When coverage is disputed, can the lawyer the insurer hired to defend the insured also bring the insurer's declaratory-judgment action against that same insured?

Plain-English summary

The inquiry asked the Committee to refine Opinions 165 and 407, which address the duty of an attorney retained by an insurance carrier when the carrier raises a coverage question at the outset of a suit. Specifically, the inquirer asked whether the same attorney engaged by the carrier could file an answer for the insured to preserve the status quo in the liability case while simultaneously commencing, as the carrier's counsel, a declaratory-judgment action against the insured and obtaining a stay of the liability case until the coverage question was resolved.

The Committee reviewed the substantive New Jersey law (for ethics purposes only), noting that an insurer's duty to defend is distinct from its duty to indemnify, and tracing the line of cases (Burd, Dunne v. Fireman's Fund, and Sussex Mutual v. Hala Cleaners) governing partly covered claims and the procedures for resolving coverage without a separate hearing. Under Dunne, where a potential conflict exists, the insured selects counsel acceptable to the carrier (or, failing agreement, counsel chosen by the assignment judge), and the carrier pays the defense costs, with jury interrogatories used to fix the factual basis for any liability so the coverage issue can be resolved.

The Committee concluded that the attorney hired by the carrier to file a protective pleading in the liability case ought not appear for the carrier in the declaratory-judgment case. Ideally the insured would be represented by personal counsel in both matters, and the carrier's attorney should recommend that course immediately, because it is plain the insured needs independent counsel on the coverage dispute. The Committee stated it was not modifying Opinions 165 or 407, nor transgressing the contractual rights of carrier and insured; it simply held that where coverage is in question at the inception of the liability case, the carrier's attorney must promptly advise the insured to retain personal counsel and in no case appear for the carrier against the insured in the coverage declaratory-judgment action.

Currency note

This opinion was issued in 1982, before New Jersey's adoption of the 2004 revisions to the Rules of Professional Conduct, and predates the 1984 replacement of the Disciplinary Rules by the RPCs. 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 one lawyer defend the insured and bring the carrier's coverage suit against the insured?

A: No. The opinion concluded the carrier's defense lawyer could not also appear for the carrier in the declaratory-judgment action against the same insured.

Q: What should the carrier's lawyer do when coverage is disputed?

A: The opinion held the lawyer should promptly advise the insured to retain personal counsel for the coverage dispute, recommending ideally that the insured have personal counsel in both matters.

Q: Did this change the Committee's earlier insurer-defense opinions?

A: No. The Committee stated it was not modifying Opinions 165 or 407 and was not transgressing the contractual rights of the carrier and insured.

Background and rules framework

The opinion was decided under the conflict principles then governing New Jersey lawyers, before the 1984 adoption of the Rules of Professional Conduct, against the backdrop of the Burd/Dunne coverage-procedure cases. In current terms the analysis maps onto RPC 1.7 (a lawyer may not represent one client directly adverse to another) and RPC 1.8(f) (compensation of a lawyer by one other than the client, as where a carrier pays defense counsel for the insured).

Citations and references

Rules of Professional Conduct:

• MR 1.7 / NJ RPC 1.7 (concurrent conflicts of interest)
• MR 1.8(f) / NJ RPC 1.8(f) (payment of a lawyer by a third party)

Cases:

• Burd v. Sussex Mutual Insurance Co. (coverage-procedure line; cited)
• Dunne v. Fireman's Fund American Insurance Co., 69 N.J. 244 (1976) (procedure for partly covered claims)
• Sussex Mutual Insurance Co. v. Hala Cleaners, Inc., 75 N.J. 117 (1977)

Other opinions cited:

• NJ ACPE Opinions 165 and 407 (duty of insurer-retained counsel when coverage is questioned; not modified)

See also

• NJ ACPE Op. 504: Former Comp-Defense Counsel Bringing Claims Against the Municipality
• NJ ACPE Op. 507: Suing a Client in an Unrelated Action

Source

• Full text (Justia mirror): https://law.justia.com/cases/new-jersey/advisory-committee-on-professional-ethics/2004/acp502-1.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.

110 N.J.L.J. 349, September 23, 1982

OPINION 502

Conflict of Interest Representation of Insurance Carrier and Insured where Question of Coverage is in Issue

This inquiry asks us to "refine" Opinions 165 and 407, both of which deal with the duty of an attorney retained by an insurance carrier where there is a question of coverage raised by the carrier at the inception of the suit. In a nutshell, the inquirer asks whether it is proper for the same attorney engaged by the carrier to file an Answer on behalf of the insured in order to maintain the status quo in the liability case and contemporaneously to commence Declaratory Judgment proceedings as counsel for the insurance company against the insured and to secure an Order staying all proceedings in the liability case until the Declaratory Judgment case has been concluded.

In order to resolve the question, it is necessary for us to refer to the substantive law of New Jersey, but we remind the Bar that we do so only for the purpose of deciding questions of ethics. In the typical case the relationship of the parties is beyond dispute; the rights and duties of the insured and the carrier arise out of contract, and liability policies commonly obligate the carrier to provide the insured with a defense - a duty distinct from the obligation to indemnify. Danek v. Hommer 28 N.J. Super 68

[The insurer] acts at its peril and if such defense is found to be lacking then for purposes of liability [coverage, not defense], it is bound by the judgment... against its insured. Id. at 667. The Burd court recognized this distinction by noting that the difficulty presented by a mixed claim (partial coverage) would evaporate if the insured successfully defended himself entirely on all aspects of the claim. In that instance, the coverage or indemnification issue would be mooted and the insurer, without a hearing, would be required to reimburse the insured for the costs of defense.

[I]f an action charging intentional injury is wholly defeated, the insured can well argue the claim thus found to be "groundless, false or fraudulent" was for bodily injury or property damage within the covenant to pay and did not cease to be such a claim merely because the claimant added the further "groundless, false or fraudulent" allegation of an intent to injure. In that situation, the carrier may fairly be required to reimburse the insured for the cost of the successful defense even though the carrier would not have had to pay the judgment if the case had gone against the insured on a finding of intentional injury.

The New Jersey Supreme Court in the case of Dunne v. Fireman's Fund Am. Ins. Co., 69 N.J. 244 (1976) somewhat clarified the prior holding in Burd by making it clear that there was no need for a coverage hearing when the tort claim is defended in accordance with the procedure prescribed therein by the Dunne court. The Dunne court was faced with the situation of a partly covered claim and a potential conflict for the insurer in undertaking the defense. Unlike Burd, supra, the tort action had not been adjudicated so that an opportunity still exists to establish a format whereby the trial of the tort action would negate the need for a coverage hearing and a relitigation of the issues of the tort case. The Dunne procedure provided for the selection of counsel acceptable to both the insured and insurer or, if they could not agree, counsel selected by the assignment judge in the county in which the action was pending.

Under the terms of the policy [the insurer] is under a duty to defend the suit against its insured since the allegations in the complaint include some subject matter negligence, which clearly falls within the coverage. We envision possible conflicts in this defense because coverage may not exist if liability is fixed on some other predicate, such as violation of right of privacy. Therefore, in the first instance the insured should select their own counsel, subject to the carrier's approval. In the event such approval is not forthcoming the selection should be made by the assignment judge. Reasonable counsel fees and costs of defense are to be paid by [the insurer]. At the trial interrogatories should be submitted to the jury to ascertain the precise factual basis for any conclusion of liability so that the coverage issue may be resolved. If a jury trial is waived, then the trial court will make those findings. Id. at 252. It is clear that the insurer was to be bound by the findings in the tort case insofar as the coverage issue was concerned and, in any event, the carrier was to be responsible for defense costs incurred by its insured.

We are aware of the case of Sussex Mut. Ins. Co. v. Hala Cleaners, Inc., 75 N.J. 117 (1977) and we believe that our opinion herein is not inconsistent with the Supreme Court opinion in that case.

All things considered, we are of the opinion that the attorney hired by the carrier to file a protective pleading in the liability case ought not to appear for the carrier in the Declaratory Judgement case. Ideally, the insured would be represented by his personal attorney in both matters and the attorney hired by the carrier ought to recommend this course to the insured immediately, since it is at once apparent that the insured must have independent counsel with respect to the coverage dispute. In so holding, we do not wish to be understood as modifying our holdings in Opinions 165 or 407 nor do we wish to be understood as in any way transgressing upon the contractual rights of an insurance carrier and its insured. We simply conclude that where there is a question of coverage at inception of the liability case, the attorney hired by the carrier to file defensive pleadings on behalf of the insured ought to promptly advise the insured to retain his own personal attorney for all purposes, but in no case ought to appear for the carrier against the insured in a Declaratory Judgment case brought to resolve the question of coverage.