The Tripartite Relationship: Getting on the Same Page

In the tripartite relationship between the insurer, insured, and defense counsel, potential conflicts of interest could arise, complicated further by rules in various jurisdictions. This article examines the tripartite relationship as well as effective communication strategies that can help avoid conflicts and resolve claims successfully and efficiently.

In some jurisdictions, such as Alabama, both the carrier and the corporate entity are viewed as dual clients. [See Mitchum v. Hudgens, 533 So.2d 194, 198 (Ala. 1988)]. Other jurisdictions, like Arizona, view either of those parties as the primary client. [See Paradigm Ins. Co. v. Langerman Law Offices, 24 P.3d 593, 602 (Ariz.2001), stating that the defense lawyer owed a duty to the insurer]. In Texas, the corporate entity is considered the only client. [See Safeway Managing General Agency, Inc. v. Clark & Gamble, 985 S.W.2d 166, 168 (Tex.App.-San Antonio 1998), holding that no attorney-client relationship exists between an insurance carrier and the insured’s defense counsel].

When evaluating potential conflicts in the tripartite relationship, it is recommended that you review the specific jurisdictional rules applying to your matter. Further, it is important to note that this article is an overview and does not address all potential conflicts, which can be complex.

Initial Assignment of a New Matter

As soon as a claims professional is assigned a claim file, an acknowledgment should be sent to the insured, and coverage analysis should commence immediately. Once the claims professional has confirmed coverage is triggered and a duty to defend exists, a coverage letter should be sent to the insured and defense counsel retained.

In many states, an insured may be entitled to independent counsel, depending on the coverage position the insurer takes. The claims professional should investigate each state’s rules regarding when independent counsel should be offered and advise the insured of this right, if applicable. The claims professional should conduct an initial phone call with the insured to inform it that the insurer has selected defense counsel based on counsel’s expertise and professional background, and that the claim has been sent to defense counsel for a conflicts check and retention.

For the conflicts check, we recommend that the claims professional send the selected defense counsel a copy of the loss notice, a general summary of the claim, and a list of potential parties that includes the named insured and any additional insureds. If conflicts clear, the claims professional should notify the insured, provide defense counsel’s contact information to the insured, and advise the insured that defense counsel will reach out to obtain a copy of the pertinent files and to discuss next steps.

Once conflicts clear and defense counsel confirms retention, the claims professional should request that defense counsel reach out to the insured to introduce themselves, obtain the insured’s files, discuss what will happen next, and formulate an initial litigation strategy plan. During the initial retention, it is recommended that the claims professional also provide defense counsel all information regarding any applicable retentions or deductibles that may apply to the claim.

Once the file is assigned to defense counsel, defense counsel should have an initial phone call with the insured to explain the tripartite relationship, especially if it is the first time that the insured has been involved in a legal matter. In jurisdictions where the insured is the only client, such as in Texas, defense counsel should explain to the insured that it is the client in the matter, and that the insurer is not a client.

Also, defense counsel should advise that information shared by the insured is confidential; however, defense counsel has an obligation of periodic reporting to keep the insurer informed on potential liability and damage issues in the matter. When providing this explanation, one strategy to reduce future conflict is to tell the insured that defense counsel will assume it is okay to share all information with the insurer unless the insured specifically instructs defense counsel to not share it. By addressing the insured’s questions at the outset of a new matter, the risk of future conflicts can be minimized.

Confidential Information

A potential conflict that may arise during a claim is when the insured provides information to defense counsel and then instructs defense counsel not to tell the insurer. The motivation behind this instruction can be varied, such as a concern that it will hurt the insured’s insurance rates or its ability to renew the policy. In jurisdictions where the insured is the only client, such as Texas, defense counsel has a duty to disclose to the insurer all information relevant to the underlying lawsuit. However, defense counsel should not disclose the information without authority from the insured.

If the information affects defense counsel’s analysis of risk in the lawsuit, then defense counsel should have a frank conversation with the insured on why the information is important for the insurer to know. Regardless of jurisdiction, an effective strategy for handling communications is to send the correspondence to the insured prior to sending it to the insurer, which gives the insured some control over how information is phrased to the insurer. For example, there is a difference between phrasing a liability issue for a design defect as “the insured was negligent” versus “this is likely a case of liability due to a calculation error by the insured.” However, if the insured continues to disallow defense counsel to share information with the insurer, then defense counsel should evaluate whether they need to withdraw as counsel under the ethical rules for their specific jurisdiction.

Many insurers have litigation-management guidelines that defense counsel have agreed to abide by when representing insureds. The guidelines often include a requirement that defense counsel provide the insurer with a case-management plan and periodic status reports summarizing the investigation and assessment of the insured’s liability and damages exposure. These reports are critical to the claims professional’s evaluation of the claim and necessary for appropriately setting reserves on the file.

However, sometimes a situation occurs where the insured is reluctant to allow defense counsel to provide the insured’s confidential information to the insurer. In those instances, the claims professional should have separate conversations with defense counsel and the insured regarding why the information and/or documentation is necessary to the claim evaluation. If a resolution cannot be reached, the claims professional and defense counsel should discuss the potential conflict and whether defense counsel’s withdrawal from representation is appropriate.

Another situation that may arise: Defense counsel’s investigation identifies facts or circumstances that could affect the insured’s coverage. Some states have ethical rules prohibiting defense counsel from disclosing the information to the insurer without first obtaining the insured’s informed consent. Other states may have different ethical rules. Both claims professional and defense counsel should be aware of the ethical rules in the applicable state to address this issue properly. If defense counsel does not receive the insured’s informed consent, they may need to consider withdrawing from representation if defense counsel is located in a state where both the insured and insurer are the clients.

Strategy Decisions in Lawsuits

If the insured and insurer disagree on a course of action for the claim, then there is another potential conflict that needs to be resolved: A common example is when the insurer requests defense counsel file claims against the insured’s subcontractor(s) for contribution. Due to an ongoing business relationship, the insured may instruct defense counsel that it does not consent to filing a contribution claim. In jurisdictions where the insured is the only client, such as in Texas, defense counsel cannot get in the middle of the disagreement between the insurer and insured. In other words, outside counsel cannot “take sides.” In those jurisdictions, it is recommended that defense counsel tell the insured to discuss the issue directly with the insurer. If that discussion does not resolve the conflict, then the insured can consult with separate coverage counsel. Unlike defense counsel, which cannot take sides, coverage counsel can help negotiate a resolution that both the insured and insurer are satisfied with.

One of the claims professional’s primary goals should be to develop strategies that can reduce the insured’s liability and damages exposures. In some instances, the reduction can be achieved by, as discussed above, filing a lawsuit against the insured’s subcontractor(s) for contribution. If the insured is reluctant to consent to a lawsuit against its subcontractor(s), the claims professional should discuss with the insured the importance of reducing the financial burden on the insured by apportioning liability and damage to third parties that may be responsible for the defects or claim. Additionally, the written agreement between the insured and subcontractor may contain a defense, indemnity, or hold-harmless provision that the insured can invoke to limit its liability. The claims professional should have an open and frank discussion with the insured and coverage counsel, if retained, regarding the insured’s duty to cooperate with its defense of the case as well as the benefits the insured may reap by allowing defense counsel to pursue a lawsuit against its subcontractor(s). 

Settlement Discussions

In all jurisdictions, it is recommended that the insurer, insured, and defense counsel discuss whether they want to set the case up for an early settlement or fight aggressively on the merits. It is possible the carrier will prefer early settlement to reduce litigation costs, while the insured will want to fight the merits due to reputation concerns. By being aligned on the goal at the beginning of a claim, defense counsel can position the case toward the desired outcome. On the other hand, if the insurer and insured disagree on the desired outcome, then defense counsel should provide a risk evaluation of the claim to both the insured and insurer, including a recommendation on how to move forward. In jurisdictions where the insured is the only client though, such as Texas, defense counsel cannot “take sides” between the insurer and insured on settlement strategy.

Regardless of jurisdiction, in advance of mediation, defense counsel should provide a pre-mediation report to the insurer and insured that contains an analysis of liability and damages. Defense counsel should send a draft of the report to the insured prior to sending it to the insurer so the insured has sufficient time to ask defense counsel questions about concerns it may have, as well as to ensure the recitation of key facts that affect the analysis is accurate. To minimize the risk of a conflict arising during mediation, defense counsel should schedule a call with the insurer and insured to discuss strategy for mediation and settlement authority. Being aligned in strategy helps to position the matter toward a favorable outcome at mediation.

A claims professional should always be looking for possible resolution opportunities throughout the life of a claim. The claims professional should keep in mind that some policies contain consent clauses requiring the insured’s consent to commence any settlement discussions. If the insured’s consent cannot be obtained, the claims professional, defense counsel, and insured should have a meeting to discuss the strengths and weaknesses of the case, any benefits of engaging in settlement discussions at that stage, and what could happen if the insured elects not to engage in settlement discussions, but rather to continue with litigation.

The claims professional should also consider whether continuing litigation will yield any additional and favorable information that could be helpful to the insured’s defense. If the answer is no, the claims professional may want to discuss with the insured the fact that defense costs will continue to increase while the settlement amount likely will not decrease. If the answer is yes, the claims professional may want to consider whether settlement discussions at a later stage may be more beneficial to the insured. For example, continuing with written or oral discovery may produce helpful information that can place the insured in a better bargaining position to reduce its settlement share or the overall value of the case.

The tripartite relationship can be a minefield of complex issues. While it is complex, it does not need to be a source of tension between the insurer, insured, and defense counsel. Each member of the tripartite relationship can successfully navigate this minefield through open communication.

To avoid misunderstandings or miscommunications in the future, the parties should have a call at the outset of the case to define the roles and responsibilities of each party. Be concise and detailed about the litigation strategy so each party’s expectations are appropriately managed throughout the case. An agreed-upon common defense will foster trust and cooperation among all parties in a tripartite relationship. Ultimately, effective communication will allow each party the opportunity to meaningfully contribute to the efficient and successful resolution of a claim.