President's Message: Welcome to Dairyland...a Suburb of Wonderland

WDC Journal Edition: Winter 2004
By: James Naugler - Moen Sheehan Meyer, Ltd.

Alice climbed out of the rabbit hole from Wonderland. A cow chewed grass only a few feet from the rabbit hole. “Where am I?” asked Alice. “You’re in Dairyland,” said the cow,” It’s a suburb of Wonderland.”

“Are there weird things in Dairyland like there are in Wonderland”…Alice paused…”besides talking cows?”

“Yes, answered the cow, the rule in Dairyland is, ‘If it isn’t broken, fix it.’”

Welcome to Dairyland. For decades, the tripartite relationship in which the same attorney defends both the insured and the insurer has worked well. A proposed rule change to the Rules of Professional Conduct needlessly complicates this relationship.

The tripartite relationship has its roots in practicality and common sense. In the typical case, under the insurance contract, the insurer has a duty to hire and pay for an attorney to defend the insured when sued by a third party. The attorney represents both the insured and the insurer. This relationship is even more helpful in Wisconsin than in other states. Wisconsin is one of a minority of states with a direct action rule allowing the third party to join the insurer.

Once joined, the insured and insurer are virtually one in common interests. The insured wants to minimize his or her liability and the insurer couldn’t agree more. Where conflicts (ex.-reservation of rights; one claim covered and another claim not; claims of damages exceeding the policy limits; and, defense of multiple insureds) arise, a body of case law and existing rules of professional responsibility address these issues.

When an insured is sued, the insured turns the complaint over to the insurance agent because the insured expects the insurer to provide defense counsel. After all, it is part of the policy. SCR 20:1.8 (f) reflects this reality and includes an insurance defense exception to the requirement that a client consent to a third party paying the attorney’s fees.

The rule says that, when an insurer, not the insured, pays the attorney’s fees, an attorney does not have to get the insured’s consent twice, once is enough: “…[n]o further consent…need be given if the client has given consent pursuant to the terms of an…policy requiring an…insurer to retain counsel on the client’s behalf….”

The Wisconsin Ethics 2000 Committee, in a petition to the Wisconsin Supreme Court, proposes a number of rule changes to the SCR. One of the changes deletes the insurance defense exception and requires the insured to give “informed consent.” Ignoring the question “Why now?” let’s jump ahead to “What if?” and “Then what?”

If the rule change goes through, defense attorneys retained by the insurer must obtain a separate consent from the insured beyond the first consent implicit in the policy. The insured could refuse consent but the insured may not have the right to refuse under the terms of the policy. Then what? Loss of coverage for failing to cooperate? Conflict between the insured and the insurer? Tension with defense counsel? Increased costs and delays in representation seem assured. Litigation sorting out the issues is guaranteed. All to fix something that is not broken.