Committee on Professional Ethics


QUESTION NO. 669 (89-2)



DIGEST: A lawyer appointed by an insurance company to represent an insured owes a duty of confidentiality to the insured and may not disclose confidences and secrets of the insured to the insurance company, without the consent of the insured.


CODE: DR 2-110(B)(2), DR 4-101(A), DR 4-101(B)(l), DR 4-101(B)(2), DR 4-101(C), EC 4-5, Canon 5, DR 5- 107(A)(1), DR 7-102(A).


QUESTION: What are the obligations of a lawyer appointed by an insurance company to represent an insured upon discovering information that would be grounds for denial of coverage by the insurance company?




An automobile accident occurs while the car is being driven by a friend of the owner. After both the owner and the driver are sued, the owner’s insurance company appoints an attorney to defend them. During the attorney’s investigation, the owner reveals that the driver did not have the owner’s prior consent to drive the vehicle, although the owner would have consented if asked. Under the terms of the policy, persons other than the owner/policy holder are covered only if the owner gives prior consent. Accordingly, if the insurance company knew of the lack of prior consent, it would deny coverage to the friend. It might also deny coverage to the owner, on the grounds of lack of cooperation in the defense of the lawsuit.


Knowledge of this information creates an ethical dilemma for the attorney appointed by the carrier. However, we have found no recent ethics opinions in New York to provide guidance on this subject.


It is common for insurance contracts to provide that the insurance company will provide and pay for a lawyer to represent the insured where the pleadings in a suit indicate that the insurer may be liable under the policy. See Crum v. Anchor Ins. Co., 264 Minn. 378, 119 N.W.2d 703 (1963)(insurer must defend in connection with incident within the terms of the policy). Such contracts usually contain disclosures regarding the representation and an advance consent by the insured to the representation. Assuming that the degree of disclosure is appropriate, such arrangements are permissible under the Code of Professional Responsibility, which provides: “Except with the consent of his client after full disclosure, a lawyer shall not [a]ccept compensation for his legal services from one other than his client.” DR 5-107(A)(l).


Despite the payment of legal fees by the insurance company and the fact that the lawyer may have a long-standing relationship with the insurance company, the lawyer’s client in the matter is the insured. See ABA Opin. 282 (1950), Rejohn v. Serpe, 125 Misc.2d 148, 478 N.Y.S.2d 799 (Dist. Ct. Suffolk Cy. 1984), American Employers Ins. Co. v. Aircraft specialties, 205 Misc. 1066, 131 N.Y.S.2d 393 (1954)(“[A]ttorneys, although paid by an insurance carrier, are the attorneys for the assured”); N.Y. State 519 (1980)(“The primary allegiance of counsel employed to defend against third party claims clearly belongs to the assured, notwithstanding the fact that counsel is retained and compensated by the carrier.”)


The fact that the friend did not have the permission of the car owner is a secret of the car owner under DR 4-101(A), if the client has requested that it not be revealed or its revelation would be embarrassing or detrimental to the client. EC 4-5 admonishes a lawyer to exercise care to prevent the disclosure of the confidences and secrets of one client to another. Both DR 4- 101(B)(2) and EC 4-5 prohibit a lawyer from using information acquired in the course of the representation of a client to the disadvantage of the client. Accordingly, unless one of the exceptions contained in DR 4-101(C) applies, the lawyer may not disclose the information to the insurance company.


We believe the lawyer should advise the car owner to make full disclosure to the insurer, since failure to disclose the fact that the friend did not have prior authorization to use the car might affect the owner’s own coverage. Cf. DR 7- 102(B)(1). If the car owner refuses to make the disclosure, the lawyer should resign from the representation. DR 7-l02(A), DR 2-110(B)(2). State Farm Mut. Auto Ins. Co. V. Walker, 382 F.2d 548 (7th Cir. 1967), cert. denied, 389 U.S. 1045 (1968) (If the lawyer obtains an admission from the insured or discovers evidence clearly indicating a lack of coverage, the lawyer must withdraw from representing the insured.)


Even if the owner’s actions did not rise to the level of fraud on the insurer, the lawyer might be required to withdraw. For example, in U.S. Fidelity & Guar,. Co. v.Louis A, Roser Co., 585 F.2d 932 (8th Cir. 1978), the insured was sued on three different grounds. Two were covered under the policy? the third was not. The Court held that the lawyer assigned by the insurance company was subject to a conflict of interest and must resign:


We cannot escape the conclusion that it is impossible for one attorney to adequately and fairly represent [an insurance company and its insured] in litigation in the face of the real conflict of interest which existed here. Even the most optimistic view of human nature requires us to realize that the attorney employed by an insurance company will slant his efforts, perhaps unconsciously, in the interests of his real client–the one who is paying his fee and from whom he hopes to receive future business–the insurance company.


Id., note 5 at 938. cf. Prashker_v. United States Guarantee Co., 1 N.Y.2d 584, 593, 154 N.Y.S.2d 910-917, 136 N.E.2d 871, 876 (1956); public .Serv, Mut, Ins, Co, v. Goldfarb, 53 N.Y.2d 392, 442 N.Y.S.2d 422, 425 N.E.2d 810 (1981)(If the insurance company contests coverage or a conflict of interest otherwise arises, the insured is entitled to hire an independent lawyer.)


If the matter is before a court, the lawyer must obtain the court’s permission for the withdrawal. DR 2-110(A)(1). The lawyer must also take reasonable steps to avoid foreseeable prejudice to the client’s rights. DR 2-110(A)(2).


when the lawyer withdraws from the representation, he may not inform the insurance company of the reasons for the withdrawal. OR 4-10l(B)(l). Determining exactly what the lawyer should say is more problematical. It has been suggested that the lawyer’s statement that professional considerations require termination of the representation ordinarily should be accepted as sufficient, However, we believe that the lawyer’s response will depend largely on the specific situation. It goes without saying that the lawyer may not represent the insurance company in any matter involving the facts at issue in the case. DR 4-101(B)(2), Canon 5.


May 17, 1989