When an insurer hires a lawyer to defend both the insurer and the insured in a suit exceeding policy limits, must the lawyer tell the insured about the conflict and the excess-exposure risk?

Plain-English summary

The inquiry posed a low-limits ("5 and 10") auto policy where the plaintiff P's likely damages ($20,000) far exceeded coverage and liability was a toss-up. Before suit, P's attorney A wrote the defendant D directly, stating that P had employed A, that P had assigned A a one-half interest in the cause of action, and offering to settle for $10,000. After D did not respond, A sued for $40,000; the insurer I then retained attorney B to defend. The Committee answered a series of questions about A's letter and B's duties.

On A's letter to D, the Committee concluded that A was not guilty of unethical practice if D was not represented by an attorney with respect to the accident at the time A wrote, citing Opinion 97 (8-0).

On B's duties, the Committee concluded that D is B's client (8-0), and that D became B's client when B accepted employment from I in the matter (8-0). As between D and I, B does not owe more duty to one than the other (7-1). The Committee found a conflict of interest exists between D and I (7-1), that Canon 6 requires B to fully inform D of that conflict (7-1) immediately upon accepting employment in the case from I (7-1), and that Canon 6 requires B to go so far as to inform D of the holding in the Stowers case (6-2).

Currency note

This opinion was issued in 1958, 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 Treat this page as historical context, not current guidance.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: When an insurer hires defense counsel, is the insured also the lawyer's client?

A: The Committee concluded that the insured (D) is the defense lawyer's (B's) client, and became the client when B accepted employment from the insurer in the matter.

Q: Does the defense lawyer owe more duty to the insurer than to the insured?

A: The Committee concluded that B does not owe more duty to one than the other (7-1); one member noted that ordinarily "No" is correct, but that in some circumstances of conflict the insured would owe primary duty to the insurer.

Q: Must the defense lawyer disclose the conflict to the insured, and when?

A: The Committee concluded that a conflict exists between insured and insurer and that Canon 6 requires the lawyer to fully inform the insured of it (7-1), immediately upon accepting employment in the case from the insurer (7-1).

Q: Does that disclosure include warning the insured about excess exposure?

A: Yes. The Committee concluded that Canon 6 requires the lawyer to go so far as to inform the insured of the holding in the Stowers case, which addresses exposure beyond policy limits (6-2).

Q: Was the plaintiff's lawyer's settlement letter to the defendant improper?

A: The Committee concluded that the plaintiff's lawyer was not guilty of unethical practice if the defendant was not represented by an attorney with respect to the accident at the time the letter was written, citing Opinion 97 (8-0).

Background and rules framework

The opinion interprets former Texas Canon 6 (conflicting interests) as applied to a lawyer retained by an insurer to defend both the insurer and its insured. The modern analogs are ABA Model Rule 1.7 (conflict of interest, current clients) and Model Rule 1.8(f) (compensation from one other than the client), which govern the insurer-retained-counsel relationship and the consent and disclosure it requires.

Citations and references

Rules of Professional Conduct:

• MR 1.7 (conflict of interest, current clients), as the modern analog
• MR 1.8(f) (compensation from a third party), as the modern analog
• Texas Canon 6 (former canon on conflicting interests)

Cases:

• Stowers v. American Indemnity Co., 15 S.W.(2d) 544, on an insurer's exposure for failing to settle within policy limits

Other opinions cited:

• Texas Opinion 97

See also

• TX Ethics Op. 217: County Attorney Defending a Private Criminal Case
• TX Ethics Op. 197: City Commissioner's Law Partner and Imputed Conflict
• TX Ethics Op. 184: Conflicts of Interest in Public Employment

Source

• Landing page: https://www.legalethicstexas.com/resources/opinions/opinion-179/
• Original PDF: https://tcle-web.s3.amazonaws.com/public/documents/Opinion_179.pdf

Original opinion text

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

QUESTION PRESENTED

P and D are involved in an automobile collision. D has a "5 and 10" insurance policy issued by I. P sustained such injuries that if it finds in his favor on liability, an average jury would allow him $20,000.00 damages. The evidence, both physical and eye witness testimony, is such that it is a toss-up whether the jury will hold for P or D on the question of liability. P employs Attorney A to handle his case. Before suit is filed, A writes D, informing him that P has employed A to handle his case; and P has assigned to A an undivided one-half interest in his cause of action; and offering to settle the cause of action for $10,000.00. A hears nothing from D, and A files suit for P against D for $40,000.00. I employs Attorney B to defend the suit, and B files an Answer for D.
Was A guilty of unethical practice in writing said letter to D?
Is D B's client in the case?
If the answer to question No. 2 is "Yes," at what instant did D become B's client?
As between D and I, does B owe more duty to one than he does to the other?
If the answer to question No. 4 is "Yes," to which does B owe his primary duty?
Is there a conflict of interest between D and I?
If the answer to question No. 6 is "Yes," does Canon 6 require (not whether B may do it, or whether the Attorney for the insurance company usually would do it; but would it be a violation of Canon 6 if he did not do it) B to fully inform D of the conflict between his interest and that of I?
If the answer to question No. 7 is "Yes," at what stage of the case is B required to make such disclosure to D?
Would Canon 6 require that B go so far as to inform D of the holding in the Stowers case?

18 Baylor L. Rev. 276 (1966)
CONFLICTING INTERESTS
Necessity of an attorney retained by an insurance company to defend it and the assured in a damage suit for an amount in excess of the policy limits to inform the assured of the holding in Stowers v. American Indemnity Co., 15 SW (2) 544.

Canon 6.

It is the opinion of the Committee that the above questions should be answered as follows:
No, if D is not represented by an attorney with respect to the accident and claims growing out of it at the time A writes to D. (See Opinion 97.) (8-0.)
Yes. (8-0.)
When B accepted employment from I with respect to the matter. (8-0. )
No. One member while stating that ordinarily "No" would be the correct answer to this question, there could be a conflict between D and I in some circumstances and in the event of such conflict he is of the Opinion that D will owe his primary duty to I. (7-1.)
Yes. (7-1.)
Yes. (7-1.)
Immediately upon his accepting employment in the case from I. (7-1.)
Yes. (6-2.)

Tex. Comm. On Professional Ethics, Op. 179 (1958)