A Delicate Balance

Attorneys are bound to follow whatever codes of ethics or rules of professional responsibility govern the jurisdictions in which they work. All lawyer jokes aside, most attorneys strive to represent their clients competently and within the parameters of the oaths they promise to uphold.

Many states follow the American Bar Association’s “Model Code of Professional Responsibility.” Realizing clients are entitled to receive their lawyer’s absolute best effort on their behalf, the ABA Code specifically states in its preamble: “As advocate, a lawyer zealously asserts the client’s position under the rules of the adversary system.”

While perhaps not commonly used in the English lexicon, the word “zealous” was not chosen randomly, and it places a very high standard of conduct upon lawyers. The Merriam-Webster Dictionary defines “zealous” as, “Marked by fervent partisanship for a person, a cause, or an ideal….”

Whether at a deposition, a pre-trial hearing, or before a jury, clients have the absolute right to expect, and demand, that their attorneys zealously represent them and advocate on their behalf. Anything less is widely considered to be improper or, in the worst-case scenario, evidence of malpractice.

If this is true, then certainly there should be universal agreement that lawyers owe an absolute duty to zealously represent their clients and use every reasonable skill and argument available to make certain their clients prevail. Alas, as is often said, for every rule there is an exception, and the exception here is a trap in waiting for unwary insurance fraud attorneys and the insurance carriers they represent.

The Hurdles

Let’s analyze a typical claim under review by an insurer for possible insurance fraud. At some point in the claims process, a “red-flag” or some other indicator removes the claim from the normal adjustment process. In addition to the claims professional, the company’s special investigation unit (SIU) has hopefully become involved. Outside forensic experts ranging from fire investigators to accountants may also be involved. If the insurer is acting properly, then a reservation-of-rights letter either has or will soon be sent by retained legal counsel.

Does the company simply deny the claim based on the evidence, or does it provide the policyholder the opportunity to perhaps shed some additional light on the claim before a final decision is made? Enter the first of many hurdles. Unless the policy specifically requires a recorded statement, insureds may have every right to refuse to give a statement to their insurers. Often, insurance carriers mistakenly assume they may compel a statement citing the “duty to cooperate” under the policy. But this is a risky position, since the insurance company has full control over the insurance contract.

While courts may construe the duty to cooperate broadly, if the policy is silent on a recorded statement requirement, then the more reasonable approach may be to follow the policy’s own language, which does compel an examination under oath (EUO). This is probably a better course for the insurer anyway, since the recorded statement is not under oath and may ultimately be inadmissible in court, at least as any evidence of sworn testimony.

Now the insurance carrier faces a second hurdle; one that has monetary and ethical questions. To save precious dollars, many insurers now demand their SIU or claims personnel take EUOs. Little regard is given for the potential of subjecting non-lawyer employees to potential state charges of engaging in the unauthorized practice of law, especially when policyholders or claimants exercise their right to have legal counsel present.

How does an insurance company employee respond to an attorney who asks this simple question: “Is my client legally obligated to give you this EUO to have their claim considered under our state’s laws?” Answering that immediately places the insurance company employee in a perilous situation.

Carriers that do not place their claims and SIU employees in such tenuous positions sometimes turn to the cost-saving tool of using in-house counsel to take the EUO. However, when in-house programs were set up in the 1980s, their approval by state bar associations and courts rested upon insurers asserting that the attorney’s role was to “represent solely the insured” and vigorously defend the policyholder’s interest. Companies that try to save money by asserting that their staff counsel can turn on a dime from representing a policyholder/insured in one case to walking into an EUO and solely representing the interest of the insurance carrier an hour later are taking a risk.

No decent lawyers would ever claim, with any semblance of ethics in their role as paid staff counsel, that their duty in the EUO is to make certain the policyholder’s interests are protected. Their employer, while hopefully not already pre-judging the claim, has, hopefully, at least determined there is a reasonable basis to suspect the person being questioned has engaged in fraud and may not have coverage afforded for the claimed loss or damage.

In the case of Keodalah v. Allstate, the Washington State Court of Appeals recently ruled a claims professional may be held personally liable for the tort of bad faith when not dealing with an insured fairly. The court rejected the idea that an employee may not be personally responsible for financial damages simply because he was engaged in the course and scope of his employment and following corporate directives. It is not a far stretch to imagine courts soon holding staff counsel liable not only for bad faith, but also ethical violations for not speaking out and stepping up when the employer fails to act properly.

The Balancing Act

This brings us to the carriers that do play by the rules and then refer claims out to independent panel counsel for taking EUO testimony and providing the insurer with independent legal advice and direction. Even this course is not without risk. Let’s return to our “typical” claim under investigation.

The panel counsel is retained and paid solely by the insurance carrier. In most states, some written documentation of the attorney-client relationship must exist. There is no question the insurer is the client and, returning to our ABA model, it is the carrier that is owed the attorney’s duty of zealous representation.

If the attorney is to be the insurance company’s advocate, then what is she advocating for? Non-payment of the claim for fraud not only saves the carrier from paying the claim, but also equally affirms that the initial indicators and decisions made by the insurer were in good faith and ultimately proved to be correct.

Can one safely assume the attorney’s role should be to zealously look for the evidence needed to prove the insurance company was right in red-flagging the claim, referring the matter to SIU, and proceeding with an investigation? To do less, after all, would not be in keeping with the ABA Code. But what happens when the evidence of fraud is not so clear cut; when reasonable minds may come to differing conclusions based on the evidence collected during the investigation and the EUO?

One may deduce a requirement for being “zealous” is taking the position of the client: denying the claim. But what about those pesky words “bad faith”? If the claim is in a jurisdiction where, should a jury decide the carrier’s decision was wrong, the carrier is required to pay not only the claim, but also the policyholder’s or claimant’s attorney’s fees and unlimited damages for bad faith, what duty does the attorney owe to protect her client from such a risk? How should the attorney protect the carrier while also somehow zealously representing it?

Therein lies the ethical quandary faced by insurance fraud attorneys from coast to coast. It is a fine line and a delicate balancing act of aggressively seeking the truth, poking and prodding within the parameters of the law to secure all relevant evidence, and making certain to uphold the duty of zealous representation, all while ensuring the right decision is made.

Consider the implications: For an attorney seeking the “easy” way out, the path may be simply to tell the carrier to pay the claim, contributing to insurance fraud’s annual economic drain. However, if the attorney is too aggressive, she may not only expose the carrier to a high-damage award, but also she may have participated in denying innocent claimants coverage that they were legally entitled to receive, and desperately needed, following a devastating loss.

What to Do?

While there is no easy answer, success rests in a very simple process. First, there must be the highest level of mutual trust, respect, and honesty between insurers and their legal counsel.

Second, both insurer and attorney must remain committed to seeking only the truth—in no way prejudging or trying to justify the claims decision until all the facts, evidence, and testimony have been secured.

Finally, the decision to pay or disclaim coverage must be viewed through the lens of seeking every reasonable basis under the policy to pay the claim. Insurance companies exist to pay claims. When, however, the claim is analyzed fairly and every door to justifying a reasonable basis to pay the claim is closed, the decision to disclaim coverage is both correct and proper.

Insurance fraud lawyers are a unique breed. We tread where few others dare to go. Are we zealous? Absolutely. But may our zealousness always derive from our desire to seek the truth, and nothing more.