend a corporate insured was told by the insured's general counsel that the insurer was defending under a reservation of rights, and was directed to route all documents and correspondence through general counsel for review before sending them to the insurer, so general counsel could delete material the insurer might use to deny coverage. The reports would cover only factual matters from discovery, with no coverage opinions. Retained counsel feared that letting general counsel edit the reports might breach the policy's cooperation clause, and asked whether he had to comply and whether he could properly withhold the editing demand from the insurer.

The opinion explained that counsel retained by an insurer to defend an insured represents both, and in the usual case their interests are compatible. Where coverage is in question, the insurer must either defend under a reservation of rights or seek a declaratory judgment (it may do both); if it does both simultaneously, separate counsel is required, one to defend the insured and one to prosecute the coverage action, so divided loyalties are avoided. Where the interests are in direct conflict, such that finding facts indicating no coverage would benefit the insurer to the insured's detriment, the insurer may not control or even participate in the defense; the insured is entitled to counsel of its own choosing, and the insurer's duty to defend is met by reimbursing defense costs.

On the cooperation clause, the committee concluded that the insured has no duty to reveal adverse information about possible late notice, misrepresentation, or other matters that could prejudice its coverage, so general counsel may insist that such information be deleted from reports, and retained counsel must refrain from disclosing those facts because counsel owes the insured the same duty as if personally retained. If retained counsel and general counsel cannot agree, retained counsel should advise general counsel that particular deletions may expose the insured to a breach-of-cooperation claim, and if the conflict becomes irreconcilable, retained counsel should move for leave to withdraw under Rule 1.16(b). The committee also cautioned that any claim of privilege over the reports should be examined under Waste Management v. International Surplus Lines and the common-interest doctrine.

Currency note

This opinion was issued in 1992, before Illinois adopted the 2010 Illinois Rules of Professional Conduct. The ISBA Board of Governors affirmed the opinion in May 2010 as generally consistent with the 2010 Rules, while cautioning that the specific standards referenced may differ from the 2010 Rules. Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule or requirement mentioned here.

Common questions

Q: Who does a lawyer hired by an insurer to defend the insured represent?

A: The opinion concluded that counsel represents both the insured and the insurer, and that in the usual case their interests are compatible and there is nothing improper about representing both.

Q: Can the insured require defense counsel to delete coverage-prejudicing facts from reports to the insurer?

A: The opinion concluded the insured has no duty under the cooperation clause to reveal adverse information about late notice, misrepresentation, or similar matters, so its general counsel may insist those facts be deleted, and retained counsel must refrain from disclosing them.

Q: What happens when the insurer's and insured's interests directly conflict?

A: The opinion concluded the insurer may not control or participate in the defense; the insured is entitled to counsel of its own choosing, and the insurer satisfies its duty to defend by reimbursing the costs of defense.

Q: What should retained counsel do if he and the insured cannot agree on the reports?

A: The opinion concluded counsel should warn general counsel that the deletions may expose the insured to a breach-of-cooperation claim, and if the conflict is irreconcilable, move for leave to withdraw under Rule 1.16(b).

Background and rules framework

The opinion interpreted Rule 1.16(b) (permissive withdrawal where a conflict becomes irreconcilable) and Rule 5.4 (professional independence), reasoning through Illinois insurance-defense case law that retained counsel owes the insured the same duties as if personally retained (Model Rules 1.16, 5.4).

Citations and references

Rules of Professional Conduct:

• Model Rule 1.16 (declining or terminating representation; withdrawal) / Illinois Rule 1.16(b)
• Model Rule 5.4 (professional independence of a lawyer) / Illinois Rule 5.4

Cases:

• Rogers v. Robson, Masters, Ryan, Brumund and Belon, 74 Ill.App.3d 467, 392 N.E.2d 1365 (3d Dist. 1979), insurer-retained counsel represents both insurer and insured
• Thornton v. Paul, 74 Ill.2d 132, 384 N.E.2d 335 (1978), direct conflict entitles insured to counsel of its own choosing
• Waste Management v. International Surplus Lines, 144 Ill.2d 178, 579 N.E.2d 322 (1991), common-interest doctrine and discovery of defense files
• Allstate Ins. Co. v. Keller, 17 Ill.App.2d 44, 149 N.E.2d 482 (1958), counsel's duty to the insured

Other opinions cited:

• ISBA Opinion Nos. 216 and 89-17

See also

• ISBA Ethics Op. 91-26: Suing a Client-Insurer
• ISBA Ethics Op. 93-14: Contacting an Insured Party

Source

• Landing page: https://www.isba.org/ethics/opinions/9202