Can a lawyer keep defending an insured and its employee after the insurer first denied coverage, then agreed to defend under a reservation of rights and filed a coverage declaratory judgment action?

Plain-English summary

An insurance company asked Lawyer M to defend its insured, the Shady Rest Home, and its employee, Nurse N, in a medical malpractice action. After the representation began, the insurer told Lawyer M it would neither defend nor indemnify because the defendants were not named insureds, and it notified the home directly. Attorney D, overseeing the litigation for the home, asked Lawyer M to continue the defense with the home paying his fees, and Lawyer M agreed. Lawyer M told the plaintiff's attorneys about the coverage question and tried, without success, to negotiate a small settlement on the view that the home had no substantial assets.

The insurer later reconsidered, agreed to defend under a reservation of rights, asked Lawyer M for copies of his billings so it could reimburse the home, and asked him to bill the insurer going forward. The insurer then filed a declaratory judgment action against the home, Nurse N, and the plaintiff to resolve coverage. Throughout, Lawyer M represented only the home and Nurse N, received all his information through discovery, depositions, and communications with the home and its employees, and was not involved in the declaratory judgment litigation. He asked whether he could continue representing the home and Nurse N.

The opinion concluded that he could. Nothing in the facts as stated disclosed a disqualifying conflict of interest, citing Rule 5.1(b).

Currency note

This opinion was issued in 1992, before the North Carolina State Bar's adoption of the 2003 revisions to the Rules of Professional Conduct. 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 Treat this page as historical context, not current guidance.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, deadline, or requirement mentioned here.

Common questions

Q: Can defense counsel keep representing the insured after the insurer first denied coverage and then agreed to defend under a reservation of rights?

A: Yes, on these facts. The opinion held that nothing disclosed a disqualifying conflict of interest under Rule 5.1(b).

Q: Does the insurer's separate coverage declaratory judgment action disqualify defense counsel from the underlying case?

A: Not here. The opinion noted Lawyer M was not involved in the declaratory judgment litigation and had represented only the home and the nurse throughout.

Q: Does it matter that payment shifted between the insured and the insurer?

A: The opinion treated the shifting payment arrangement as part of the facts and still found no disqualifying conflict, where counsel represented only the insured defendants and got his information from them and from discovery.

Background and rules framework

The opinion applied North Carolina Rule 5.1(b), the conflict-of-interest provision then in force (corresponding to Model Rule 1.7), assessing whether the lawyer's continuing representation of the insured defendants was materially limited by the insurer's shifting coverage position. The analysis turns on whom the lawyer actually represented and what information he held.

Citations and references

Rules of Professional Conduct:

• MR 1.7 (conflict of interest; current clients)
• North Carolina Rule 5.1(b) (conflict of interest)

See also

• NC Ethics Op. RPC 151: representation of insured and insurer
• NC Ethics Op. RPC 156: informing the client when the insurer's defense ends

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/rpc-140/

Original opinion text

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

Inquiry:

Lawyer M was contacted by Insurance Company and asked to represent its insured, the Shady Rest Home, and its employee, Nurse N, who were named as defendants in a medical malpractice action brought by Plaintiff P. Lawyer M undertook the representation. Prior to filing responsive pleadings, Lawyer M received a communication from Attorney D, who advised Lawyer M that he, Attorney D, would be representing the Shady Rest Home and would be overseeing the litigation. Shortly thereafter, Lawyer M received a telephone call from a representative of Insurance Company advising him that Insurance Company would neither defend nor indemnify Shady Rest Home and Nurse N because they were not named insureds in the subject policy. Insurance Company also notified Shady Rest Home directly of its position. Attorney D then contacted Lawyer M to ask that Lawyer M continue the defense of Shady Rest Home and Nurse N and advised that Shady Rest Home would continue paying for Lawyer M's services. Lawyer M agreed to continue.

Soon thereafter, Lawyer M met the plaintiff's attorneys, Lawyers I and L, and informed them that a question of coverage had arisen and that Insurance Company had taken the position that it did not provide coverage for either defendant. Lawyer M indicated that Shady Rest Home could pay a small amount in settlement and further suggested that pursuit of the lawsuit would be fruitless because Shady Rest Home had no substantial assets. This effort to negotiate was unavailing.

In the meantime, Attorney D obtained information which caused Insurance Company to reconsider its position about coverage. Not long thereafter, Lawyer M was again contacted by a representative of Insurance Company and advised that Insurance Company had decided to provide a defense under a reservation of rights. Lawyer M was requested to provide Insurance Company with copies of his billings to Shady Rest Home so that the insurance company could reimburse Shady Rest Home and was further requested to bill Insurance Company in the future.

Subsequently, Lawyer M learned that Insurance Company filed a declaratory judgment action against Shady Rest Home, Nurse N and Plaintiff P to resolve the coverage question. In the meantime, Lawyer M continues to represent Shady Rest Home and Nurse N and has been paid for his services by the insurance company.

Lawyer M has represented only Shady Rest Home and Nurse N throughout the litigation. All information he has received has come through discovery, depositions and communications with Shady Rest Home and its employees. He has not been involved in the declaratory judgment litigation. Under the circumstances, may Lawyer M continue to represent Shady Rest Home and Nurse N?

Opinion:

Yes. Nothing in the facts as stated discloses a disqualifying conflict of interest. Rule 5.1(b).