Can a lawyer hired by an insurer to defend an insured develop facts that would defeat coverage, after telling the insured to get his own lawyer?

Plain-English summary

The inquiry posed a recurring problem in insurance defense: a complaint (or workers' compensation petition) alleges facts that, if true, trigger the carrier's duty to defend, but the attorney the carrier retains discovers facts suggesting the allegations are untrue and that the true facts would expose the insured to liability the policy does not cover (for example, an accident that actually occurred before the policy's effective date). The attorney asked whether he could ethically continue in the case and try to prove the true facts if he first notified the insured of his intention, inviting the insured to obtain personal counsel.

The Committee answered that he could not proceed that way. Quoting Williams v. Bituminous Casualty Corporation, it explained that a carrier may not so defend an insured as to leave him liable and uncovered, and an attorney engaged by the carrier to defend in the insured's name could not ethically seek such a result. Citing ABA Opinion 282, it stated that the lawyer so employed must represent the insured as his client with undivided fidelity under Canon 6, and (quoting American Employers Ins. Co. v. Goble Aircraft Specialties) that counsel paid by the carrier owes the insured an undeviating and single allegiance, with no two standards for privately retained and carrier-paid counsel.

Adherence to that standard, the Committee held, forbids the attorney from taking a position adverse to the insured. His duty to the carrier requires that he disclose the situation to it, and the true facts should be established by an appropriate separate proceeding, such as a declaratory judgment action brought by the carrier against the insured and the plaintiff, in which the original attorney may not appear for any party so that all interested parties have independent counsel. Under no circumstances may the original attorney proceed with the defense in the main case until the disputed facts have been finally determined; if the main action is stayed pending that determination, he may, with the consent of both the insured and the carrier, continue as counsel of record for the insured.

Currency note

This opinion was issued in December 1969, before New Jersey's September 13, 1971 adoption of the Disciplinary Rules (Code of Professional Responsibility), so the Committee was applying the Canons of Professional Ethics (Canon 6) and the cited authorities. It also predates the 1984 Rules of Professional Conduct and all later revisions. The conflict principles it applied are now treated under RPC 1.7. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule or requirement mentioned here.

Common questions

Q: Can a carrier's defense lawyer prove facts that would put the loss outside coverage?

A: No. The Committee held that defense counsel owes the insured undivided fidelity and may not take a position adverse to the insured in the case; doing so would improperly leave the insured liable and uncovered.

Q: Does warning the insured to hire his own lawyer cure the problem?

A: No. The Committee held that even after inviting the insured to obtain personal counsel, the attorney may not continue to develop the adverse facts in the underlying case; the coverage dispute must be resolved separately.

Q: How should the coverage dispute be resolved?

A: Through a separate declaratory judgment action brought by the carrier against the insured and the plaintiff, in which the original attorney may not appear for any party. If the main case is stayed, he may continue as the insured's counsel of record with the consent of both the insured and the carrier.

Background and rules framework

The opinion applied Canon 6 of the Canons of Professional Ethics, requiring undivided fidelity to the insured even when the carrier pays the fee, drawing on Williams v. Bituminous Casualty and ABA Opinion 282. In current New Jersey terms the conflict analysis falls under RPC 1.7, and the proper route is a separate coverage action with independent counsel for the affected parties.

Citations and references

Cases:

• Williams v. Bituminous Casualty Corporation, 51 N.J. 146 (1968)
• American Employers Ins. Co. v. Goble Aircraft Specialties, 205 Misc. 1066, 131 N.Y.S.2d 393 (1954)
• Szabo v. Standard Commercial Body Corp., 221 App. Div. 722, 225 N.Y.S. 332 (3d Dept. 1927)

Other authorities:

• Canons of Professional Ethics, Canon 6 (conflicting interests / undivided fidelity)
• ABA Committee on Professional Ethics and Grievances, Opinion 282 (1950)
• ABA Committee on Professional Ethics, Informal Opinions 728 (1963), 822 (1965), 873 (1965), 948 (1966)

See also

• NJ ACPE Op. 166: Using a Policyholder's Statement to His Insurer Against Him at Trial
• NJ ACPE Op. 407: Insurance Carrier's Attorney Opposed to the Insured in a Declaratory Action
• NJ ACPE Op. 578: Insurance Defense Counsel's Duty to Advise the Insured on Settlement

Source

• Full text (Justia mirror): https://law.justia.com/cases/new-jersey/advisory-committee-on-professional-ethics/2004/acp165-1.html
• Issuing authority: New Jersey Supreme Court Advisory Committee on Professional Ethics, via the NJ Courts Supreme Court Committees page

Original opinion text

Reproduced from a full-text mirror of the official opinion for research purposes. The linked official source controls.

92 N.J.L.J. 831, December 18, 1969

OPINION 165

Conflict of Interest Insurance Policy Disputed Facts re Coverage

The inquirer submits the following hypothetical set of facts which, in one form or another, is recurrent in the field of defending insurance cases:

The Complaint (or Petition in Workmen's Compensation cases) alleges facts which, if true, invoke the duty of the insurance company to defend the insured. The attorney retained by the carrier to defend the matter ascertains facts which suggest that the allegations of the Complaint (or Petition) are not true and that the true facts would expose the insured to liability not covered by the policy.

A sample situation; date of accident alleged to be June 1, 1968. The policy was issued on May 30, 1968, and the actual date of the accident was May 25, 1968.

The attorney asks whether he may ethically continue in the case and endeavor to prove the true state of facts if he first notifies the insured of his intention to do so (to protect the insurance carrier), by this means inviting the insured to secure personal counsel.

The New Jersey Supreme Court in Williams v. Bituminous Casualty Corporation, 51 N.J. 146 (1968), said:

Thus the coverage question does not depend upon an issue material to the litigation between the employee and the employer. The resolution of the employee's claim against the employer would not have settled the coverage problem. More than that, if the Division of Workmen's Compensation somehow accepted the issue in the trial of the employee's claim against the employer, the carrier could not have asserted its position in the employer's name, for a carrier may not so defend an insured as to leave him liable and uncovered. An attorney, engaged by the carrier to defend in the insured's name, could not ethically seek such a result. See Szabo v. Standard Commercial Body Corp., 221 App. Div. 722, 225 N.Y.S. 332 (3d Dept. 1927).

In A.B.A. Comm. on Professional Ethics and Grievances, Opinion 282 (1950), it was held that:

The essential point of ethics involved is that the lawyer so employed shall represent the insured as his client with undivided fidelity as required by Canon 6.

See also American Employers Ins. Co. v. Goble Aircraft Specialties, 205 Misc. 1066, 1075, 131 N.Y.S.2d 393, 401 (1954), where the Court said:

When counsel, although paid by the casualty company, undertakes to represent the policyholder and files his notice of appearance, he owes to his client, the assured, an undeviating and single allegiance. His fealty embraces the requirement to produce in court all witnesses, fact and expert, who are available and necessary for the proper protection of the rights of his client.

The Canons of Professional Ethics make it pellucid that there are not two standards, one applying to counsel privately retained by a client, and the other to counsel paid by an insurance carrier.

Adherence to this standard forbids the attorney taking a position adverse to the interest of the insured. However, his duty to the carrier requires that he disclose the situation to it. Obviously, the true state of facts should be established by appropriate judicial proceeding such as the institution of a declaratory judgment suit by the carrier against its insured as well as the plaintiff or petitioner. The attorney may not appear for any of the parties in the declaratory judgment case. See A.B.A. Comm. on Professional Ethics Informal Opinions 728 (l963), 822 (1965), 873 (1965), 948 (1966).

In such a collateral proceeding, all interested parties would have the benefit of independent counsel and the resolution of the disputed facts would ordinarily be binding. Under no circumstances may the original attorney proceed with the defense of the insured in the main case until the disputed facts have been finally determined. If the original action is stayed pending determination of the issue in dispute, the original attorney may, with the consent of both the insured and the carrier, continue as counsel of record for the insured.