In a traditional attorney-client relationship, the attorney acts as the client’s zealous advocate, protects the client’s confidences, and at all times acts in the client’s best interests. But what duty, if any, is owed to an insurer by defense counsel appointed by the insurer? Does the payment of defense costs and the attorney’s reporting requirement to the insurer create any duty owed by the attorney to the insurer? The answers to these questions have implications not only for defense counsel, the insured, and the insurer, but also for the injured party and its counsel. In a recent decision, the Washington Court of Appeals reiterated that defense counsel owes a duty of care only to the client (the insured) and not the insurer.
In The Doctors Co. v. Bennett, Bigelow & Leedom, P.S. (Wash. Ct. App. May 26, 2015), the insureds, two physicians and their employer, were sued for medical malpractice after a baby delivered by the physicians suffered severe disability due to oxygen deficiency during delivery. The insurer then undertook the defense of the physicians and the employer without a reservation of rights and retained defense counsel. Following some alleged legal missteps, the insurer settled with plaintiffs for over $7 million in excess of the insureds’ policy limits and then brought suit for legal malpractice against defense counsel.
The Court of Appeals addressed whether defense counsel owed the insurer a duty of care as a “non-client” — based on the “tripartite relationship” among the insurer, the insured, and defense counsel — and as an intended third-party beneficiary.
The insurer first argued that the Court of Appeals should adopt the test set forth in Restatement (Third) of the Law Governing Lawyers § 51. In the insurance context, under Restatement § 51 “a lawyer designated by an insurer to defend an insurer owes a duty of care to the insurer . . . [for] matters as to which the interests of the insurer and the insured are not in conflict, whether or not he insurer is held to be a co-client of the lawyer.” This argument was quickly rejected, as previously established Washington law requires a showing that the insurer was an intended beneficiary of the law firm’s services to the insured, and that an alignment of interests in and of itself is insufficient to create a duty of care between defense counsel and the insurer.
The Court of Appeals next addressed whether the insurer had adequately demonstrated that it was an intended beneficiary of defense counsel’s representation of the insured. If not, the insurer had no standing to sue. The Court of Appeals first noted that “Washington courts have general been reluctant to extend professional malpractice protection to nonclient third parties because such a duty could create potential conflicts.” Due to this understandable reluctance, the court observed, “No Washington court has ever applied [the intended-beneficiary theory] to hold that an attorney retained by an insurer to defend its insureds owes an additional duty of care to the insurer.”
With these concerns in mind, and consistent with prior caselaw, the court found that the alleged alignment of interests between the insurer and its insureds, together with defense counsel’s duty to report to the insurer, did not mean that either the insureds or defense counsel intended to benefit the insurer. Lastly, the Court of Appeals expressly refused to recognize a “tripartite” relationship (which provides that an insurance-defense relationship is always intended to benefit the insurer) because it would not only fundamentally alter established Washington law, but also violate Washington rules of professional conduct governing attorneys. Because the insurer could not establish that the insured or defense counsel intended to benefit the insurer apart from duties owed directly to the insured, defense counsel owed the insurer no duty of care.
The result in Doctors Company is the right one. The potential for conflicts of interest are seemingly unavoidable if defense counsel must protect not only the insured’s interests, but also the party who is paying its bill and who could also ultimately be on the hook for an unfavorable judgment or settlement. Not only does the tripartite relationship place defense counsel in a difficult position, but it also creates problems for plaintiff’s counsel, as plaintiff’s counsel must litigate against an attorney who must protect the often divergent issues between the insurer and the insured. At least in Washington, these concerns have been put to rest in favor of insureds.