WHAT HAPPENS IF IT’S THE LAWYER’S FAULT - Texas ...THE TILLEY FOLLIES - WHAT HAPPENS IF IT’S THE LAWYER’S FAULT? Presenter MICHAEL SEAN QUINN Law Office of Michael Sean Quinn

THE TILLEY FOLLIES - WHAT HAPPENS IF IT’S

THE LAWYER’S FAULT?

Presenter

MICHAEL SEAN QUINN

Law Office of Michael Sean Quinn

230 N. Main Street, Ste. 202

Salado, Texas 76571

Ph: 254.947.0221

Fax: 254.947.0729

[email protected]

www.michaelseanquinn.com

Author

PORTIA BOTT

Attorney at Law

4408 Spicewood Springs Road, Ste. 306

Austin, Texas 78759

Ph: 512.342.2910

Fax: 512.342.2911

[email protected]

State Bar of Texas

9th

ANNUAL

ADVANCED INSURANCE LAW COURSE

April 12-13, 2012

Dallas

CHAPTER 6

The Tilley Follies - What Happens if it’s the Lawyer’s Fault? Chapter 6

i

TABLE OF CONTENTS

A. INTRODUCTION ............................................................................................................................................. 1

B. TILLEY DESCRIBED ........................................................................................................................................ 1

C. SPECIFIC ACTS/OMISSIONS OF ATTORNEY MISCONDUCT ................................................................. 1

D. THE TILLEY DECISION—THE MAJORITY ................................................................................................ 3

E. THE CONCURRING OPINION ....................................................................................................................... 4

F. THE INHERENTLY FLAWED RELATIONSHIP BETWEEN INSURER AND INSURANCE DEFENSE

LAWYER, YESTERDAY AND TODAY ........................................................................................................ 4

G. PROFESSIONAL RULES IMPLICATED ........................................................................................................ 6

H. SOLE CLIENT VS. DUAL REPRESENTATION DISPUTE .......................................................................... 7

I. DOES UNAUTHORIZED PRACTICE OF LAW COMM. V. AMERICAN HOME ASSUR. CO.

PROVIDE ANY REAL ANSWERS? ............................................................................................................... 8

J. COMMON TILLEY-TYPE ISSUES ENCOUNTERED TODAY ..................................................................... 8

K. THE CALIFORNIA ALTERNATIVE—CUMIS COUNSEL .......................................................................... 9

CONCLUSION ............................................................................................................................................................... 9

THE TILLEY FOLLIES - WHAT HAPPENS IF IT‘S THE LAWYER‘S FAULT? (PowerPoint Presentation) ......... 11


1

THE TILLEY FOLLIES - WHAT

HAPPENS IF IT’S THE LAWYER’S

FAULT?

A. INTRODUCTION

Every Texas lawyer, hopefully, who is at all

connected with insurer-provided representation of

insureds in liability lawsuits knows of the Tilley case

and that it requires lawyers to give their client-insureds

their utmost loyalty in situations involving conflicts or

potential conflicts between the insured and insurer.

Employers Casualty Company v. Tilley, 496 S.W.2d

552 (Tex. 1973). Tilley actually authoritatively

adjudicated only the consequences to an insurance

company of surreptitiously using the insurance defense

lawyer (―ID lawyer‖) hired to defend an insured in a

liability suit to develop coverage defenses in order to

defeat the insured‘s coverage. It did not address the

consequences to the lawyer of acting on behalf of the

insurer against the insured. That is what this paper is

about, although it really only scratches the surface of

the issue. Tilley is hugely important in the area of legal

ethics in Texas even though it primarily adjudicated

issues of equitable estoppel of liability insurance

carriers and non-waiver agreements. Moreover, the

majority opinion in Tilley is not as protective of

insureds‘ interests as most believe as the recent opinion

in Unauthorized Practice of Law Committee v.

American Home Assurance Co., 261 S.W.3d 24, 42

(Tex. 2008) points out.

B. TILLEY DESCRIBED

The Tilley decision arose out of a declaratory

judgment action filed by Employers Casualty seeking

judgment that it‘s insured failed to give adequate

notice of an oilfield accident resulting in bodily

injuries under CGL policy, therefore, coverage for the

accident was forfeited. It was undisputed that Tilley

did not give Employers Casualty notice of an accident

for some twenty months until suit was filed against

him. Tilley claimed that he had no knowledge of the

accident until he was sued.

Joe Tilley operated a business furnishing tools and

employees for the lifting of casing pipe in drilling

operations. Tilley was not at the well site on

November 25, 1967, when the accident occurred. A

drilling company employee, Douglas Starky, tied a

―catline‖ to a casing pipe and Tilley‘s equipment and

crew then lifted the pipe which slipped and fell on

Starky ultimately causing him to loose his right arm.

Tilley‘s foreman, Grady Fore, was directing the Tilley

crew when the accident occurred. According to Fore,

the accident was caused by the way Starke tied the

catline rather than how the pipe was lifted. It was

disputed whether Tilley was told about the accident

and/or had actual notice of it before Starke filled suit

against Tilley twenty-three months later.

When Tilley was eventually sued, Employers

Casualty secured a general non-waiver agreement and

hired Dewey Gonsoulin to defend Tilley. Lawyer

Gonsoulin defended Tilley in the Starky lawsuit for

some eighteen months, and, at the same time, ―also

performed services for Employers which were adverse

to Tilley.‖ Id. at 554.

The declaratory judgment action was apparently

filed prior to the disposition of the Starky lawsuit.1

Employers‘ Casualty sought summary judgment on the

ground that Foreman Fore‘s awareness of the accident

was imputable to Tilley, thus Tilley‘s lengthy delay in

giving notice breached the policy as a matter of law

relieving Employers‘ of its policy obligations. In

response, Tilley ―raised a disputed issue of fact

concerning Fore‘s responsibilities and authority.‖

In addition, the Court states that ―Tilley proved‖

that his insurer-provided attorney ―while representing

Tilley in the personal injury case, developed the

adverse evidence about Fore‘s knowledge.‖ Tilley

argued that this conduct by Employers created a waiver

and estoppel that defeated Farmers‘ notice defense.

The trial court agreed and overruled Employers‘

motion, finding that Employers owed Tilley both a

defense and indemnity in the Starky lawsuit.

C. SPECIFIC ACTS/OMISSIONS OF

ATTORNEY MISCONDUCT

The specific acts and omissions noted by the

Court to have been committed by Lawyer Gonsoulin

while representing Tilley are:

● worked for Employers adversely to Tilley in

developing evidence upon which to deny

coverage;

● took a statement from Foreman Fore with the

expressed intent of establishing that Tilley

had knowledge of the accident through the

foreman;

● took four other statements from Tilley‘s

employees to establish that they had

informed Tilley of the accident (knowing that

such evidence was contrary to Tilley‘s

position);

● briefed the legal issues about late notice for

Employers without advising Tilley;

● interviewed two other people at Employers‘

behest to establish late notice;

1The Court affirmed the court of appeals‘ reversal (or

reformation) of that portion of the trial court‘s judgment

finding a duty to indemnify Tilley in the Starky case citing

Firemen’s Insurance Company of Newark v. Burch, 442

S.W.2d 331 (Tex. 1968). Employers Cas. Co. v. Tilley, 496

S.W.2d 552, 554 (Tex. 1973)


2

● over a period of a year-and-a-half, wrote

numerous letters to Employers and had

numerous oral conversations with Employers

personnel regarding developing its coverage

defense, suggesting additional investigation,

and advising of the legal possibilities of

proving such a defense;

● failed to disclose these acts to Tilley;

● failed to disclose to Tilley the conflict of

interest on the late notice issue between him

and Employers;

● failed to disclose to Tilley that the statements

taken from his employees were going to

effect coverage as opposed to being used in

connection with the liability defense;

● failed to disclose to Tilley that he needed an

independent lawyer to protect his interests;

and

● failed to disclose to Tilley that he was not

representing Tilley fully on all issues.

Id. at 556-57.

The misconduct depicted in this list violates just

about every fiduciary duty owed by a lawyer to a

client. The specific duties implicated in Tilley, and in

most modern conflict scenarios, is the duty of loyalty,2

full disclosure,3 and, to a lesser extent, at least, in

Tilley, confidentiality.4

2 An attorney owes a client undivided loyalty which applies

in all aspects of the representation. Lopez v. Munoz,

Hockema & Reed, L.L.P., 22 S.W.3d 857, 867 (Tex.

2000)(―Fundamentally, a lawyer should always act in the

client‘s best interests‖; an attorney owes his client ―perfect

good faith‖); Gibson v. Ellis, 126 S.W.3d 324, 330 (Tex.

App.—Dallas 2004, no pet.)(―attorney breaches his fiduciary

duty to a client when he, . . . subordinates his client's interest

to his own, engages in self-dealing, . . . or makes

misrepresentations to achieve these ends‖); Deutsch v.

Hoover, Bax & Slovcek, L.L.P., 97 S.W.3d 179, 196 (Tex.

App.—[14th Dist.] 2002, no pet.)(attorneys owe their clients

a fiduciary duty of ―most abundant good faith‖); see also

RESTATEMENT (Third) OF AGENCY § 8.01 (1006).

3 Incident to the duty of loyalty is the duty of absolute

disclosure. Willis v. Maverick, 760 S.W.2d 642, 645 (Tex.

1988)( ―As a fiduciary, an attorney is obligated to render full

and fair disclosure of facts material to the client‘s

representation‖); Tanox, Inc., v. Akin, Gump, Strauss, Hauer

& Feld, L.L.P., 105 S.W.3d 244, 253 (Tex. App.—[14th

Dist.] 2003, pet. denied)(attorney-client relationship is one

of ―most abundant good faith‖ requiring absolute perfect

candor, openness and honesty); Deutsch v. Hoover, Bax &

Slovcek, L.L.P., 97 S.W.3d 179, 196 (Tex. App.—[14th Dist.]

2002, no pet.) (attorneys owe their clients a fiduciary duty of

―most abundant good faith,‖ requiring absolute perfect

candor, openness, and honesty, and the absence of any

concealment or deception); Perez v. Kirk & Carrigan, 822

Considering the seriousness of attorney

misconduct occurring in Tilley, the majority was

exceedingly circumspect in its treatment of it. Indeed,

the Supreme Court of 1973 was much more deferential

to the attorney involved than courts are likely to be

today.

At the outset, it should be stated that the

impeccable reputation of the attorney

engaged by Employers to represent Tilley,

Mr. Dewey Gonsoulin, and the fact that his

conduct may be representative of the

customary conduct of counsel employed by

insurance companies in similar situations, is

not questioned by counsel for Tilley not by

this Court.

Id. at 558. Nevertheless, the Court concluded that:

[C]ustom, reputation, and honesty of

intention and motive are not the tests for

determining the guidelines which an attorney

must follow when confronted with a conflict

between the insurer who pays his fee and the

insured who is entitled to this undivided

loyalty as his attorney of record.

Id.

S.W.2d 261, 265 (Tex. App.—Corpus Christi 1991, writ

denied)(The fiduciary relationship between attorney and

client requires ―absolute and perfect candor, openness and

honesty, and the absence of any concealment or deception‖);

see also Anderson, Greenwood & Co. v. Martin, 44 S.W.3d

200, 212–13 (Tex. App.-Houston [14th Dist.] 2001, pet.

denied)(Texas law requires attorney who has made

misstatements to a client to make a full disclosure of the

truth).

4 NCNB Tex. Nat’l Bank v. Coker, 765 S.W.2d 398, 399

(Tex. 1989)(―The preservation of clients‘ secrets and

confidences is not an option‖); see also Vinson & Elkins v.

Moran, 946 S.W.2d 381, 394 (Tex. App.-Houston [14th

Dist.] 1997, writ dism‘d by agmt)(holding that legal

malpractice actions are not assignable, in part because to

allow assignment would undermine the attorney-client

privilege, which privilege is ―‘the oldest of the privileges for

confidential communications known to the common law,‘‖

and noting that when a lawyer is sued by his/her own client

the law excuses the lawyer to reveal any confidences

necessary to a defense, but that the duty of confidentiality

would necessarily remain if suit were brought by a non-

client).


3

D. THE TILLEY DECISION—THE MAJORITY

The majority opinion in Tilley is undisputedly one

of the two most important decisions in the area of

liability insurance in Texas.5 The main proposition for

which Tilley is known, i.e., that the ID lawyer owes

loyalty to the insured and not to the insurer, was not

the majority‘s position at all rather it was the

concurrence‘s position. That the insured was owed the

duty of loyalty was not new law in Texas.6 In Tilley,

the majority merely reiterated the ID lawyer‘s duty of

loyalty to the insured and from there went on to

consider the effect of the insurer‘s role in co-opting an

ID lawyer into secretly acting against his client to

develop the insurer‘s late notice defense.

Conceptually, the position actually advocated by the

Tilley majority is contrary to the idea that the duty of

loyalty is owed only to the client-insured for which

Tilley is known.

Under the subheading of ―Duties of Insurers and

Attorneys Employed to Represent Insureds,‖ the

majority held that Employers was estopped to assert its

late notice defense. Id. at 559. The majority based its

holding on (1) Texas case authority regarding a

lawyer‘s duty of loyalty; (2) professional ethical rules;

(3) other states‘ case authority for estopping insurers

from denying coverage or liability in analogous

situations; and (4) a set of guidelines by a coalition of

the ABA and an insurance industry group.7

5 The other being G.A. Stowers Furniture Co. v. Am. Indem.

Co., 15 S.W.2d 554 (Tex. Comm. App. 1929, holding

approved)(recognizing insured‘s cause of action against

insurer for negligently refusing settlement offer within

policy limits).

6 The proposition in Tilley, that an ID lawyer owes his/her

loyalty to the insured client was announced not in Tilley, but

in Automobile Underwriters’ Ins. Co. v. Long, 63 S.W.2d

356, 358-59 (Tex. Comm. App. 1933)(decision adopted)

some forty years before. That case involved a suit by an

insured to recover a judgment against the insured where the

ID lawyers withdrew because the insured retracted a waiver

of his rights (drawn up by the ID lawyers); the issue was

whether the insured had failed to cooperate as contended by

the insurer; the Court held that he had not. Id. Likewise,

Long was a coverage dispute between an insured and the

insurer, and the offending attorneys were not parties.

Interestingly, Long, dealt with only the obligation of

the ID lawyer to inform the insured of a conflict and was

silent about a duty to inform the carrier. 63 S.W.2d 356,

358-59 (Tex. Comm. App. 1933)(decision adopted)((―When

counsel were employed by the company they become

Long‘s (the insured‘s) unqualified attorneys of record, and . .

. owed him the duty to conscientiously represent him, and if

. . . his interests and those of the company conflicted, he

should have been so informed and given the opportunity to

‗protect himself‘‖).

7 The majority cited with approval the ―Guiding Principles‖

drafted by the American Bar Association National

The professional ethical rule primarily cited by

the majority was Canon 5 of the Code of Professional

Responsibility promulgated by the Court in 1971. Id.

at 558. The majority describes Canon 5 as dealing

specifically ―with conduct of a lawyer representing

multiple clients with conflicting or potentially

conflicting interests,‖ which is implied to be the

professional rule governing the situation involved in

Tilley. The Court quotes Ethical Consideration 5—16

under Canon 5 because it expressly addressed a

lawyers‘ ―[r]epresentation of ‗an insurer and his

insured.‘‖ EC 5—16 provided:

Thus before a lawyer may represent multiple

clients, he should explain fully to each client

the implications of the common

representation and should accept or continue

employment only if the clients consent. If

there are present other circumstances that

might cause any of the multiple clients to

question the undivided loyalty of the lawyer,

he should also advise all of the clients of

those circumstances. [Emphasis added.]

Conference of Lawyers and Liability Insurers ―for the

guidance of liability insurers furnishing legal counsel for the

insureds.‖ Employers Casualty Company v. Tilley, 496

S.W.2d 552, 559 (Tex. 1973)(quoting principles IV and V of

the ‗National Conference of Lawyers and Liability

Insurers—Guiding Principles‘ 20 Fed. of Ins. Counsel J. 95

et. seq. (1970)). Interestingly, principle IV quoted by the

majority requires that when an ID lawyer ―becomes aware of

facts or information which indicate to him a question of

coverage,‖ the lawyer is obligated to ―promptly inform both

the company and the insured . . ., of the nature and extent of

the conflicting interests.‖ Tilley, 496 S.W.2d at 559. These

―Guiding Principles‖ embraced by the Supreme Court have

since found their way to the dust bin of history as they were

subsequently rescinded by the ABA in 1980 under pressure

from the Antitrust Division of the Justice Department.

Robert B. Gilbreath, Caught in a Crossfire Preventing and

Handling Conflicts of Interest: Guidelines for Texas

Insurance Defense Counsel, 27 Tex. Tech. L.R. 139, 148 n.

51 (1996); Robert E. O‘Malley, Ethics Principles for the

Insurer, the Insured, and Defense Counsel: The Eternal

Triangle Reformed, 66 Tul. L. Rev. 511, 513 (1991). Justice

Johnson in his concurring opinion in Tilley criticizes the

majority for embracing the ―Guiding Principles‖ which had

not been considered or approved by the Texas bench and

bar. Tilley, 496 S.W.2d at 563-64. He said that the ―court

should not be considering the ethical obligation . . . required

of a commercial enterprise to its customer; this court should

be considering the fiduciary relationship inherent in the

attorney-client relationship and the effect of its transgression

upon the rights of the parties.‖ Id. at 564.


4

Id.8 The majority opinion in Tilley unmistakably

adopts the view that both the insured and the insurer

are clients of the ID lawyer. It was Lawyer

Gonsoulin‘s (and Employers‘) failure to disclose and

warn Tilley of the coverage defense in the face

eighteen month‘s of working against Tilley that

doomed Employer‘s late notice defense, despite the

majority‘s analysis that Lawyer Gonsoulin owed equal

duties to both Tilley and Employers.

The 1958 Opinion 179 of the Texas Committee on

Professional Ethics, appointed by the Supreme Court,

reinforces the conclusion that the consensus of the day

was that both the insurer and the insured were clients

of the ID lawyer and equal duties were owed to both.

Tex. Comm. on Professional Ethics, Op. 179 (1958). It

involved an auto accident in which a pre-suit Stowers

demand lapses. The defendant‘s insurer hires B to

defend when suit is filed.

The Committee was asked among other things

whether (a) the ID lawyer had a duty to inform the

defendant-insured of the holding of Stowers; (b) the

defendant-insured was B‘s client in the case; and (c) as

between the insurer and the insured, ―does B owe more

duty to one than he owes to the other‖? The

Committee answered question (a) affirmatively (8-0),

and question (b) affirmatively but with only a 6-2 vote.

To question (c), the Committee answered, ―No,‖ but

one member appears9 to have answered that in the

event of a conflict between the defendant-insured and

the insurer, the ID lawyer owed his primary duty to the

insurer (7-1). Id.

E. THE CONCURRING OPINION

Little remembered is the concurring opinion in

Tilley by Associate Justice Sam Johnson in which he

embraced the majority‘s basic holdings but differed in

the appropriate underlying professional rules that

should govern the representation of an insured by an

ID lawyer. Justice Johnson warned against ―fail[ing]

to look to that to which this court should be

particularly sensitive—and that which underlies the

present case disposition—the ethical considerations

involved in the attorney-client relationship made

evident in the instance record.‖ Tilley, 496 S.W.2d at

562. He mentions other parts of the Code of

Professional Responsibility including the fiduciary

8 Canon 5 and EC 5—16 were subsequently changed and the

rule governing representation of multiple parties is now

found in rule 1.06 and comment 16 of the Texas Disciplinary

Rules of Professional Conduct. See supra, pp. 11-12.

9 This refers to # 4 of the Opinion which contains a strategic

typo. However, based on the context it appears that in the

last portion of # 4 the letter ―B‖ was actually intended rather

than ―D.‖ Tex. Comm. on Professional Ethics, Op. 179

(1958).

duties owed to clients and that a lawyer‘s professional

judgment ―is to be used Solely for the benefit of his

client and that no conflicting interest shall dilute such

loyalty.‖ [Emphasis in original.] Id.

The concurring opinion then draws the conceptual

distinction between the professional rules employed by

the majority which involve ―representation of two or

more clients, [and] the ethical considerations

enumerated under the Interests of Multiple Clients‖

and portions of the rules requiring undivided loyalty to

the client. The concurrence concludes that the

―representation provided by the attorney more

appropriately should be construed as representation of

a single client, Tilley.‖ Id. at 563. Justice Johnson

quotes from EC 5—1 requiring an attorney‘s

professional judgment to be free from compromising

influences, including those of third parties.

Although Justice Johnson‘s opinion is perhaps too

cryptic, it is safe to conclude that he advocated the

position that the ID lawyer had only one client, the

insured, and the insurer was merely a third party

paying the tab as a result of an extraneous contractual

duty. Under Justice Johnson‘s analysis, the ID lawyer

not only would not have a duty to reveal a coverage

defense to an insurer, but to do so would violate the

lawyer‘s duty of loyalty to the client as well as the duty

of confidentiality.

The differences in the majority and concurrence‘s

conceptualization of the ID lawyer‘s relationship to the

insured and especially the insurer was prescient of

scholarly and ethical battles surrounding the tripartite

relationship that peaked in the mid 1990s and as well

as the problems remaining today.

F. THE INHERENTLY FLAWED

RELATIONSHIP BETWEEN INSURER AND

INSURANCE DEFENSE LAWYER,

YESTERDAY AND TODAY

The inherent structure of the insurer/insured/ID

lawyer relationship creates compelling pressures on

both the ID lawyer and the insurer to ―hedge‖ in their

obligations to the insured, especially in situations

involving coverage disputes and particularly when

coverage disputes are entangled with liability case

facts. The less knowledgeable, sophisticated, and

vigilant the insured the greater the ID lawyer and

insurer will be tempted. Likewise, the longer the ID

lawyers‘ relationship with the insurer or the insurance

industry, and the greater the portion of the lawyer‘s

practice involved in that industry, the greater these

temptations. It is the insurer and ID lawyer that have

virtually a monopoly on information, money, and

power in the relationship. No one can deny that these

pressures are not just as real, widespread, and

compelling today as they were at the time of Tilley, if

not more so.


5

The majority in Tilley referred to these pressures

as ―serious questions involving legal ethics and public

policy, and said, [c]ounsel for both parties apparently

conceded that similar situations often confront insurers

and attorney employed by them to represent insureds

under [CGL] policies and that guidelines from this

Court would be welcomed.‖ Id. at 557-58.

One justice of the Eighth Circuit characterized the

danger inherent in the tripartite relationship when he

said ―[e]ven the most optimistic view of human nature

requires us to realize that an 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.‖

United States Fid. & Guar. Co., v. Louis A. Rosen Co.,

585 F.2d 932, 938 n.5 (8th Cir. 1978); see also Tews

FuneralHome, Inc. v. Ohio Cas. Ins. Co., 832 F.2d

1037, 1045 (7th Cir. 1987)(recognizing risk where there

is a conflict of interest, ―there is a danger that the

attorney appointed by the insurer may find it

financially advantageous to protect the insurer's

interests‖); Rose v. Royal Ins. Co., 3 Cal. Rptr.2d 483,

487 (Ct. App. 1991)(―Where an insurer is called upon

to defend its insured, the attorney retained by the

insurer may have a compelling interest in perfecting

the insurer's position, whether or not it coincides with

what is best for the insured‖).

Twenty-five years after Tilley, Justice Gonzalez in

his concurring/dissenting opinion in State Farm Mut.

Auto. Insurance Co. v. Traver, eloquently summarized

the problems of the tripartite relationship and the

limitations of Tilley:

In 1973, we clearly defined the tripartite

relationship in terms of professional ethics.

[Citation omitted.] Under Tilley, the lawyer

owes unqualified loyalty to the policy holder.

Defining the attorney‘s allegiance was

designed to make everyone‘s role in the

relationship clear. . . . This rule has existed

for twenty-five years and serves well in

perhaps the majority of cases. It allows the

attorney to provide a single-minded defense

to the insured. That was my view when I

wrote in Ranger County Mutual Insurance

Co. v. Guin, 723 S.W.2d 656, 660-63 (Tex.

1987)(Gonzalez, J., dissenting). In Ranger, I

argued that insurance companies should not

have the full spectrum of vicarious liability

that goes with a true principal-agent

relationship. . . . I adhere to that view today,

but it may be necessary to modify the rule in

Tilley to account for current trends in

insurance defense practice.

Since Tilley and Ranger, in part because of

tort reform[10] of the 1990s, the business of

insurance and the practice of insurance

defense have undergone revolutionary

changes. In the last two decades, the

insurance industry has seen fierce

competition, a change in investment climate,

and constant pressures to contain costs. To

weather changing market forces and dramatic

shake-outs within the industry, companies

have changed the way they operate. I am

concerned that these changes have weakened

the protection Tilley envisioned.

For example, one trend that has serious

ethical implications is the so-called ―captive

law firm.‖ . . . The sole reason for a captive

law firm‘s existence is to provide legal

services at a low cost to the insurance

company. I venture to say that in most cases,

the policy holder is not aware of this

arrangement. As we previously discussed, in

these situations, it is probably impossible for

any attorney to provide the insured the

unqualified loyalty Tilley requires. You bite

the hand that feeds you at your own peril.

In short, the market-based, economic

paradigm of today‘s world makes the rules

our Court and the Legislature have developed

in a non-market paradigm suspect,

ineffective, and obsolete. The lawyers are

under tremendous pressure trying to serve

two masters.

980 S.W.2d 625, 633-34 (Tex. 1998)(Gonzalez, j.,

concurring in part and dissenting in part).

10 Judge Gonzalez accurately assessed tort reforms‘ role in

forcing this change by:

perceptively reduc[ing] the amount of insurance

defense work to go around. Competition for

insurance work weakens the defense lawyer‘s

hand while it allows insurance companies to

demand ever-stringent cost containment

measures. . . . Cost containment is not bad in

itself. However, . . . I am concerned that defense

lawyers may be reluctant to resist cost-

containment measures that detrimentally affect

the quality of the insured‘s defense . . [and]

compromise a lawyer‘s autonomy and

independent judgment on the best means for

defending the insured.

State Farm Mut. Auto. Ins. Co. v. Traver, 980

S.W.2d 625, 633-34 (Tex. 1998)

1998)(Gonzalez, J., concurring in part and

dissenting in part).


6

G. PROFESSIONAL RULES IMPLICATED

It is difficult to imagine other scenarios where

lawyers are routinely subjected to such powerful

pressures to undercut their client‘s interests than in the

insurer/ID lawyer context. Yet, the legal profession

tolerates these inherently conflict-laden relationships—

in fact liability insurance makes the litigation world go

round.

How does the legal profession ―manage‖ these

relationships? Primarily through two types of

professional rules of conduct: (1) those designed to

assure the lawyer‘s allegiance to the client despite a

non-client third-party‘s payment of legal fees, Texas

Disciplinary Rules of Professional Conduct, § 1.08(e)

(1989) reprinted in TEX. GOV‘T CODE ANN., tit. 2,

subtit. G, app. (Vernon Supp. 1995)(State Bar Rules,

art. X § 9), and (2) those designed to regulate multiple

client representations in the context of conflicts or

potential conflicts of interest among the clients. Id. at

§ 1.06(b)(2), (c), (e). Also implicated in typical

insured v. insurer conflicts is the question of

confidentiality which is treated in rule 1.05(b).

Rule 1.08(e) is the most commonly recognized

rule addressing the tripartite relationship in Texas.

Rule 1.08(e) provides:

Rule 1.08 Conflict of Interest: Prohibited

Transactions

. . . .

(e) A lawyer shall not accept compensation

for representing a client from one other than

the client unless:

(1) the client consents;

(2) there is not interference with

the lawyers independence of

professional judgment or the

lawyer-client relationship; and

(3) information relating to

representation of a client is

protected as required by Rule

1.05.

Tex. Disciplinary R. of Prof. Conduct, § 1.08(e)

(1989). That the Texas Bar considers this rule to apply

to the tripartite relationship is demonstrated by the

official comments to the rules. Comment 5 to the rule

states:

5. Paragraph (e) requires disclosure to the

client of the fact that the lawyer‘s services

are being paid for by a third party. Such

must also conform to the requirements of

Rule 1.05 concerning confidentiality and

Rule 1.06 concerning conflict of interest. . . .

Where an insurance company pays the

lawyer‘s fee for representing an insured,

normally the insured has consented to the

arrangement by the terms of the insurance

contract.

Id. at cmt. 5.

Implicated also is rule 1.06 which deals generally

with conflicts of interest and provides in relevant part:

Rule 1.06 Conflict of Interest: General

Rule

(a) A lawyer shall not represent

opposing parties to the same

litigation.

(b) In other situations and to the extent

permitted by paragraph (c), a

lawyer shall not represent a person

if the representation of that person:

(1) involves a substantially

related matter in which

the person‘s interests are

materially and directly

adverse to the interests of

another client of the

lawyer or the lawyers

firm; or

(2) reasonably appears to be

or become adversely

limited by the lawyers or

law firm‘s responsibilities

to another client or to a

third person or by the

lawyers or law firm‘s

own interests.

(c) A lawyer may represent a client in

the circumstances described in (b)

if:

(1) the lawyer reasonably

believes the

representation of each

client will not be

materially affected; and

(2) each affected or

potentially affected client

consents to such

representation after full

the existence, nature,

implications, and possible

adverse consequences of

the common

representation and the


7

advantages involved, if

any.

(d) A lawyer who has represented

multiple parties in a matter shall

not thereafter represent any of such

parties in a dispute among the

parties arising out of the matter,

unless prior consent is obtained

from all such parties to the dispute.

(e) If a lawyer has accepted

representation in violation of this

Rule, or if multiple representation

properly accepted becomes

improper under this Rule, the

lawyer shall promptly withdraw

from one or more representations to

the extent necessary for any

remaining representation not to be

in violation of these Rules.

Id. at Rule 1.06(a)(e). Comment 12 to rule 1.06

actually refers to the situation involved in rule 1.08(e)

and states:

Interest of Person Paying for a Lawyers

Service

12. A lawyer may be paid from the source

other than the client, if the client is informed

of that fact and consents and the arrangement

does not compromise the lawyer‘s duty of

loyalty to the client. See Rule 1.08(e). For

example, when an insurer and its insured

have conflicting interests in a matter arising

form a liability insurance agreement, and the

insurer is required to provide special counsel

for the insured, the arrangement should

assure the special counsel‘s professional

independence.

Id. at cmt. 12.

The pertinent rule governing

confidentiality of client information is:

Rule 1.05 Confidentiality of Information

. . . .

(b) Except as permitted by paragraphs (c)

and (d), or as required by paragraphs (e)

and (f), a lawyer shall not knowingly:

1) Reveal confidential information of

a client or former client to:

(i) a person that the client has

instructed is not to receive the

information; or

(ii) anyone else, other than the

client, the client‘s

representatives, or the

members, associates, or

employees of the lawyer‘s law

firm.

2) Use confidential information of a

client to the disadvantage of the

client, unless the client consents

after consultation.

. . . .

4) Use privileged information of a

client for the advantage of the

lawyer or of a third person, unless

the client consents after

consultation.

Id. § 1.05(b)(1), (2) (4).

H. SOLE CLIENT VS. DUAL

REPRESENTATION DISPUTE

The debate over how many clients an ID lawyer

represents reached its peak by the mid 1990s.11 The

dual representation theory views ID counsel as having

both the insured and insurer as clients and owing the

duty of loyalty to both. The RESTATEMENT (Third)

OF THE LAW OF LAWYERING § 134 cmt. f punts

and states that this issue ―is a question to be

determined on the facts of the particular case.‖ This is

what the Supreme Court appears to have done in

American Home. Unauthorized Practice of Law

Committee v. American Home Assurance Co., 261

11 See, e.g., Eric M. Holmes, A Conflict of Interest Roadmap

for Insurance Defense Counsel: Walking an Ethical

Tightrope Without a Net, 26 Williamette L. Rev. 1 (1989);

Ronald E. Mallen and Jeffrey M. Smith, Legal Malpractice

§ 23.3 (1989); Douglas R. Richmond, Walking a Tightrope:

The Tripartite Relationship Between Insurer, Insured, and

Insurance Defense Counsel, 73 Neb. L. Rev. 265 (1994);

Charles Silver, Does Defense Counsel Represent the

Company or the Insured?, 72 Tex. L. Rev. 1583 (1994);

Charles Silver and Kent Syverud, The Professional

Responsibilities of Insurance Defense Lawyers, 45 Duke L.

J. 255 (1995); Douglas R. Richmond, Lost in the Eternal

Triangle of Insurance Defense Ethics, 9 Geo. J. Legal Ethics

475 (1996); Stephen L. Pepper, Applying the Fundamentals

of Lawyers’ Ethics to Insurance Defense Practice, 4 Conn.

Ins. L. J. 27 (1997).


8

S.W.3d 24 (Tex. 2008). There is an enormous amount

of scholarly and practical discussion of this debate,

which is beyond the scope of this paper. Besides, in

Texas the debate appears to be over and dual

representation appears to have won. See. American

Home Assurance Co., 261 S.W.3d at 42.

I. DOES UNAUTHORIZED PRACTICE OF

LAW COMM. V. AMERICAN HOME

ASSUR. CO. PROVIDE ANY REAL

ANSWERS?

In 2008, the Supreme Court handed down its

decision in Unauthorized Practice of Law Committee

v. American Home Assurance Co. in which it held that

liability insurers did not engage in the unauthorized

practice of law by using staff attorneys to defend

claims against insureds, if the insurer‘s and insured‘s

interests were aligned. 261 S.W.3d 24 (Tex. 2008). In

essence, the Court resurrected principle IV of the

industry ―Guiding Principles‖ and Ethics Opinion 179.

See infra.

The court of appeals‘ opinion in that case included

a determination that ID lawyers represent both insureds

and insurers even though the duty to the insured is

primary. American Home Assurance Co. v.

Unauthorized Practice of Law Committee, 231 S.W.3d

831, 837-38 (Tex. App.—Eastland 2003), aff’d as

modified and rev’d in part, 261 S.W.3d 24 (2008)(―the

Texas Supreme Court has not expressly held that Texas

is a one-client state. . . . . Reality and common dictate

that the insurance company is also a client‖). The

opinion characterized Tilley as clearly concluding that

the ID lawyer had ―two clients, the insurer and the

insured.‖ Id. at 838. It also cited the Texas Committee

on Legal Ethics as viewing the attorney as having two

clients in Ethics Opinion 260.12 The court of appeals

also noted that the ―‘one-client, two-client‘ argument

speaks to ethical conflicts, not to whether an insurance

company is engaged in the unauthorized practice of

law,‖ i.e., the discussion is dicta.

On appeal, the Supreme Court addressed this issue

but in an unsatisfactory way; it addressed it in a single

paragraph with conspicuously little discussion,

analysis, or guidance. True, the treatment of the one-

client/two-client was dicta in both appellate opinions.

But then, the same may be said of the Tilley decision

and look at its importance over the years. The Court

failed to give a clear answer to the over-arching

questions and merely left the nature of the ID lawyer-

insurer relationship up to retainer agreements, citing

12 Tex. Comm. on Professional Ethics, Op. 260 (1963).

one of Charles Silver‘s articles,13 even though most of

the arrangements between insurers and ID law firms

are informal and often oral. Rarely, do these

arrangements specify whether there is an attorney-

client relationship between the ID lawyer and the

insurer. Rarer still do retainer agreements, written or

oral, provide that an insured is to be informed of the

insurer‘s co-client status.

The Court cursorily addressed the topic only in

response to the Committee‘s assertion that ID lawyers

represent only client insureds and not also insurers.

The Court said, ―[b]ut we have never held that an

insurance defense lawyer cannot represent both the

insurer and the insured, only that an insurance defense

lawyer must represent the insured and protect his

interests from compromise by the insurer,‖ citing

Traver, Garcia, and Tilley.

American Home, 261 S.W3d at 42 n.75. The Court

went on to say that ―we have noted that ‗an insurer‘s

right of control generally includes the authority to

make defense decisions as if it were the client ‗where

no conflict of interest exists,‖ citing Northern County

Mut. Ins. Co. v. Davalos, 140 S.W.3d 685, 688 (Tex.

2004). According to the Court, ID lawyers can

represent both the interests of the insured and insurer in

liability suits and still provide ―undivided loyalty to the

insured‖ and ―at all times protect the interests of the

insured if those interests would be compromised by the

insurer‘s instructions.‖ American Home, 261 S.W3d at

42 n.75 (citing Traver, 980 S.W.2d at 628).

If an insurer‘s instructions to an ID lawyer would

compromise the insured‘s interests, isn‘t there already

at least a potential conflict? If the insurer persists in its

compromising instructions, isn‘t the representation of

both the insured and insurer doomed under the ethical

rules? The Court goes so far as stating that not even

the existence of a reservation of rights on coverage

necessarily raises a disqualifying conflict. In this day

of extreme market pressures, what is the likelihood that

the ID lawyer will inform both parties and withdraw

from representing both?

J. COMMON TILLEY-TYPE ISSUES

ENCOUNTERED TODAY

Probably the most common conflict problem ID

lawyers face today, as in Tilley‘s day, is what to do

about information raising a coverage defense

uncovered during the course of defending the insured.

Should the ID lawyer disclose the existence of a

coverage defense to the insurer? It is not uncommon

for an insurer to be unaware of potential policy

defenses at the time a case is assigned to an ID lawyer.

13 Charles Silver, Does Insurance Defense Counsel

Represent the Company or the Insured?, 72 Tex. L. Rev.

1538, 1603-04 (1994).


9

The majority in Tilley indicated that the ID counsel is

obliged to disclose the information to both the insured

and the insurer. American Home seems to compel the

same. However, current rule 1.05 prohibits the use of

information obtained during the course of the

representation to the disadvantage of the client. Rule

1.08(e) requires that confidentiality be maintained even

when a third party pays the fee.

There is a substantial and serious discrepancy

between the disclosure requirement articulated by

American Home (and in the majority opinion in Tilley)

and the professional rules. Compare Tex. Comm. on

Prof‘l Ethics, Op. 482, 57 Tex. Bar J. 200

(1994)(concluding that former employee and additional

insured‘s statement threatening perjury hostile to his

co-defendant employer could not be disclosed without

that client‘s consent because it was gained as part of an

attorney-client relationship and withdrawal from the

representation of both clients was required) with Tex.

Comm. on Prof‘l Ethics, Op. 609 (2011)(―since the

lawyer will have obligations as a lawyer to both the

insured and to the insurance company, there will exist

the risk that conflicts of interest may arise where . . . it

may be impossible for the lawyer to continue to

represent the insured‖); see also Daniel M. Martinez,

Comment, Insurance Companies Use of “Captive” or

In House Counsel to Represent Insureds Constitutes

the Unauthorized Practice of Law: Is American Home

the Right Decision for Texas?, 34 St, Mary‘s Law J.

1007 (2003); Gilbreath, 27 Tex. Tech L. Rev. at 155-

56; Gail M. Dickenson, Note, If an Insurance

Company Uses an Attorney Employed to Defend the

Insured as an Investigator to Prepare a Policy

Defense, It is Estopped From Asserting the Defense, 52

Tex. L. Rev. 610, 161 (1974).

Other more modern Tilley-type issues are

insurers‘ use of cost-containments measures such as in-

house lawyers, litigation guidelines, and auditing of

outside counsels‘ fee statements. However, since the

Supreme Court has specifically approved of the use of

in-house lawyers in American Home, this author

expects the same result in the case of litigation

guidelines and auditing. Yet, through all of this, ID

lawyers are expected to comply with their duties of

loyalty, confidentiality, and independent professional

judgment to both clients. It is the economic and

market forces that ushered in the use of these cost-

cutting measures that have doubled-down the pressures

on ID lawyers from Tilley’s day, and, as some would

strongly argue, increased the likelihood that the

shameless conduct involved in Tilley will still occur,

and not infrequently.

K. THE CALIFORNIA ALTERNATIVE—

CUMIS COUNSEL

The court in the now famous case of San Diego

Credit Union v. Cumis Insurance Society, 208 Cal

Rptr. 494, 497-98 (App. Ct. 1994), held that where an

insurer tenders a qualified defense under a reservation

of rights, a conflict of interest exists, and the insured is

entitled to independent counsel at the insurer‘s

expense. That court took seriously the well-recognized

tendency of ID lawyers to have closer ties to the

insurer and a more compelling interest in protecting the

insurer‘s interest over the insureds. This alternative

certainly dispels the dangers that an insured‘s

representation will be compromised by the insurer. Of

course, California generally has a more robust view of

consumer protections and regulation of the insurance

industry than Texas.

CONCLUSION

Tilley dealt with the consequences to an insurer

that fosters a breach of allegiance by an ID attorney

and uses the fruits of the breach to challenge coverage

against the insured, i.e., equitable estoppel, the insurer

will be estopped from its coverage defense as a matter

of law. Id. at 559. Regardless of the actual ―holding‖

in Tilley, long-standing perceptions and subsequent

Supreme Court reliance on it had enshrined the

―primacy of the loyalty owed to the insured‖ as a

fundamental bulwark of Texas insurance law. At the

very least, American Home has served to correct any

view that the loyalty due an insured is supreme.

The author of this paper and the seminar speaker

have a combined 47 years of experience in Texas

insurance law, including practicing and studying

insurance-defense matters. This experience has

convinced both that the incidents of substantial

conflicts and potential conflicts between liability

insureds and insurers are far more widespread than

case law, the professional rules, or scholarly

commentaries reflect. The consensus ends there. The

author sides with Justice Johnson and the other one-

client advocates. The speaker, however, is of the view

that dual representation can be maintained as long as

there is not even the potential for a coverage dispute or

other conflict between an insured and the insurer (and

all professional rules are observed).

The author also believes that in today‘s pro-

insurer legal climate in Texas insurers are far more

likely to perceive coverage defenses than they would a

decade ago. The temptation not to bite the hand that

feed you is just too great, and the danger for mischief

is greater, in these economic times. To that end, the

author believes that California got it right—and that a

requirement similar to Cumis counsel is really the only

effective way to protect insureds, and that the problems


10

and risks are wide-spread enough to justify this

alternative.14 But in this day of cost-containment

pressures and pro-insurer policies in Texas, she is not

holding her breath.

14 In fact, comment 12 to rule 1.06 appears to require an

insurer to provide ―special counsel‖ in the instance of a

policy-based conflict.


11

THE TILLEY FOLLIES - WHAT HAPPENS

IF IT‘S THE LAWYER‘S FAULT?

(PowerPoint Presentation)

THE TILLEY FOLLIES-WHAT HAPPENS IF IT’S THE LAWYER’S FAULT?

Speaker: Michael Sean Quinn, Ph.D., J.D., C.P.C.U. &cLaw Office of Michael Sean Quinn

230 North Main St, Ste. 202Salado, Texas 76571

254-947-0221512-656-0503

[email protected]

Essayist: Portia BottAttorney at Law

4408 Spicewood Springs Rd, Ste. 306Austin, Texas 78759

512-342-2910512-342-2911

[email protected]

THE CASE #1

Employers Ins. Cas. Co. v. Tilley, 496 S.W.2d 552, 558 (Tex. 1973).

QUICK SUMMARY

Defense Provided

Duty to Defend?y

Non-Waiver Agreement (N-W-Ag)

What is an N-W-Ag?


12

Uses Defense Lawyers To Prove No Coverage

Lawyers Depend on What? Lawyers Depend on What?

So What’s the Folley?

Logical?

Given Broader Construction: Yes

BUT

ANOTHER CASE

Unauthorized Practice of Law

Committee v. American Home Assurance Co.

261 S.W.3d 24,42 (Tex. 2008)

Minor?


13

ITS DICTA

Retentions agreements may regulate

“FOLLY” DEFINITIONS:

Foolish Foul-Ups

Idiot Action

Lack of Good Sense

Lack of Prudence

Foresight Lacking

Thoughtless Lackingg g

Irrational Present

Motley Crew < Part Of


14

Laugh-able

Satire-able (e.g., Erasmus)( g , )

Mocked Easily

Entertainment Centers Folies Bergère Ziegfeld Follies

Good Time Vacation


15


16

Architecture

Very Ornate Building

Sometimes Impliedly Deliberately But Unfinished


17


18

SATIRE

Erasmus of Rotterdam (1466-1536)

GEOGRAPHICAL LOCATIONSFOLLY BEACH, SOUTH CAROLINA


19

Quinn’ Folly—Idiot?→Anxious

↓ Huddleston

↓ St. Bar

↓ “Deep Throat” like Plot

BETH BRADLEY

PARADOX


20

REPORT TO INS-

Report Facts Crucial Defense, Settlement Numbers

Report can Stimulate Rethink

Case Merits

Coverage

Report Indecision

Withdraw?

“Give Away”

DECISION NOT TO REPORT & DUTY TO COOPERATE


21

Quinn’s Example

Insured’s

Fraud


22

WIG- FOLLY WIG CAP WIG STAND

OTHER

Excessive?

Primaries & Excesses


23

WHAT HAPPENS IF IT’S THE LAWYER’S FAULT - Texas ...THE TILLEY FOLLIES - WHAT HAPPENS IF IT’S THE LAWYER’S FAULT? Presenter MICHAEL SEAN QUINN Law Office of Michael Sean Quinn

Documents