The Tripartite Relationship and Attorneys-Client Privilege
Wendy J. Keenan, Wilson Elser, New York
In the litigious era in which we live, lawyers are increasingly blamed if their representation of a client does not go as the client expected. In addition to demanding the return of fees paid, clients demand compensation from their attorney for the amounts they believe they would have recovered or for amounts they had to pay due to some perceived malpractice. Attorneys purchase legal malpractice professional liability insurance policies to shift to an insurer the burden of defending and settling these claims and lawsuits. Pursuant to the terms of such policies, insurers are generally afforded the right and duty to defend an insured when a claim is made or a lawsuit is commenced. The policy provision extending this right and duty will also likely confirm the insurer’s right to select defense counsel, control the defense and, should the opportunity present itself, settle any claim with the insured’s consent.
To meet its obligation to provide a defense, the insurer will retain defense counsel located in the jurisdiction in which the claim or lawsuit is pending. The retention of such counsel gives rise to the “tripartite relationship” between the insured, insurer and defense counsel during the pendency of the claim or lawsuit, which can be described as “a loose partnership, coalition or alliance directed toward a common goal, sharing a common purpose." American Mut. Liab. Ins. Co. v. Superior Court, 113 Cal. Rptr. 561, 571 (Ct. App. 1974). This article discusses the tripartite relationship; the interplay between the insured, insurer and counsel; and the existence of the attorney-client privilege in this relationship.
Who Is the Client?
The tripartite relationship involves the insurer, its insured and the counsel retained by the insurer to represent the insured in the defense of a claim. The underlying concept is that these three parties are in a coalition to work together to reach a favorable, mutually beneficial resolution to the claim at issue. Their interests are aligned inasmuch as it is in the best interests of the insured and the insurer for the claim to be resolved as quickly and for as little as possible, either in defense costs or damages.
Most legal malpractice policies give the insurer the right to control the defense, including the selection of defense counsel. In some cases counsel has a preexisting relationship with the insurer, and in others with the insured. Regardless of whether any such prior relationship exists, an attorney-client relationship is always created between appointed counsel and the insured, with the insured being owed a duty of undivided loyalty by counsel. This relationship is generally limited to the defense of a specific claim, but for corporate insureds, the representation may extend to other matters, including other claims or litigation.
The relationship that is created between the insurer and appointed defense counsel is not as universally recognized. The majority of jurisdictions, more than 35 states, acknowledge that counsel retained by the insurer to represent the insured has two clients – the insurer and the insured. The recognition of dual representation enhances the prospect of a higher-quality defense, as the insured, insurer and counsel can more easily share information, more thoroughly analyze issues and strategize to develop the best possible defense. Defense counsel can capitalize on the information provided by the insured as well as the insurer’s vast experience in managing litigation.
Attorney-Client Privilege in the Dual-Client Relationship
To effectively and competently represent its clients, counsel must be able to share and obtain information from the insured and the insurer without fear of such communications being obtained by the opposition. While communications solely between the insurer and the insured are not ordinarily protected by any type of privilege, the tripartite relationship allows for the assertion that communications between the insured, insurer and counsel are protected by attorney-client privilege.
At present, only a few states have articulated a clearly defined rule that the attorney-client privilege applies in the tripartite relationship. California and Kentucky are two such states.
In California, the Court of Appeals for the Fourth Appellate District held in Bank of America, NA v. Superior Court that both the insurer and insured were holders of the attorney-client privilege and that it was unnecessary for both insured and insurer to seek to quash a subpoena seeking privileged documents. 212 Cal App 4th 1076 (2013). In this case, Bank of America (BOA) was an insured under a lender’s title policy issued by Fidelity National Title Insurance Company. When BOA made a claim under the policy, Fidelity retained counsel to pursue certain of BOA’s rights. The defendant in that action served a subpoena on Fidelity’s parent company and another title insurer requesting documents, including communications between counsel and Fidelity. While BOA moved to quash the subpoena on the grounds that the defendant sought documents protected by attorney-client privilege, Fidelity did not. The Superior Court denied the motion, and BOA and Fidelity brought a petition for a writ of mandate.
The Court of Appeals held that as Fidelity had retained counsel to represent BOA, a tripartite attorney-client relationship was established. The court further determined that since BOA and Fidelity were joint clients of said counsel, it was not necessary for both BOA and Fidelity to seek to quash the subpoena, as it was sufficient that one of the joint holders of the attorney-client privilege had done so.
The BOA decision confirmed the existence of the tripartite relationship and the extension of an attorney-client privilege to all communications between the insured, insurer and counsel in California. The court made it clear that the nature of the action was not an issue and that the attorney-client privilege applies when the insurer retains counsel for its insured, regardless of whether said counsel was appointed to defend an action or to prosecute a claim on the insured’s behalf.
The issue of tripartite relationships and attorney-client privilege was also recently considered by the U.S. District Court for the Southern District of West Virginia, Charleston Division. For the first time under Kentucky law, this court contemplated whether communications between an insurer, insured and counsel are protected by the attorney-client privilege.
In Ellis v. Arrowood Indemnity Co., the plaintiffs commenced a legal malpractice action against two law firms, both of which carried malpractice insurance. 2014 U.S. Dist. LEXIS 121913 (USDC WVa). Arrowood retained counsel to represent one of the defendant law firms. The lawsuit was bifurcated, and phase one ultimately resulted in a jury verdict in favor of the plaintiffs. A settlement was reached before phase two began, but due to an undisclosed conflict between the judge and the plaintiffs’ trial consultant, the verdict and the settlement were vacated. Due to a delay while the parties attempted to reach a new settlement, the plaintiffs filed a lawsuit directly against the Arrowood. In that lawsuit, subpoenas were issued to the insured law firm and the counsel retained by Arrowood to represent them seeking communications between counsel and the insurer. Arrowood moved to quash the subpoenas.
The court held that under Kentucky law, since an insured and an insurer are joint clients of counsel retained by an insurer to represent an insured, the rules of joint representation apply and, thus, an attorney-client privilege existed with respect to confidential communications between the insurer, counsel and the insured. (The court denied Arrowood’s motions to quash solely on the grounds that Arrowood failed to file a privilege log and failed to provide the factual basis for the court to determine whether the attorney-client privilege applies.)
The Arrowood court made new law in Kentucky by ruling on a previously undeveloped area of law in that state. The court made it clear that Kentucky was joining the ranks of the majority in holding that the insurer, like the insured, is a client of the appointed defense counsel.
Even if the tripartite relationship and attorney-client privilege is recognized, care must be taken to ensure that the privilege is not inadvertently waived. In this regard, all parties must be wary about disclosing information to any individual or entity not considered to be a client under this analysis. This disclosure can be something as small as copying such third-party non-clients on otherwise privileged communications, which could be argued by the opposition as having waived any attorney client privilege that would otherwise have attached, making such communications possibly discoverable to the opposing party.
The Single-Client Relationship
A minority of states, including but not limited to Texas, Connecticut and Colorado, reject the dual client relationship, with case law determining that appointed counsel has one and only one client: the insured. Those states have rejected the tripartite relationship on the grounds that if there is no attorney-client relationship between the insurer and appointed counsel, there can be no attorney-client privilege between them.
Whether or not the applicable jurisdiction adheres to the minority approach, the insurer will still require information and documentation to assess the allegations asserted against its insured, the quantum of damages sought by the plaintiff, and the potential exposure and settlement value to the insured and insurer. However, when attorney-client privilege does not apply to communications between counsel and the insurer, how can one protect such communications?
Information that is generally available to the public, such as pleadings, motions and documents filed with the court, can be provided to the insurer without fear of the attorney-client privilege being waived. In addition, deposition transcripts or communications sent to or received from the opposing party can also be provided to the insurer. While it may not be prudent in those states that only recognize the insured as the client of the appointed counsel to send documents containing substantive analyses to the insurer, oral discussions about the claim or litigation with counsel present may be a possible alternative.
In addition, participating in mediation may afford the insurer, insured and appointed counsel with an alternative means to share information with the insurer, under a privilege that may not otherwise exist. In many states, information or documentation exchanged or discussed at mediation is generally not discoverable. The scope and extent of the mediation privilege should be explored in states that do not recognize the tripartite relationship as a means by which the insured, insurer and counsel can discuss during the mediation the critical issues involved in a claim or litigation, such as strategy, potential for resolution and settlement value.
The attorney-client privilege is an important element in the defense of any claim or lawsuit, but it can present problems where the tripartite relationship exists between the insured, the insurer and appointed counsel. Before information and documentation is shared among these parties, it is of the utmost importance to confirm the law in the applicable jurisdiction and whether the tripartite relationship and applicability of the attorney-client privilege are recognized. If they are not, alternative means must be considered to share information with the insurer.
*Wendy Keenan focuses her practice on complex professional liability coverage matters as claims and monitoring counsel for international and domestic insurance carrier clients. Her practice includes the representation of insurers in all aspects of coverage disputes. Wendy approaches client assignments from the dual perspective of a lawyer and a businessperson to determine the most legally savvy and cost-effective means to resolve a particular claim.
In her coverage practice, Wendy has handled claims under policies for attorneys, architects and engineers, real estate agents, mortgage brokers, and insurance agents and brokers, as well as nonprofit organizations, unions, translators and interpreters, telephone marketing services, and other miscellaneous professions.
Wendy also has a strong background handling all aspects of ERISA defense litigation and most recently has been retained to defend a number of premises liability cases.
She may be reached at: firstname.lastname@example.org