After opposing the insured in a coverage declaratory-judgment action, can the insurance carrier's lawyer go back to defending that insured in the underlying negligence case?

Plain-English summary

The Committee addressed the relationship between an attorney retained by a liability insurer and the insured, where coverage and the insured's interests may diverge. The inquirer was retained by the carrier to defend the insured in a negligence action that included a punitive-damages count. The carrier asserted the policy did not cover punitive damages and tendered a reservation-of-rights agreement under Merchants Indemnity Corp. v. Eggleston. When the insured declined to sign, the inquirer, as the carrier's attorney of record, commenced a declaratory-judgment action against the insured; the negligence action was apparently stayed pending that determination, a procedure the New Jersey Supreme Court sanctioned in Burd v. Sussex Mutual Insurance Co.

The declaratory-judgment action, in which the insured had personal counsel, became moot when the negligence plaintiff consented to dismiss the punitive-damages count. The inquirer asked whether he could now defend the negligence action, assuming the insured's fully informed consent.

The Committee concluded he could. Because the issue projected in the declaratory-judgment action plainly did not require investigating or resolving any facts relevant to the suit for damages, it saw no reason the inquirer could not defend the negligence case. It contrasted Opinion 165, which held that where the coverage question depends on an issue material to the litigation to be defended, the carrier's attorney may not appear for any party in the declaratory-judgment case, and the original attorney may not proceed with the defense until the disputed facts are finally determined.

Currency note

This opinion was issued in 1978, before New Jersey's 1984 replacement of the Disciplinary Rules by the Rules of Professional Conduct and the later revisions to those rules. In current New Jersey terms the analysis corresponds to RPC 1.7 (conflicts of interest), as applied to the tripartite insurer-insured-counsel relationship. Treat this page as historical context, not current guidance.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 the carrier's lawyer defend the insured after suing the insured over coverage?

A: On these facts, yes. The opinion held that, because the coverage issue did not require resolving facts relevant to the negligence suit, the lawyer may defend it with the insured's informed consent.

Q: When can the carrier's lawyer not return to the defense?

A: When the coverage question depends on an issue material to the litigation to be defended; in that case, per Opinion 165, the lawyer may not appear in the declaratory action and may not proceed with the defense until the disputed facts are finally determined.

Q: What made the conflict resolvable here?

A: The punitive-damages coverage dispute became moot and, more fundamentally, did not turn on facts shared with the negligence case, so defending the negligence action did not put the lawyer on both sides of the same factual question.

Background and rules framework

The opinion drew on the line of New Jersey authority governing the insurer-retained defense lawyer's duties to the insured, including Merchants Indemnity Corp. v. Eggleston and Burd v. Sussex Mutual Insurance Co., and the Committee's Opinion 165. The dividing line is whether the coverage dispute and the underlying suit share a material fact question. In current New Jersey terms the analysis corresponds to RPC 1.7.

Citations and references

Rules of Professional Conduct:

• MR 1.7 / NJ RPC 1.7 (conflicts of interest)

Cases:

• Merchants Indemnity Corp. v. Eggleston, 37 N.J. 114, 179 A.2d 505 (1962)
• Burd v. Sussex Mutual Insurance Co., 56 N.J. 383, 391, 267 A.2d 7, 11 (1970)

Other opinions cited:

• NJ ACPE Opinion 165, 92 N.J.L.J. 831 (1969)

See also

• NJ ACPE Op. 502: Insurer's Counsel and the Insured Where Coverage Is in Issue
• NJ ACPE Op. 428: Insurer Counsel Defending Municipalities and Practicing Before Municipal Bodies

Source

• Full text (Justia mirror): https://law.justia.com/cases/new-jersey/advisory-committee-on-professional-ethics/2004/acp407-1.html
• Issuing authority: New Jersey Supreme Court Advisory Committee on Professional Ethics, via the NJ Courts Supreme Court Committees page

Original opinion text

Reproduced from a full-text mirror of the official opinion for research purposes. The linked official source controls.

102 N.J.L.J. 363, October 19, 1978

OPINION 407

Conflict of Interest - Insurance Carrier's Attorney Representing Insured he Opposed in Declaratory Action

In a number of prior opinions this Committee has considered the delicate relationship between attorneys retained by insurance carriers by virtue of liability insurance policies and the insured. It is not uncommon to encounter situations where, by reason of the scope or amount of coverage afforded by the policy, the interests of the insured are not perfectly coincident with those of the insurance carrier.

In this matter the inquirer was retained by the insurance carrier to defend the insured in a negligence action. One of the counts of the complaint sought punitive damages. The carrier asserted that the policy did not afford coverage for punitive damages and tendered a reservation of rights agreement to the insured in accordance with the principles of Merchants Indemnity Corp. v. Eggleston, 37 N.J. 114, 179 A.2d 505 (1962). The insured declined to enter into such an agreement and the inquirer commenced a declaratory judgment action against the insured as attorney of record for the carrier. We are advised that the original action did not proceed, presumably because it was stayed until disposition of declaratory judgment action. This procedure has been sanctioned by the New Jersey Supreme Court. Burd v. Sussex Mut. Ins. Co., 56 N.J. 383, 391, 267 A.2d 7, 11 (1970).

The declaratory judgment action, in which the insured was represented by personal counsel, ultimately became moot because the attorney representing the plaintiff in the negligence case consented to a dismissal of the count of the complaint under which punitive damages were sought. The inquirer asks whether he may now undertake and carry to a conclusion the defense of the negligence action, assuming that the insured has consented to such representation after having been fully informed.

On these facts, since the issue projected in the declaratory judgment action plainly did not require the investigation or resolution of any facts relevant to the suit for damages, we see no reason why the inquirer cannot defend the negligence case. In Opinion 165, 92 N.J.L.J. 831 (1969), we held that, where the coverage question depends upon an issue material to the litigation to be defended, the attorney retained by the carrier may not appear for any of the parties in the declaratory judgment case. Speaking of the declaratory judgment case, we then said:

In such a collateral proceeding, all interested parties would have the benefit of independent counsel and the resolution of the disputed facts would ordinarily be binding. Under no circumstances may the original attorney proceed with the defense of the insured in the main case until the disputed facts have been finally determined. If the original action is stayed pending determination of the issue in dispute, the original attorney may, with the consent of both the insured and the carrier continue as counsel of record for the insured.