When an insurer hires an attorney to defend an insured, can that attorney also represent the insurer's interests once a coverage dispute arises over tendering policy limits into court?

Plain-English summary

The inquiry arose from a recurring scenario: an insured carried minimum automobile liability limits, liability was clear, and the likely judgment would exceed the policy limits given the severity of the injuries. The policy's duty to defend terminated once the limits were exhausted, and the insurer wanted to tender the policy limits into court and seek a declaration that its duty to defend had ended. The opinion confirmed that when an insurer retains an attorney to represent an insured, the insured, not the insurer, is the attorney's client, citing ABA Informal Opinions 728, 783, and 822, and Tennessee Formal Ethics Opinion 83-F-52's requirement of a direct attorney-client relationship and undivided loyalty free of control by whoever pays the fee.

Applying Canon 5 and its Ethical Considerations (EC 5-1, 5-21, 5-22, 5-23), the opinion explained that an attorney's professional judgment must be exercised solely for the client's benefit, that third-party payors who place lawyers with clients hold potential power to pressure that judgment, and that Disciplinary Rule 5-107(B) makes it mandatory that a lawyer not let a person who recommends, employs, or pays the lawyer direct or regulate the lawyer's professional judgment. Because insurer-retained defense counsel sits in a position of potential conflict, the opinion required full disclosure of the possible effect on independent judgment, an opportunity for the insured to evaluate the need for separate representation, and resolution of doubts against the propriety of continued representation. It also restated the attorney's continuing post-termination duties to a former client (preserving confidences, not attacking the prior resolution, not taking on matters closely related to the former representation) and cited Formal Ethics Opinion 84-F-65's holding, quoting Autry v. State, that an attorney cannot represent conflicting interests once the attorney has received a client's confidences.

The opinion then answered five specific questions. The attorney may not represent or advise either the insured or the insurer once a conflict arises over coverage or policy terms; both should be told to seek independent counsel. The attorney may not advise the insured, at the outset, that representation will end if the insurer pays its limits into court, because that question is a legal interpretation of the insurance contract, not an ethics question, and risks taking an adversary position against the client. The attorney may withdraw if there is no provision or assurance of a reasonable fee once the insurer stops paying defense costs, provided withdrawal complies with DR 2-110(A)(1), (2), and (3), and the insured should be told to seek independent counsel. The attorney should likewise advise the insured if aware the insurer is contemplating ceasing payment and exhausting the limits. Finally, there is no impropriety in relating discovery information about potential liability or damages to the insurer, but the attorney may not relate discovery information that would adversely affect the insured's coverage where that information is protected by the attorney-client privilege or as a client confidence or secret.

Currency note

This opinion was issued in 1985, before Tennessee's adoption of the 2003 Rules of Professional Conduct, which replaced the former Code of Professional Responsibility. 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: Who is the client when an insurer hires an attorney to defend an insured?

A: The insured is the client. The opinion held that an attorney retained by an insurer to represent an insured owes undivided loyalty to the insured and may not let the insurer, as the entity paying the fee, direct or regulate the attorney's professional judgment.

Q: Can the attorney advise the insurer on tendering policy limits into court to end its defense obligation?

A: No. Once a conflict arises between the insured and insurer over coverage or the terms of the policy, the attorney is ethically prohibited from representing or advising either party and should direct both to independent counsel.

Q: Can the attorney share information learned in discovery with the insurer?

A: The opinion drew a line: there is no impropriety in relating discovery information about potential liability or damages, but the attorney may not relate discovery information that would adversely affect the insured's coverage where that information is subject to attorney-client confidences and secrets.

Background and rules framework

The opinion applied Canon 5 of the Code of Professional Responsibility (independent professional judgment), its Ethical Considerations EC 5-1 and EC 5-21 through EC 5-23, and the mandatory Disciplinary Rule 5-107(B), together with DR 7-101(A) (zealous representation), DR 4-101 (preserving confidences and secrets), and the withdrawal requirements of DR 2-110(A)(1)-(3). The modern correlates are Model Rule 5.4(c) (no interference with a lawyer's independent judgment by one who recommends, employs, or pays the lawyer) and Model Rule 1.7 (conflicts of interest), cited here as navigational cross-references rather than rules the opinion itself applied.

Citations and references

Cases:

• Autry v. State, 430 S.W.2d 808, rule against representing conflicting interests once a client's confidences have been received

Other opinions cited:

• ABA Informal Opinion 728 (1963), insured is the client of insurer-retained defense counsel
• ABA Informal Opinion 783 (1965), insured is the client of insurer-retained defense counsel
• ABA Informal Opinion 822 (1965), insured is the client of insurer-retained defense counsel
• Tennessee Formal Ethics Opinion 83-F-52, direct attorney-client relationship and undivided loyalty
• Tennessee Formal Ethics Opinion 84-F-65 (January 18, 1984), conflicting representation and former-client confidences

See also

• ABA Formal Op. 96-403: Obligations of a Lawyer Representing an Insured Who Objects to a Proposed Settlement Within Policy Limits
• ABA Formal Op. 01-421: Ethical Obligations of a Lawyer Working Under Insurance Company Guidelines and Other Restrictions
• AL Ethics Op. 1994-08: For Rule 1.7 Purposes, Lawyer Retained by Insurer to Defend Insured Represents Both
• Tenn. Ethics Op. 84-F-80: Corporation Billing Affiliates for In-House Counsel (same 83-F-52 third-party-payor independent-judgment framework)

Source

• Landing page: https://www.tbpr.org/ethic_opinions/85-f-100

Original opinion text

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

85-F-100 - Attorney employed by Insurer to defend Insured

BOARD OF PROFESSIONAL RESPONSIBILITY OF THE SUPREME COURT OF TENNESSEE

FORMAL ETHICS OPINION 85-F-100

Inquiry is made concerning the ethical obligations of an attorney employed by an insurer to defend the insured when a question arises under the insurance contract as to the continuing obligation of the insurer to defend on behalf of the insured.

The matter under inquiry may arise when the insured has an automobile liability insurance policy with minimum limits, a clear case of liability of the insured, and the probability of a judgment in excess of the policy limits due to the serious nature and extent of the injuries and damages. The policy of insurance provides that the insurer's duty to defend or settle on behalf of the insured terminates when the policy limits have been exhausted. Further, due to the facts, circumstances and potential liability the insurer wishes to simply tender the policy limits into Court and assert, by means of petition for declaratory judgment or other means, that its duty to defend the insured has terminated.

When an insurer retains an attorney to represent an insured, the insured is the attorney's client. See ABA Informal Opinions 728 (1963), 822 (1965) and 783 (1965).

Tennessee Formal Ethics Opinion 83-F-52 states that an attorney is required to have a direct attorney-client relationship in the delivery of his legal services, that he should devote his

complete loyalty to the client and not allow the person or entity who pays his fee, or anyone else, to regulate, direct, control or interfere with his professional judgment.

Canon 5 of the Code requires an attorney to exercise independent professional judgment on behalf of a client. The Ethical Considerations relating to Canon 5 which are material to this inquiry are as follows:

EC 5-1. The professional judgment of a lawyer should be exercised---solely for the benefit of his client and free of compromising influences and loyalties. Neither his personal interests, the interests of other clients, nor the desires of third persons should be permitted to dilute his loyalty to his client.

EC 5-21. The obligation of a lawyer to exercise professional judgment solely on behalf of his client requires that he disregard the desires of others that might impair his free judgment. The desires of a third person will seldom adversely affect a lawyer unless that person is in a position to exert strong economic, political or social pressures upon the lawyer. These influences are often subtle, and a lawyer must be alert to their existence ---

EC 5-22. Economic, political, or social pressures by third persons are less likely to impinge upon the independent judgment of a lawyer in a matter in which he is compensated directly by his client and his professional work is exclusively with his client. On the other hand, if a lawyer is compensated from a source other than his client, he may feel a sense of responsibility to someone other than his client.

EC 5-23. A person or organization that pays or furnishes lawyers to represent others possesses a potential power to exert strong pressures against the independent judgment of those lawyers. Some employers may be interested in furthering their own economic, political or social goals without regard to the professional responsibility of the lawyer to his individual client. --- an employer may seek, consciously or unconsciously, to further its own economic interests through the action of the lawyers employed by it. Since a lawyer must always be free to exercise his professional judgment without regard to the interests or motives of a third person, the lawyer who is employed by one to represent another must constantly guard against erosion of his professional freedom.

The aspirational objectives of the Ethical Considerations cited hereinabove become mandatory in character in Disciplinary Rule 5-107(B) of the Code, to-wit:

DR 5-107(B)

A lawyer shall not permit a person who recommends, employs, or pays him to render legal services for another to direct or regulate his professional judgment in rendering such legal services.

In instances wherein an attorney is employed by an insurer to represent an insured the attorney is in the precarious position of having a potential, if not actual, conflict of interest. He is bound by Disciplinary Rule 7-101(A) to represent the client-insured zealously, and by DR 4-101 to preserve the confidences and secrets of the client-insured. There should be a full and complete disclosure of the possible effect of his representation on the exercise of his independent professional judgment and the client-insured should be given an opportunity to evaluate the need for representation free of any potential conflict and all doubts should be resolved against the propriety of representation.

The attorneys continuing ethical obligations to the client-insured following the termination of the attorney-client relationship are (i) to continue to preserve the confidences and secrets of the former client; (ii) to abstain from attacking the resolution of the legal matter accomplished on behalf of the former client; and (iii) to abstain from representing another in an action involving the former client in a matter arising out of or closely related to the previous matter.

Tennessee Formal Ethics Opinion 84-F-65 states that it is improper to represent several insureds in a class action against an insurance company in a claim for policy benefits after having ten years previously represented the parent insurance company in defense of a similar claim. The opinion quoted Autry v. State, 430 S.W.2d 808, as follows:

It has long been firmly established, both in the Canons of Professional Ethics and by judicial opinions, that attorneys cannot represent conflicting interests or undertake to discharge inconsistent duties. When an attorney has once been engaged and receives the confidences of his client, he cannot enter the services of those whose interests are adverse to that of his client or former client. The rule is a rigid one, and it is well that it is so.

The attorney in this instance specifically inquires as follows:

• Is it proper for the attorney, who has established contact with the insured on the basis that the attorney would be representing the insured in the tort action against him, to then represent or advise the insurance carrier in its efforts to tender the policy limits into Court and obtain permission to terminate the defense of the tort action against the insured?

• Should the attorney advise the insured, at the commencement of the tort action against him, that the attorney's representation will cease in the event the insurance carrier pays its policy limits into Court and ceases payment of the defense costs of the tort action?

• Is it proper for the attorney to seek permission to withdraw from the representation of the insured in the tort action in the event the insurance carrier has terminated its obligation to pay for the defense of such tort action?

• Should the attorney advise the insured that the insurance carrier is contemplating paying the policy limits into court and ceasing payment of the defense costs if the attorney, due to his relationship with the insurance carrier, is aware that such action is being considered by the insurance company?

• What is the attorney's obligation in relating to the insurance company discovery information obtained, which might cause the insurance carrier to determine to terminate its defense duty and exhaust the policy limits due to the information obtained by the attorney relating to the potential liability and damages involved in the particular case?

The answer to inquiry No. 1 is, No. Further, the attorney is ethically prohibited from representing or advising either the insured or insurer when a conflict arises between the insured and insurer over the coverage or terms of the policy of insurance. In such instances the attorney should advise either or both parties to seek independent legal advice and representation regarding the matter.

The answer to inquiry No. 2 is, No. The attorney is ethically prohibited from taking an adversary position or assume an adversary role with his client. This question relates to a legal interpretation of the insurance contract and therefore involves a matter of law. The attorney should not become involved in conflicts between the insured and insurer concerning interpretations of the insurance contract or any matter of law and should advise either or both parties to seek independent legal advice and representation.

The answer to inquiry No. 3 is, Yes. The attorney is not ethically obligated to continue an attorney-client relationship when there are no provisions or assurances for the payment of a

reasonable attorney fee. The withdrawal from representation should be in complete compliance with Disciplinary Rule 2-110(A)(1), (2) and (3). Further the attorney should advise the insured to seek independent legal advice and representation concerning the legal obligation of the insurer concerning the matter.

The answer to inquiry No. 4 is, Yes; and, the attorney should further advise the insured to seek independent legal advice and representation concerning the matter.

The answer to inquiry No. 5 is, (i) there is no impropriety in the attorney relating discovery information obtained regarding potential liability or damages; however, (ii) the attorney is

prohibited from relating any discovery information which would adversely affect the insureds coverage of insurance when such information is subject to the attorney-client confidences and secrets.

This opinion is not intended to undertake or attempt to address any matters relating to the interpretation of any policy or contract of insurance and not intended to address any factual or legal issues. The opinion is only intended to address the ethical obligations of an attorney employed by an insurer to defend an insured.

This 30th day of September, 1985.

ETHICS COMMITTEE:

W. J. Flippin

Edwin C. Townsend

APPROVED AND ADOPTED BY THE BOARD