Originally Published in Daily Journal - May 24, 2013.
Insurance coverage lawyers are sometimes called upon to serve as expert witnesses on the standards of practice applicable to coverage attorneys engaged by insurers to provide coverage advice. Less often, they are called upon to represent insurers who have suffered significant losses because their coverage counsel provided below-the-standard advice and potentially engaged in conflicts of interest perhaps breaching fiduciary duties.
Coverage counsel who become complacent or lazy or careless and who fail to provide advice consistent with the standards of practice are vulnerable to malpractice claims. Most commonly, the coverage counsel are engaged to advise as to third-party claims under liability policies where the coverage counsel provide unduly aggressive advice on the basis of an inadequate investigation and inadequate analysis of the policy at issue.
There has been a proliferation of suits where the coverage counsel provide substandard advice to defend claims which obviously fall outside of the policies at issue or deny and/or withdraw coverage where it was unwise or unwarranted to do so. More commonly, malpractice claims may arise where coverage counsel advise their clients not to defend where the possibility of coverage was not conclusively negated, and then compound their errors by undertaking to defend the bad faith cases which inevitably ensue when a defense is wrongfully denied or worse, withdrawn.
Undertaking to defend their insurance company clients in the bad faith cases may be a violation of the Rules of Professional Conduct, where the coverage counsel could be a witness, unless the coverage attorney secures an informed written consent. California Rules of Professional Conduct, Rule 5-210. There is also a conflict because the coverage counsel may be motivated to "cover-up" their own bad prior coverage advice. The failure to inform the insurer client of the rather profound conflict of interest inherent in defending a bad faith case predicated on the attorney's own coverage advice raises the specter of breach of fiduciary duties.
The reason for the disclosure requirement is rather obvious. First, where coverage counsel may be a witness in the trial, the client's success will depend, in part, on the credibility of the coverage counsel. Counsel's credibility as a witness is compromised if counsel is also an advocate. Second, where the coverage counsel retains control over the defense of the ensuing bad faith cases, it is likely the coverage counsel will be unwilling or unable to objectively reevaluate their own prior advice. Thus the insurer-client is deprived of an unbiased consideration of the advice of counsel defense, a serious consideration in any bad faith case. Further, the insurer-client is also deprived of any objective re-evaluation of the coverage position upon which the lawsuit is based, including an open-eyed evaluation of its exposure to liability and damages.
The following is a short list of relevant authority related to the standards applicable to coverage counsel.
Advice of Counsel Defense
(a) An insurer may rely on advice of counsel when the insurer provides sufficient information to the advising attorney, fully disclosing all the relevant facts, actually receives and relies on the advice and where the insurer is not so knowledgeable as to the legal standards involved that it knew the advice was erroneous. State Farm Mut. Auto Ins. Co. v. Superior Court, 228 Cal. App. 3d 721,725 (1991).
(b) An insurer cannot avoid extra-contractual liability by relying on legal advice that it knew was incorrect. Moore v. American United Life Ins. Co., 150 Cal App 3d 610,621 (1984) (applying a standard of "disability" which the insurer knew to be incorrect).
Standard of Care for Coverage Counsel
(c) Like any other attorney, a coverage attorney may be liable for malpractice if he assumes a duty, breaches that duty, and that breach proximately causes damages. Neel v. Magana, Olney, Levy, Cathcart & Gelfand, 6 Cal. 3d 176 (1971). When an insurer withholds from its attorney pertinent facts needed to formulate his or her opinion, the insurer may be liable for bad faith even punitive damages. Neal v. Farmers Ins. Exch., 21 Cal 3d 910, 921-23 (1978) (There, assigned insurer's coverage counsel was not provided the information conveyed by defense counsel casting significant doubt on the credibility of a key witness on which the coverage opinion depended.)
(d) The elements for a claim of professional negligence against a coverage attorney are the same as for any claim against an attorney and include (1) his/her employment for the purposes of rendering a coverage opinion; (2) the failure of the attorney to exercise the requisite skill and knowledge; and (3) that such negligence was the proximate cause of damage to the client (or claimant). Ovando v. County of Los Angeles, 159 Cal. App. 4th 42 (2008); Purdy v. Pacific Automobile Ins. Co., 157 Cal. App. 3d 59 (1984); Nautilus Ins. Co. v. Cooksey, Howard et al., 2002 WL 173521 (2002) (where an insurer sued its coverage counsel for "failing to exercise the requisite degree of skill and care in the legal services it performed for Nautilus and breached its fiduciary duties by failing to take ‘all reasonable actions necessary to ensure that the … [other carriers] would share in any amounts paid by Nautilus to defend or indemnify [the insureds]'"). NORCAL Mutual Ins. Co. v. Sedgwick, Detert et al., 2009 Cal. App. LEXIS 2242 (2009) (where NORCAL sued its coverage counsel for, among other negligent acts: "failure to properly advise NORCAL about the impact the evidence of a timely tender would have on NORCAL's denial of coverage based upon late tender.").
(e) The standard of care of a coverage attorney rendering an opinion as to a claim presented by a California based insured, on a contract delivered to the insured in California (thus subject to California law as the place of performance is California, Civil Code Section 1646) is that such an attorney should exercise the skill and knowledge ordinarily possessed by coverage attorneys practicing in California including taking into account the custom and practice of the insurance industry, standard of care applicable and special skills relevant to the advice. California Civil Jury Instructions, CACI 600 (2006 ed.).
(f) In rendering advice in the specialized area of insurance coverage to an insurer in regard to responding to a claim, such attorneys are likely to be held to a higher standard of care including possessing knowledge of the insurance industry standards applicable to the handling of claims. Courts may apply a 3-part analysis to determine the standard of care, where a specialized area of law is at issue such as insurance coverage advice, including: (1) whether the area is specialized; (2) should the coverage attorney be held to the higher standard; and (3) the qualifications of the expert witnesses opining on the standard of care. Legal Malpractice, 2009 Ed. Section 20:4, pg 1325-26, (The Standard of Care), Mallen & Smith; Banerian v. O'Malley, 42 Cal. App. 3d 604 (1974).
(g) Coverage counsel for insurers are held to the same special standard of care as their insurer clients and have obligations to both the insureds and claimants. An Insurance Code 11580 claim (permitting a direct action by judgment creditor against the defendant's liability insurer for bodily injury or property damages) may be maintained against an insurer's coverage counsel if that counsel, as agent for the insurer, misrepresents material facts or otherwise engages in fraudulent conduct. Just as an insurer may be held liable for defrauding its insured, so an insurer should not be allowed to deceive a third party beneficiary of the insurance policy. "If an insurer may be found liable to a third party beneficiary for fraud, so may its coverage counsel." It thus evident that coverage counsel have a duty "to be truthful in describing insurance coverage to a third party beneficiary." Shafer v. Berger Kahn, et al., 107 Cal. App. 4th 54, 80-81 (2003).
These cases can be complex, and often include one or more underlying suits, and must take into account that insurers have nondelegable duties to make the coverage decisions they do make, whether on advice of counsel or not. There is a large body of developed common law and statutory law which applies to the insurance industry about which any lawyer holding himself or herself out as a coverage attorney, must know and/or diligently research. The rules vary in different states. Thus, coverage counsel are specialists and held to a higher standard than an ordinary general practitioner handling a slip and fall or fender-bender. While insurers have the ultimate duty to respond to claims under their policies in conformance with the contract, the statutes, regulations and the common law, they frequently turn to their trusted coverage counsel for advice to sort out the trees from the forest.
Even the most sophisticated insurer-clients are entitled to rely on the advice they receive from their coverage counsel, and if the coverage counsel fail to meet the basic standards applicable to such advice, insurers are, more frequently than ever before, choosing to hold their coverage counsel accountable.
Joan M. Cotkin is an insurance attorney and litigator at Nossaman LLP with more than 30 years of experience helping corporate and public sector clients recover hundreds of millions of dollars in insurance coverage. She can be reached at (213) 612-7828 or jcotkin@nossaman.com.
