Can insurer-retained defense counsel appear for and defend an insured who cannot be located, acting on the insurance carrier's instructions?

Plain-English summary

An attorney was retained by an insurance carrier to defend an insured in a negligent-construction lawsuit. The plaintiff could not locate the insured, who was served by publication, and despite repeated attempts neither the carrier nor the attorney could locate the insured. The attorney asked whether he could appear for the insured, file pleadings, conduct discovery, and otherwise defend the case at the carrier's request.

The Committee answered yes, provided the carrier's insurance contract with the insured gives it the right to retain counsel to defend claims against the insured. Quoting Sentry Select Insurance Co. v. Maybank Law Firm, the Committee noted that when an insurer hires an attorney to represent its insured, an attorney-client relationship arises between the attorney and the insured, and the attorney owes the fiduciary duty to the insured (not the insurer). The Committee treated the existence and terms of the insurance contract, including any right to control the defense or settle within limits, as questions of law beyond its review, citing Allstate Insurance Co. v. Wilson and Sentry Select.

The Committee acknowledged that ordinarily an attorney may not simply appear for and defend a person without an engagement, oral or written (citing A Fast Photo Express and Dunkley v. Shoemate). But where a person has, by contract including an insurance contract, delegated authority to another to choose counsel and conduct the defense, the attorney may reasonably rely on the instruction of that agent, here the carrier, to appear and defend, absent any contrary direction from the missing insured. The insured's contracting for a defense constitutes consent, absent contrary communication, for the attorney to be compensated by the carrier, subject to Rule 1.8(f).

The Committee reminded attorneys appointed by carriers that the insured, not the insurer, is the client to whom the fiduciary duty is owed and whose interests must be protected. In a footnote, it added that where the insured is a missing person or entity, a trustee, receiver, guardian, or personal representative may be or become appointed to act on the insured's behalf, and the attorney would then look to that representative for direction.

In practice

Under this opinion, insurer-retained counsel may appear for and defend an insured who cannot be located, acting on the carrier's instruction, when the policy gives the carrier the right to retain counsel for the defense. The opinion treats the insured's contracting for a defense as consent (absent contrary communication) to the attorney's compensation by the carrier under Rule 1.8(f), and it stresses that the insured, not the carrier, is the client owed the fiduciary duty. The opinion notes that if a trustee, receiver, guardian, or personal representative is appointed for the insured, counsel should look to that representative for direction.

Common questions

Q: Can insurer-retained counsel defend an insured who cannot be located?

A: Yes. The opinion concludes counsel may appear and conduct the defense on the carrier's instruction if the insurance contract gives the carrier the right to retain counsel to defend claims against the insured.

Q: Who is the client when an insurer hires the lawyer, the insurer or the insured?

A: The insured. Quoting Sentry Select, the opinion concludes the attorney-client relationship and the fiduciary duty run to the insured, not the insurer.

Q: How can counsel appear without an engagement from the missing insured?

A: The opinion concludes that by contracting for a defense through the policy, the insured delegated authority to the carrier to choose counsel and conduct the defense, so counsel may reasonably rely on the carrier's instruction absent contrary direction from the insured.

Q: Does the carrier paying the lawyer raise a third-party-payment issue?

A: The opinion concludes the insured's contracting for a defense constitutes consent, absent contrary communication, for the attorney to be compensated by the carrier, subject to Rule 1.8(f).

Background and rules framework

The opinion interprets Rule 1.2 (scope of representation and allocation of authority), Rule 1.4 (communication), and Rule 1.8(f) (accepting compensation from one other than the client). South Carolina's rules correspond to the ABA Model Rules. The Committee grounded its analysis in South Carolina insurance-defense case law, including Sentry Select Insurance Co. v. Maybank Law Firm and Allstate Insurance Co. v. Wilson, while leaving the contractual rights and duties between a particular insurer and insured as questions of law outside its review.

Citations and references

Rules of Professional Conduct:

• MR 1.8 / SC RPC 1.8(f) (compensation from one other than the client)
• MR 1.2 / SC RPC 1.2 (scope of representation; allocation of authority)
• MR 1.4 / SC RPC 1.4 (communication)

Cases:

• Sentry Select Insurance Co. v. Maybank Law Firm, LLC, 426 S.C. 154, 826 S.E.2d 270 (2019), insurer-retained counsel owes the fiduciary duty to the insured.
• Allstate Insurance Co. v. Wilson, 259 S.C. 586, 193 S.E.2d 527, insurer's right and duty to control the defense under the policy.
• A Fast Photo Express, Inc. v. First Nat'l Bank of Chicago, 369 S.C. 80, 630 S.E.2d 285 (Ct. App. 2006), an attorney may not act without authorization from the client.
• Dunkley v. Shoemate, 350 N.C. 573, 515 S.E.2d 442 (N.C. 1999), no representation without client contact or authorization.

See also

• ABA Formal Op. 03-430: Insurance Staff Counsel Representation
• ABA Formal Op. 96-403: Insured Objecting to Settlement
• CA COPRAC Op. 1987-091: In-House Insurer Counsel Representing Insureds

Source

• Landing page: https://www.scbar.org/for-lawyers/quicklinks/legal-resources/ethics-advisory-opinions/ethics-advisory-opinion-19-04/
• Original PDF: https://www.scbar.org/media/vhrpcse0/eo-194.pdf

Original opinion text

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

UPON THE REQUEST OF A MEMBER OF THE SOUTH CAROLINA BAR, THE ETHICS ADVISORY COMMITTEE HAS RENDERED THIS OPINION ON THE ETHICAL PROPRIETY OF THE INQUIRER'S CONTEMPLATED CONDUCT. THIS COMMITTEE HAS NO DISCIPLINARY AUTHORITY. LAWYER DISCIPLINE IS ADMINISTERED SOLELY BY THE SOUTH CAROLINA SUPREME COURT THROUGH ITS COMMISSION ON LAWYER CONDUCT.

South Carolina Rules of Professional Conduct: 1.2, 1.4, 1.8

Factual Background: Attorney is retained by Insurance Carrier to defend Insured in a lawsuit alleging negligent construction of a condominium project. Plaintiff's counsel could not locate the Insured. Insured was served by publication. Despite repeated attempts, neither Insurance Carrier nor Attorney can locate Insured regarding the pending lawsuit.

Question: May Attorney appear on behalf of Insured, filing pleadings, conducting discovery and otherwise defending the case on behalf of the Insured at the request of the Insurance Carrier?

Summary: Attorney may appear for and defend an Insured who cannot be located at the request of the Insurance Carrier if Insurance Carrier's insurance contract with the Insured gives it the right to retain counsel to defend claims made against the Insured. Where a person has, by contract, including insurance contract, delegated authority to another to choose counsel, conduct the defense of a claim, and perhaps even settle a matter within certain boundaries, an attorney may reasonably rely upon the instruction of the person's agent, in this situation Insurance Carrier, to appear and conduct the defense of the case in the absence of any direction from the missing Insured to the contrary.

Response: Yes, Attorney may appear for and defend Insured at the request of the Insurance Carrier if Insurance Carrier's insurance contract with the Insured gives it the right to retain counsel to defend claims made against the Insured. "When an insurer hires an attorney to represent its insured, an attorney-client relationship arises between the attorney and the insured – his client. Pursuant to that relationship, the attorney owes the client – not the insurer – a fiduciary duty." Sentry Select Insurance Company v. Maybank Law Firm, LLC, 426 S.C. 154, 156, 826 S.E.2d 270, 271 (2019).

The question presumes that Insurance Carrier and Insured have a binding contract of insurance that at least arguably applies to the factual situation involving negligent construction and either requires Insurance Carrier to hire counsel to defend the claims asserted against Insured or at least gives it the right to select counsel to defend Insured. By the terms of an insurance policy an insured may also delegate to an insurance carrier the right to settle claims against the Insured within the coverage limits of the insurance policy. Cf. Allstate Ins. Co. v. Wilson, 259 S.C. 586, 193 S.E.2d 527 (noting that under particular terms of the policy at issue, the insurer, not the insured, "had the right and the duty to control the defense until such time as it was determined that it had no liability insurance coverage"); Sentry Select, 426 S.C. at 157-8, 826 S.E.2d at 271 ("[A]n insurance company that hires an attorney to represent its insured is in a unique position in relation to the resulting attorney-client relationship. Pursuant to the insurance contract, the insurer has a duty to defend its insured, and must compensate the attorney for his time in defense of his client. If the insured settles or has judgement imposed against him, the insurance contract ordinarily requires the insurer to pay the settlement or judgement. Many insurance contracts provide the insurer has a right to investigate and settle claims as a representative of the insured. Finally, the insurer's right to settle must be exercised in good faith, and that duty of good faith must requires the insurer to act reasonably in protecting the insured from liability in excess of the policy limits").The rights and duties as between any particular insured and insured's insurance carrier in any particular insurance policy are a question of law, not ethics, beyond the scope of the committee's review.

Ordinarily, an attorney may not simply appear for and defend a person or entity at the attorney's whim without entering into an engagement, whether oral or written, for representation. A Fast Photo Express, Inc. v. First Nat'l Bank of Chicago, 369 S.C. 80, 90, 630 S.E.2d 285, 290 (Ct. App. 2006) (citing Dunkley v. Shoemate, 350 N.C. 573, 515 S.E.2d 442 (N.C.1999) for the proposition that a lawyer may not act on behalf of a person or entity where he or she "had no contact with the client and had not been authorized by the client to act on his behalf"). Where, however, a person has, by contract, including insurance contracts, delegated authority to another to choose counsel, conduct the defense of a claim, and perhaps even settle a matter within certain boundaries, an attorney may reasonably rely upon the instruction of the person's agent, in this situation Insurance Carrier, to appear and conduct the defense of the case in the absence of any direction from the missing Insured to the contrary.[1] Insured's contracting with Insurance Carrier through the insurance policy for a defense constitutes consent (in the absence of any further communications from the Insured to the contrary) for Attorney to receive compensation from insurance Carrier for undertaking defense for Insured subject to S.C.R. Prof. Conduct 1.8(f). Attorneys appointed by insurance carriers to defend the carrier's insureds are reminded that the insured and not the insurance company is the client to whom a fiduciary duty is owed and whose interests are to be protected. See Sentry Select, 426 S.C. at 156, 826 S.E.2d at 271 ("When an insurer hires an attorney to represent its insured, an attorney-client relationship arises between the attorney to represent its insured – his client. Pursuant to that relationship, the attorney owes the client – not the insurer – a fiduciary duty").

[1] In the facts given to the Committee, the insured appears to be an individual who simply cannot be located. An attorney asked by the insurer to represent a missing insured should be alert to the fact that in the case of an insured entity or person, a trustee, receiver, guardian, personal representative or similar person may have been or may be, in the course of representation, appointed to act on behalf of such a person or entity. Upon ascertaining the existence of such a person, the attorney would need to look for direction from the appointed representative of the insured for direction in defending the claim.