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The Tripartite Relationship and Unintended Consequences

September 8, 2014

It’s not often an attorney has the opportunity to comment on a significant case, especially where he is also one of the subjects within the opinion itself. However, the recent decision of Western Heritage Ins. Co. v. Montana, WL 30557393, July 7, 2014, presents just such an opportunity.

At the heart of this decision is the tripartite relationship between insurer, insured, and defense counsel. The underlying facts are these: The insurance carrier retained our Firm, i.e., me, to defend a bar owner on whose property a fight between patrons occurred. One patron suffered brain damage as a result of the fight, and the bar was sued for negligent security. An initial reservation of rights letter was sent, and the case proceeded as expected over the next few years. It became apparent during the protracted litigation that the insured, despite having some very good defenses, wished to avoid a trial if at all possible. Seizing on this, the plaintiff’s counsel approached me, as defense counsel, with what he thought was a reasonable settlement strategy. His client would release my client from liability in return for a consent judgment at a mutually agreeable figure (in this case, several million dollars); and then the plaintiff would proceed against my client’s insurer for what he felt was either a flawed coverage position, or bad faith, or both.

It was at this point all the interests of the various players in this particular tripartite relationship came into potential conflict. It was true that as defense counsel I had an obligation to get my client out of the case if possible and ethical. And here was a chance for the client to “walk away” with no personal exposure. Unfortunately, I was not able to advise my client regarding the merits of the “offer,” because it would also run afoul of my obligation to the insurer. In other words, I could not assist the insured/client in reaching a settlement agreement that would expose the liability insurer to a large damages award without the insurer’s consent, since I had a fiduciary duty to them as well.

As a result, while I stood ready to continue to defend my client in any legitimate way possible, both myself and the Firm were dismissed by my client insured, so that the client could then hire private counsel who, in turn, could effectuate the deal proposed by the plaintiff’s counsel.

As explained quite well in the Montana decision, by taking this course, my client had essentially failed to cooperate. He had no right to dismiss me as defense counsel under a theory that the defense he was being provided by the insurer was “conditional.” Nor did my client properly reject the original defense offered in a timely manner. However, by the same token, neither was the insurer released from its obligation to pay what it believed was the $25,000 sub-limit, and which it had always maintained was the most it would pay.

On a side note, the court also stated in the opinion that I advised my client (the insured) that I could not communicate the settlement offer. This was not completely accurate. While I could communicate anything the client wanted me to communicate, I could not advise the client about strategies surrounding an offer that put me in conflict with the insurer. Many previous settlement offers were actually discussed within the tripartite relationship, but this one was the exception.

All in all, this was an interesting recitation of the tripartite relationship in action. And yes, the tripartite relationship certainly has an old world name, but with thoroughly modern problems.