Sept. 15, 2021 – At what point does a conflict arise when an opposing party is insured by a client’s insurer?

Question

Our firm handles a variety of litigation matters, which includes doing some insurance defense work. We recently took on the representation of a plaintiff, and discovered that the defendant is insured by an insurance company that we are representing on a separate, unrelated matter.

The insurance company would not be named as a party-defendant in the matter, but would be obligated to pay an award of damages.

May we continue to represent the plaintiff, or does the fact that we represent the insurance company on another matter create a conflict requiring withdrawal?

Answer

SCR 20:1.7 governs concurrent conflicts and states, in relevant part:

(a) Except as provided in par. (b), a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if:

(1) the representation of one client will be directly adverse to another client; or

(2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer's responsibilities to another client, a former client or a third person or by a personal interest of the lawyer.

ABA Formal Ethics Opinion 05-535 (2004) considered the question posed in the above scenario and concluded there was no “direct adversity” conflict under SCR 20:1.7(a):

In the opinion of the Committee, such simultaneous representation does not, without more, result in “direct adversity” under Rule 1.7(a)(1) unless the client liability insurer providing defense and indemnity to the defendant in the second case also is a named party in the litigation. Ordinarily, a liability insurer is not a named party in an action seeking to impose liability on its insured. If the liability insurer were a named party in the second action, it would be directly adverse to the plaintiff, and there would be a concurrent conflict of interest.Although a liability insurer has an economic interest in the litigation that ordinarily is aligned with the interests of its insured, economic adversity alone between the insurer and the plaintiff in the second action is not, in the opinion of the Committee, the sort of direct adversity that constitutes a concurrent conflict of interest under the Model Rules.Simultaneous representation in unrelated matters of clients whose interests are only economically adverse does not ordinarily constitute a conflict of interest requiring the consent of the respective clients (footnotes omitted).

The concept that “economic adversity” does not equate to “direct adversity” under SCR 20:1.7 is derived from ABA Comment [6], which states in relevant part:

On the other hand, simultaneous representation in unrelated matters of clients whose interests are only economically adverse, such as representation of competing economic enterprises in unrelated litigation, does not ordinarily constitute a conflict of interest and thus may not require consent of the respective clients.¹

It is important to bear in mind that the conclusion that there is no direct adversity no longer holds if it becomes necessary to conduct adverse discovery, such as subpoenaing documents or conducting depositions, against the insurer, even if the insurer is not named as a party to the action.

For a full discussion of the conflicts that arise from conducting adverse discovery against a current client, see Wisconsin Formal Ethics Opinion EF-20-02.

The analysis does not end with direct adversity, however. The lawyer must also consider whether the lawyer’s ability to competently represent the plaintiff may be materially limited by the lawyer’s responsibilities to the insurer – thus giving rise to a conflict under SCR 20:1.7(a)(2), such as a reluctance to press for policy limits because of the business relationship with the insurer. The lawyer should also be aware of the possibility of creating legal precedent that may be harmful to the interests of the insurer.²

The lawyer should also be mindful to the possibility that the firm may possess relevant protected information about the insurer. ABA Formal Op. 435 discusses as follows:

Additionally, the lawyer should consider whether information she has acquired about the insurer’s business practices, such as claims handling and case evaluation procedures, would be materially helpful to the plaintiff who is adverse to the insurer’s insured. Even though this information about the insurer may be known by other, similarly-experienced lawyers, including both lawyers who do and lawyers who do not represent this insurer, if the lawyer acquired the information in connection with her representation of the insurer, and if the information would materially help the plaintiff in his claims against the insured defendant, then the lawyer may have to conclude that she will not be able to provide competent and diligent representation to the plaintiff without revealing or using confidential information in violation of Rules 1.6, 1.8, or 1.9 (footnote omitted).

If a lawyer determines that a material limitation conflict exists under SCR 20:1.7(a)(2), the lawyer should then determine whether the lawyer may continue the representation with the written and signed informed consent of both clients pursuant to SCR 20:1.7(b).

Note that whether different lawyers within the firm are representing the plaintiff and the insurer is irrelevant to the analysis, because all such conflicts are imputed to every lawyer in the firm, pursuant to SCR 20:1.10(a).

Of course a law firm in this situation may choo​​​se not to undertake the representation of the plaintiff out of concern for the relationship with the insurance company (sometimes referred to as a “business conflict”), but ABA Formal Op. 05-435 provides helpful guidance for analysis under the disciplinary rules.

Endnotes

¹ ABA Formal Opinion was release the same day as ABA Formal Opinion 05-434, which also discusses the concept of direct adversity, and is discussed in “Dilemma: Estate-planning Clients, a Divorce, and Potential Conflicts,” InsideTrack, July 21, 2021.

² The conflicts are often referred to as “positional conflicts,” and ABA Formal Ethics Opinion 93-377 provides a thorough discussion.