Attorney Toolbox: Conflict of Interest Research for Attorneys of Insurance Company Captured Law Firms
FACTS
In a personal injury case the insured who has been sued is represented by an attorney who is an employee of the insured’s insurance company.
ISSUE
Is there an inherent conflict of interest when an attorney employed by the insurance company takes on the defense of the insured?
THE LAW
Rule 32:1.7 of the Iowa Rules of Civil Procedure discuss conflict of interest. A conflict of interest occurs when “there is a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client, a former client, or a third person or by a personal interest of the lawyer.” Iowa R. Civ. P. 32:1.7(a)(2). Based upon this, when a lawyer represents both an insurance company while defending an action against the insurance company’s insured a potential conflict of interest can exist. However, a lawyer may represent a client if the “lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client” and “informed consent by both parties is given in writing.” Iowa R. Civ. P. 32:1.7(b)(1)-(4).
There are a couple of Iowa cases that discuss a conflict of interest between an insurance company, the insurance company’s insured, and the insurance company’s attorney. However, in none of these cases does the court explicitly say that a relationship of this nature is a conflict of interest between the parties. Iowa courts have recognized that when an attorney represents both the insurer and the insured, there is an attorney-client relationship for both. Henke v. Iowa Home Mutual Casualty Co., 87 N.W.2 920, 923 (Iowa 1958). In one such case, a conflict of interest is recognized in situations where a plaintiff offers to settle within policy limits. Koppie v. Allied Mutual Insurance Co., 210 N.W.2d 844, 847 (Iowa 1973). Courts in Wisconsin have held that an attorney may act for both parties with the full knowledge and consent of both. Henke, 87 N.W.2d
at 924. In these situations, however, it can be impossible for the attorney to be faithful to both clients. Id. “In almost every such case there is a potential conflict of interest and, if and when it develops, that lawyer cannot and should not try to render further service or advice therein.” Id.
In Iowa Supreme Court Attorney Disciplinary Board v. Clauss, the court held that “[e]xcept with the consent of the client after full disclosure, a lawyer shall not accept employment if the exercise of the lawyer’s professional judgment on behalf of the client will be or reasonably may be affected by the lawyer’s own financial, business, property, or personal interests. 711 N.W.2d 1, 2 (2006). According to the decision in Clauss, the attorney’s representing both the insured and the insurance company is involved in a conflict of interest. Because they are employees of in this case Nationwide, the attorney’s have a financial, business, property, and/or personal interest in their employer and any decisions they make on behalf of the insured could be affected by their interests in Nationwide. According to Clauss, the attorney’s representing both the insured and Nationwide Mutual Insurance Company are required to obtain valid waivers from each client that are sufficient to satisfy the Iowa Rules of Court. It would appear the Court must review the waivers and not just take the defense attorneys word there are written waivers and that they cover all conflict situations. Those written waivers must cover in detail a list of the potential conflicts, which would seem to be near impossible.
It is not enough that the lawyer simply informs the client that he is representing both sides. Clauss, 711 N.W.2d at 3. “In order to make a valid waiver, it must be a knowing, intelligent act done with sufficient awareness of the relevant circumstances and likely consequences.” Brady v. United States, 397 U.S. 742, 748 (1970).
An attorney may represent multiple clients if two necessary conditions are met: 1) it is obvious that the lawyer can represent the interests of each client, and 2) if each client must consent to representation after full disclosure of the possible effects of such representation. Clauss, 711 N.W.2d at 3. Because the conditions are necessary, each must be met for a lawyer to represent clients with conflicting interest. The decision in Clauss explicitly states that a lawyer is precluded from accepting employment if his own financial interest conflict with his clients. Id. The attorneys representing simultaneously the insured and the insurance company, under Clauss, appear to have a conflict of interest that cannot be waived due to the fact that it is not obvious that both the insured and the insurance company can have their interests adequately represented simultaneously the by same counsel, and because counsel has a number of interests in the insurance company that prevent them from fully representing the interests of the insured.
In Clauss, the attorney’s license was suspended for representing multiple clients when: 1) his professional judgment could have reasonably been affected by the lawyer’s own financial, property, or personal interests; 2) he continued to represent multiple clients when his professional judgment is likely to be adversely affected by the representation of another client; and 3) he failed to fully disclose the possible adverse affects of representing multiple clients with conflicting interests. In a personal injury case, where the defense attorney represents both the insured and the insurance company it is impossible to know how the facts of the case will develop that may lead to an excess judgment. It is therefore impossible to waive such a conflict situation and the attorney is committing all three of the above infractions and should be subject to removal from the case and/or disciplinary action.
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