Must an insurer-retained defense lawyer warn the insured of his Stowers rights against the insurer in time to demand a within-limits settlement?

Plain-English summary

The inquiry asked whether a lawyer retained by an insurance company to defend its insured in a damage suit violates the Canons by failing to inform the insured, in time to demand a within-limits settlement, of the insured's rights against the insurer under Stowers v. American Indemnity Co., 15 S.W.2d 544. The eight Committee members divided equally.

Four members concluded the defense lawyer has a duty to inform the insured of his Stowers rights and that failing to do so is unethical. They rested largely on Canon 6's statement that it is unprofessional to represent conflicting interests except by express consent given after full disclosure, reasoning that the interests of the insurer and the insured conflict, especially over settlement, so the lawyer must make a full disclosure that includes explaining the Stowers case. Two of those members also thought the failure could implicate Canon 28 and violate Canon 8, which required giving the client a candid opinion of the merits and probable results of the litigation.

The other four members concluded the lawyer is under no duty to advise the insured about Stowers, because the lawyer is engaged by the insurer not to advise the insured on policy rights but to defend the damage suit. They pointed out that the policy gives the insurer complete control of the litigation and that under Stowers the insurer owed only a duty of ordinary care in the defense; to hold otherwise would graft a requirement onto a judicial interpretation of substantive law that Stowers itself did not impose.

The members did, however, seem to agree on one point: when the amount sued for exceeds the policy limits, the lawyer should advise the insured of that fact and that the insured is free to consult an attorney of his own selection to represent his individual interest (4-4).

Currency note

This opinion was issued in 1957, under the former Texas Canons of Ethics, which the Texas Disciplinary Rules of Professional Conduct replaced effective January 1, 1990. 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 Treat this page as historical context, not current guidance.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: Did the Committee decide whether defense counsel must explain Stowers to the insured?

A: No. The eight members split 4-4, so the opinion left it an open question whether failing to inform the insured of his Stowers rights is unethical.

Q: What was the disagreement about?

A: Four members read Canon 6 (and Canon 8's candid-opinion duty) to require full disclosure because the insurer's and insured's interests conflict over settlement; the other four saw the lawyer as engaged only to defend the suit, with the insurer controlling the litigation under Stowers.

Q: Was there anything the whole Committee agreed on?

A: Yes. The members seemed to agree that when the amount sued for exceeds the policy limits, the lawyer should tell the insured of that fact and that the insured is free to retain his own counsel.

Background and rules framework

The opinion interprets former Texas Canon 6 (conflicting interests and disclosure at retainer) and Canon 8 (the duty to give a candid opinion of the merits and probable results of litigation), and references Canon 28. The modern analogs are ABA Model Rule 1.7 (conflict of interest, current clients) and Model Rule 2.1 (a lawyer's duty to render candid advice). The substantive backdrop is Stowers v. American Indemnity Co., the Texas decision governing an insurer's duty in handling a within-limits settlement demand.

Citations and references

Rules of Professional Conduct:

• MR 1.7 (conflict of interest, current clients), as a modern analog
• MR 2.1 (candid advice), as a modern analog
• Texas Canon 6 (conflicting interests; disclosure at retainer)
• Texas Canon 8 (candid opinion of the merits and probable results)
• Texas Canon 28

Cases:

• Stowers v. American Indemnity Co., 15 S.W.2d 544, the insurer's duty regarding a within-limits settlement demand

See also

• TX Ethics Op. 179: Insurance Defense Conflicts
• TX Ethics Op. 308: Representing the Insured in a Stowers Case After Suing Him
• TX Ethics Op. 297: Direct Settlement Talks With an Adjuster and the Insurer's Consent

Source

• Landing page: https://www.legalethicstexas.com/resources/opinions/opinion-156/
• Original PDF: https://tcle-web.s3.amazonaws.com/public/documents/Opinion_156.pdf

Original opinion text

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

QUESTION PRESENTED

Is it a violation of the Canons of Ethics for an attorney retained by an insurance company to defend its assured in a damage suit to fail to inform the assured of his rights against the insurance company under the Stowers Case in time for assured to make demand on the insurance company that they settle the case within the limits of their liability policy?

18 Baylor L. Rev. 261 (1966)

CONFLICTS OF INTEREST - ADVISING ON THE MERITS OF A CLIENT'S CAUSE
It is an open question whether it is improper for an attorney retained by an insurance company to defend its assured in a damage suit to fail to timely inform the assured of his rights against the company under the doctrine of Stowers v. American Indemnity Co. 15 S. W. 2d 544.

Canons 6, 8.

The eight members of the committee are equally divided on the matter. Four members are of the opinion that said insurance company attorney is under a duty to inform assured of his rights under the Stowers Case, and that it is unethical for him not to do so. This view is based largely upon the provision of Canon 6 reading: "It is unprofessional to represent conflicting interests, except by express consent of all concerned given after a full disclosure of the facts." The interests of the insurance company and of the assured are said to be conflicting, especially with respect to the matter of a settlement and hence it is contended it would be unethical for said attorney not to make a "full disclosure of the facts" and that would include an explanation of the Stowers Case.

It is contended this duty also arises by reason of the provision of Canon 6 that, "It is the duty of a member at the time of retainer to disclose to his client all the circumstances of his relations to the parties, and any interest in, or connection with, the controversy which might influence the client in the selection of counsel," but, on the other hand, it is said such provision only applies to the relation between said attorney and the insurance company. Failure to advise assured of the holding of the Stowers Case was also considered by two members to possibly violate Canon 28 and to violate Canon 8 requiring the attorney to give his client "a candid opinion of the merits and probable results of pending or contemplated litigation."

The other half of the committee is of the opinion that said attorney is under no duty to advise assured of the Stowers case and that such attorney is engaged by the insurance company not to advise assured as to assured's rights under the policy but to defend assured in the damage suit. It was pointed out that the policy gives the insurance company complete control of the litigation, and that under the Stowers case the insurance company only owed assured the duty and obligation to exercise ordinary care in the defense of the litigation. It was said that to hold the conduct in question unethical would be to ingraft a requirement upon a judicial interpretation of substantive law not made by the Stowers Case.

The members seemed to be in agreement that when the amount sued for exceeds the policy limits that said attorney should advise assured of such fact and that he was free to consult an attorney of his own selection to represent his individual interest. (4-4)

Tex. Comm. On Professional Ethics, Op. 156 (1957)