Proposed Ethics Rule Change Will Adversely Affect Insurance Defense Counsel

WDC Journal Edition: Winter 2004
By: Bernard T. McCartan – Immediate Past President Civil Trial Counsel of Wisconsin

Pending before the Wisconsin Supreme Court is a petition for amendment of the Wisconsin Rules of Professional Conduct for Attorneys having potential ramifications for every insurance defense lawyer in Wisconsin. Among other things, the Wisconsin Ethics 2000 Committee petition seeks an amendment of SCR 20:1.8(f) that would abolish the insurance defense exception to the requirement that attorneys obtain consent of the client after consultation when a third party, such as an insurance carrier, is paying the lawyer’s fees. The proposal, if approved, will have a direct and potentially adverse affect on the conduct of insurance defense practices statewide. The purpose of this article is to briefly review the proposal and identify some of the problems it poses.

The change recommended by the Ethics 2000 Committee would alter SCR 20:1.8(f) as follows :

(f) 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.

The petition offers only a brief comment in support of the recommendation :

Rule 1.8 Conflicts of interest: prohibited transactions. Among other proposed changes, the committee recommends deletion of the insurance defense exception to the requirement that a client consent to the lawyer’s fee being paid by a third party. One of the recurring themes in the proposed rules is that lawyers clarify their relationships, and the committee views this as equally important in the insurance defense setting. See Marten Transport, Ltd. v. Hartford Specialty Co., 194 Wis. 2d 1, 533 N.W.2d 452 (1995).

Under the proposal, “informed consent” is defined in a new sub-section of SCR 20:1.0, Terminology, as follows :

(f) “Informed consent” denotes the agreement by a person to a proposed course of conduct after the lawyer has communicated adequate information and explanation about the material risks of and reasonably available alternatives to the proposed course of conduct.

Regardless of the context in which they arise, the Wisconsin Ethics 2000 Committee and ABA Ethics 2000 Commission lump all third party payer arrangements together and treat them in the same manner. Accordingly, under the proposed amendment to SCR 20:1.8(f) a lawyer retained by an insurance company to represent an insured must obtain the informed consent of the client before undertaking representation. However, what exactly “informed consent” means is not entirely clear from the either the proposed definition or the accompanying ABA Commission comments . Does an attorney have to disclose the percentage of his/her income that is derived from insurance defense work in general or from the carrier retaining his/her services on a particular case? Does an attorney have to disclose the number of files referred from a particular carrier, either to the attorney or his/her firm? Does an attorney have to disclose every possible conflict of interest that might arise even though there is no apparent conflict at the time of referral? Does an attorney have to warn the insured of the possibility of an excess verdict and, if so, in what sort of detail? In what sort of detail must an attorney describe the insurer’s contractual right to control the defense? These questions and more are left unanswered.

The logistics of complying with the proposed rule are likely to be burdensome for those engaged in defense practice and potentially detrimental for the insured. Upon receipt of a referral from an insurer, counsel would be required to contact the insured to fulfill the informed consent requirement. A letter with appropriate information might be enough, but perhaps not if the insured has questions. A personal meeting might be required. Though the rule does not expressly require it, good practice probably dictates that the disclosure and consent be memorialized in a writing signed by the insured, all of which would have to be accomplished before the representation could commence. That could be problematic if the attorney has difficulty contacting the insured or the time for answering is short. Delay could also ensue if the insured declines or is reluctant to give consent, putting the representation on hold until the issue is resolved. In addition, an insured’s refusal to consent to appointed counsel could actually create unintended collateral coverage issues by putting the insured in breach of the duty to cooperate and jeopardizing the insurer’s contractual right to control the defense. That, in turn, could create additional conflicts of interest for defense counsel.

Where the insured has personal counsel, personal counsel might advise the insured not to accept the informed consent and to insist upon appointment of personal counsel to represent the insured, raising the specter of litigation over the right to select counsel in a case in which the insurer and the insured have no other conflicts. Moreover, simply forwarding such a letter to the insured could create distrust in the appointed counsel, despite counsel’s appointment to represent the insured.

According to the Ethics 2000 Committee, the rule change is needed to ensure clarification of the lawyer/client relationship. However, aside from that general statement, the committee fails to give any concrete examples of the need for change. No case law or other specific evidence of a problem with the current rule or the insurance defense exception is mentioned. Though it cites the Marten case, its relevance is not explained. In fact, the case has nothing to do with third party payer arrangements in the insurance defense context. The firm whose service was at issue in Marten was retained and paid by the client, not the insurer. The insurer’s argument that an attorney-client relationship existed between it and the firm was rejected. Marten was a unique case that the Supreme Court addressed on its own merits.
In addition to its failure to identify a significant problem with the existing rule, the Ethics 2000 Committee also fails to recognize that insurance defense lawyers currently must clarify relationships with their clients in order to comply with other existing rules, including SCR 20:1.6, Confidentiality, SCR 20:1.7, Conflicts of Interest, and SCR 20:5.4(c), Independence of Counsel.

Insurance defense arrangements present unique circumstances for which it is appropriate to maintain an exception to the general rule requiring consent and consultation. In contrast to the informal, ad hoc arrangements that characterize many third party payer arrangements , liability insurance contracts are commonly used and highly regulated instruments serving a specialized purpose in society and the legal system. In addition to statutory and administrative regulation, they are the subject of a large body of case law, dealing with, among other things, the insurer’s duty to defend. Lawyers involved in the insurance defense practice are highly cognizant of their obligations to the insured in the tripartite relationship created under these contracts and take pains to carry them out. In the end, the proposed change to SCR 20:1.8(f) would unnecessarily complicate the practice of the defense bar without any demonstrated benefit to the insured/client.

In summary, the Wisconsin Ethics 2000 Committee has failed to identify a genuine problem with insurance defense arrangements that needs to be addressed by a rule change. Neither has it articulated any other substantial reason for removing the insurance defense exception contained in SCR 20:1.8(f). Changing the rule as proposed would create unnecessary and burdensome requirements for the insurance defense bar while providing nothing more than a theoretical benefit to insured clients in most cases. At the same time, it may have the unintended consequence of creating breaches of the contractual relationship between insurers and their insureds in some cases.

The petition for approval of the Ethics 2000 Committee recommendations is scheduled for a hearing before the Wisconsin Supreme Court on February 17, 2005. Information about all of the proposed changes, including complete copy of the petition and the Ethics 2000 Committee report, are available on the State Bar web site at CTCW members concerned about the proposed change to SCR 20:1.8(f) can voice their concerns by contacting their representative on the State Bar Board of Governors and asking that the State Bar oppose the change. Comments on the issue can also be sent directly to the State Bar through a link on its website.
Time is of the essence. The Board of Governors will be meeting on January 14, 2005 and is expected to take positions on the various changes proposed in the petition before the Supreme Court hearing. It is important that CTCW members make their views known.

Bernard T. McCartan is Associate General Counsel for American Family Mutual Ins. Co. in Madison, WI. The focus of his practice is property and casualty insurance claims and coverage litigation. He received his J.D. in 1976 from the Marquette University Law School.