Court Warns Insurance Defense Counsel: Inform Insured of Limits on Representation

By Kirk Swanson  

Attorneys retained by a liability insurance company to defend a policyholder must advise the insured of significant developments in the case and of the limited scope of the representation even when the insurance contract gives the insurer the exclusive right to settle the case, the Louisiana Supreme Court made clear Oct. 16 (In re Zuber, La., No. 12-B-0916, 10/16/12).

The court dismissed disciplinary charges against two defense attorneys who failed to keep the insured client in the loop as they handled his case and then settled it on behalf of the insurer without notifying the insured in advance.

In its per curiam opinion, the court acknowledged that the issue of a defense attorney's obligations when representing an insured at the request of an insurer “has not been addressed in detail in our disciplinary jurisprudence.” Accordingly, the court used this case to make clear that counsel owe obligations to an insured even when the insurance policy gives the carrier the sole authority to decide whether to settle an action against the insured.

Case Closed.

When Dr. Michael Teague was sued for medical malpractice, his liability carrier, St. Paul Insurance Co., retained the law firm of Seale, Smith, Zuber & Barnette to handle the case. Donald S. Zuber worked on the case initially, including consulting with Teague. He then turned it over to another member of the firm, Catherine Smith Nobile.

Even when the insurer is calling the shots, don't keep the insured in the dark about their direction.

Nobile mistakenly failed to secure a jury trial. She informed St. Paul but not Teague of this development, the court said. The case went to mediation, which resulted in a settlement against Teague for $50,000.

Teague's policy with St. Paul included a “consent to settle” provision that gave the insurer the exclusive right to settle a claim against the insured within the policy limits. Nobile did not notify Teague of the mediation or the settlement until after the fact. Teague sued Zuber and Nobile for malpractice, but his case was ultimately thrown out.

Three-Ingredient Recipe.

The Office of Disciplinary Counsel charged Zuber and Nobile with violating a number of disciplinary rules. A hearing committee found that both lawyers failed to comply with Louisiana Rule of Professional Conduct 1.4, which requires adequate communication with clients. The disciplinary board agreed but added that Nobile also violated Rule 1.3 on diligence when she inadvertently forfeited Teague's right to a jury trial.

The supreme court dismissed all charges against Zuber and Nobile, in light of the hazy state of the law in Louisiana about insurance defense counsel's obligations in the “tripartite relationship” among insurer, insured, and defense attorney. It accepted the lawyers' position that “their actions were taken in good faith and were not intended to cause prejudice to Dr. Teague.”

But the court used its opinion to clarify the law on this issue, and to warn the defense bar that they have professional obligations to an insured even when the insurer has the exclusive contractual right to direct the insured's defense.

Shots in the Dark.

Although the disciplinary authorities had focused their attention on Rule 1.4, the court concluded that the most pertinent ethics standard at issue in this situation is Rule 1.2, which permits a lawyer to limit the scope of a client's representation under specified conditions.

In short, the opinion makes clear that even when the insurer is calling the shots, defense counsel must not keep the insured in the dark about where they're going.

“[W]e interpret rule 1.2 as requiring a lawyer who will represent the insured at the direction of the insurer to make appropriate disclosure sufficient to apprise the insured of the limited nature of the representation as well as the insurer's right to control the defense in accordance with the terms of the insurance contract,” the court declared.

In light of the sparse precedent in Louisiana, the court directed lawyers' attention to ABA Formal Ethics Op. 96-403 (1996). That opinion emphasized Model Rule 1.2's recognition that a limited-scope representation hinges on adequate notice to the insured, “at the earliest practicable time,” of the confined scope of the representation, and of the lawyer's intention to follow the insurer's instructions on defending the insured.

Even with the insurer providing guidance, the court added, defense counsel “should make efforts to keep the insured reasonably apprised of developments in the case.”

Two Clients.

In a separate opinion, Justice Bernette J. Johnson agreed that Zuber was in the clear but argued that Nobile fell short of meeting her ethical obligations.

Nobile “corresponded regularly” with St. Paul about the case against Teague but “provided none of this information to the insured, Dr. Teague, who was also her client,” Johnson noted.

Although the insurance policy defined the relationship between insurer and insured, she stated, it “did not define or extinguish the ethical responsibilities of Ms. Nobile to her client, Dr. Teague.”

“Nobile's behavior merits, at a minimum, a public reprimand,” Johnson said.

Chief Disciplinary Counsel Charles B. Plattsmier and G. Fred Ours of the Office of Disciplinary Counsel, Baton Rouge, La., represented their office. Zuber, Baton Rouge, and Nobile, Shreveport, La., appeared pro se.

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