ETHICS OPINION 659-1983 DUTY OF ATTORNEY RETAINED BY INSURANCE COMPANY

Opinion Number 659

NEW YORK COUNTY LAWYERS’ ASSOCIATION

COMMITTEE ON PROFESSIONAL ETHICS

In answering questions this Committee acts by virtue of the following provision of the By-laws of the Association, Article 54, Section 3:

“This Committee shall have power, when consulted, to advise inquirers respecting questions of proper professional conduct, reporting its action to the Board of Directors from time to time.”

It is understood that this committee acts on specific questions submitted ex parte and in its answers bases its opinion on such facts only as are set forth in the question.

QUESTION NO. 659

Does an attorney retained by an insurance company to defend the assured have a duty to reveal possible misconduct by the assured, learned by the attorney during discovery, to the insurance company which in turn might use such knowledge to disclaim coverage? Does the above attorney’s ultimate duty lie with the insurer or the assured?

ANSWER TO QUESTION NO. 559

An attorney has been retained by an insurance company to defend a claim against its assured’s errors and omissions policy and has provided it with monthly status reports. One of the allegations set forth in the complaint attributes fraudulent acts to the assured. In the course of discovery proceedings and private conversations with a former employee of the assured, it has come to the attorney’s attention that some of the allegations may be true. The attorney states that such information regarding possible fraudulent acts by the assured is not subject to a claim of privilege and requests the Committee’s opinion as to (i) whether he has a duty to reveal such misconduct to the insurance company which in turn might use such knowledge to disclaim coverage under its policy and (ii) where an attorney’s ultimate duty Lies with respect to an insurer and its assured when the attorney has been retained by the former to represent the latter.

EC 5-1 of thy Code of Professional Responsibility states that., “The professional judgment of a lawyer should be exercised, within the bounds of the law, solely for the benefit of his client and free of compromising influences and loyalties. Neither his personal interests, the interests of other clients, nor the desires of third persons should be permitted to dilute his loyalty to his client”, More specifically, “A lawyer shall not permit a person who recommends, employs, or pays him to render legal, services for another to direct or regulate his professional judgment in rendering such legal services”. DR 5-107B.

There can be no doubt but that under the facts presented to us the assured is the client of the retained attorney and the attorney is obligated to represent the assured with undivided fidelity regardless of the fact that his fee for legal services is being paid by another. See N.Y. State 73 (1968); ABA Inf, 1476 (1981). The insurance company is not a party to the suit and it has a contractual obligation not to take any action that would prejudice the assured’s defense to the allegations set forth in the complaint, as the insurance policy presumes the furnishing of counsel unfettered by divided loyalty and fully committed to the highest standards of legal representation in the best interest of the assured. Id. In addition, the attorney supplied by the insurance company has the duty to defend the suit in its entirety and should not use information acquired in the course of the representation of the client to the disadvantage of the client, See N.Y. State 73 (1968); EC 4-5.

It is therefore the view of the Committee that not only is the attorney under no duty to inform the insurance company of the possibility of fraudulent acts by the assured, but that since this would work to the detriment of his client, the assured, he may not do so. It follows, with respect to the second question, that the ultimate duty of an attorney employed by a carrier to defeat its assured is to the assured.

 

June 30, 1983