Can a liability insurer's instructions limiting how defense counsel conducts the defense create an ethical problem for the lawyer?

Plain-English summary

The Committee was asked whether a liability insurer's instructions to defense counsel to conduct or limit a defense so as to minimize the insurer's costs can give rise to an ethical problem. It answered "Yes." The opinion acknowledged that insurers have always been concerned about expenses and fees and have a legitimate interest in keeping costs down, and noted some commentators' view that carrier-imposed limitations are not a problem so long as claims do not exceed policy limits. The Committee took issue with that generalization, prompted by insurance defense counsel who had sought guidance because of extraordinary limitations certain insurers tried to impose.

The opinion explained that a restricted defense budget can pose an ethical dilemma because the insured is defense counsel's client, entitled to competent and zealous representation and a defense not adversely affected by prohibited conflicts of interest. At some point, carrier-imposed restrictions may threaten counsel's ability to provide that representation and to bring independent professional judgment to bear on the insured's behalf, and the insurer's budgetary restrictions may justify or require withdrawal. The opinion pointed to Bevevino v. Saydjari, where an insured was devastated at trial because of inadequate preparation tied to the carrier's cost decisions, and quoted the trial court's observation that the neglect appeared to be a function of the carrier's deliberate decision not to spend enough to defend the case properly.

The opinion emphasized it was issued only to advise of ethical considerations that may arise, not to suggest counsel may needlessly run up a bill (which it called just as reprehensible as yielding professional control to an adjuster or claims manager) and not to suggest that costs are not a legitimate concern of the insurer. It stressed that conflicts are not inevitable or irreconcilable and can usually be resolved amicably, while underscoring that the insured is the client and counsel's professional obligations flow from the attorney-client relationship, not from the commercial relationship between the insured and the insurer.

Currency note

This opinion was issued in 1988 under Kentucky's former Code of Professional Responsibility (in effect 1971 to 1990), before the Kentucky Bar Association's 1990 adoption of the Rules of Professional Conduct (SCR 3.130) and the substantial 2009 revisions to those rules. Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against the current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Who is the client when an insurer hires defense counsel for an insured?

A: The insured. The opinion stressed that the insured is defense counsel's client and that counsel's professional obligations flow from the attorney-client relationship, not from the insurer-insured commercial relationship.

Q: Can an insurer limit the defense budget to control costs?

A: It has a legitimate interest in costs, but the opinion concluded that at some point carrier-imposed restrictions may threaten the lawyer's ability to provide competent, zealous, independent representation to the insured.

Q: What should counsel do if the insurer's limits compromise the defense?

A: The opinion said occasions may arise in which the insurer's budgetary restrictions justify or require withdrawal, while cautioning that counsel may not needlessly run up a bill either.

Background and rules framework

The opinion interprets the former Code's conflict, third-party-direction, competence, and zealous-representation provisions, DR 5-101, DR 5-105, DR 5-107 (avoiding influence by those who pay for a lawyer's services), DR 6-101 (competence), and DR 7-101 (zealous representation). The modern analogs are Model Rule 1.7 (conflicts), Model Rule 1.8(f) (compensation from a third party), and Model Rule 5.4(c) (a third party who pays may not direct the lawyer's professional judgment). The analysis turns on the lawyer's duties to the insured as the client.

Citations and references

Rules of Professional Conduct:

• DR 5-101; DR 5-105; DR 5-107; DR 6-101; DR 7-101 (former Code)
• MR 1.7 (conflicts of interest); MR 1.8 (third-party compensation); MR 5.4 (professional independence)

Cases:

• Bevevino v. Saydjari, 76 F.R.D. 88 (S.D.N.Y. 1977), aff'd, 574 F.2d 676 (2d Cir. 1978), consequences of overly restrictive carrier-imposed defense
• Moritz v. Medical Protective Co., 428 F. Supp. 865 (W.D. Wis. 1977), insured as client

See also

• KBA Ethics Op. E-340: Insurer in Client Interviews
• ABA Formal Op. 03-430: Insurance Staff Counsel

Source

• Landing page: https://kybar.org/For-Members/Rules-Ethics-Information/Ethics-Opinions
• Original PDF: https://kybar.org/Portals/0/Admin/Ethics%20Opinions/KBA_E-331.pdf

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

KENTUCKY BAR ASSOCIATION
Ethics Opinion KBA E-331
Issued: September 1988

This opinion was decided under the Code of Professional Responsibility, which
was in effect from 1971 to 1990. Lawyers should consult the current version
of the Rules of Professional Conduct and Comments, SCR 3.130 (available at
http://www.kybar.org), before relying on this opinion.

Question:

A liability insurance carrier instructs defense counsel to conduct or limit a
defense so as to minimize the insurer's costs. Can such carrier imposed
limitations give rise to an ethical problem?

Answer:

Yes.

References:

DRs 5-101, 5-105, 5-107, 6-101 and 7-101; Bevevino v. Saydjari, 76 F.R.D.
88 (S.D.N.Y. 1977), aff'd, 574 F.2d 676 (2d Cir. 1978).
OPINION

Liability insurers have always been concerned about expenses and attorney fees for
which they are responsible pursuant to the terms of the standard liability policy. It is
apparent that the insurer has a legitimate interest in keeping such costs down. Indeed, some
commentators have advanced the generalization that carrier imposed limitations are not a
problem so long as the claims do not exceed the policy limits. Cf. Hutcheson, Recurring
Conflict Problems Facing Insurance Defense Lawyers, in Conflicts of Interest in Insurance
Practice 41 (DRI Monograph No. 5, 1971). On the other hand, several insurance defense
counsel have sought guidance from the Committee because of the imposition of
extraordinary limitations that certain liability insurers have sought to impose upon them.
We must take issue with the above mentioned generalization, or any generalization, to the
following extent.
A restricted budget for the defense can pose an ethical dilemma for defense
counsel. This is so because the insured is defense counsel's client. The insured is entitled to
competent and zealous representation, and a defense that is not adversely affected by
prohibited conflicts of interest. At some point, carrier imposed restrictions may threaten
counsel's ability to provide such representation and impact on the lawyer's ability to bring
to bear his independent professional judgment on behalf of the insured. Occasions may
arise in which the insurer's budgetary restrictions will justify, or require, withdrawal.
The case of Bevevino v. Saydjari, 76 F.R.D. 88 (S.D.N.Y. 1977) presents an
example of the consequences of overly restrictive defense strategies imposed by an
insurance carrier. In that case defense counsel were full time employees of the carrier (a

practice prohibited in Kentucky not only because of inherent conflicts of interest, but also
because of our rules against "corporate" and unauthorized practice of law). The insured
have been devastated at trial because of inadequate pretrial preparation, because he had not
been prepared for his deposition, and because certain testimony was not presented because
of cost considerations.
The trial judge observed:
Since the carrier is in the business of defending lawsuits, it must be
presumed to know the necessary ingredients of a proper defense. We
therefore can only conclude that the above described neglect was a
function of the carrier's deliberate decision not to spend enough money to
have the lawsuit properly defended .... Presumably it has concluded that
by taking all its assumed risks as a package it saves money in the end by
skimping on preparation costs and hoping for settlements.
Although these observations were made in passing on a motion for judgment n.o.v.,
the court could not resist giving its opinion on the propriety of legal action against the
carrier and counsel. Id. at 94 n.11.
We issue this opinion only to advise of ethical considerations that may arise in this
context. We are not suggesting that counsel has carte blanche to needlessly run up a bill.
Such conduct would be just as reprehensible as yielding professional control of his or her
work to an adjuster or claims manager. Nor are we suggesting that costs and expenses are
not a legitimate concern of the insurer. Conflicts are not inevitable, or irreconcilable.
Presumably these matters can be resolved amicably and responsibly in the great majority of
cases.
We only wish to emphasis that the insured is defense counsel's client, and that
counsel owes professional obligations to his or her client that flow from the attorney-client
relationship and are not bounded by the "hardboiled commercial" relationship between the
insured and the insurer. Cf. Moritz v. Medical Protective Co., 428 F.Supp. 865, 872 (W.D.
Wis. 1977).

Note to Reader
This ethics opinion has been formally adopted by the Board of Governors of the
Kentucky Bar Association under the provisions of Kentucky Supreme Court Rule 3.530
(or its predecessor rule). The Rule provides that formal opinions are advisory only.