A TRAIL GUIDE FOR THE INSURANCE DEFENSE LAWYER

TERRY W. RHOADSCOTTON, BLEDSOE, TIGHE & DAWSON, P.C.

500 W. Illinois, Suite 300Midland, Texas 79701

DONNA K. McELROYCOX & SMITH INCORPORATED

112 East Pecan, Suite 1800San Antonio, Texas 78205

ADVANCED CIVIL TRIAL COURSE 2002August 28-30, 2002 - Dallas, Texas

October 9-11, 2002 - Houston, TexasOctober 30-November 1, 2002 - San Antonio, Texas

CHAPTER 26

DONNA K. MCELROYCOX & SMITH INCORPORATED

112 EAST PECAN STREETSAN ANTONIO, TX 78205

(210) 554-5272dkmcelro@coxsmith.com

AREAS OFPRACTICE:

Practice devoted to litigation, primarily in themanagement aspects of employment and laborlaw.

ADMISSIONS: Licensed to practice law in Texas, 1986;Licensed to practice before the Supreme Courtof the State of Texas; the United States Court ofAppeals for the Fifth Circuit; the United StatesDistrict Court for the Western District of Texas.

CERTIFICATION: Board Certified, Labor and Employment Law,Texas Board of Legal Specialization.

EDUCATION: Tulane University School of Law (Cum Laude),New Orleans, Louisiana, J.D., 1986

Auburn University, Auburn, Alabama, B.S.,Public Administration, 1983

PROFESSIONALACTIVITIES:

Member, State Bar of Texas

Member, Texas Bar Foundation

Member, San Antonio and American BarAssociations

Member, San Antonio Bar Foundation

Member, Committee on Employee Rights andResponsibilities and the Privacy and CollateralTorts Subcommittee of the American BarAssociation Section of Labor and EmploymentLaw

Member, National Association of College andUniversity Attorneys

Member and Former Board of Directors ofBexar County Women’s Bar Association

CIVIC/BUSINESSACTIVITIES:

Board of Directors, Downtown YMCA

Member, National Association of WomenBusiness Owners

Member, Society for Human Resources

Member, San Antonio Human ResourcesAssociation

Member, YMCA of San Antonio and the HillCountry, Committee on Human Resources

Board of Directors, Lone Star Auburn Club

RECENTSPEAKINGENGAGEMENTS andPUBLICATIONS:

American Corporate Counsel Association,“Legal Implications of Employer ElectronicSurveillance of Employees,” October 2001

Lorman Education Services, “AvoidingEmployee Lawsuits: Boardroom vs.Courtroom,” October 2001

Cox & Smith & Trinity University, Issues 2001,“The Volatile Employee – From Harassment toWorkplace Violence, Navigating TroubledWaters,” September 2001

Laredo and McAllen Chambers of Commerce,Issues 2001, “Workplace Violence- What areyour Responsibilities and (Potential)Liabilities?”, June and September 2001

Laredo and McAllen Chambers of Commerce,Issues 2001, “Cultural and Other DevelopingHarassment Theories to Trap the UnsuspectingEmployer,” June and September 2001

Council on Education in Management,“Preventing Wrongful Discharge andRetaliation Claims Resulting from Disciplineand Termination of FMLA-preotectedEmployees,” June 2001

State Bar of Texas, ADR Section Programs,“Compulsory Arbitration Agreements BetweenEmployers and Employees- Any Idea WhoseTime has Come or Unfair Leverage for

Employers?,” February 2001

American Legal Administrators Seminar,“Religious Discrimination in the Workplace,”October 2000

Cox & Smith & Trinity University, Issues 2000,“Blinded by Faith: What Happens whenReligion Collides with the Workplace,”September 2000

Lorman Education Services, “Workers’Compensation in Texas: FMLA, ADA, Returnto Work, Using Modified Duty, andCoordinating Leaves of Absence underWorkers’ Compensation and Other Laws,”September 2000

St. Mary’s Law Journal, “Effective Resolution ofDisputes in the New Millennium: Perceptions,Myths and the Law;” Arbitration andEmployment Law, March 2000

Council on Education in Management,“Progressive Discipline, Coaching andTermination Law,” January 2000

Cox & Smith & Trinity University, Issues 2000,“Harassment – Life After Faragher MaySurprise (and Confound) You,” September 2000

Council on Education in Management, “TheNext Steps With Performance Evaluations:Integrating Your Appraisal Process Into anOverall Litigation Prevention Strategy,” June1999

Council on Education in Management,“Ensuring that Employees on Modified Duty or‘Special Tasks’ Do Not Reduce DepartmentalProductivity or Create a Disgruntled andLitigious Working Environment,” May 1999

Institute of Management Accountants,“Avoiding Labor Litigation – From Applicationto Termination,” May 1999

Texas Food Industry Association, “TheAnatomy of a Lawsuit,” May 1999

National Business Institute (Lorman),“Overview of State and Federal Wage & HourLaws,” “Worktime or Hours Worked,” and“Issues in Overtime,” January 1999

United States Department of Interior,“Avoiding Litigation in Today’s LitigiousSociety,” October 1998

National Association of International Educators(Trinity University), “Legal Issues FacingEducators,” March 1998

Council on Education in Management, “ClaimsBased Upon Stress and Mental Disabilities – ToRehabilitate or Terminate,” March 1998

Council on Education in Management,“Compulsory Arbitration Agreements … IssuesConcerning the Enforcement of CompulsoryArbitration Agreement Between Employers andEmployees,” October 1997

University Personnel Directors, “The TexasConcealed Handgun Legislation-PotentialImpact for Employers,” July 1995

American Society of Women Accountants, “TheAnatomy of a Lawsuit (Avoiding the Fray),”June 1995

Personnel Law Update, Council On EducationIn Management, “Regulating EmployeeSpeech...Can an Employer Require EnglishOnly in the Workplace and WhateverHappened to the First Amendment?,”December 1994

381650.1

1Mid: TRHOADS\001010\001503\196961.1

TERRYTERRY W.W. RHOADSRHOADSCotton, Bledsoe, Tighe & Dawson, P. C.Cotton, Bledsoe, Tighe & Dawson, P. C.

500 West Illinois, Suite 300Midland, Texas 79701-4337Telephone: (915) 684-5782Facsimile: (915) 682-3672

1415 Louisiana, Suite 2100Houston, Texas 77002Telephone: (713) 759-9281Facsimile: (713) 759-0458

EDUCATION:EDUCATION:

Texas A&M University (B.S., 1976)Texas Tech University (J.D., 1982)

PROFESSIONAL ACTIVITIES AND HONORS:PROFESSIONAL ACTIVITIES AND HONORS:

1982-Present: Cotton, Bledsoe, Tighe & Dawson, P.C.(Shareholder since 1988)

1993: Board Certified Personal Injury Trial Law

1993: Board Certified Civil Trial Law

Member: Midland County Bar Association, State Bar of Texas, TexasAssociation of Defense Counsel; Defense Research Institute

LICENSED TO PRACTICE IN THE FOLLOWING COURTS:LICENSED TO PRACTICE IN THE FOLLOWING COURTS:

United States Supreme CourtUnited States Court of Appeals, Fifth CircuitUnited States Court of Appeals, Federal CircuitUnited States District Courts: Northern, Southern and Western Districts of TexasAll State Courts of Texas

LAW RELATED PUBLICATIONS:LAW RELATED PUBLICATIONS:

Author/Speaker for the Permian Basin Landmens’ Association:1999 Ethics in the Oil Patch, Dilemmas From Prior Presentation (Casting for Litigation)

Author/Speaker for St. Mary’s University School of Law:1999 Litigating From The Defendant’s Perspective

Author/Speaker for the Denver Association of Petroleum Landmen:1998 Ethics in the Oil Patch, Dilemmas From Prior Presentation

Author/Speaker for the State Bar of Texas

2Mid: TRHOADS\001010\001503\196961.1

1997 Suing and Defending Governmental Entities “Ethical Issues in RepresentingGovernmental Entities and their Employees”

Author/Speaker for the Texas Municipal League Attorney Workshops1995 Ways to Assert Section 101.106 of the Texas Tort Claims Act1994 Limiting Attorney’s Fees and Sanctions1992 Hot Pursuits

Speaker, Texas Association of Mayors, Council Members and Commissioners1996 An Employment Law Primer

PRACTICE BACKGROUND:PRACTICE BACKGROUND:

In addition to his traditional insurance defense - personal injury practice, Terry focuses his practice

in areas unique to governmental entities. From activities of law enforcement officials to the medical

decisions and protocols of emergency medical personnel, Terry handles and supervises litigation

involving claims under both the Tort Claims Act and the Federal Civil Rights Acts.

Although never claiming to have seen it all, Terry has over 15 years of experience, representing a

variety of public entities (municipalities, water districts, flood control districts, hospitals) across the

state. From employment matters to personal injury, flood and water damage claims to high speed

chases, jail suicides to the Endangered Species Act, Terry has defended a wide variety of special

cases. Terry also maintains a good reputation in the legal community, which is an important,

intangible benefit to the client.

When in-house counsel or risk management determines there is a further need for a seasoned trial

lawyer, Cotton, Bledsoe, Tighe and Dawson answers that call by providing experienced lawyers

and professional staff. Terry is just one of our attorneys that works hard and represents the client

well.

REPRESENTATIVE TOWNS AND CITIES:REPRESENTATIVE TOWNS AND CITIES:

AndrewsAngletonBay CityBaytownBig SpringBunker HillConroe

Deer ParkFort StocktonHempsteadLivingstonMidlandMonahansOdessa

PearlandPecosPresidioRichmondSugarlandWest University

A Trail Guide for the Insurance Defense Lawyer Chapter 26

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Table of Contents

I. INTRODUCTION.......................................................................................................................................................1

II. TRAIL HEAD – PREAMBLE: A LAWYER’S RESPONSIBILITIES ..............................................................1

III. DAYLIGHT HIKE - THE RULES.......................................................................................................................2

IV. BASE CAMP - THE TRIPARTITE RELATIONSHIP ....................................................................................2

V. THE ASSENT..............................................................................................................................................................3

A. DUTY AND LOYALTY – THE TILLEY CASE .................................................................................................................3B. ATTORNEY INDEPENDENCE – THE TRAVER CASE......................................................................................................4

VI. THE SUMMIT – WHAT A VIEW! .....................................................................................................................5

A. PROTECTIONS FOR THE INSURED...............................................................................................................................6B. DEVELOPMENTS FOR THE PRESERVATION OF COUNSEL – SAVING THE ENVIRONMENT..........................................6

VII. WHICH TRAIL HOME? – A MATTER OF OPINIONS................................................................................7

A. DIRECTION BY COMMITTEE.......................................................................................................................................7B. DECISION BY ONE TRUMPS MANY ............................................................................................................................9C. LET MORE LEGAL MINDS DECIDE.............................................................................................................................9D. ANOTHER CURVE IN THE ROAD: THE CUMIS DOCTRINE – IS THERE A DUTY TO ADVISE THE CLIENT TO USE

SOMEONE ELSE? ......................................................................................................................................................10

IX. PRACTICAL HIKER’S GUIDE........................................................................................................................11

A. DON’T BURY YOUR HEAD IN THE SAND....................................................................................................................11B. PUT IT IN WRITING – CLEAR COMMUNICATIONS AVOID MANY PITFALLS ...............................................................12

X. CONCLUSION..........................................................................................................................................................13

APPENDIX A………………………………………………………………………………………………………... 14

A Trail Guide for the Insurance Defense Lawyer Chapter 26

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A TRAIL GUIDE FOR THE INSURANCEDEFENSE LAWYER

TERRY W. RHOADSCOTTON, BLEDSOE, TIGHE & DAWSON,

P.C.500 W. Illinois, Suite 300

Midland, Texas 79701

DONNA K. McELROYCOX & SMITH INCORPORATED

112 East Pecan, Suite 1800San Antonio, Texas 78205

Advanced Civil Trial Course 2002August 28-30, 2002

Dallas, Texas

October 9-11, 2002Houston, Texas

October 30-November 1, 2002San Antonio, Texas

A Trail Guide for theInsurance Defense Lawyer

I. INTRODUCTION

The past decade has been challenging forattorneys and firms representing clients whose claimsare insured. Attorneys who did not typically viewthemselves as “insurance defense” lawyers found moreand more of their clients claims covered by insurance. The insurance industry claims paradigm changeddramatically in the 1990’s with the advent of litigationguidelines, case management systems, the use of“captive” counsel and third-party audits of defensecounsel bills. Limitations imposed by this newrelationship between insurer and approved counselthreatened the freedom of the attorney to perform herduties of representation of the insured/client. Manyterms of the arrangements between the insurancecompany and the defense firm created ethical andfinancial dilemmas for attorneys. As insurers soughtto reduce costs of defense, attorneys were constantlypressured to provide quality representation for theclient while biting the hand that fed them. Fortunately,

our predecessors established guidelines of governancefor our professional conduct; markers which we willnow revisit and which are directing the pendulum incivil insurance defense practice to a more appropriateposition.1

II. TRAIL HEAD – PREAMBLE: ALAWYER’S RESPONSIBILITIES

Lawyers have tremendous responsibility, asguardians of the law, for the preservation of societyand quality of justice2. Lawyers continue to battletensions created in their roles of service as arepresentative of clients, an officer of the legal system,and as a citizen. We are required to maintain thehighest standards of ethical conduct for thepreservation of our profession and society. It is theseethical standards that separate lawyers from otherprofessions and underscore our importance ascounselors and advocates.

Thus, when conflict arises and the attorney findsherself in the throws of difficult ethical problems, it isimperative that a solution is sought and guidancegauged against the minimum standards of ethicalcondct which govern our profession, the TexasDisciplinary Rules of Professional Conduct (the“Rules”). From this platform, we examine next thepurpose for our profession: the client. As we shall see,in Texas it is impermissible to agree to restrictionsimposed by an insurance company which “interferewith the lawyer’s exercise of his or her independentprofessional judgment in rendering such legal servicesto the insured/client.”3 Our journey continues.

1 Anecdotally, at least one of your authors has had

extensive conversations with various in-house counsel thatinstituted litigation management guidelines only to dropthe guidelines because the in-house staff noted a sharpincrease in litigation costs after the implementation ofthe guidelines.

2 TEX. DISCIPLINARY R. PROF. CONDUCT preamble ¶1(1989), reprinted in Tex. Gov’t Code Ann., tit. 2, subtit. G.App. (Vernon Supp. 1992) (STATE BAR RULES art. X, §9).

3 OP. TEX. ETHICS COMM’N. No. 533 (2000).

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III. DAYLIGHT HIKE - THE RULES

It is no coincidence that the first set of Rules andaccompanying Comments govern the attorney-clientrelationship under the title of “Client-LawyerRelationship.”4 For purposes of this review, the focusis about loyalty to the client, an essential element inthis special relationship.5 The comment to Rule 1.06could not be more succinctly stated: If a conflict exitsbefore the representation begins, the representationshould be declined. If it arises afterwards, the conflictmust be eliminated even if it means withdrawal torectify the situation.

Likewise, there is no question that the duties of anattorney to the client are those of a fiduciary.6 Included in the scope of a lawyer’s required conduct,is the requirement to honor and maintaincommunications with the client as confidential.7

Although these principles are fundamentally anduniversally accepted by our bar, the practical (realworld) application of these principles must beexamined in the various judicial rulings in this arena. It is through this examination that the insurancedefense lawyer’s ethical path will be illuminated andher loyalty to her client shown to be unwavering.

IV. BASE CAMP - THE TRIPARTITERELATIONSHIP

The insurance liability contract providesprotection to the insured when a covered claim isasserted against the insured. The agreement providesfor the insurer to pay for the insured’s defense andultimately, satisfaction of a judgment if the insured isfound to be legally responsible to the claimant. Ofcourse, the insurer is motivated to resolve the claimand provide its insured legal representation at as lowa cost as is practical. The contractual rights ofinsurers in this area include the authority to appoint

4 TEX. DISCIPLINARY R. PROF. CONDUCT 1.01 - 1.15

(1989).

5 TEX. DISCIPLINARY R. PROF. CONDUCT 1.06 & cmt(1989).

6Tex. Disciplinary R. Prof. Conduct 1.05 & cmt (1989).

7 Id.

counsel, accept or reject settlement offers, and whenno conflict of interest exists, to make other decisionswhich are normally vested in the client.

Exceptions to the general provisions dealing withselection of counsel and control of settlement arefound in professional liability policies wherepermission of the insured for settlement iscontractually secured. However, even if you can findsuch a policy, it is becoming so expensive to buycoverage of this nature, a practical matter the insuredcannot afford an insurance contract which gives himthe right to select counsel and accept or rejectsettlement offers.

In return, the insured owes certain obligations tothe insurer, including the important requirement ofcooperation with the investigation and defense of theclaim or litigation. Counsel should be mindful of herclient’s duty and encourage cooperation i.e., attenddeposition, keep appointments, providedocumentation, when necessary. The client mustunderstand, even if there is no issue of an excesscoverage claim, that she has something to lose if shefails to cooperate – coverage. Of course, care must betaken not to jeopardize coverage for the client whensuch “encouragement” is required.

The attorney chosen to defend the insured will belooking to the insurer for payment of her legal fees andreimbursement of expenses. Whether the selection ofcounsel to defend the insured results from theinsured’s relationship with the insurer, or if the insurerhas a long-standing relationship with an insurancedefense firm from which the attorney is retained,counsel must understand and appreciate therelationship and the duties that attach when calledupon to represent the insured. This is furthercomplicated by the fact that in some cases the attorneymay require the insured to sign an engagement letteragreeing to pay whatever fees and expenses are notpaid by the insurance company.

The other factor to be considered here is that thatthe lawyer is ethically obligated to charge the client a“reasonable” fee.8

8 Tex. Disciplinary R. Prof. Conduct 1.04 (1989). Let’s

not kid ourselves, the fees, or the desire to reduce fees, arereally at the heart of these issues.

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Factors to be considered in determining thereasonableness of a fee include the following:

• the time and labor required;

• the novelty and difficulty of the questionsinvolved;

• the skill requisite to perform the legalservice properly;

• the likelihood, if apparent to the client,that the acceptance of the particularemployment will preclude otheremployment by the lawyer;

• the fee customarily charged in the localityfor similar legal services;

• the amount involved and the resultsobtained;

• the time limitations imposed by the clientor by the circumstances;

• the nature and length of the professionalrelationship with the client;

• the experience, reputation, and ability ofthe lawyer or lawyers performing theservices; and

• whether the fee is fixed or contingent.9

It is within the framework of this attorney-clientrelationship created, in part, by the client (who has aclaim to defend) and the insurer (who has anobligation to appoint counsel and defend the claim)where occasions arise that an attorney’s loyalty andindependence may be questioned.

V. THE ASSENT

There should be little debate about an attorney’sduty of loyalty to her client. Realistically, mostattorneys in the insurance defense area of practicedevelop business relationships (“good workingrelationships”) with insurance company claimspersonnel, many of whom are not lawyers and are not

9 Id.

bound by ethical considerations governing lawyers(adjusters, representatives, managers). For instance,an attorney may have as many as 50 to 70 cases inwhich she is retained to represent a different insured ineach case but which files are monitored by only one ortwo people from the insurance company. Throughreporting requirements and status/activity reporting,the attorney develops a rapport over time with theinsurance company employee, whereas contact witheach client/insured on an overall scale may be muchless, especially depending upon the type of case.

Recognizing where the bill is paid and where thenext call may come with the request to defend the nextlitigated claim, the attorney naturally develops arelationship and business loyalty with the insurer. Thechallenge is not to focus on the potential pipeline ofwork, but to keep the focus where it belongs: on theclient.

A. Duty and Loyalty – The Tilley Case

The Tilley case is not only illustrative, butremains the standard when gauging loyalty to theclient.10 In fairness to a very fine and ethical defensecounsel, legal ethics in this subject area and theaccompanying policy issues were not defined until thiscase was decided almost thirty years ago. Tilley hasgiven us some bright-line direction in which to managewhat some have described as the “community ofinterest” and the “magic circle” involving therelationships among the insured, the insurer, and theattorney.

A review of Tilley is instructive. Employersretained an attorney to represent Tilley in a personalinjury case filed by Starky.11 Employers had Tilleysign a non-waiver agreement. For approximately 18months, the attorney performed services in the defenseof Tilley and for Employers on matters adverse toTilley on coverage issues.12 Tilley said he had noknowledge of the accident made the basis of thelitigation until he was sued almost two years after the

10 Employers Casualty Co. v. Tilley, 496 S.W.2d 552

(Tex. 1973).

11 Id. at 554.

12 Id.

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alleged date of the accident.13 Employers claimedTilley was not as entitled to coverage because of thelate notice provided it by the insured.14

The declaratory judgment suit was filed byEmployers seeking a determination that Tilley’s late notice of the accident violated the policy and relievedEmployers from defending its insured on the Starkylitigation.15 Tilley cross-acted and the case wasdecided by the trial court on cross motions forsummary judgment. The trial court denied Employers’motion and granted Tilley’s.16 The Court of Appealsin Beaumont reformed and affirmed the trial court’sjudgment.17

The Texas Supreme Court decided the controllingquestion was whether Employers waived or wasestopped from asserting the policy violation of latenotice.18 The Court focused on the attorney-clientrelationship finding that the attorney “owes theinsured the same type of unqualified loyalty as if hehad been originally employed by the insured.”19 Because Employers utilized Tilley’s attorney to gaininformation in support of its coverage position andbecause Tilley was not informed of the conflict ofinterest arising from his attorney’s activity forEmployers, the Supreme Court easily found that Tilleywas prejudiced in both the Starky lawsuit and in thedeclaratory judgment action.20 The Court held thatEmployers was estopped from denying Tilley adefense in the Starky litigation.21

13 Id.

14 Id.

15 Id.

16 Id.

17 Id., citing Employers Casualty Co. v. Tilley, 484S.W.2d 802 (Tex.Civ.App.–Beaumont 1972), affirmed, 496S.W.2d 552 (Tex. 1973).

18 Employers Casualty Co., 496 S.W.2d at 557.

19 Id. at 558.

20 Id. at 561.

21 Id.

In his concurring opinion, Justice Johnsonemphasized the professional responsibilities andfiduciary relationship between a client and theattorney, amplifying for the practitioner that the dutiesare imposed upon the attorney to represent the clientand if multiple representations invoke conflictinginterests, the attorney must immediately exercise herjudgment solely for the benefit of the client, free ofcompromising influences and loyalties.22 In a phrase: the buck stops with us. The Supreme Court approvedtwo of the Guiding Principles of the American BarAssociation’s National Conference of Lawyers andLiability Insurers in arriving at its decision in Tilley.23

The approval of Guiding Principle IV left someconfusion about the proper manner for an attorney tohandle a situation when a conflict of interest arisesduring representation. Although Tilley would seem toapprove an attorney promptly informing both theinsurer and the insured of the nature and extent of theconflicting interest, later commentary and decisionsrecommend that the attorney take the more“conservative” approach and not disclose to the thirdparty (insurer) any specifics about the conflict so asnot to violate Texas Disciplinary Rule 1.05 –Confidentiality of Information.24 Given the ethicsopinions from the Texas Supreme Court, the moreconservative advice is perhaps the most prudent. More on those later.

B. Attorney Independence – The TraverCase

Although the Texas Supreme Court mentioned theTilley case in 1994 as a reminder that the duty ofunqualified loyalty of an attorney is to theclient/insured,25 the next pronouncement ofsignificance in this area came in 1998.26 In Traver, a

22 Id. at 561-564.

23 Id. at 559.

24 Id. But see, Robert B. Gilbreath, Caught in aCrossfire Preventing and Handling Conflicts of Interest:Guidelines for Texas Insurance Defense Counsel, 27 Tex.Tech. L. Rev. 139, 161 (1996).

25 American Physicians Ins. Exch. v. Garcia, 876S.W.2d 842, 844 n.6 (Tex. 1994).

26 State Farm Mut. Auto Ins. Co. v. Traver, 980S.W.2d 625 (Tex. 1998).

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judgment in excess of insurance limits of anautomobile policy was entered against State Farm’sinsured, Mary Davidson, after a trial in which counselwas provided by State Farm.27 Traver, as executor ofthe Estate of Mary Davidson, deceased, thereaftersued State Farm alleging, among other claims, thatState Farm was responsible for the negligence ofdefense counsel who, Traver asserted, committedmalpractice during the representation of Ms.Davidson.28 The trial court granted summaryjudgment on all claims for State Farm.29 The court ofappeals reversed in part finding that State Farm wouldbe vicariously responsible to the extent counselretained for Ms. Davidson committed malpractice.30

Although Traver sought to frame the case in terms ofagency law and reap the benefits of dicta from RangerCounty Mutual Ins. Company v. Guin31 to hold StateFarm responsible, the Texas Supreme Courtemphasized that Ranger was a Stowers32 case only andheld that “a liability insurer is not vicariouslyresponsible for the conduct of an independent attorneyit selects to defend an insured.”33

Independent! The Supreme Court in Traver, said:“A defense attorney, as an independent contractor, hasdiscretion regarding the day-to-day details ofconducting the defense, and is not subject to the

27 Id. at 626 (Ms. Davidson died shortly after trial and

Ronald Traver was her Executor).

28 Id.

29 Id.

30 Traver v. State Farm Mut. Auto Ins. Co., 930S.W.2d 862, 870-71 (Tex.App.–Fort Worth 1996), rev’d,980 S.W.2d 625 (Tex. 1998).

31 723 S.W.2d 656, 659 (Tex. 1987) (“When Rangerundertook to defend Peden and Guin, it became theiragent. Ranger hired attorney Otto Ritter to representPeden and Guin, so Mr. Ritter became their sub-agent. Any negligence on the part of either Ranger or Mr. Ritterwould support a suit by Peden and Guin for damages. Aninsurer’s duty to its insured is not limited to the narrowboundaries contended by Ranger, rather it extends to thefull range of the agency relationship”).

32 G.A. Stowers Furniture Co. v. American IndemnityCo., 15 S.W.2d 544 (Tex.Comm’n App. 1929, holdingapproved).

33 Traver, 980 S.W.2d at 628

client’s control regarding those details.”34 Emphasizing that while the lawyer owes unqualifiedloyalty to the insured and should not act contrary tothe client’s wishes, the attorney is free to withdrawfrom the representation if she cannot perform as thatindependent contractor.35 Referring to Tilley, theCourt stressed that “the lawyer must at all time protectthe interests of the insured if those interests would becompromised by the insurer’s instructions.”36

VI. THE SUMMIT – WHAT A VIEW!

You have arrived ... the trail of learning andinstruction conquered. Take a look at the view fromhigh ... you deserve it. Except, as a free, self-willed,independent contracting attorney governed only by thelimitations of what is good and right for my client, theinsured, you should ask: Will the insurance companyrecognize and graciously honor the fact that I may giveindependent advice to my client which defeats thecarrier’s attempt to avoid coverage? Should I help theclient, or is my duty only not to harm him? Do Isimply drop the case (and run) and withdraw whenevera conflict arises? How strongly do I try to “workthrough” a conflict?

We submit that the fact scenarios which raisethese questions are countless, but the principles, rulesand guidance provided by the Bar and the courts canusually provide you some acceptable range ofdiscomfort or comfort, whatever the case may be. While the view of practicing is spectacular in theory,when the clouds move in, the warmth of a secureprofessional career can move to a deep chill as you arejudged (second-guessed with the benefit of 20/20hindsight) by both the client and the insurer when ajury verdict and judgment exceeds policy limits. Now,alone at the top, and in plain view, you may be thehunted.

To avoid contributing to a tombstoneadvertisement of some attorney or firm which toutsvictories and dollars collected, recognize the client’sneeds while you have a clear view.

34 Id. at 627.

35 Id. at 627-28.

36 Id.

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A. Protections for the Insured

The Stowers case created a common law dutysurrounding the performance of the insurance contractwhen it was decided that the insurer who takescomplete and exclusive control of litigation, includingnegotiations and settlement, assumes “theresponsibility to act as the exclusive and absoluteagent of the assured in all matters pertaining to thequestions in litigation.”37 Importantly, it was theagency-type relationship between the insurer and theinsured from which this common-law doctrine wasgenerated.

Of course, the application of the Stowers doctrineas it has come to be known springs from the very basicbeginnings in negligence: “[A]s such agent, it ought tobe held to that degree of care and diligence which anordinarily prudent person would exercise in themanagement of his own business; and if an ordinarilyprudent person, in the exercise of ordinary care, asviewed from the standpoint of the assured, would havesettled the case, and failed or refused to do so, then theagent, which in this case is the indemnity company,should respond in damages.”38

Thus, the client (insured) should always beinterested in whether the litigation is handled non-negligently in the event he is exposed to a possiblejudgment in excess of his policy limits.

For the attorney, she should recognize that theStowers duty is activated when: (1) the claim againstthe insured is within the scope of coverage; (2) thedemand is within the policy limits; and (3) the termsof the demand are such that an ordinarily prudentinsurer would accept it, considering the likelihood anddegree of the insured’s potential exposure to an excessjudgment.39 Counsel must labor to get a full andcomplete release for her client when confronted witha settlement demand that appears reasonable.

37 G.A. Stowers Furniture Co. v. American Indemnity

Co., 15 S.W.2d 544.

38 Id. at 547; See also, Williams v. O’Daniels, 35 Tex.542 (1871) (negligent breach of an agency relationshipconstitutes independent tort).

39 American Physician Ins. Exch. v. Garcia, 876S.W.2d 842, 849 (Tex. 1994).

The Supreme Court has consistently refused toexpand insurer liability beyond the Stowers confinesand the contractual rights afforded under a policy.40 Thus, counsel should remain alert to these areas sowhen placed in a situation, she can recognize theissues, gather her bearings and continue the journeywith due course.

B. Developments for the Preservation ofCounsel – Saving the Environment

Meanwhile, in the 1990’s, lawyers and law firmswere beginning to suffer from their status quo,resulting in diminished enjoyment in the practice fromthe insurer’s attempts to reduce claim costs. Othersrecognized the impropriety of several of therestrictions insurers placed on the attorney whenrepresenting the client, and chose to do somethingabout it. In fact, a bit of a ground swell has begun inseveral states to “push back” against ever increasinginsurance management guidelines imposed on counsel. The following are a few examples of how differentstates have attempted to address these situations, withvarying results. The Montana Supreme Court, inApril 2000, decided that:

1. An attorney practicing in Montana maynot agree to an insurer’s billing and practicerules which impose conditions limiting ordirecting the scope and extent of therepresentation of her client, the insured; andthat

2. An attorney practicing in Montana maynot submit detailed descriptions ofprofessional services to third-parties withoutfirst obtaining the informed consent to doso.41

What better venue than Montana to first providea pristine pronouncement preserving attorneyindependence and client confidences. Montana is notalone however. The Kentucky Supreme Court issued

40 Maryland Ins. Co. v. Head Industrial Coatings

and Services, Inc., 938 S.W.2d 27 (Tex. 1996); Traver, 980S.W.2d at 629.

41 In re Ugrin, Alexander, Zudick & Higgins, P.C.(2000), 299 Mont. 321, 2P.3d 806.

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a decision prohibiting insurers from paying flat fees.42

The rationale of the Kentucky Court is that flat feearrangements create the potential for inherent ethicalproblems for lawyers – simply stated – the lawyerstands to gain by limiting the services provided. Inwhat might be considered a more radical conclusionthe Court left in place an Advisory Ethics Opinionissued by the Kentucky Bar Association whichproscribed the use, by insurance companies, ofsalaried attorneys to provide legal defense services toan insured under an insurance policy.

Before you start to think there is a trend afoot,compare these decisions to the State of Indiana wherethe State Supreme Court held that “captive” law firmsdo not create an inherent conflict of interest, and youend up with a real headache that does not relate to thealtitude of the summit!43 The Indiana Court did,however, hold that the use of the individuals’ names,e.g., Rhoads & McElroy, P.C., as the firm name wasmisleading and a violation of the rules of professionalconduct prohibiting the practice of law under amisleading name, since the lawyers handled onlymatters for the insurer or its policy holders.

Enter now the debate in Texas, where defensecounsel were also on the move. In Traver, JusticeGonzalez highlighted the changes in the insuranceindustry and in the insurance defense practice.44 Henoted that the well documented “source of unendingethical, legal, and economic tension”45 carried byinsurance defense counsel and serious ethicalimplications of those within a captive law firm.46 Healso questioned the ethics of billing audits pointing tothe threat to the attorney-client privilege.47 Justice

42 American Ins. Assn. V. Kentucky Bar Ass’n.,

9175.W.2d 568 (Ky. 1996).

43 Cincinnati Insurance Company v. Wills, 717N.E.151 (Ind. 1999.). For those who are interested, theWills decision provides the citations to the State EthicsOpinions that have been issued dealing with the questionof the propriety of using ethics counsel, as well as listingseveral cases that have addressed this issue. Id. At 155.

44 Traver, 980 S.W.2d at 629-635.

45 Traver, 980 S.W.2d at 633.

46 Id.

47 Id. at 634.

Gonzalez asked the Legislature to address thesematters.48 It is upon this note, we embark on thereturn home, and review recent developments.

VII. WHICH TRAIL HOME? – AMATTER OF OPINIONS

A. Direction by Committee

In 2000, the Professional Ethics Committee of theState Bar of Texas issued several opinions addressingsome of the ethical concerns raised by JusticeGonzalez in the Traver case. Opinion Nos. 53249 and53350 dealt with the ethical issues of third-party billingaudits required by insurers and litigation/billingguidelines, respectively.

The first opinion, No. 532, asked the question: “[w]ithout the informed consent of the client, may alawyer, who is retained by an insurance company todefend its insured, be required by the insurancecompany to submit fee statements to a third-partyauditor describing legal services rendered by thelawyer on behalf of the client?”

Though the lawyer may be selected, employed andpaid by the insurance company, the Opinionreaffirmed that the only client in that situation was theinsured, citing Tilley. Moreover, because a lawyerowes unqualified loyalty to the insured, “the lawyermust at all times protect the interests of the insured ifthose interests would be compromised by the insurer’sinstructions.”51 Ultimately, the Committee set astandard that probably effectively wipes out the use ofthese guidelines in Texas. Before bills may besubmitted to a third-party auditor, the lawyer mustconsult with and obtain the client’s informed consent.“Consultation in this context involves informing theclient of the implications or possible adverseconsequences of disclosure, including the possibility

48 Id.

49 TEX. COMM. ON PROFESSIONAL ETHICS, OP. 532, 63TEX. B.J. 805 (2000).

50 TEX. COMM. ON PROFESSIONAL ETHICS, OP. 533, 63TEX. B.J. (2000).

51 Id., citing Traver.

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that revealing a fee statement to a third-party auditormay result in a loss or waiver of the attorney-clientprivilege with respect to information described in suchfee statement.”52 It is difficult to imagine a scenariowhere a client would willingly agree to expose itself tosuch risk, and it is even more difficult to imagine anattorney who is following her duty of loyalty to theclient to recommend such a course of action.

The second opinion, No. 533, presented a slightlymore difficult issue for the Committee. It posed thequestion: “[m]ay a lawyer, who is retained by aninsurance company to defend its insured, ethicallycomply with litigation/billing guidelines which placecertain restrictions on how the lawyer shouldconduct the defense of the insured?”

The Opinion noted several types of restrictionstypically placed upon lawyers by insurance companies,such as:

1. Whether to hire an expert in the defense ofthe insured;

2. What, if any, legal research may beconducted by the lawyer in defense of theinsured;

3. What, if any, depositions may be taken inthe defense of the insured;

4. Whether the defense counsel mayinvestigate the claims made against theinsured;

5. Whether particular depositions may bevideotaped;

6. Whether any motions, including motionsto dismiss or for summary judgment, may befiled; and

7. Whether the lawyer or a paralegal shouldengage in the preparation of variousdocuments. 53

52 Id.

53 We are certain that all of you have seen similarbilling guideline limitations.

The Committee then discussed the meaning andextent of the duty of loyalty that a lawyer owes herclient. “Litigation/billing guidelines which interferewith the lawyer’s professional judgment not onlyviolate the above mentioned Rules but also Rule1.01(b), which prohibits a lawyer from frequentlyfailing to ‘carry out completely the obligations that thelawyer owes to a client or clients’ (emphasis added). ‘Loyalty to the client/insured demands that ‘thelawyer must at all times protect the interests of theinsured if those interests would be compromised bythe insurer’s instructions.’ State Farm MutualAutomobile Ins. Co. v. Traver, 980 S.W.2d 625, at628 (Tex. 1998).”54 The Opinion states very clearlythat “the lawyer must at all times be free to exercisehis or her independent professional judgment inrendering legal services to the client.”55

Finally, the Committee reminded lawyers ofComment 5 to Rule 5.04 that “[t]he lawyer shouldrecognize that a person or organization that pays orfurnishes lawyers to represent others possesses apotential power to exert strong pressures against theindependent judgment of the lawyer. The lawyershould be watchful that such persons ororganizations are not seeking to further their owneconomic, political, or social goals without regardto the lawyer’s responsibility to the client.”56

In Opinion 533, the Committee concluded it is“impermissible under the Texas Disciplinary Rules ofProfessional Conduct for a lawyer to agree with aninsurance company to restrictions which interfere withthe lawyer’s exercise of his or her independentprofessional judgment in rendering such legal servicesto the insured/client.”57

54 Id. (emphasis supplied). The “other Rules”

mentioned were Rule 1.06, Comment 1, regarding loyalty;Rule 2.01, outlining the requirement that the lawyerexercise independent professional judgment and rendercandid advice; and Rule 1.o8(a)(2), prohibiting attorneysfrom accepting compensation for representing the clientfrom one other than the client if there is interference withthe lawyer’s professional independent judgment, or withthe attorney-client relationship.

55 Id.

56 Id. (emphasis supplied).

57 TEX. COMM. ON PROFESSIONAL ETHICS, OP. 533, 63TEX. B.J. 806 (2000).

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Fundamentally, the Committee in both Opinionsreaffirmed that lawyers must always consider theclient/insured’s interests first and determinative ofthe issue.

B. Decision by One Trumps Many

The 77th Legislature in 2001 looked hard atliability insurers and sought to enact legislation whichcodified the ethical opinions by prohibiting litigationguidelines which interfered with defense counsel’sduty of loyalty to the client, her duty to exerciseindependent professional judgment, the attorney-clientrelationship between counsel and the insured, or whichwould result in a waiver of any privileges of theinsured.58 The bill was approved by the Legislature,but was among those vetoed by the Governor in June,2001.59 The Associated Press reported that the reasonthe bill was vetoed was it “could invite litigation,which would ultimately increase costs to consumersthe bill seeks to protect.”60

While you cannot believe everything that youread, we think that one quote from an insurancerepresentative bears mentioning. The NationalAssociation of Independent Insurers supported theveto of SB 1654. The Best Insurance News reportedthe rationale for wanting the veto was “that for yearsinsurers have limited what their attorneys can do todefend a claim in relation to adding depositions, orasking for motions. Texas is the first state to legislatethat insurers can’t dictate how their counsel handlescases said Kathleen Jensen, insurance services counselfor the association. ‘It’s unreasonable interferencebetween an insurer and the attorney. If there’s aproblem, they don’t have to take the case,’ she said.”61

Doesn’t this beg the question regarding what thelegislature was attempting to accomplish? Isn’t theproper question, can any attorney take the case andcomply with the rules of professional conduct?

58 Tex. S.B. 1654, 77th Leg., R.S. (2001).

59 S.J. of Tex., 77th Leg., R.S. 4520 (2001).

60 Associated Press Newswires, Gov. Rick Perry’srecord 82 vetoes. November 25, 2001.

61 Best Insurance News, Legislature Passes Texas-Sized Number of Insurance-Related Bills. June 4, 2001.

C. Let More Legal Minds Decide

Along this path home, business arrangementsbetween insurers and attorneys are changing. Theissues surrounding captive firms raised by JusticeGonzalez in Traver are currently in litigation.62 Thecase in the lead at this time is American HomeAssurance Company, Inc. v. Unauthorized Practiceof Law Committee, a case from Dallas County inwhich final judgment was rendered on May 20, 2002. In American Home, the district court grantedsummary judgment declaring that the use of staffcounsel, who are employees of insurers, to defendinsureds (third parties) in Texas is the unauthorizedpractice of law by such company.63 However, JudgeHall stopped short of entering an injunctionprohibiting this practice, perhaps helping to set thestage for a Texas Supreme Court resolution of theissue. Although the judgment is framed in terms ofthe insurance companies’ conduct, the ethicalapplication to staff counsel is apparent. The case is onappeal in the Eastland Court of Appeals.64

Finally, in the arena where lawyers are invited byinsurers to submit fixed fee rate proposals for therepresentation of insureds, the Texas Committee onProfessional Ethics this year took a position contraryto Kentucky. It concluded that a lawyer may enter intosuch arrangements provided the insurance companypays the costs of defense and the lawyer maintains herethical obligations to the client/insured.65

The Committee recognized that “the fixed feearrangement at issue in this Opinion clearly is aneconomic means by the insurance company to controland/or limit the amount of legal expenses. However,while the lawyer is free to enter into an agreement withthe insurer regarding fees, it remains the lawyer’sethical responsibility to provide the necessaryprofessional representation to the client as held in

62 American Home Assurance Co. v. Unauthorized

Practice of Law Committee. D.V.-99-08673-C (68th Dist.Ct., Dallas County, Tex., May 20, 2002).

63 Id.

64 Id.

65 TEX. COMM. ON PROFESSIONAL ETHICS, OP. 542, 65Tex. B.J. 555 (2002).

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Employer’s Casualty Co. v. Tilley, 496 S.W. 2d 552(Tex. 1973).”66

The Committee recognized that a fixed feearrangement might result in the lawyer beinginadequately compensated, but noted that this is nodifferent than other types of fee arrangements. “Regardless of those economic pressures, the lawyerproviding services under a fixed fee arrangement mustprovide the necessary legal services that the lawyerdetermines in the lawyer’s professional judgment arerequired.”67

You should be aware, however, that theCommittee also indicated that fee arrangement with aninsurance company under which the lawyer is requiredto pay the costs and expenses of litigation, regardlessof the outcome of the litigation, would constitute aviolation of Rule 1.08(d), because a lawyer may notprovide financial assistance to a client in connectionwith a pending or contemplated litigation, except incases not applicable to this situation.

D. Another Curve in the Road: The CumisDoctrine – Is There A Duty To AdviseThe Client To Use Someone Else?

While it is beyond the scope of this paper topresent a complete analysis of the Cumis doctrine, given the changing landscape regarding duty of loyaltyand the focus of the Ethics Committee on theresponsibility to the client, irrespective of who hiresyou and pays the bills, we thought it appropriate tomention a potential overlay of the Cumis doctrine tothese issues. The Cumis doctrine was developed in theCalifornia courts.68 Essentially, the doctrine holds that

66 Id.

67 Id.

68 San Diego Federal Credit Union v. Cumis Ins.Society, Inc., 162 Cal. App. 3d 358, 208 Cal. Rptr. 494, 50,A.L.R. 4th 913 (4th Dist. 1984). (Where duty to defend andconflict of interest exist, the insurer should surrendercontrol of the defense and retain independent counselselected by its insured.) The Cumis doctrine was furthersolidified in California in U.S. Fidelity and Guaranty Co.v. Superior Ct., 204 Cal. App. 3d 1513, 252 Cal. Rptr. 320(4th Dist. 1988), reh’g denied and op. modified (1988). (Holding where insurer defends under reservation of rightsthe insurer must permit the use of independent counsel atthe insurer’s expense).

if an insurance company defends an insured under areservation of rights, a conflict of interest arises suchthat the insured may have a right to hire independentcounsel at the insurance company’s expense.69 Thetheory underlining the rationale of the Cumis doctrinehas gained acceptance in our jurisdiction as well.

As the Fifth Circuit Court of Appeals explained:

A reservation of rights is a properaction if the insurer believes, in goodfaith, that the complaint alleges conductwhich may not be covered by the policy. In such situation, reservation of rightswill not be a breach of the duty to defend,but notice of intent to reserve rights mustbe sufficient to inform the insured of theinsurer’s position and must be timely. When a reservation of rights is made,however, the insured may properlyrefuse the tender of defense andpursue his own defense. The insurerremains liable for attorneys’ feesincurred by the insured and may notinsist on conducting the defense. Refusal of the tender of defense isparticularly appropriate where … theinsurer’s interest conflict with those ofthe insured. When the insurer is denyingcoverage…and where coverage, vel non,will depend upon the finding of facts asto certain issues in the main case…theinsurer is not in a position to defend theinsured.70

The Rhodes court went on to explain that the insurer’sduty to defend the insured may conflict with theinsurer’s right to raise defenses against the insured.71

69 The right to independent counsel may not be

automatic upon the issuance of a reservation of rightsletter. See Native Sun Investment Group v. Ticor Title Ins.Co., 189 Cal. App. 3d 1265, 235 Cal. Rptr. 34 (4th Dist.1987). (Cumis not invoked where the litigation was notdeterminative as to policy coverage.)

70 Rhodes v. Chicago Insurance Co., 719 F.2d 116,120-121 (5th Cir. 1983)(emphasis added).

71 See id. at 121 n. 6. See also Ideal Mut. Ins. Co. v.Myers, 789 F.2d 1196 (5th 1986).

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The Texas Court of Appeals in San Antonio alsoaddressed this issue many years ago, recognizing:

Where the insurer is denyingcoverage, but at the same timedemanding the right to defend the lawsuiton behalf of the insured, and wherecoverage, vel non, will depend upon thefinding of the trier of facts as to certainissues in the main case…the insurer isnot in a position to defend the insured.Travelers was confronted with thesituation that it must acknowledgecoverage and thus eliminate thecontroversy between it and [theinsureds], or stand upon its contentionthat there was no coverage. By its actionin denying full coverage, Travelersbrought itself in a position where it couldnot properly represent [the insureds].Travelers chose not to admit fullcoverage, and thus [the insureds] had aright to be defended by … an attorney oftheir own selection.72

So why does all of this matter to you? If yourclient is sent a reservation of rights letter, and even ifyou tell your client unequivocally that you will notrepresent the client regarding coverage issues and youare smart enough to put that in writing, do you have aduty to explain to your client that he may have a rightto invoke independent counsel to represent him, i.e.,not you, solely because of the potential conflict ofinterest raised by the reservation of rights letter? Obviously, if the client invokes his right to Cumiscounsel and the insurer withdraws its reservation ofrights, your client is in a much better position. Youhave honored your duty of loyalty to your client bymaximizing coverage for the client.

To further muddy the trail, additional dilemmasexist as you set the strategy for the case. Do you filea motion for summary judgment on the negligenceclaim leaving only an uncovered breach of contractclaim? Similarly, do you file a motion to dismiss theslander claim leaving only an uncovered employmentrelated claim? Given the Ethics Opinions, theSupreme Court’s ruling in Arce which we will turn to

72 Steel Erection Co. v. Travelers Indemnity Co., 392

S.W.2d 713, 716 (Tex.Civ.App.—San Antonio 1965, writref’d n.r.e.),

next, and perhaps even the general concern about dutyof loyalty being raised through the various corporatescandals the country is grappling with, you may not beable to explain the failure to take action to advise yourclient about his Cumis rights or maximizing coveragein the strategy of the litigation, especially if the matterblows up down the road. As you will see, under Arce,no damages are required, just a breach of fiduciaryduty.

IX. PRACTICAL HIKER’S GUIDE

A. Don’t Bury Your Head In the Sand

So how do you navigate the path without havingto leave the trail all together? The one thing that youcannot do is become an ostrich, stick your head in thesand and act like nothing happened. The SupremeCourt has made it clear that an attorney that ignoresethical rules can be sued for malpractice and forced todisgorge the fees earned – even if the attorneyobtained a successful result for the client.73 If youhave not read Burrow v. Arce, you should read it. Thecase involved a suit by clients suing their formerlawyers who received approximately $60 million inattorneys’ fees of the approximately $190 million insettlement funds. There is an extensive discussionregarding fee forfeiture. Fundamentally, the principalquestion for the Court was whether an attorney whobreaches his fiduciary duty to his client may berequired to forfeit all or part of his fee, irrespective ofwhether the breach caused the client actual damages. The Texas Supreme Court answered this in theaffirmative.

Although the Court sent the case back to the lowercourt for a determination of whether the attorney’sclaim that Rule 1.08(f) was unconstitutionally vague,it did so with the admonition that the determination ofa violation of Rule 1.08(f) alone was not conclusivewithout the consideration of whether other disciplinaryrules were violated that might also justify forfeiture.74

Thus, the Court clearly left the door open that other

73 Burrow v. Arce, 997 S.W. 2D 229(Tex. 1999).

74 Id. At246.

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violations that were “serious violations of duty” couldresult in fee disgorgement.75

The impact of Arce has not been completedplayed out in the courts of appeal. One impact isclear, the question of whether acquiescing to billingguidelines causes you to breach your fiduciary duty isrelevant regardless of the outcome of the litigation orthe effect of the settlement on the client. This tensionis sure to expand as retention amounts continue toincrease. An example clarifies the issue. The client ison the hook for the first dollars of a claim under apolicy with a $500,000 retention. You agree to billingguidelines that suggest limitations upon your ability totake certain discovery or hire experts. Your analysisof the class action suit is that liability could exceed the$3,000,000 in insurance coverage. Ultimately, younegotiate an early settlement of $750,000. The clientpays its $500,000 and the insurance company pays therest, including your attorney’s fees. The case is settledThe client learns eight months later from an industrybuddy involved in litigation by the same attorneysbringing similar claims against his company that thereis a hot-shot expert who knows the “Achilles heal” ofthe plaintiffs’ claim and they were able to settlequickly and cheaply because the plaintiffs’ counsel didnot want to develop any bad law. You never hired anexpert. There may be many legitimate reasonssupporting that decision and the cases may not be asidentical as the two friends think. The file maysupport the fact that this case was sufficientlydifferent that there was risk beyond the settlementamount; and your client would have had to pay the$500,000 anyway. Remember, however,disgorgement under Arce does not require the clientestablish actual damages, only a breach of fiduciaryduty, so the fact that the retention would have beenpaid anyway might not save the day.

B. Put it in Writing – ClearCommunications Avoid Many Pitfalls

Retention letters are not just for clients who donot have insurance coverage. Take the time at theoutset of the litigation to communicate to the client inwriting:

75 Id.

• the exact nature of the relationship(attached as Appendix A is some samplelanguage you might consider whenrepresenting an insured);

• what the client’s responsibilities are interms of assisting with the preparationof the defense;

• expectations regarding payment, e.g., theinsurance company is providingcoverage, but as the client she is alsoresponsible if the insurance companydoes not pay;

• be specific about the limited nature of therepresentation; do not create anexpectation that you are the insured’slawyer for all purposes (unless that isyour intent);

• state in the retention agreement that youcannot guarantee the outcome of thelitigation and your fees are not predicatedon that outcome;

• if the risks are high and the insuranceamounts seem insufficient to coverpotential liability, remind the client earlythat the insurance company is notresponsible for the entire judgment if itexceeds policy limits (excluding Stowerssituations);

• it’s not always just about money; indicatewhere there may be obligations relatingto the insured that are not related tomoney, e.g., in employment-relatedlitigation injunctive relief andreinstatement are remedies available toplaintiffs and the courts. Obviously, justbecause it may be cheaper for theinsurance company if the insured isrequired to reinstate an employee,thereby cutting off front pay, this may bevery detrimental to your client’s interest. If your client is in an industry whichrequires a license to operate, e.g., childcare providers, health care providers,architects, the language of a settlementagreement could impact your client’slicense. Do not let the client find out

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about these remedies and the possibleimpact on other aspects of the client’slife at the trial or worse yet after thesettlement;

• ideally, have the client execute a copy ofthe letter for your files;

Do not stop at the initial retention agreement. Turning back to our example, if the lawyer hadprepared a written analysis for the client indicatingthat additional work and investigation could be doneon the case, including the hiring of experts whichmight expose weaknesses in the plaintiffs’ case, thatyou have discussed the hiring of experts with theinsurance company and they want the client’s inputregarding whether to move forward with the case oraccept the early settlement offer, the billing guidelineissue would have been effectively removed as aconsideration – as would the question of whether theguidelines impacted your ability to honor yourfiduciary duty to the client. The letter should gothrough the same risk/reward analysis as any otherletter regarding settlement, namely stepping the clientthrough the risks of walking away from an earlysettlement offer versus continuing to fight. The clientcould have, and likely would have, reached thedecision to settle the case under the same terms. Itsnot bullet proof, but it shows you were absolutelyloyal to your client and clearly establishes the consentgiven by the client to settle the case.

One more area to document – when it’s over. Given the fact that many of your clients may not bevery sophisticated about legal matters, it is a good ideato put a “period at the end of the sentence” at theconclusion of the matter. A simple letter notifying theclient that the representation has concluded andthanking her for the opportunity to be of service is notonly a good client relations idea, it establishes thatthere should be no expectation of continuedrepresentation which would carry with it a continuingduty of loyalty. This is particularly important whendealing with a client that might have multiple claimsover the years who gets used to seeing you appointedby their insurance company as their counsel.

X. CONCLUSION

The journey we take as professionals requiresstrong adherence to the moral and ethical principles

upon which our law, and the trust by the public in thelaw, is nourished. Loyalty to your client, above allelse, must be zealously guarded. When tested, andyou will be, we trust the guides provided in this articlewill serve to make your trek a safe and sound one. Ifyou avoid the temptation of serving two masters,76 youstill enjoy the scenery during your hike through yourprofessional career.

76 Traver, 980 S.W. 2d at 634 (referencing Matthew

6:24).

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Appendix A

Sample Language

It is our understanding that you and [insurance company name] have a common interestin the efficient disposition of this matter. Based on our review, it does not appear that either youor [insert name of insurance company] have a conflict of interest. At any time during thecourse of this representation, if you believe your interests and the interests of your insurancecompany are no longer the same, you must notify me immediately.

[Insurance company name] may request copies of pleadings, reports, billing statementsor other potentially confidential materials during the course of this matter. As we have discussed,the disclosure of some of this information may result in a waiver of the attorney-client privilege. By accepting this defense, you consent to us providing any and all materials to [insurancecompany name] or its designated representative. You must immediately inform me if youconvey information to us that you believe should not be shared with [insurance company] or itsdesignated representative.

We have not undertaken to review any of your insurance policies. Most policies havestrict notice provisions and an immediate review is strongly advised. If you believe you haveadditional policies that may cover all or part of this matter, we recommend that you immediatelynotify those insurance companies and me.

We will work closely with [insurance company] to try to follow billing and legalmanagement guidelines for covered fees and expenses. Our primary duty, however, is torepresent your interests. We have an ethical obligation to perform our duties in the mannerconsistent with your best interests even if inconsistent with [insurance company’s] guidelines.