Can a lawyer hired by an insurer to defend an insured withdraw from that defense and then bring a coverage suit against the insured on a related matter?

Plain-English summary

An insurance company hired a lawyer to defend a now-defunct corporation against a personal-injury and property-damage claim. The policy appeared to cover the initial claim, but the lawyer believed cross-claims were not covered. The lawyer proposed to withdraw as the corporation's counsel for its failure to cooperate and, on the insurer's behalf, bring a declaratory-judgment action to determine coverage and to declare that the corporation had no coverage because of that failure. The lawyer asked whether this gave rise to a conflict of interest.

The opinion concluded that, on first impression, a conflict was clearly presented, because the lawyer proposed to withdraw from representing a client and then sue that former client on a definitely related matter. It observed, however, that the lawyer had had no contact with the corporation or anyone associated with it, possessed no privileged information, and gained no advantage from the representation, so the lawyer had never really represented the client except in name only. It applied Rule 5-105 (a lawyer must not let independent professional judgment on the client's behalf be impaired by representing conflicting interests) and Rule 5-107(B) (a lawyer cannot let the person who employs the lawyer to render services for another direct the lawyer's professional judgment).

Even though the conflict might not be real, the opinion concluded the conduct would give the appearance of impropriety and raise the inference that Rules 5-105 and 5-107(B) had been violated. It cautioned the lawyer to avoid that appearance and recommended the insurer retain separate counsel to prosecute the declaratory-judgment action, so that if the lawyer later withdrew for appropriate reasons, the withdrawal would not be for the purpose of suing a present client.

Currency note

This opinion was issued in 1985, when New Mexico lawyers were governed by the former New Mexico Code of Professional Responsibility, which the State Bar later replaced with the Rules of Professional Conduct; it also predates the State Bar of New Mexico's November 3, 2008 revisions to those Rules (the New Mexico adoption of the ABA Ethics 2000 changes). The conflict rules it cites are no longer in force. Treat this page as historical context, not current guidance.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 counsel withdraw and then sue the insured over coverage?

A: The opinion concluded the conduct gave at least the appearance of a conflict under Rules 5-105 and 5-107(B), and recommended the insurer use separate counsel for the coverage action rather than have defense counsel bring it.

Q: Did it matter that the lawyer had never actually dealt with the insured?

A: The opinion noted the lawyer had no contact with the corporation, held no privileged information, and gained no advantage, so any conflict might not be real, but it concluded the appearance of impropriety remained because the lawyer would be suing a former client on a related matter.

Q: What did the opinion recommend to cure the problem?

A: It recommended the insurer retain separate counsel to prosecute the declaratory-judgment coverage action, so that any later withdrawal by defense counsel would not be for the purpose of suing a present client.

Background and rules framework

The opinion interpreted the former New Mexico Code of Professional Responsibility: Rule 5-105 (declining or withdrawing from employment when independent professional judgment is or may be impaired by conflicting interests) and Rule 5-107(B) (not permitting a third party who employs the lawyer to direct or regulate the lawyer's professional judgment), in the tri-partite setting of an insurer, its retained defense counsel, and the insured.

Citations and references

Rules of Professional Conduct (former Code):

• Model Code DR 5-105 / NM Code Rule 5-105 (impairment of independent professional judgment by conflicting interests)
• Model Code DR 5-107 / NM Code Rule 5-107(B) (third party directing the lawyer's professional judgment)

See also

No sibling opinions yet indexed.

Source

• Landing page: https://www.sbnm.org/Leadership/Committees/Ethics-Advisory-Committee/Ethics-Advisory-Opinions
• Original PDF: https://www.sbnm.org/Portals/NMBAR/AboutUs/committees/Ethics/1985/1985-1.pdf

Original opinion text

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

Advisory Opinion 1985-1
FACTUAL SITUATION:
An attorney has been hired by an insurance company to defend an architectural co-op corporation that is in the trucking business from a personal injury and property damage claim arising out of an automobile accident. The corporation is defunct. While the insurance apparently provides coverage for the initial claim, there are cross-claims which, in the opinion of the attorney, are not covered by the policy. The attorney proposes to withdraw as counsel for the corporation for its failure to cooperate and, on behalf of the insurance company, bring a declaratory judgment action to declare whether there is coverage and to declare that the corporation has no coverage because of its failure to cooperate.
QUESTION:
Does the proposed conduct give rise to a conflict of interest?
ANALYSIS:
On first impression, a conflict of interest is clearly presented. The attorney proposes to withdraw from representing a client in an existing case and, thereafter, sue his former client on a matter definitely related to his prior representation. From the factual situation presented, however, it is apparent that the attorney has had no contact whatsoever with the corporation or any officer, director, shareholder or anyone associated with it. It can be inferred from the factual situation that the attorney is in possession of no privileged information and has had no advantage by virtue of having represented the corporation. In short, it appears that the attorney has never really represented the client except in name only.
Rule 5-105 provides that a lawyer shall not allow his independent professional judgment on his client's behalf (i.e., the corporation) to be impaired by his representation of conflict interests (i.e., the insurance company). Rule 5-107(B) provides that an attorney cannot permit a person (i.e., the insurance company) who employs the attorney to render legal services for another (i.e., the corporation) to direct or regulate the attorney's professional judgment in rendering such services.
Since the conduct described is, upon first impression, a conflict of interest, despite whether in reality it is, it would give the appearance of impropriety. Specifically, the conduct would give rise to the inference that Rules 5-105 and 5-107(B) had been violated. In the circumstances, the attorney is cautioned to avoid such an appearance and it is recommended that the insurance company retain separate counsel to prosecute the declaratory judgment action. In that way, if the attorney subsequently withdraws (for appropriate reasons) from the case, it will not be for the purpose of suing his present client.