When an insured business is faced with litigation, sometimes the question of who gets to select defense counsel arises. Third-party liability policies often state that the insurer has both the duty and right to defend the policyholder. Most courts interpret these policies to give the insurer the right to select defense counsel. However, the right to defend is limited by both the Rules of Professional Conduct that apply to all lawyers and fiduciary duties inherent in the contract. These limitations can, in many circumstances, create a policyholder’s right to select defense counsel.
Defense counsel hired by an insurer are obligated to follow the applicable Rules of Professional Conduct, regardless of any language in the applicable insurance policy. Two particularly applicable rules are Rules 1.7 and 1.8(f) of the Minnesota Rules of Professional Conduct (“MRPC”).
A. MRPC 1.7
Rule 1.7(a) prohibits counsel from representing a policyholder if the representation involves a “concurrent conflict of interest.” A concurrent conflict of interest exists if:
· the representation of one client will be directly adverse to another client; or
· 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.
The Comments to the Rule reiterate that conflicts of interest can arise not just from the lawyer and law firm’s responsibilities to another client, but also from their responsibilities to a third person or from their own personal interests. MRPC 1.7, cmt. [1]. Thus, regardless of whether the liability insurer is a client, defense counsel must evaluate whether there is a significant risk that representation of the policyholder will be materially limited by the responsibilities and personal interests inherent in counsel’s relationship with the liability insurer.
B. MRPC 1.8
Counsel must also assess Rule 1.8(f), dealing with payments on behalf of clients. This rule prohibits a lawyer from accepting compensation from a third party for representation of the client, unless:
· the client gives informed consent or the acceptance of compensation from another is impliedly authorized by the nature of the representation;
· there is no interference with the lawyer’s independence of professional judgment or with the client-lawyer relationship; and
· information relating to the representation of a client is protected as required by Rule 1.6.
The insurance contract between the insurer and policyholder may constitute implied authorization for counsel’s acceptance of compensation from the insurer. However, insurer-imposed conditions or limitations, like litigation guidelines, would not be impliedly authorized if they run afoul of the Rules of Professional Conduct or defense counsel’s obligations to its policyholder client. See, e.g., MRPC 5.4 (prohibiting lawyer from allowing a person who pays it to render legal services for another to direct or regulate a lawyer’s professional judgment in rendering such legal services).
On its face, Rule 1.8(f)’s protections of confidentiality and against third-party interference apply regardless of the need to obtain informed consent. Defense counsel may not defend a client if he or she believes that the confidentiality of the client’s information would not be protected, or that there would be interference with the client-lawyer relationship.
C. Informed Consent
If, after conducting the above conflicts analysis, counsel believes their defense would comply with Rule 1.8(f), but would pose a conflict under Rule 1.7(a), the counsel may nevertheless defend the policyholder if all of the following conditions are met:
· the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client;
· the representation is not prohibited by law;
· the representation does not involve the assertion of a claim by one client against another client represented by the law firm in the same litigation or other proceedings before a tribunal; and
· each affected client gives informed consent, confirmed in writing.
MRPC 1.7(b). “Reasonable belief” means that the circumstances are such that a lawyer of reasonable prudence and competence would hold that belief under the circumstances. MRPC 1.0(i) & (j). “Informed consent” requires a decision after the lawyer has communicated adequate information and explanation about the material risks and alternatives to the proposed course of conduct. MRPC 1.0(f).
“Informed Consent” should be read broadly. It can include: (a) the facts and circumstances giving rise to the matter; (b) an explanation reasonably necessary to inform the client of the material advantages and disadvantages of the proposed course of conduct; (c) a discussion of the client’s options and alternatives; (d) any material matters bearing upon the lawyer’s duty of undivided loyalty or duty to protect confidentiality; and (e) in some circumstances, whether it is appropriate to seek the advice of other counsel. See, e.g., MRCP 1.0, cmt [6].
Conclusion
If there is a reservation of rights, and litigation strategy or information could affect coverage, defense counsel has an ethical obligation to provide full information to their client and protect them. This includes information that could affect litigation and settlement strategy, confidential information, litigation guidelines, and a full disclosure of the relationship between defense counsel and the insurer. If any of those factors create a situation where the defense is compromised, the policyholder may have a right to select their own defense counsel regardless of any language in the policy.