When an insurer hires a lawyer to defend an insured under a reservation of rights, can the lawyer take a step that helps the insurer but cuts off the insured's defense or coverage?

Plain-English summary

A plaintiff sues an insured on two claims. The insurer owes a duty to defend and indemnify the first claim but would owe nothing if only the second claim had been brought, and the second claim's damages exceed policy limits. The insured tenders the whole defense; the insurer accepts both claims subject to a reservation of rights on the second and hires a lawyer to defend the insured. The lawyer concludes the first claim might be dismissed, decided on summary judgment, or settled for a sum the insurer would pay, while the second claim cannot be. The insured does not want the lawyer to do this, because disposing of the first claim alone would end the insurer-paid defense on the second claim and reduce the insured's leverage to fund a global settlement. The opinion asks whether the lawyer may move against or settle the first claim, and answers no.

The opinion explains that a lawyer who represents an insured in an insurance-defense case generally has two clients, the insurer and the insured, so the lawyer must observe Oregon RPC 1.7 on current-client conflicts. The relationship is created and limited by the insurance policy. When an insurer defends without a reservation of rights, the community of interest between insurer and insured is essentially complete and there is little room for conflict; when the insurer defends under a reservation of rights, a risk of conflict arises.

To manage that risk and permit joint representation, the opinion states that both the ethics rules and insurance law require the lawyer to treat the insured as the primary client whose protection must be the lawyer's dominant concern. It follows that the lawyer cannot file a motion that would adversely affect the insured's right to a defense or to coverage, and must instead act consistently with the insured's interests. The opinion notes the insurer remains free to hire separate counsel to litigate the coverage question.

In practice

The opinion holds that, under the current Oregon rules, the insured's status as primary client in a reservation-of-rights defense is the controlling principle: the defense lawyer cannot take a litigation step that serves the insurer's coverage position at the cost of the insured's defense or coverage. Per the opinion, the analysis turns on whether the contemplated motion or settlement would diminish the insured's right to a defense or to coverage. Verify the current text of Oregon RPC 1.7 before relying on any specific point.

Common questions

Q: Who is the client when an insurer hires a lawyer to defend its insured?

A: Generally both. The opinion states the lawyer has two clients, the insurer and the insured, although specific facts can overcome the assumption of a tripartite relationship.

Q: Can the defense lawyer dispose of a covered claim to limit the insurer's exposure?

A: No, where it harms the insured. The opinion concludes the lawyer cannot file a motion against or settle the covered claim if doing so would leave the insured without an insurer-paid defense or diminish coverage.

Q: Does a reservation of rights change the lawyer's duties?

A: Yes. Per the opinion, when the insurer defends under a reservation of rights, the insured is the primary client whose protection must be the lawyer's dominant concern; the insurer may hire separate counsel to litigate coverage.

Background and rules framework

The opinion interprets Oregon RPC 1.7 (current-client conflicts of interest) as applied to the insurer-insured-lawyer relationship, corresponding to Model Rule 1.7, with the informed-consent definitions in Oregon RPC 1.0(b) and (g).

Citations and references

Rules of Professional Conduct:

• Oregon RPC 1.7 / Model Rule 1.7 (current-client conflicts)
• Oregon RPC 1.0(b), (g) (confirmed in writing; informed consent)

Cases:

• Nielsen v. St. Paul Companies, 283 Or 277, 583 P2d 545 (1978)
• In re Weidner, 310 Or 757, 801 P2d 828 (1990)
• Ferguson v. Birmingham Fire Ins. Co., 254 Or 496, 460 P2d 342 (1969)

Other opinions cited:

• ABA Formal Ethics Op. No. 282 (1950); ABA Informal Op. No. 1476 (1981)
• OSB Formal Ethics Op. No. 2005-77 (rev 2026) (insured defense after coverage work)

See also

• OSB Ethics Op. 2005-77: Insured Defense After Coverage Work
• OSB Ethics Op. 2005-22: Third-Party Payment of Fees

Source

• Landing page: https://www.osbar.org/ethics/toc.html
• Original PDF: https://www.osbar.org/_docs/ethics/2005-121.pdf