Does insurance-defense counsel violate the rules by telling opposing counsel he has no authority to negotiate because the insurer controls settlement?

Plain-English summary

In an auto-accident suit, the defendant's insurer retained defense counsel (Lawyer B). After discovery, plaintiff's counsel made a written settlement demand. Lawyer B responded that he had no authority to negotiate, that his role was simply to prepare the case for trial, that he had forwarded the demand to the insurer, and that plaintiff's counsel should again speak with the adjuster. The question was whether Lawyer B's conduct violated the rules, particularly Rules 1.8(f) and 5.4(c).

The committee said the insurer-insured-attorney relationship can be viewed either as one in which the insured is the client and the insurer merely pays, or as one in which the lawyer represents two clients, and either is permissible if the client or clients have consented after consultation. Under Rule 1.7, a lawyer may represent two clients if he reasonably believes the representation will not be adversely affected and the clients consent. The committee assumed, given no contrary facts, that the insured consented to the insurer directing the litigation and negotiations, and that negotiations were within policy limits so leaving them to the insurer did not put the insured at risk. It pointed to Rule 1.2(c), which lets a client limit the objectives of the representation: a client may tell the lawyer to prepare the case for trial only while reserving settlement to itself. Assuming the insured had so limited the representation, the conditions of Rules 1.8(f) and 5.4(c) were met. The committee added that once a divergence of interest appears (for example, a demand exceeding policy limits, a coverage question, or other conflict), the lawyer could no longer represent both, and common practice is to have the insured and insurer obtain independent counsel; and that if the insured had not limited the scope under Rule 1.2, Rules 1.8(f) and 5.4(c) would appear to be violated.

Currency note

This opinion was issued in 1990, before the South Carolina Bar's adoption of the 2005 revisions to the Rules of Professional Conduct. Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Can insurance-defense counsel leave settlement decisions to the insurer?

A: The committee said yes, where the insured has limited the scope of the representation under Rule 1.2 and consented to the insurer directing litigation and settlement; on that assumption, counsel's "no authority to negotiate" stance did not violate the rules.

Q: When does letting the insurer direct the case violate Rules 1.8(f) and 5.4(c)?

A: The committee said those rules would appear to be violated if the insured had not limited the scope of the representation under Rule 1.2.

Q: What happens when the insured's and insurer's interests diverge?

A: The committee said that once a divergence appears, such as a demand above policy limits or a coverage dispute, the lawyer can no longer represent both, and the common practice is for the insured and insurer to obtain independent counsel.

Background and rules framework

The opinion applies Rule 1.2(c) (limiting the scope of representation), Rule 1.7 (concurrent conflicts and dual representation), Rule 1.8(f) (third-party compensation), and Rule 5.4(c) (professional independence), each corresponding to the like-numbered Model Rule. The committee made client consent and a Rule 1.2 scope limitation the hinge of whether the insurer's control of settlement is permissible.

Citations and references

Rules of Professional Conduct:

• South Carolina RPC 1.2(c) / Model Rule 1.2: a client may limit the objectives of the representation.
• South Carolina RPC 1.7 / Model Rule 1.7: dual representation is permissible with reasonable belief and client consent.
• South Carolina RPC 1.8(f) / Model Rule 1.8(f): third-party compensation requires client consent and no interference with judgment or the relationship.
• South Carolina RPC 5.4(c) / Model Rule 5.4(c): a lawyer shall not let a third party who pays direct the lawyer's professional judgment.

See also

• SC Bar Ethics Op. 19-04: Defending a Missing Insured
• SC Bar Ethics Op. 20-02: Lawyer Funding a Settlement
• SC Bar Ethics Op. 90-33: Agency-Directed Lien Work

Source

• Landing page: https://www.scbar.org/for-lawyers/quicklinks/legal-resources/ethics-advisory-opinions/ethics-advisory-opinion-90-44/

Original opinion text

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

UPON THE REQUEST OF A MEMBER OF THE SOUTH CAROLINA BAR, THE ETHICS ADVISORY COMMITTEE HAS RENDERED THIS OPINION ON THE ETHICAL PROPRIETY OF THE INQUIRER’S CONTEMPLATED CONDUCT. THIS COMMITTEE HAS NO DISCIPLINARY AUTHORITY. LAWYER DISCIPLINE IS ADMINISTERED SOLELY BY THE SOUTH CAROLINA SUPREME COURT THROUGH ITS COMMISSION ON LAWYER CONDUCT.

Ethics Advisory Opinion 90-44

Plaintiff's attorney has filed suit against a defendant in an automobile wreck case. Defendant's insurance company retains attorney B to represent defendant in the suit. After discovery has been completed attorney A submits a written demand to attorney B for settlement of the case for a certain sum. Attorney B responds in writing: "I do not have the authority to negotiate. My role is simply to prepare the case in anticipation of trial. I have forwarded your letter to (the insurer). I would recommend that you speak once again with (the adjuster)."

Question:
Does attorney B's conduct violate the rules of Professional conduct, and in particular rule 1.8 (f) and rule 5.4 (c) and if so what action should attorney A take in the matter?

Summary:
Attorney B's conduct, assuming insured has limited the scope of representation as defined in Rule 1.2, does not appear to violate any of the Rules of Professional Conduct.

Opinion:
There are many aspects of a lawyer's activities which are permitted by the Rules of Professional Conduct, provided the client "consents after consultation." The relationship between and among an attorney, an insured and an insurer, while common in practice, presents unusual situations vis-a-vis the Rules. This relationship could be viewed as one in which the insured is the client, with the insurer only paying for the representation. Alternatively, the relationship could be viewed as one where the attorney represents two clients. Either is permissible provided that the client or clients have "consented after consultation." For the purposes of answering your questions, we assume that both the insured and the insurer have "consented after consultation", since your fact presentation offers no evidence to the contrary. Were this not the case, the answer might be different.

Rule 1.7 provides that an attorney may represent two clients if the lawyer reasonably believes that the representation will not be adversely affected, and the clients consent after consultation. We assume here that the insured has consented to the insurer's directing the litigation and retaining charge of negotiations. We further assume that negotiations are within the policy limits, and, consequently, that leaving negotiation in the hands of the insurer does not put the insured at risk. Rule 1.2 (c) clearly provides that the objectives of a lawyer's representation may be limited by a client. It is perfectly permissible for a client in any situation to tell the lawyer that he, the lawyer, is only to prepare the case for trial; that the client intends to retain the right to conduct any settlement negotiations. Again we must assume here, given no evidence to the contrary, that the insured has limited the scope of representation pursuant to Rule 1.2. (If the insurer is also considered a client, it has, of course, also limited the scope of representation pursuant to Rule 1.2).

It would be the opinion of this Committee that, unless and until evidence of divergence of interest between insured and insurer appears, such as in a situation where the demand is greater than the policy limits, a question of coverage or other conflict exists, both the insured and the insurer are "clients" of the attorney, and therefore the conditions contained in Rule 1.8 (f) and 5.4 (c) have been met. Of course, at such times as such a conflict emerges, it would appear that the attorney can no longer represent both parties, and it appears to be common practice in this situation that the insured and insurer are instructed to obtain independent counsel.

If the insured has not limited the scope of representation pursuant to Rule 1.2, then Rule 1.8. (f) and Rule 5.4 (c) would appear to be violated.