In Kentucky, when an insurer provides an insured's defense under a reservation of rights, may the defense lawyer communicate with the insurer and continue the representation despite the potential coverage conflict?

Plain-English summary

The opinion answered six questions about a lawyer retained by an insurer to defend an insured. The Committee restated Kentucky's foundation that the lawyer's client is the insured, not the insurer (KBA E-368, KBA E-378), with the insurer a third-party payor under KRPC 1.8(f). The insurance contract may give the insurer control over and require cooperation in the defense, but it does not define the lawyer's ethical duties; under KRPC 1.4 the lawyer should explain the arrangement at the outset, including that the lawyer will communicate with the insurer, and may then have usual and customary communications with the insurer as impliedly or expressly authorized under KRPC 1.6.

On the disclosure questions, the Committee concluded that a lawyer must be vigilant under KRPC 1.1 and 1.3 to identify information disadvantageous to the insured and to withhold it absent the insured's particularized consent; if the lawyer is competent and diligent yet forwards information not known to be damaging, no ethical violation occurs. A defense under a reservation of rights is permissible only if the resulting conflict is not so great that the client cannot consent under KRPC 1.7(b). The Committee identified the key factors: how much of the lawyer's fees come from the insurer, whether the lawyer represents the insurer in other matters, and the reason for the reservation (a coverage issue tied to the facts and theories of the underlying case creates the sharpest divergence).

On the coverage litigation, the Committee concluded that if the insurer files a declaration-of-rights action, the lawyer may represent neither the insurer nor the insured in that action, but may continue the underlying defense as long as KRPC 1.7(b) is not violated. The Committee noted that Kentucky, unlike some jurisdictions that order insurer-paid independent counsel as a matter of contract law, treats the lawyer as having a single client (the insured) and relies on the conflict rules to police the relationship (citing Finley v. Home Insurance Co. (Hawaii 1998)).

Currency note

This opinion was issued in 1999 and predates the Kentucky Supreme Court's substantial 2009 revisions to the Rules of Professional Conduct (SCR 3.130), under which Rules 1.6, 1.7, and 1.8 cited here were amended (waiver of confidentiality now requires "informed consent" as defined in Rule 1.0(e), and Comment 4 to Rule 1.7 has been deleted). The Kentucky Bar Association notes that lawyers should consult the current version of the rules before relying on this opinion. Treat this page as historical context, not current guidance. Verify against the current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: In a Kentucky insurance-defense case, whose interests control the lawyer's duties?

A: Per the opinion, the insured's. The Committee restated that the lawyer's client is the insured, the insurer is a third-party payor under KRPC 1.8(f), and the insurance contract does not define the lawyer's ethical duties.

Q: Could the lawyer share defense information with the insurer?

A: The opinion concluded the lawyer could have usual and customary communications with the insurer once the insured was informed and consented, but had to withhold information harmful to the insured absent particularized consent; if the insured forbade disclosure, the lawyer had to comply unless KRPC 1.2(d) (crime or fraud) was implicated.

Q: Could the lawyer defend the insured under a reservation of rights?

A: Per the opinion, yes, unless the conflict was so great the client could not consent under KRPC 1.7(b). The Committee said the analysis turned on the share of the lawyer's fees coming from the insurer, any other representation of the insurer, and the reason for the reservation.

Q: If the insurer filed a declaration-of-rights (coverage) action, could the lawyer handle it?

A: No. The opinion concluded the lawyer could represent neither the insurer nor the insured in the coverage action, but could continue the underlying defense as long as KRPC 1.7(b) was not violated.

Q: Did Kentucky require the insurer to provide separate independent counsel?

A: Per the opinion, no as a matter of ethics. The Committee distinguished jurisdictions that order insurer-paid independent counsel as a matter of contract law, noting Kentucky treats the insured as the sole client and relies on the conflict rules.

Background and rules framework

The opinion interprets KRPC 1.7(b) (conflicts of interest; the Model Rule 1.7 counterpart), KRPC 1.8(f) (compensation from a third party; Model Rule 1.8), KRPC 1.6 (confidentiality; Model Rule 1.6), KRPC 1.4 (communication; Model Rule 1.4), KRPC 1.1 and 1.3 (competence and diligence; Model Rules 1.1 and 1.3), and KRPC 1.2(d) (limits on assisting crime or fraud; Model Rule 1.2). It applies the now-deleted Comment 4 to KRPC 1.7 on when client consent may not be requested.

Citations and references

Rules of Professional Conduct:

• MR 1.7 / KRPC 1.7(b) (conflicts; materially limited representation)
• MR 1.8 / KRPC 1.8(f) (compensation from a third party)
• MR 1.6 / KRPC 1.6 (confidentiality)
• MR 1.4 / KRPC 1.4 (communication)
• MR 1.1, MR 1.3 / KRPC 1.1, 1.3 (competence; diligence)
• MR 1.2 / KRPC 1.2(d) (assisting crime or fraud)

Statutes:

• Cal. Civil Code sec. 2860 (1998), independent-counsel statute (discussed as another jurisdiction's contract-law rule)

Cases:

• U.S. Fid. & Guar. Co. v. Louis A. Roser Co., 585 F.2d 932 (8th Cir. 1978), reservation of rights and independent counsel
• Finley v. Home Insurance Co., 975 P.2d 1145 (Hawaii 1998), single-client model in insurance defense

Other opinions cited:

• KBA E-378 (1995); KBA E-368 (1994); KBA E-340 (1990): the lawyer represents the insured
• Ill. Op. 92-02 (1992): duty not to disclose facts prejudicing the insured's coverage position

See also

• KBA Ethics Op. E-409: Disclosure of Legal Billing Information to the Insurer's Outside Auditor
• KBA Ethics Op. E-408: Lawyer Who Is Also a Real Estate Sales Agent

Source

• Landing page: https://kybar.org/For-Members/Rules-Ethics-Information/Ethics-Opinions
• Original PDF: https://kybar.org/Portals/0/Admin/Ethics%20Opinions/KBA_E-410.pdf

Original opinion text

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

KENTUCKY BAR ASSOCIATION
Ethics Opinion KBA E-410
Issued: September 1999

Since the adoption of the Rules of Professional Conduct in 1990, the Kentucky Supreme
Court has adopted various amendments, and made substantial revisions in 2009. For
example, this opinion refers to Rules 1.6 and 1.8, which were amended. Waiver of
confidentiality requires “informed consent” as defined by Rule 1.0(e). Comment 4 to
Rule 1.7 has been deleted. Lawyers should consult the current version of the rules and
comments, SCR 3.130 (available at http://www.kybar.org), before relying on this
opinion.

Question 1:

Does an attorney violate the Kentucky Rules of Professional Conduct if he
discloses information to the Insurer in the course of defending the Insured if that
information is damaging to the Insured on the issue of coverage but is not known
by the attorney to be damaging when the information is disclosed?

Answer:

An attorney must be ever vigilant, pursuant to KRPC 1.1 and 1.3, to identify
information that might be disadvantageous to the client Insured and to refrain
from disclosing such information absent fully informed client consent. If the
attorney is competent and diligent in this regard and yet forwards to the Insurer
information not known to the attorney to be damaging, no unethical conduct has
occurred.

Question 2:

May an attorney defend an Insured if the Insurer provides the defense under a
reservation of rights?

Answer:

Yes, if the relationship between the attorney and the Insurer and the reason for the
reservation of rights does not create a situation in which the conflict of interest is
so great that the client cannot consent under 1.7(b).

Question 3:

May an attorney defending an Insured whose defense is provided by the Insurer
under a reservation of rights communicate with the Insurer regarding the status
and analysis of liability?

Answer:

Yes, if the attorney protects the rights and confidences of the client Insured and
discloses no information disadvantageous to the client without particularized
consent.

Question 4:

May an attorney continue to defend the Insured if the Insurer provides the defense
and if the Insurer files an action for Declaration of Rights?

Answer:

The attorney may continue to defend the Insured as long as no conflict violative
of KRPC 1.7(b) exists. The attorney cannot represent either party in the
Declaration of Rights action.

Question 5:

May an attorney defending the Insured communicate about the status and analysis
of liability with the Insurer who is providing the defense if the Insurer has filed an
action for Declaration of Rights?

Answer:

The attorney may communicate with the Insurer within the parameters discussed
regarding Questions 1 & 3.

Question 6:

May an attorney defend an Insured in a matter in which the Insurer is providing
the defense is also a party when the attorney represents the Insurer in other
unrelated matters?

Answer:

Yes, if the matter in which the attorney defends the Insured and in which the
Insurer is a party will not involve a development of facts and theories relating to
coverage issues.

References:

Kentucky Rule of Professional Conduct (KRPC)1.1) (SCR 3.130 (1.1)); KRPC
1.2(d); KRPC 1.3; KRPC 1.4; KRPC 1.6; KRPC 1.7; KRPC 1.8(f); KBA E-378
(1995) KBA E-368 (1994); KBA E-340 (1990); Cal. Civil Code sec. 2860 (1998);
Ill. Op. 92-02 (1992); U.S. Fid. & Guar. Co., v. Louis A. Roser Co., 585 F.2d 932,
938 n.5 (8th Cir. 1978); Finley v. Home Insurance Co., 975 P.2d 1145 (Hawaii
1998); Douglas Richmond, Lost in the Eternal Triangle of Insurance Defense
Ethics, 9 Geo. J. Legal Ethics 475, 486 (1996)
OPINION

Question 1:
When an Insurer provides the defense to an Insured, the attorney represents the Insured
but not the Insurer. See KBA E-368 (1994); KBA E-378 (1995). The Insurer is a third-party
payor and the situation is governed by Kentucky Rules of Professional Conduct (KRPC) 1.8(f),
which states:
A lawyer shall not accept compensation for representing a client from one other
than the client unless:
(1) such compensation is in accordance with an agreement between the client and
the third party or the client consents after consultation;
(2) there is no interference with the lawyer’s independence of professional
judgment or with the client-lawyer relationship; and
(3) information relating to representation of a client is protected as required by
Rule 1.6.

The confidentiality of client confidences is governed by KRPC 1.6, which states:
A lawyer shall not reveal information relating to representation of a client unless
the client consents after consultation, except for disclosures that are impliedly
authorized in order to carry out the representation, and except as stated in
paragraph (b).
Paragraph (b) states:
A lawyer may reveal such information to the extent the lawyer reasonably
believes necessary:
(1) to prevent the client from committing a criminal act that the lawyer believes is
likely to result in imminent death or substantial bodily harm; or
(2) to establish a claim or defense on behalf of the lawyer in a controversy
between the lawyer and the client, to establish a defense to a criminal charge or
civil claim against the lawyer based upon conduct in which the client was
involved, or to respond to allegations in any proceeding concerning the lawyer’s
representation of the client; or
(3) to comply with other law or court order.
The contract of insurance between the Insurer and the Insured pursuant to which the
Insurer provides the defense commonly allows the Insurer to have some measure of control
regarding the defense provided and commonly requires that the Insured cooperate in the defense.
Such is a matter of contract and may govern the rights of the Insurer and the Insured as to each
other.
The contract of insurance does not, however, define the ethical duties an attorney hired
by an Insurer to defend an Insured owes to the client Insured. KRPC 1.4 states that the attorney
should keep the client “reasonably informed” and that the attorney should “explain a matter to
the extent reasonably necessary to permit the client to make informed decisions regarding the
representation.” Thus, the attorney hired by the Insurer to defend the Insured should, at the
beginning of the client-lawyer relationship, explain to the client the nature and requirements of
the Insurer and Insured contract. As part of this explanation, the attorney should point out to the
client that in order for the Insured to abide by his or her obligations under the insurance contract,
that the attorney will be in communication with the Insurer about the defense. Having informed
the client of the client’s rights and obligations, and assuming that the client consents to the
arrangement, including the usual and customary disclosures to the Insurer, the attorney may,
throughout the defense have such usual and customary communications with the Insurer. Those
communications are consistent with KRPC 1.6(a) as being communications done with actual or
implied authorization.

However, an attorney defending an Insured must be ever cautious with regard to any
information “relating to the representation” that might be disadvantageous to the client if it were
disclosed to the Insurer. As was stated in KBA E-340 (1990):
Counsel should resist any [Insurer] ‘demand’ that might put the insured at
risk. It is also clear that any intrusion into the attorney/client sanctum should be
permitted only with the informed consent of the client.
When such potentially damaging information is revealed to the attorney, the attorney must
consult with the client and obtain the client’s consent before disclosing the information. If the
client directs the attorney to refrain from disclosing, the attorney must follow the instruction of
the client as long as KRPC 1.2(d), which forbids assisting the client in a crime or fraud, is not
implicated.
With regard to recognizing the information as damaging to the client, the attorney’s
conduct is guided by KRPC 1.1. KRPC 1.1 states that a “lawyer shall provide competent
representation to a client.” Competence is defined to require “ the legal knowledge, skill,
thoroughness and preparation reasonably necessary for the representation.” KRPC 1.1. KRPC
1.3 requires a lawyer to “act with reasonable diligence and promptness in representing a client.”
Comment 1 to 1.3 states: “A lawyer should act with commitment and dedication to the interests
of the client and with zeal in advocacy upon the client’s behalf.” The attorney representing the
Insured must be every vigilant and must abide by KRPC 1.1 and 1.3 with regard to protecting the
client’s rights and identifying information that might be harmful to the Insured.
If the attorney is competent and diligent in this regard and yet forwards to the Insurer
information not known to the attorney to be damaging, no unethical conduct has occurred.
Question 2:
All attorneys who are paid by Insurers to defend Insureds must scrupulously monitor the
tripartite relationship to ensure that the attorney’s independence of judgment is not impaired, that
the attorney’s representation of the Insured is not impaired, and that client confidences are
protected. In so doing, the attorney must be ever mindful that with regard to this tripartite
relationship the attorney’s client is the Insured and not the Insurer. As part of the duties of
competence and diligence and the duty to communicate with the client discussed above, the
attorney should explain the nature of a defense under reservation of rights to the client. When
the Insurer provides the defense under a reservation of rights, the possibility exists that an
impermissible conflict of interest is created.
An Insurer may offer a defense under a reservation of rights for a variety of reasons. For
example, an Insurer may issue a reservation when the recovery against the Insured may exceed
policy limits. An Insurer may offer a defense under a reservation of rights when the plaintiff
asserts two or more claims, one of which is not within the insurance contract coverage. An
Insurer may offer a defense under a reservation of rights when the possibility exists that no

coverage is due because of the nature of the claim or facts providing the basis for the claim or
because of an unrelated issue such as a misstatement on the policy application.
When an attorney represents an Insured and the Insurer is providing the defense under a
reservation of rights, the attorney must analyze the situation under the general conflict of interest
rule, KRPC 1.7(b). KRPC 1.7(b) states that a ‘lawyer shall not represent a client if the
representation of that client may be materially limited by the lawyer’s responsibilities to another
client or to a third person, or by the lawyer’s own interests, unless” two conditions are satisfied.
First, the lawyer must “reasonably believe that the representation will not be adversely affected.”
Second, the client must consent after consultation.” Comment 4 to KRPC 1.7 states that “when a
disinterested lawyer would conclude that the client should not agree to the representation under
the circumstances, the lawyer involved cannot properly ask for such agreement, or provide
representation on the basis of the client’s consent.”
In applying this rule, the attorney must consider his or her relationship with the Insurer as
well as the reason for the reservation of rights to decide whether the client’s representation “may
be materially limited.” For example, an attorney who receives a large percentage of the
attorney’s total fees from cases in which the Insurer is providing the defense may have a more
significant motivation to please the Insurer than an attorney who depends on the Insurer for a
small percentage of his or her total fees. An attorney dependent on the Insurer for a substantial
part of his or her fees may conclude that the allegiance to the Insurer may adversely affect the
representation of the Insured. Likewise, an attorney who represents the Insurer in unrelated
matters may have more of an allegiance to the Insurer and that allegiance may adversely affect
the representation of the Insured.
When the reason for the reservation of rights is a misstatement on the application or some
other issue not involved in the matter in which the attorney represents the Insured, even an
attorney who receives a substantial amount of his or her fees from the Insurer may conclude that
the representation would not be ‘materially limited.” The same can be said about the situation in
which the reservation of rights issues as a result of the possibility of a judgment in excess of
policy limits.
When the reason for the reservation of rights is one involving the facts and theories to be
developed in the matter in which the attorney defends the Insured, the Insurer’s and the Insured’s
interests diverge more significantly and the attorney must always be vigilant to protect the
client’s rights and confidences and pursue the best defense for the client. This may require the
attorney to be more adversarial in dealing with the Insurer because the Insurer may, consciously
or unconsciously, desire to tilt the defense in a way to minimize its own liability. See Douglas
Richmond, Lost in the Eternal Triangle of Insurance Defense Ethics, 9 Geo. J. Legal Ethics 475,
486 (1996) (“An insurer’s reservation of rights presents a potential conflict of interest because
the insurer may be more concerned with developing facts showing non-coverage than facts
defeating liability.”). The attorney, representing only the Insured, should seek to act in the best
interest of the Insured, which usually means insuring that if there is a judgment, it will be
covered by the Insurer. If the attorney also receives a significant percentage of his or her

business from the Insurer, under 1.7(b), the attorney may have a conflict that cannot be waived
by the client, the Insured.
We note that some jurisdictions have taken the position that, as a matter of law, not
ethics, a reservation of rights issued on certain bases creates a conflict of interest such that the
Insured is entitled to “independent counsel” paid for by the Insurer. See Cal. Civil Code sec.
2860 (1998) (a conflict of interest does not arise with a reservation of rights based on a claim for
punitive damages or the possibility of a judgment in excess of policy limits but “may exist” in
other reservation of rights scenarios “when the outcome of that coverage issue can be controlled
by counsel first retained by the insurer for the defense of the claim”). See also U.S. Fid. & Guar.
Co., v. Louis A. Roser Co., 585 F.2d 932, 938 n.5 (8th Cir. 1978). We caution that those
statements are statements of what the law of the relevant jurisdiction requires regarding the
insurance contract and does not involve what the rules of professional conduct require regarding
attorney conduct. In addition, the stance is based on the notion that the attorney has as clients
both the Insured and the Insurer, a view to which Kentucky does not adhere. See Finley v. Home
Insurance Co., 975 P.2d 1145 (Hawaii 1998). In Finley v. Home Insurance Co., 975 P.2d 1145
(Hawaii 1998), the Hawaii Supreme Court refused to set a hard and fast rule with regard to when
an Insurer must provide “independent counsel” on the basis that in Hawaii the attorney hired to
defend the Insured has only one client, the Insured, and that the rules of professional conduct for
attorneys in Hawaii should appropriately police conflict of interest.
Question 3:
An attorney defending an Insured under a reservation of rights may continue to
communicate with the Insured within the bounds outlined in the discussion of Question 1 above.
The attorney must protect the rights and confidences of the client. While the client may consent
generally to the sharing of information with the Insurer, the Insured must be specifically
consulted with regard to any information that is injurious to the client and, in particular, injurious
to the Insured’s rights in the potential coverage dispute. If the Insured forbids release of the
harmful information, the attorney must follow the instruction of the client. See Ill. Op. 92-02
(1992) (in a jurisdiction recognizing that the attorney represents both the Insured and the Insurer,
attorney has duty to not disclose facts to the Insurer which might prejudice the Insured’s rights in
a potential coverage dispute). The attorney must be cautious that the inability to share
information creates a division of loyalty for the attorney such that KRPC 1.7(b) would prohibit
continued representation.
Question 4:
If the Insurer files an action for Declaration of Rights, the attorney representing the
Insured cannot participate as counsel for Insurer because to do so would be to take an action
directly adverse to a present client in a matter intimately related to the present client. KRPC
1.7(a) states that an attorney “shall not represent a client if the representation of that client will
be directly adverse to another client unless” the attorney reasonably believes that the
representation will not adversely affect the representation and the client consents. Comment 4 to
KRPC 1.7 states that the attorney should not request consent if a disinterested lawyer would

conclude that the client should not consent. The Insured cannot be asked to consent to such
representation of the Insurer in a Declaration of Rights action.
Nor can the attorney represent the Insured in the Declaration of Rights action. Though
the Insurer is not a client of the attorney, the position the attorney would find himself or herself
in litigating the coverage question against the Insurer who is paying the attorneys fees in the
underlying matter is not one permissible under 1.7(b).
Assuming that both Insurer and Insured are represented by other counsel in the
Declaration of Rights action, the attorney may continue to represent the Insured with the defense
provided by the Insurer as long as the particular facts do not create a situation in which 1.7(b)
would be violated. In the vast majority of situations, the fact that a Declaration of Rights action
is ongoing should not affect adversely the attorney’s representation of the Insured.
Likewise, the fact that the Declaration of Rights action may be held in abeyance should
have no independent effect on the 1.7(b) analysis in most cases because the Declaration of Rights
action should not create an impermissible conflict even if it occurs at the same time as the
underlying action. If the particular facts create a situation in which 1.7(b) prohibits continued
representation, the fact that the Declaration of Rights action is held in abeyance may serve to
lessen the conflict.
Question 5:
The attorney may communicate with the Insurer within the parameters discussed in
Question 1 and 3.
Question 6:
When the attorney represents the Insured in a matter, represents the Insurer in unrelated
litigation, and the Insurer is added as a party to the same action, the attorney must withdraw from
the representation of the Insured if the representation of the Insured is “directly adverse” to the
Insurer, a client, and if a disinterested lawyer would not conclude that the Insurer should consent
to such representation. KRPC 1.7 & cmt. 4. If, in effect, the involvement of the Insurer in the
matter in which the attorney represents the Insured will involve a development of facts and
theories relating to coverage issues, the attorney, in representing the Insured, is pursuing a
representation “directly adverse” to a client, the Insurer. In addition, KRPC 1.7 would prevent
obtaining the Insurer’s consent to the representation because no disinterested attorney would
conclude that the Insurer should consent.
We note that even if the Insurer consented, the attorney would have to consider the effect
the representation of the Insurer in unrelated matters would have on the representation of the
Insured in this matter involving the Insurer. The attorney may have a significantly enhanced
allegiance to the Insurer as a result of the attorney-client relationship on other matters. Applying
1.7(b) as described in the discussion of Question 2, the allegiance created by the attorney-client
relationship along with the adversarial nature of the proceedings in which the Insurer and the

Insured now both appear may “materially limit” the representation of the Insured. Thus, the
attorney would be required to obtain the consent of the Insured, if a disinterested attorney would
conclude that the Insured should consent.

Note to Reader
This ethics opinion has been formally adopted by the Board of Governors of the Kentucky
Bar Association under the provisions of Kentucky Supreme Court Rule 3.530 (or its predecessor
rule). The Rule provides that formal opinions are advisory only.