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Y O U N G L A W Y E R S J O U R N A L
46
APRIL/MAY 2016
relationship. Further, most insureds are
understandably concerned with maximiz-
ing any available insurance coverage to
protect against potential excess judgments
and uninsured liability. This is particularly
true if the insurer reserves the right to deny
coverage for one or more of the underlying
claims, or where an insured has available
insurance under another policy. Thus,
a question arises as to whether defense
counsel retained by the insurer has a duty
to help the insured maximize or pursue
available insurance coverage, or otherwise
advise the insured on the status of coverage
issues. Recent case law suggests that courts
may be willing to extend the tripartite
relationship in this regard.
As discussed previously, the tripartite
relationship creates simultaneous obliga-
tions to both the insurer and the insured.
Rule 1.7(a) of the Illinos Rules of Pro-
fessional Conduct, however, prohibits a
lawyer from representing one client if the
representation would be directly adverse to
another client or if such representation is
materially limited by the lawyer’s responsi-
bilities to another client. Ill. R. Prof. Con-
duct 1.7(a). Thus, any advice regarding the
scope or availability of insurance provided
by the insurer or whether the insured has a
cause of action against its insurer arguably
creates a conflict of interest prohibited by
Rule 1.7(a).
On the other hand, seeking to utilize
coverage benefits or maximize available
insurance coverage from other insurers or
sources may not involve a conflict, and
may sometimes provide a direct benefit to
both the insurer and insured. For example,
whether the insured has excess insurance
above the primary policy or other insurance
that may potentially contribute to a loss
could both secure the insured against an
excess judgment and reduce the insurer’s
proportionate share of liability and defense
obligations.
Whether defense counsel, however,
must
investigate insurance issues for the benefit
of the insured has not been specifically
addressed under Illinois law. Other juris-
dictions have held that defense counsel
in certain situations may have a duty to
advise the insured on coverage and protect
the insured’s excess coverage. In
Darby &
Darby, P.C. v. VSI International, Inc.
, 739
N.E.2d 744 (N.Y. 2000), the insured’s
independent defense counsel withdrew
from representing an insured client due to
the nonpayment of attorneys’ fees. Subse-
quent counsel notified the insured that its
policy actually covered its litigation costs.
The insurer agreed to defend the insured;
however, only for the future cost of litiga-
tion. When the prior counsel later filed
suit for unpaid attorneys’ fees, the insured
brought a malpractice counterclaim based
on the prior counsel’s failure to identify
and advise on the issue of available coverage
for costs. The New York Court of Appeals
ultimately sided with prior counsel, but
left open the possibility for future claims
against attorneys for failure to advise clients
on insurance coverage issues. The court
specifically acknowledged that law firms
have a duty to “keep abreast of emerging
legal trends” and that this may include
a duty to assess and advise client about
potential coverage.
In cases involving a likelihood of excess
judgment, the foregoing duty to advise the
insured may also include a duty to investi-
gate whether excess insurance is available
and, if so, to notify the excess carrier on
the insured’s behalf. In
Shaya B. Pac.,
LLC v. Wilson, Elser, Moskowitz, Edelman
& Dicker, LLP
, 38 A.D.3d 34 (N.Y. App.
Div. 2d Dep’t 2006), another New York
case, the insured sued its insurer-retained
defense counsel for malpractice in failing
to promptly advise an excess carrier of the
underlying lawsuit. Ultimately, the court
held such a duty would turn primarily on
the scope of the agreed representation–a
question of fact–and on whether, in light
of all relevant circumstances, the attorney
had “failed to exercise the reasonable skill
and knowledge commonly possessed by a
member of the legal profession.” The court
did note, however, that the investigation of
available other coverage alone does not nec-
essarily create a conflict in violation of the
tri-partite relationship. As recent as Decem-
ber 11, 2015, a North Carolina attorney was
sanctioned for not adequately investigating
and disclosing her client’s available excess
insurance coverage.
See Palacino v. Beech Mt.
Resort, Inc.,
2015 U.S. Dist. LEXIS 166244