Mike Curry – October 10, 2013
A construction company faces a long and often difficult journey when it receives a “Notice of Claim” letter informing it of a possible construction-defect lawsuit. Usually, one of the first questions asked is, “What am I supposed to do now?” A prudent construction company will immediately notify its insurance carrier(s), and often, the insurance carrier will retain a lawyer to defend the construction company.
When it hires an attorney to defend you, an insurance carrier creates a “tripartite relationship.” As its name suggests, the tripartite relationship consists of three parts: you, the insurance carrier, and the attorney the insurance carrier hires to defend you. The insurance company typically has a select number of firms from which to choose panel counsel, and retains the attorney of its choice to defend a claim.
The nature of the tripartite relationship – the fact the insurance carrier controls the “purse strings” – is the source of many headaches. The relationship often leaves the client with a suspicion that the attorney represents the insurance carrier, and is, therefore, acting in the carrier’s best interests rather than your own. Ethically, that’s simply not true (but it’s common for a newly initiated defendant to improperly refer to his attorney as “the insurance carrier’s attorney.”)
Although hired by the insurance company, the insured is the attorney’s client. The Ethics Committee of the Colorado Bar Association addressed this issue when it wrote, “An attorney retained by an insurance company to represent its insured in the defense of a claim by a third party is typically paid by the insurance company. Nonetheless, the insured is the client to whom the lawyer’s duty of loyalty is owed, regardless of the terms of any retention agreement the lawyer may have with the carrier.”
While the carrier-appointed attorney is working away defending your case, the insurance company may be busy investigating whether its policy actually provides coverage for the lawsuit. At some point, particularly with construction-defect lawsuits, it may issue a “Reservation of Rights” letter to advise you there may not be coverage, and that it reserves its rights to withdraw the defense attorney and disclaim coverage. You presumably call your attorney and ask him to explain what’s going on, what the letter means, and what to do next. Your attorney responds by not answering any of your questions and simply stating, “I cannot offer legal advice on coverage issues.”
Exasperated, you respond, “What? But you’re my attorney!” Unfortunately, because of the tripartite relationship, your carrier-appointed attorney cannot offer legal advice regarding coverage issues. You’re pretty much on your own . . . unless you hire personal/coverage counsel.
Let’s look at another scenario. The plaintiff – the homeowners association – issued an expert report that claims over $2,000,000 in damages. Your insurance policy only provides $1,000,000 in coverage. During mediation, the HOA offers to settle its claims for $1,000,000. Your carrier-appointed attorney thinks this is a great deal and recommends to the insurance carrier that it accept the offer. You think to yourself, “That’s a no brainer; we’re settling! I could lose my business, maybe my house, and possibly everything else if the HOA wins at trial.” However, the insurance carrier refuses the offer – against the attorney’s recommendation and without even consulting you. What do you do now? Isn’t that why you purchased insurance?
Here’s a third scenario: you’re listed as an “additional insured” on your subcontractor’s insurance policy. Shortly after you receive the notice of claim letter, you write to your subcontractor’s carrier and notify it of the pending lawsuit. Without any explanation, the subcontractor’s carrier refuses to defend or indemnify your company in the lawsuit. Who do you turn to?
In each of the above scenarios, an independent attorney – one you hire – can help you with coverage issues that your insurance-assigned attorney simply cannot address due to the nature of the tripartite relationship. Personal counsel owes no fiduciary obligation to the insurance company and can work to protect your interests when they are adverse to your insurance company. Often personal counsel is utilized to persuade the insurance carrier to provide coverage or settle the case.
If you ever find yourself looking at a reservation of rights letter, and have questions regarding what happens next, please feel free to call us to talk about the issues.