When an insured asks defense counsel to send a policy-limits demand to set up a bad-faith claim against the insurer, what can the lawyer do?

Plain-English summary

A lawyer retained by an insurer to defend a doctor in a catastrophic malpractice case was asked by the insured doctor to send the insurer a demand to settle within policy limits, so the doctor could later sue the insurer for bad-faith refusal to settle if the verdict exceeded the limits. The opinion addressed how defense counsel should handle that request.

The opinion concluded counsel must not counsel the insured about any bad-faith claim and may not send a demand letter on the insured's behalf to the insurer, but is obligated to inform the insurer of the insured's wishes about the case. It reasoned that defense counsel retained by an insurer represents both the insurer and the insured. When the possibility of a judgment exceeding policy limits becomes apparent, counsel must promptly advise both clients of the existence and nature of the conflict. Where the insured has contractually surrendered control of the defense and settlement authority to the insurer, counsel will generally be obliged to follow the insurer's instructions on those matters. To fully protect the insured from excess exposure, especially as to settlement, defense counsel should also advise the insured that counsel cannot fully represent those interests and that the insured should consider employing independent counsel.

Currency note

This opinion was issued in 1991, before North Carolina's adoption of the 2003 revisions to the Rules of Professional Conduct, and it cites the rule numbering then in effect. 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 Treat this page as historical context, not current guidance.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: Could insurer-retained defense counsel send the insured's policy-limits demand to the insurer?

A: No. The opinion concluded counsel may not send a demand letter on the insured's behalf to the insurer, but is obligated to inform the insurer of the insured's wishes about the case.

Q: Could counsel advise the insured about a bad-faith claim against the insurer?

A: No. The opinion concluded counsel must not undertake to counsel the insured about any bad-faith claim, because counsel represents both the insured and the insurer.

Q: What did counsel have to do when a judgment could exceed policy limits?

A: The opinion concluded counsel must promptly advise both clients of the existence and nature of the conflict and advise the insured to consider employing independent counsel.

Background and rules framework

At the time, the opinion applied the principles governing a lawyer who represents both an insurer and an insured, focusing on the conflict that arises when a judgment may exceed policy limits and the insured wants to position a bad-faith claim. In current numbering the subject matter corresponds to Model Rule 1.7 (conflict of interest) and Model Rule 1.4 (communication). It cited the then-current Rules 6(b)(1), 7.1(a)(1), and 5.1(a).

Citations and references

Rules of Professional Conduct:

• N.C. Rules 6(b)(1), 7.1(a)(1), 5.1(a) (then in effect)
• Current counterparts: Model Rule 1.7 (conflict of interest); Model Rule 1.4 (communication)

See also

• NC State Bar 2003 FEO 12: Insurer Settlement Advice
• NC State Bar 2010 FEO 1: Defending a Missing Insured
• ABA Formal Op. 96-403: Insured Objecting to Settlement

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/rpc-91/

Original opinion text

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

Editor's Note: This opinion was originally published as RPC 91 (Revised).

Inquiry:

Attorney A is retained by an insurance company to defend Dr. B in a malpractice suit brought against Dr. B. The case is very serious with catastrophic injuries to a minor child. The doctor has $2,000,000 of insurance coverage. Dr. B comes to Attorney A and tells him that he is very worried about the case and wants Attorney A to immediately send a demand letter to the insurance company to settle within policy limits. Dr. B tells Attorney A that he read an article in a professional publication that he should do this in the event the jury awards the Plaintiff a judgment in excess of his policy limits. Dr. B could then sue his insurer for bad faith refusal to settle within policy limits. How should Attorney A handle this situation?

Opinion:

Attorney A must not undertake to counsel with Dr. B relative to any bad faith claim and may not send a demand letter on his behalf to the insurance company; however, Attorney A is obligated to inform the insurance company of Dr. B's wishes in regard to the case. Rule 6(b)(l). Rule 7.1(a)(l). Whenever defense counsel is employed by an insurance company to defend an insured against a claim, he or she represents both the insurer and the insured. When the possibility of judgment in excess of the policy limits becomes apparent to defense counsel, he or she must promptly advise both clients of the existence and nature of the conflict. Rule 5.1(a). Where the insured has contractually surrendered control of the defense and authority to settle the claim to the insurer, counsel will generally be obliged to accept his or her instructions in these matters from the insurer. In order to fully protect the insured from exposure in excess of the policy limits, especially with regard to settlement, defense counsel obtained by the insurer should also advise the insured that he or she cannot fully represent those interests and that it would be appropriate for the insured to consider employing independent counsel to provide such representation.