Oregon State Bar Bulletin — AUGUST/SEPTEMBER 2008
Insurance Counsel
Insurance Counsel Conflict of Interest
When Will Oregon Courts Face the “Cumis Counsel” Question?
By Arden J. Olson

Insurance affects most lawsuits today. Statistics in one study suggest that 80 percent of cases overall (88 percent involving non-government defendants) are defended by carrier-engaged counsel.1 Whatever the precise numbers may be in any jurisdiction, the influence of carriers on liability defense is undoubtedly immense.

Oregon is one of about 20 states that routinely consider both the insured and the insurance company to be clients of a lawyer retained (and paid) by an insurance carrier to represent an insured.2 Other states including Washington take another view, that carrier-retained counsel represents the insured only and must uphold the insured’s interests even if those interests turn out to be antagonistic to the carrier.3 Where the lawyer has two clients in the same matter, the possibility of conflict of interest between the clients is obvious. In the context of insurance, conflicts of perspective, if not of interest, between the carrier and insured are routine. Although a number of the "two client" states have fashioned solutions to that problem that require carrier-paid "independent" counsel for the insured, Oregon has yet to face that question.

Other States: History and Scope of Independent Counsel

The conflict of interest provisions of the Rules of Professional Conduct evaluate an attorney’s conflict of interest against three factors:

A current conflict of interest exists if:

(1) the representation of one client will be directly adverse to another client;

(2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client, a former client or a third person or by a personal interest of the lawyer; or

(3) the lawyer is related to another lawyer … in a matter adverse to a person whom the lawyer knows is represented by the other lawyer in the same matter.

Rule 1.7(a). Where a lawyer is deemed to represent both the insured and the carrier, some states have found conflicts of interest in various situations. The leading case in this arena is San Diego Navy Fed. Credit Union v. Cumis Ins. Soc’y, Inc., 162 Cal App 3d 358, 208 Cal Rptr 494, 50 ALR4th 913 (Ct App 1984), which established in California that an insured has the right to carrier-paid independent counsel (commonly called "Cumis counsel") whenever the carrier’s interests differ from those of the insured. The key purpose of "independent" counsel under the Cumis line of authority is to provide clarity that, unlike normal retained defense counsel in a "two-client state," such a lawyer owes no fiduciary duty to the insurer, but only to the insured.

The circumstances under which such a right has been found vary among the states. Among the most prominent are:

When the insurer has multiple insureds with conflicting interests in the same matter. This problem is not really about conflict between the insured and carrier, but between insureds. Although the right to Cumis counsel has otherwise been recognized only in "two-client" states, where a lawyer is under conflicting duties to multiple insureds a right to independent counsel exists even in the "one client" states, because no lawyer can represent multiple clients in the same matter if their interests diverge.4

When the carrier reserves rights on whether a particular loss is covered. The nature of the reservation normally affects the analysis, and the general view appears to be that a reservation of rights without more is insufficient to create a conflict warranting independent counsel. Some states, however, appear to take the view that — because events may occur in the course of the representation that cannot fully be anticipated — a carrier’s determination that it is not fully "on the insured’s side" itself mandates counsel not controlled by the carrier.5

When the suit alleges acts both within and outside the bounds of coverage. A clear issue arises, for example, when the underlying lawsuit stems from alleged behavior that might have been negligent (covered under the policy) or intentional (not covered). Punitive damages claims generally raise the same issues. The lawyer, if representing both the carrier and insured in that situation, would have a duty to advocate on the insured’s behalf that any liability stemmed from negligence, and to advocate on the insurer’s behalf that any liability arose from intentional acts.6

When a verdict or settlement might exceed policy limits. It is almost always in the insured’s interest to settle a matter within policy limits, but if the likely exposure (should liability be found) exceeds those limits, the carrier’s best strategy may be to attempt to defeat liability rather than to minimize damages or to settle near policy limits. The insured may thus have no interest at all in "rolling the dice," whereas for the carrier it can be the only strategy toward success.

Independent Counsel and Carrier: The Ethical Issues

In both the "two client" and "one client" states, some version of Rule 1.7(a)(2) limits a lawyer from proceeding if a personal interest of the lawyer inappropriately infringes on the lawyer’s independent professional judgment. The concern was perhaps most pointedly articulated in the Cumis decision itself:

The [idea that an insurer’s ethical and legal duty to the insured shields counsel from undue carrier influence] flies in the face of the reality of insurance defense work. Insurance companies hire relatively few lawyers and concentrate their business. A lawyer who does not look out for the Carrier’s best interest might soon find himself out of work.

Cumis, 162 Cal App 3d at 364. The answer given by some courts, usually those in "one client" states, relies on the professionalism of lawyers and disciplinary process:

[T]he best result is to refrain from interfering with the insurer’s contractual right to select counsel and leave the resolution of the conflict to the integrity of retained defense counsel. Adequate safeguards are in place already to protect the insured in the case of misconduct. If the retained attorney scrupulously follows the mandates of the Hawai’i Rules of Professional Conduct (HRPC), the interests of the insured will be protected. In the event that the attorney violates the HRPC, the insured has recourse to remedies against both the attorney and the insurer.

Finley v. Home Ins. Co. 90 Hawai’i 25, 31-32, 975 P2d 1145 (1998).

The Model Rules of Professional Conduct also regulate the extent to which counsel for any client may take direction from someone who is not their client, providing:

A lawyer shall not accept compensation for representing a client from one other than the client unless:

(1) the client gives informed consent;

(2) there is no interference with the lawyer’s independence of professional judgment or with the client-lawyer relationship; and

(3) information relating to representation of a client is protected as required by Rule 1.6.

Rule 1.8(f). In Oregon, since the carrier is a client of the lawyer it engaged, this rule arguably does not apply, because the lawyer is accepting compensation only from a client. On the other hand, the lawyer represents the insured as one client and accepts compensation from the insurer (someone "other than the [first] client"), so the rule should apply, raising the question whether the insurance policy giving a carrier the right to choose counsel constitutes "informed consent" by the insured. Those questions are yet unanswered.

Significant controversy has arisen — in both "one-client" and "two-client" states — about when carriers can control or limit costs of a liability defense, contrary to the wishes of the insured. In a notable example, applying the principle that an insurer may not interfere with the client-lawyer relationship between the insured and counsel, Montana concluded that insurer guidelines requiring prior approval for defense costs impermissibly interfere with counsels’ independent judgment. In re Rules of Professional Conduct & Insurer Imposed Billing Rates & Procedures, 299 Mont 321, 336, 2 P3d 806 (2000). In Formal Opinion 2005-166, the Oregon State Bar has adopted much of the decision’s rationale, opining that defense counsel may not agree to comply with carrier guidelines without regard to the insured’s interests.

All carrier-retained counsel are required under Oregon’s view, as articulated by the OSB, to consider an insured the "primary client" and counsel’s "dominant concern." See OSB Formal Op. 2005-166 at 458. The notion that a lawyer with two clients has to prefer one of them reflects, perhaps, the discomfort which generated the right to independent counsel in the Cumis cases. When the Oregon courts face that issue directly, it seems unlikely that relegating the insurer to "second class client" status will satisfactorily resolve
the issue.

"Independent Counsel": The Issues

Oregon will inevitably have to address the question raised by the Cumis line of cases and statutes.7 When the Cumis court created an almost unlimited independent counsel right in California, it prompted a statutory redefinition to pare the decision back. Among other things, the statute allows waiver by the insured, permits policy language defining how independent counsel will be chosen, eliminates punitive damages or excess claims as bases for conflict, limits fees to independent counsel, provides arbitration for disputes and obligates independent counsel to share most information related to the claim with the carrier.8 The legislative motive was plainly economic, because Cumis defined few clear boundaries. Alaska followed a similar path.9

The examples of California and Alaska, where broadly-worded decisions prompted legislatures to cut them back, suggest that careful thought should be given to the scope of any such right whenever it is first considered. Key issues include:

When is a reservation of rights sufficient to create a conflict of interest for the insured’s carrier-engaged lawyer?

To what extent should allegations of intentionally wrongful conduct or seeking punitive damages create a conflict sufficient to entitle the insured to independent counsel?

Should the possibility of a verdict or settlement over policy limits give a right to independent counsel?

What, if anything, is the role of independent counsel with respect to whether a carrier decides to settle within policy limits?

To what extent must independent counsel communicate with, report to or get approvals from the carrier, particularly with respect to issues in the underlying action that may be relevant to the reason for the conflict, such as coverage?

Does the insured get to choose independent counsel, or may the insurer retain the right to choose counsel? If the latter, is such counsel truly independent? May the carrier disapprove the insured’s selection?

What limits, if any, may the carrier put on the fees of independent counsel? In the event of disputes around fees, how are they to be resolved?

What kinds of provisions may be placed into an insurance contract to define how to balance the insurer’s right to control the defense of actions against the insured’s interest in protecting against conflicting interests of the carrier?

Only lawyers will benefit from litigating any uncertainties around these issues. Whether Oregon’s legislature or its courts first address them, the more guidance that can be provided when the matter is first decided, the less costly will be the implementation of whatever solutions may be fashioned.



1. See Samuel R. Gross & Kent Syverud, Don’t Try: Civil Jury Verdicts in a System Geared to Settlement, 44 UCLA L Rev 1, 25 (1996).

2. Such "two client" states also include Alabama, Alaska, Arizona, California, Connecticut, Florida, Illinois, Indiana, Maryland, Massachusetts, Mississippi, New Jersey, New York, North Carolina, Nevada, Pennsylvania, Texas, Utah and Wisconsin.

3. See Tank v. State Farm Fire & Cas. Co., 105 Wn2d 381, 388, 715 P2d 1133 (1986) ("RPC 5.4 (c)demands that [carrier-retained] counsel understand that he or she represents only the insured, not the company"); see generally In re Rules of Professional Conduct and Insurer Imposed Rules and Procedures, 299 Mont 321, 333-34, 2 P3d 806 (2000) (insured is the "only client" and may not be controlled by carrier). Other "one client" states include Arkansas, Colorado, Hawaii, Michigan, Minnesota, New Hampshire, Ohio and West Virginia.

4. See, e.g., First Ins Co of Hawaii, Inc. v. State of Hawaii, 66 Haw 413, 422, 665 P2d 648 (1983) (where interest of mutually-insured codefendants do not coincide, insurer must appoint independent counsel for each).

5. See, e.g., Three Sons, Inc. v. Phoenix Ins. Co., 357 Mass 271, 276, 257 NE2d 274 (1970) ("Control of the case by the insurer, when it may later disclaim liability under the policy, means that the insured’s rights may be adversely affected").

6. Cf. Williams v. Farmers Mutual of Enumclaw, 245 Or 557, 423 P2d 518 (1967) (for purposes of collateral estoppel, insurer was not obligated to "participate in the lawsuit" where insured was alleged both to be guilty of negligence and criminal assault).

7. Oregon is not alone in this respect among "two client" states. Alabama, Arizona, Connecticut, New Jersey, North Carolina, Nevada and Utah, for examples, also have yet to address whether a conflict between those clients gives an insured a right to carrier-paid independent counsel.

8. Cal Civ Code § 2860; see also Fl Stat § 627.426(2) (addressing the issue in similar ways).

9. See CHI of Alaska, Inc. v . Employers Reins. Corp., 844 P2d 1113 (Alaska 1993) (adoping Cumis rule for coverage defense cases); Alaska St § 21.89.100 (adopted in 1995). Like Oregon, both California and Alaska have strong separation of powers doctrines, so both statutes raise an interesting question: whether those legislatures properly circumscribed the courts’ power to regulate lawyers with respect to conflicts of interest.

Arden Olson is a shareholder with Harrang Long Gary Rudnick, practicing out of offices in Portland and Eugene. He focuses on legal ethics, insurance law, health law and commercial litigation matters.

©2008 Arden Olson

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