REVISITING "SERVING TWO MASTERS" IN CALIFORNIA AND PARTICULARLY THE TRIPARTITE RELATIONSHIP INSURANCE DEFENSE COUNSEL SHARE WITH THE INSURED CLIENT AND THEIR PRINCIPAL INSURERS

By: Phillip Feldman, Esq.
14401 Sylvan St., Suite 208
Van Nuys, CA 91401
Tel: 818-986-9890
Email: LegMalpExpert@aol.com or StateBarDefense@aol.com.
Website: www.LegalMalpracticeExperts.com
or www.CAStateBarDefense.com.

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Almost two years ago, we suggested depublication of an appellate decision which confused the attorney client relationship between insurance defense counsel and their client(s). "Conflicts-Representation adverse to a present client must be measured against the duty of undivided loyalty, which every attorney owes to each client." . Commentary, Verdicts &Settlements, Daily Journal, July 9, 1999. It set forth some of the reasons why State Farm v. Federal was simply a very poorly articulated case. Whether or not it reached the right result, its dicta and reasoning caused consternation to the legislature and all insurance defense counsel. Because there was no Supreme Court review or attempt to depublish State Farm, its long range effect caused legislative intervention. Instead of over-riding the decision (which the legislature had the power to do (Muskopf v Corning Hospital District 55 Cal. 2d 211), they called for a study to elicit recommendations for disciplinary rule and professional responsibility changes in order to deal with "the issues concerning the relationship between an attorney and an insurer when the attorney is retained by the insurer to represent the insured."

Legislative wish was to resolve "the legal and professional responsibility issues" because they had an effect on "both the Rules of Professional Conduct for attorneys and procedural issues affecting the conduct of litigation."

The study completed resulted in no proposed changes to the rules or law but only a cosmetic addition to a comment to the rule against serving two masters. (Rule of Professional Conduct 3-310). A more detailed analysis was required then and is still needed.

Subparagraph (F) (1) succinctly describes and defines the reason for Rule of Professional Conduct 3-310. Its purpose is to insure "independence of professional judgment" and minimize "interference with the client-lawyer relationship". "Loyalty is an essential element in the lawyer's relationship to a client. An impermissible conflict of interest may exist before representation is undertaken, in which event the representation should be declined. The lawyer should adopt reasonable procedures, appropriate for the size and type of firm and practice, to determine both in litigation and non-litigation matters the parties and issues involved, and to determine whether there are actual or potential conflicts of interest. If such conflict arises after representation has been undertaken, the lawyer should withdraw from representation.---Resolving questions of conflict of interest is primarily the responsibility of the lawyer undertaking the representation." (Comment, ABA Model Rule 1.7 Conflict of Interest: General Rule)

In order to determine on whose behalf a lawyer must exercise such independent professional judgment, the lawyer must unequivocally know who his or her client is. "Client means a person who, directly or through an authorized representative, consults a lawyer for the purpose of retaining the lawyer or securing legal service or advice from him in his professional capacity---." (Evidence Code § 951).

It is apparent no person or entity would utilize legal services if lawyers were free to disclose "confidential communication(s) between client and lawyer" and for that reason the client is privileged "to prevent (the lawyer) from disclos(ure)." (Evidence Code § 954). In addition to communications, a lawyer might probe on behalf of a client and thereby secure non-public information of and concerning the client which reasonable persons would deem private or secret (confidential). A lawyer must "maintain inviolate the confidence, and at every peril to himself or herself to preserve the secrets, of his or her client." (B&P § 6068 (e).)

Along with privileged communications and the expectation of confidentiality, no person or entity would utilize legal services in the absence of lawyer loyalty. Without public use of the legal profession the, rule of law would succumb to the rule of " might makes right" it replaced a long time ago.

"An attorney's duty of loyalty is not one that is capable of being divided.---(because of the damage bifurcation would do) to the existing client's sense of trust and security---. A client who learns that his or her lawyer is also representing a litigation adversary, ---cannot long be expected to sustain the level of confidence and trust in counsel that is one of the foundations of the professional relationship.---(It is) analogous to the biblical injunction against serving two masters. (Flatt v Superior Court (1994) 9 Cal. 4th 275, 282, 284-286). "By virtue of this rule an attorney is precluded from assuming any relation which would prevent him from devoting his energies to his client's interest." (IBID, 289; Anderson v Eaton (1930) 211 Cal. 113).

In some, few particulars, the fiduciary duty remains somewhat sacrosanct, as, for example, when lawyers act as trustees. (Probate Code § 39, 15687, Rule of Professional Conduct 4-100.) Modern loyalty is less absolute and more abstract than either confidentiality or privileged communications because it is more dynamically interpreted as reasonable client/societal expectations change from time to time. (We no longer condone attorneys to be killed in "honor" duels as Alexander Hamilton was, nor do we permit our Supreme Court Chief Justices to do duel for honor either (CJ Fields). Fifty years ago, the fourth edition of Black's Law Dictionary still defined loyalty as "Faithfulness to one's prince or sovereign---". Today it defines "fealty" (from which fidelity is derived) as "the oath by which (a feudal tenant or vassal) swore faithfully to perform the feudal obligations to his lord." Loyalty, however, is "faithfulness or allegiance to a person, cause duty or government".(Black's Law Dictionary, 7th Ed (1999) 625, 959).

California lawyers take the same oath to support the U.S. and the state constitution" and faithfully to discharge the duties of an attorney at law to the best of his knowledge and ability which all states have always required. (B&P § 6067, Rush v Cavanaugh 2 Pa. 187). Clients are the persons and entities to whom such faithful duty discharge is due.

Rules of professional conduct do not directly deal with susceptibility of a lawyer to liability to non-clients who, for factual, legal or policy reasons are owed such duties either. Most of the country follows California's balancing test to determine when lawyers owe duties to non-clients. Biakanja v Irving (1958) 49 Cal. 2d 647, 650 set out the legal balancing which civil courts are empowered to make to extend or withhold lawyer's duties to non-clients. Over a dozen alternative theories are used in different forums to make such determinations in addition to or instead of the "balancing test". Rules of Professional Conduct and the State Bar Court empowered to enforce them are not appropriate forums to make case by case legal determinations of the respective rights of non-clients and lawyers claimed to owe them duties.

The fact that professional liability violations do not make lawyers ipso facto susceptible to State Bar disciplinary process (i.e., purporting to obtain client "waivers" of legally non-waivable conflicts, supra) is small consolation to a lawyer whose violation of a rule of law renders the lawyer a defendant in a legal malpractice, breach of fiduciary or fraud action who faces a much longer statute of limitations for the disciplinary process. In the past, the State Bar Court hasn't generally applied common law determinations of the Rules of Professional Conduct under their primary purview except where enunciated by the California Supreme Court. Appellate decisions, however, are, in fact, matters of law to the same extent as any legislative mandate found in the State Bar Act and in addition Supreme Court approval by citation of multiple, relevant appellate case law may likely alter past practice.

Notwithstanding the admonition of our Rule 1-100, the tendency is for many of the professional responsibility rules and all dealing with conflicting interests, to find their way into the mainstream of common law "case law". This is logical since it would be somewhat ludicrous for a civil court to find that a lawyer's violation of this rule was nonetheless within the community standard. The California Supreme Court, for example, cited this rule in its Flatt decision, supra. As a consequence ,it is more probable than not that common law interpretations of this rule by the all California appellate courts and certainly the Supreme Court are clearly binding on the State Bar Court.

Mandates such as Flatt, supra, may not be ignored. Even though California lawyers are not directly disciplined for violation of American Bar Association Rules of Professional Conduct, when, the California Supreme Court cites them with approval, as they did in Flatt, supra, it may be necessary for lawyers concerned with compliance to cease looking for "loop-holes" in our rules and more strictly abide with the reasons for both our rules and the ABA rules.

From time to time, courts disqualify lawyers from serving their clients at the behest of their client's adversaries. Such judicial determinations are not factual determinations made by juries because they require balancing of the interests of present and alleged past clients. They are not ethical or responsibility constraints either. A rule of professional responsibility such as this and the State Bar Court empowered to enforce such rules are inappropriate forums to make case by case equitable determinations based on competing interests of adverse parties and neither are used for that purpose. For that reason, disqualification cases such as People ex rel Dept. of Corporations v. SpeeDee Oil Change (1999) 20 Cal. 4th 1135 (reversing non-disqualification) and the case which motivated the state legislature to request present clarification, State Farm Mutual Auto Insurance Company v. Federal Insurance Company (1999) 72 Cal. App. 4th 1422) turning, as they do on multiple factors bearing on the relationship inter se of two lay entities offer scant guidance to lawyers on the boundaries of serving differential clients at different times. The reason why successive (in contrast to simultaneous) representation of different clients (as is always the case in disqualification cases) have little bearing on non-disqualification issues is because only client confidentiality is in issue, whereas the pivotal issue in conflict cases is the expectation of loyalty and not confidentiality. (Flatt, supra, at 283.) For disqualification determinations, "substantial relationship test mediates between two interests that are in tension" in the context of successive relationships. (Flatt, supra.)

State Farm did remind the profession that insurance defense counsel practice on the horns of a dilemma. "Liability insurance is socially desirable; policy holders and the companies are entitled to adequate legal representation; the sensible way to provide such representation is through regularly-retained experts. There is no risk that clients will be led to incompetent attorneys, and the attorneys are in a position to deal directly with the client when the need for legal services arises. Moreover, the interests of the insurance company and the client will ordinarily coincide, so that there is little danger that the insurance company's attorney will be placed in the position of representing conflicting interests. It has been thought better to make adjustments for the occasional case where the interests of the policy holder and the company conflict, than to prohibit the practice altogether." (Clifton Hidebrand, et al. v The State Bar of California (1950) 36 Cal. 2d 504.) The Supreme Court case is a reminder that common interest of insured and insurer against the claimant is the rule and that conflicts between them are the exception.

In the absence of collusion/conspiracy, attorneys are not generally responsible for their principal's (insurance companies) short falls unrelated to attorney representation. (Doctors' Company v The Superior Court of Los Angeles County (1989) 49 Cal. 3d 30.) Even if an attorney only participates in sacrificing the insured client for the benefit of his principal (insurer), the attorney's conflict renders him liable. (Ivy v Pacific Automobile Insurance Company (1958) 156 Cal. App. 2d 652.) Once it becomes apparent that the duty to the insured client would conflict with the duty to the insurer, older cases required the attorney to terminate the relationship. (McClure v Donovan (1947) 82 Cal. App. 2d 664.) Later, sufficient full disclosure and informed consent liberalized the requirement. (Betts v Allstate Insurance Co. (1984) 154 Cal. App. 668; Ishmael v Millington (1966) 241 Cal. App. 2d 520, 526.) The insured client, however, must know of their right to conflict free representation as part of being informed. (Klemm v Superior Court (1977) 75 Cal. App. 3d 893.) Once a conflict between the insured client and the insurer is patent, however, a court may determine "as a matter of law defendant's conduct under the circumstances of the particular case violated the general standards of professional care ---required--". (Lysick v Walcom (1968) 258 Cal. App .2d 136) (professionally negligent settlement).) It follows that if an actual conflict exists such as excess exposure, under-insured coverage, validated reservation of rights, intentional, malicious or similar conduct on the part of the insured client, most, but perhaps not all coverage disagreements and like differences of interest, which cannot be resolved by appointment of "Cumis" counsel, only unwise attorneys would continue joint representation.

In earlier times, attorneys tended to be less mobile and for that reason the issue of conflicts arising out of prior association with a firm's effect on an attorney's present employment rarely surfaced. Modernly freedom of association, mergers and acquisitions, and the sheer size of megafirms has increased mobility almost beyond the point of attorney's being able to even identify past clients of former firms. The California Supreme Court has provided multiple guidelines: First, the distinction between an attorney leaving a firm in the midst of litigation for a firm representing the first firm's client's adversary is usually an "actual" conflict to the extent the attorney was or continues to be involved. Because the representation is "concurrent" and not merely successive, there is no relevance to building an "ethical wall" (shielding the attorney from any present involvement). The reason is similar to the distinction between "disqualification" cases and concurrent representation cases. The former turns on "confidentiality" and the latter on loyalty. (Flatt, supra.) Some of the rules of earlier times, however, are now strictly construed to accommodate attorney freedom of association. Disqualification accommodations of earlier times applying vicarious disabilities to entire firms in concurrent litigation settings (Galbraith v State Bar (1933) 218 Cal. 329) have no relation to the successive transactional settings of the twenty first century.

There is a more pertinent reason why, in California, the sanctity of attorney client privilege, confidentiality and loyalty are not diminished by not using conflict of interest ethical rules to restrain attorney's freedom of association. It is found in the language of 3-310 (F) (1). Whether an attorney is being paid by an insurer, the new firm employing the attorney or any other source, accepting compensation from them may never interfere with the attorney's independence of professional judgment or with the client-lawyer relationship.

Postscript (April, 2003): Almost three years after the author's original article criticizing State Farm as a poor decision, the California Supreme Court on March 3, 2003 approved a comment to the California professional responsibility rule. It says that in spite of the State Farm decision, when an insurer is not a party but only indemnifies they are not on parity with a represented party. The court did not change the old comment reminding counsel that for purposes other than discipline, "written consent" may not suffice so "non-waivable" conflicts are alive and well in California. Substantial differences between the California conflict rules (3-300, 3-310) and the ABA Rules of Professional Conduct (1.6-1.12) exist which limit application of the rule. . Author does testify throughout the U.S. on conflicts and other malpractice and ethics issues in all states. More and more PROFESSIONAL RESPONSIBILITY RULES create a minimum standard of care applicable to professional liability.

Phillip Feldman B.S., M.B.A., J.D. (310) LEG MALP (534-6257), consults and testifies on STANDARD OF CARE, STANDARD OF CONDUCT (rules of professional conduct, ethics, conflicts, competent lawyering, lawyer duties), CAUSATION, informed consent, fiduciary duties, reasonableness of fees etc.

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