May insurance-retained defense counsel disclose to the carrier evidence the counsel obtained from a third party that could let the carrier deny coverage to the insured?

Plain-English summary

The opinion presents a panel defense counsel ("PDC") who, in the course of defending an insured under a reservation-of-rights letter, receives from opposing counsel a "mea culpa" letter dated before the insurance application. The letter has two effects: it supports a statute-of-limitations defense, but it also tends to show the insured knew of the claim before applying for the policy and failed to disclose it. The latter would let the carrier deny coverage.

The committee starts from the established California tripartite attorney-client relationship: insurer, insured, and counsel, with equal and potentially competing duties to both clients (Bank of America v. Superior Court (2013) 212 Cal.App.4th 1076; State Farm Mut. Auto. Ins. Co. v. Federal Ins. Co. (1999) 72 Cal.App.4th 1422). It then notes the lawyer's section 6068(m) and former Rule 3-500 duty to keep both clients reasonably informed.

The committee extends State Bar Formal Opinion 1995-139, which addressed the same conflict when counsel learned the coverage-defeating fact from a confidential attorney-client communication. The opinion concludes that the source of the information (insured client versus third-party opposing counsel) is "a distinction without a difference." Section 6068(e)'s duty extends to the client's "secrets," meaning information that would be detrimental to the client, not only confidential communications. The mea culpa letter is therefore protected from disclosure to the carrier.

The committee concludes that PDC faces an irreconcilable conflict under Flatt v. Superior Court (1994) 9 Cal.4th 275: keeping the carrier informed is opposed by the duty to preserve the insured's secrets. Mandatory withdrawal under former Rule 3-700(B)(2) follows. The opinion also requires PDC to take reasonable steps under Rule 3-700(A)(2) to avoid prejudice, including notifying both clients of the conflict without revealing its nature, seeking a substitution of attorney, and continuing the representation until relieved.

In practice

The opinion holds that, under California's rules as they stood in 2017, insurance panel defense counsel who learns from any source of facts that would let the carrier deny coverage cannot tell the carrier and must withdraw. The withdrawal must be conducted under former Rule 3-700(A)(2) without disclosing the nature of the conflict, and counsel must continue representation until relieved by the tribunal.

The opinion is from 2017 and is framed under former Rules 3-100, 3-500, and 3-700. Current California Rules 1.6, 1.4, and 1.16 carry forward the equivalent duties.

Common questions

Q: I'm panel defense counsel and discovered through discovery that my insured failed to disclose a material fact on the policy application. Can I tell the carrier?

A: No, per this opinion. The mandatory disclosure under former Rule 3-500 to one client is opposed by the duty to preserve the other client's secrets under section 6068(e) and former Rule 3-100. The committee holds the conflict is irreconcilable and requires withdrawal under former Rule 3-700(B)(2).

Q: Does it matter that I learned the fact from opposing counsel and not from the insured?

A: Per the opinion, no. The committee treats the source of information as a distinction without a difference, citing In re Johnson and the established LACBA opinions (386, 436, 456) that the duty extends to "secrets" gained in the professional relationship even from public sources.

Q: Can I tell the carrier I am withdrawing because of a conflict?

A: Per the opinion, you may notify both clients that a conflict has arisen requiring withdrawal, but without revealing its nature. The opinion ties this to former Rule 3-700(A)(2)'s duty to avoid foreseeable prejudice and Bus. & Prof. Code section 6068(e).

Q: What if the tribunal will not let me out?

A: Per former Rule 3-700(A)(1) and Cal. State Bar Op. 1994-134 as cited, the lawyer continues representing the insured until relieved by the tribunal. The opinion expressly acknowledges this duty.

Background and rules framework

The opinion interprets former California Rules 3-100 (confidentiality), 3-500 (duty to inform the client), and 3-700 (withdrawal), with statutory grounding in Bus. & Prof. Code sections 6068(e) (secrets of the client) and 6068(m) (duty to keep client reasonably informed). The tripartite framework is established by Bank of America v. Superior Court (2013), State Farm v. Federal Ins. Co. (1999), and Lysick v. Walcom (1968). Flatt v. Superior Court (1994) supplies the conflict-of-interest standard.

Citations and references

Rules of Professional Conduct:

• Former California Rule 3-100 (confidentiality)
• Former California Rule 3-500 (duty to inform client)
• Former California Rule 3-700 (withdrawal)

Statutes:

• Bus. & Prof. Code section 6068(e) (preservation of client secrets)
• Bus. & Prof. Code section 6068(m) (duty to keep client reasonably informed)

Cases:

• Bank of America, N.A. v. Superior Court of Orange County, 212 Cal.App.4th 1076 (2013), tripartite attorney-client relationship
• Flatt v. Superior Court, 9 Cal.4th 275 (Cal. 1994), conflict-of-interest definition
• In re Johnson, 4 Cal. State Bar Ct. Rptr. 179 (Rev. Dept. 2000), confidentiality of client's prior felony conviction
• Lysick v. Walcom, 258 Cal.App.2d 136 (1968), duty to disclose facts to enable client decisions
• State Farm Mut. Auto. Ins. Co. v. Federal Ins. Co., 72 Cal.App.4th 1422 (1999), equal duties to insurer and insured

Other opinions cited:

• California State Bar Formal Opinion 1995-139: confidentiality of insured's communication conflicting with disclosure to carrier
• California State Bar Formal Opinion 1994-134: withdrawal duties
• LACBA Formal Opinions 386, 436, 456: scope of client secrets

See also

• No sibling opinions yet indexed.

Source

• Landing page: https://lacba.org/?pg=ethics-opinions
• Original PDF: https://lacba.org/docDownload/2010563