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Who’s Driving This Bus? Issues Involving the Tripartite Relationship


The tripartite relationship describes the dynamic between an insurer, an insured, and a defense attorney hired by the insurer to defend the insured. Its scope and defense counsel’s rights and obligations to its clients within this relationship are among the most debated topics in insurance law.

This article discusses the various conflicts that may arise and outlines certain insurance policy provisions that may be impacted by this relationship. It is important for life sciences companies to be aware of these dynamics so that a successful resolution–for all parties–can be achieved.

But is it really a tripartite relationship? The answer is yes. Plainly stated, the tripartite relationship refers to counsel appointed by the insurance carrier, and that counsel’s joint representation of the insurer (carrier) and the insured (defendant). The majority view among the states is that both the carrier and insured are clients. Other states follow the minority view where counsel has one “client”, the insured. The minority position views the competing interests of the carrier as weakening the relationship between defense counsel and the insured. Whether your state follows the majority or minority view, the relationship still involves all three parties and your company should be aware of the interests of those involved.

Conflicts of Interest

The central question surrounding the tripartite relationship is whether one attorney can serve two masters. Because the insured is a client (and regardless of whether the carrier is also a client), defense counsel owes the insured a duty of undivided loyalty. This is clearly stated in Rule 5.4c of the Model Rules of Professional Conduct. Luckily, in most cases, this does not present a problem because the carrier’s interests are fully consistent with those of the insured—to defeat or settle the claim brought against the insured by a third party. The duty of undivided loyalty also means defense counsel may do nothing that injures the interests of the insured without the informed consent of the insured. For example, defense counsel cannot assist the insurance carrier in defeating coverage as such assistance would breach the duty of undivided loyalty to the insured.

Though the usual alignment of interests of the attorney’s two clients—the insured and the carrier—allows the tripartite relationship to function smoothly, the relationship becomes more complex when the interests of the two clients diverge. This occurs where there are potential conflicts such as those created by allegations of intentional conduct or fraud by the insured.

For example, a complaint alleges the distributor of a drug aimed at weight loss is named along with the manufacturer for bodily injuries caused by the drug. The claims made against the distributor are for negligence and intentional violation of the state’s consumer protection statute. One claim is clearly covered (negligence) while the other may not be. Another trigger for this issue is when the lawsuit seeks punitive damages, or money damages to punish a company and deter future “bad” conduct. Allegations of intentional conduct, if proven, would invalidate coverage under most insurance contracts. In that instance, an insurer will agree to defend, but will issue a Reservation of Rights letter addressing allegations or damages that may not be covered. How does counsel negotiate the intricacies of defending the insured without jeopardizing coverage under the policy? The general rule is if representing the insured and the carrier jointly creates a conflict of interest, then joint representation is impermissible absent informed written consent from the insured. If the insured consents, there is no problem with the carrier continuing to manage the litigation. However, most insureds will not consent to joint representation, in which case and independent counsel representing only the insured may be hired by the insurer to discharge its duty to defend.

Right to Independent Counsel

Not every reservation of rights letter creates a conflict of interest thereby invoking the obligation to appoint independent counsel. Generally, there must be an actual present conflict between the claims alleged and coverage under the policy. In addition, defense counsel must be able to affect the outcome of whether the claim is covered. Restatements Third of the Law Governing Lawyers1 states a conflict of interest exists “if there is a substantial risk that the lawyer’s representation of the client would be materially and adversely affected by the lawyer’s own interests or by the lawyer’s duties to a third person.”

The duty to retain independent counsel varies greatly from state to state. The duty in most states is found in common law, that is, case law, which addresses conflicts as they arise with respect to independent counsel. Other states have both statutes and case law (California and Florida). Some states (Idaho and Nebraska) have neither statutes nor case law to address this situation. The precedent also varies substantially around the country. For example, Arizona case law allows the insurer to appoint counsel, but permits the insured to control the direction of the litigation in a conflicts situation. Illinois and Indiana take similar views and require the insurer to either 1) File a declaratory judgment action to determine whether coverage exists or 2) Hire independent counsel to defend the insured under a reservation of rights.

Right of Reimbursement for Defense of Uncovered Claims

There are a number of other issues that often arise in the tripartite relationship. For example, what if a carrier hires counsel to defend a lawsuit which contains a mixture of covered and uncovered claims? Can the insurer continue to defend all claims and reserve rights to recoup expenses related to the uncovered claims? For the insurers, the case law on the right to reimbursement has turned decidedly negative in the past 10 years. The seminal case in the early years was the Buss case in California.2 The California Supreme Court in Buss held that an insurer defending a lawsuit consisting of a mixture of claims covered or potentially covered, and claims clearly not covered, could be reimbursed for costs related solely to claims not covered by the policy as it did not bargain to bear those costs. Although this was widely considered the majority position, only seven state courts have actually permitted such reimbursement (Colorado, New Jersey, Montana, Florida, Delaware, Connecticut and California). While 18 state and federal courts permit an insurer to seek defense fees for non-covered causes of action, only 12 of them allow the insurer to do so if the insured objects to the reservation of rights letter.

In 2013, the Washington Supreme Court in National Surety v. Immunex3rejected the Buss approach for the reimbursement of defense fees. The Immunex Court held that the policy language must specifically allow reimbursement of such fees. Since then, the Supreme Courts of Pennsylvania, Arkansas, Illinois, Texas and Wyoming have agreed with the Washington State Supreme Court’s analysis. All but Arkansas have said their decision was based on the failure of the policy language to include a right of reimbursement. Eight federal courts have agreed with the Immunex rationale. Most recently, the Third Circuit upheld the defense cost reimbursement clause in a Professional Liability policy in the Amico Mutual Ins. Co v. Heffler case.4

Can Counsel Move for Summary Judgment if the Result Would be That Only Non-covered Claim Remain?

Another interesting issue is whether counsel should move for summary judgment on certain (covered) allegations which would leave pending only uncovered claims pending in the litigation. For example, a manufacturer of implantable electric spine stimulators (used on post-surgery patients to enhance the regeneration of bone) is sued by a patient for bodily injuries due to the off-label use of this product. The allegations are strict product liability, negligence and negligent misrepresentation. A strong defense to the strict product liability and negligence claims would be the “learned intermediary” defense. Should counsel move for summary judgment on these claims if the result is that the likely uncovered claim of negligent misrepresentation (the off label promotion to doctors) is all that remains?

The majority view is that the insurance carrier owes a duty to defend all claims as long as there remains potentially covered claims. If counsel moves for summary judgment on the covered claims and the motion is granted, your company may be left to defend the remaining claims. What should counsel do? The answer depends on the facts of the case. Considering the potential ramifications, defense counsel should fully disclose to the insured the coverage risks associated with a summary judgment motion under the circumstances. In some cases, it would be more beneficial to proceed with summary judgment in spite of coverage ramifications. The key for defense counsel faced with this dilemma is that the decision can be made only by the insured after consultation and full disclosure.

Can Counsel Disclose Information to the Insurer That Could Provide a Basis to Deny Coverage?

An interesting twist on the responsibilities of counsel in the tripartite relationship is whether defense counsel can disclose information to the insurer that provides a basis to deny coverage? Defense counsel’s options include 1) Disclosure to the insurer 2) Withholding that info from the insurer or 3) Analyzing whether the information is protected by the attorney client privilege before disclosing to the insurer. Under ABA Model Rule 1.6 defense counsel is obligated to maintain the confidences of the insured. However, because most insurance policies gave the carrier the right to control the litigation, there is implied consent from the insured for defense counsel to disclose claim information to the carrier through status reports and legal bills. In some instances, disclosure may result in a conflict of interest. Simply because the carrier controls the litigation or pays the legal bills, disclosure is not automatically authorized.

For example, in certain jurisdictions, defense counsel must obtain the company’s informed consent to disclose materially adverse information, such as that which would limit or preclude coverage to the carrier. Informed consent means the information and material risks of disclosure must be discussed with the insured and reasonable available alternatives to disclosure must be explored. If your company refuses to consent to disclosure to the carrier, there is a conflict. Furthermore, if the carrier has asked for and truly requires the confidential information, defense counsel should withdraw. In California, the State Bar has issued a formal opinion stating that defense counsel has a duty to protect adverse coverage information from disclosure to a carrier. This view has found favor with a significant number of states.

What if the Insured does not agree with the Carrier about the Case Handling Strategy and Settlement Authority?

Another ethical dilemma arises when the insured has a large deductible or SIR (Self Insured Retention) and wishes to control the litigation. Most policies currently written have either an SIR or a deductible. SIRs and deductibles serve the same purpose of controlling expenses by allocating financial responsibility for settlement of a claim or defense expenses to the insured i.e., “having skin in the game”.

Some SIRs and deductibles can be quite significant, and are often in excess of $100,000. You may encounter a potential conflict of interest if the insurer wants to settle the case for an amount within, or close to, the deductible or SIR whereas your company may prefer to try the case in the hope of avoiding a judgment. If it’s the insured’s money at stake, such as exists in an SIR situation or a high deductible policy, should an insured dictate case handling strategy and settlement?

This is a difficult question. In most jurisdictions, the insurer has the authority to settle claims or lawsuits without the insured’s consent absent language in the policy. These courts hold that the insured relinquishes control of its defense when it accepts representation by counsel paid for by an insurer. However, this is not the case where the expenses remain within the SIR layer. To maintain control, many carriers have inserted language granting themselves authority to select counsel and to direct the litigation as well as requiring the insured to cooperate by sharing defense strategy and providing case documentation. The ambiguity regarding who is in control rests with those policies that do not contain such language or the language is unclear.

Just as there are clauses granting control to the insurers, there are also clauses such as .Consent to Settle” and “Hammer Clauses” which cede control of the litigation to the insured. Consent to Settle clauses are most commonly found in professional services policies, and require the insured to grant its approval to a settlement. Consent to Settle clauses are viewed as necessary for professional policies as not only is there financial liability at issue, but often the professional’s reputation is at issue as well. And additionally, there may be tracking of settlements as part of the professional’s continued licensing. Thus for the professional, there is a lot more at stake in the decision to try the case or settle.

More commonly found in General Liability (GL) policies is the Hammer Clause. The Hammer Clause of the insurance policy holds the insured financially responsible if they disagree or try to stop a proposed settlement recommended by the insurer. The Hammer Clause is a cost shifting feature that kicks in when the insurer recommends settlement at a certain figure and the insured disagrees. If the insurance policy contains such a clause, then the insured becomes responsible for any settlement above the proposed settlement figure and any future expenses.

Irrespective of these different clauses and policy language, a carrier’s strategic directive cannot impede defense counsel’s ability to competently and effectively represent the insured. If defense counsel receives a strategic directive from the carrier, defense counsel should consider whether she can follow the directive without violating the duty of competent representation. These issues often arise in relation to litigation and billing guidelines (i.e. limiting the number of depositions or requiring prior approval for legal research or motions). In these instances, defense counsel is required to proceed in the best interest of the insured. As a result, if there is a disagreement between defense counsel strategy and carrier strategy, defense counsel should disclose the disagreement to the insured and then approach the carrier about the disagreement and the options for resolution. If the disagreement is unresolvable in a manner that would protect the insured’s interests, there is a conflict and defense counsel should withdraw.

Under ABA Model Rule 1.2, defense counsel must honor the insured’s decisions about settlement. However, under must insurance policies, the insured relinquishes the right to make decisions about settlement and the carrier is authorized to settle a claim without the insured’s consent. The insured does, however, retain the power to reject the defense and assume the risk and expense of its own defense. So, if the insured disagrees with the claim handling strategy or the authorization for settlement by the insurer, defense counsel should give the insured the opportunity to reject the settlement and terminate the representation.

Conflicts Pertaining to Damages in Excess of Policy Limits

Cases in which the potential damages exceed available policy limits can also cause conflicts of interest between the insured and insurer. In this case, many times the insured will make a demand that the insurance carrier tender policy limits to avoid a judgment in excess of policy limits for which there may or may not be insurance coverage. If the insurer disagrees with the settlement value of the case and believe the cases can be settled for less than limits, a conflict is created and the insurer and insured’s interest diverge.

The same conflict of interest exists when there are covered and uncovered claims to be resolved in a settlement. A policy-limits settlement is not in the insured’s best interest when there are significant coverage issues involved. What should defense counsel do in this situation? Excess exposure alone does not create a conflict for defense counsel: defense counsel is in pursuit of two objectives: either win the case or keep the damages as low as possible. If counsel meets these objectives, then both clients (insurer and insured) will benefit. The question is the issue of settlement and at what amount. There is sparse case law addressing this issue, and certainly not a consensus. Some states has held that an insurer must allow an insured to make the ultimate choice regarding settlement as part of its enhanced duty of good faith.

Conflicts Relating to the Use of In-House Counsel by the Insured

Insurers must hire lawyers to comply with their obligations to defend an insured. Based on years of experience, insurers have found that they can obtain equally good results with full time employee lawyers as with traditional law firms. The employee lawyers, often in captive law firms, are more economical for the insurers to utilize than the law firms. The insurers argue that there is no evidence that the use of employee lawyers has resulted in a decrease in quality of representation for its insureds. They argue that the savings in utilizing the employee lawyers allows the carriers to pass on the savings as reduced premiums.

However the use of employee lawyers is not without controversy. Different parties argue that the use of employee lawyers to defend insureds violates the unauthorized practice of law as lawyers are forbidden “to assist a person who is not a member of the bar in the performance of an activity that constitutes the unauthorized practice of law.”5 The “person” in the previous statement is the insurance carrier. As corporations cannot practice law, insurers have countered this argument by creating law firms who are independent lawyers, but are employees of the insurer. Additionally, insurers have taken the position that there is no conflict as the interests of the carrier are united with the insured in defeating the claim.

Fortunately, most courts addressing such challenges have upheld the propriety of using employee lawyers to defend insureds. Of the 24 states that have addressed the question, courts in 14 states and ethics committees in eight others have agreed that a liability insurer defending it’s insured with employee counsel does not engage in unauthorized practice of law. It is important to note that lawyers who are employees of insurers face the same ethical issues as outside law firms.


The tripartite relationship presents a complex and challenging dynamic. The ultimate goal is the successful resolution of a claim and the capping of risk, while managing the relationship between defense counsel, the insurer and the insured. Medmarc, through its experienced claims examiners and in conjunction with its carefully selected defense panel members, can assist policyholders in navigating this process to achieve a successful outcome.


1 Restatement (Third) of the Law Governing Lawyers §8 (2000).

2 Buss v. Superior Court (Transamerica Ins. Co.), 16 Cal.4th 35, 65 Cal.Rptr.2d 366; 939 P.2d 766 (1997).

3 National Sur. Corp. v. Immunex Corp., 176 Wn.2d 872, 297 P.3d 688 (2013).

4 CAMICO Mut. Ins. Co. v. Heffler, Radetich & Saitta, LLP, No. 13-3619 (3d Cir. 2014).

5 ABA Model Rule 5.5(b)


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