:: Appointed Defense Counsel: The Small Print Enlarged
Stephen Rosenberg handily summarizes the ethical duties and potential conflicts of interest that arise when an insurer provides a legal defense in his article, The Three Rules of the Tripartite Relationship. He writes:
The whole issue can really be boiled down to three handy rules of thumb. First, the defense counsel appointed by the insurer must focus only on defending the case as though the insured were his or her only client, and cannot muddle about between the insurer and the insured over any coverage issues that remain outstanding. Second, the insurer needs to retain separate lawyers, in the role of so-called coverage counsel, to take the factual information developed by defense counsel in defending the case and evaluate how it affects coverage. And third, an insured must remember that the defense counsel is solely going to defend the case, without regard to coverage disputes and is not looking out for the insured’s interests with regard to whether any recovery in the case will actually be covered; the insured has to instead hire independent coverage counsel of its own to take steps to parlay the evidence developed by the defense counsel into a commitment of coverage by the insurer. The Three Rules of the Tripartite Relationship, Stephen Rosenberg, Boston ERISA And Insurance Litigation Blog
Without assigning blame, I submit that employers frequently do not understand the implications of the foregoing.
Here’s an example.
ACME, Inc. has a self-funded group health plan. One of ACME’s employees, Joe Lunch Bucket, is injured when a co-worker runs him over with a forklift.
ACME insures its workers’ compensation obligations through Litigation Mutual, a workers compensation carrier. Joe files a claim with L.M. which is promptly denied with a terse suggestion in the denial letter that the claim be submitted to Joe’s health insurance carrier. Joe hires an attorney and pursues a workers comp claim. L.M. appoints an attorney to defend.
In this case, the aggressive defense of L.M. on questionable facts (recall the forklift accident) is not in ACME’s best interest because if Joe is forced to settle or even relinquish his claim, ACME’s self-funded health plan has to absorb the costs of Joe’s medical bills. Moreover, if the expenses exceed the stop loss specific retention amount, ACME may have trouble getting reimbursed since the stop loss carrier may not view the risk transfer from L.M. to the health plan as such a nifty idea.
A related issue – if L.M. settles out of court with Joe, will defense counsel consult ACME about the proper reimbursement of the health plan out of the settlement? (Remember, the health plan has probably been paying Joe’s bills based on the denial of comp benefits.) That would be nice, but I wouldn’t count on it.
Having your insurance carrier provide a legal defense has its advantages and disadvantages. Employers should view the responsibility of understanding the conflicts that can arise as on their own watch. In many cases, the best approach will be to have regular corporate counsel advise of the specific issues that may be of concern.
