"...The ethical dilemmas thus imposed upon the carrier-employed defense attorney would tax Socrates, and no decision or authority we have studied furnishes a completely satisfactory answer.... This is a tortuous, perilous path."

Hartford Accident & Indem. Co. v. Foster,
528 So. 2d 255 (Miss. 1988).

In Pine Island Farmers Coop. v. Erstad & Riemer, P.A., 649 N.W.2d 444 (Minn. 2002) the Minnesota Supreme Court answered the longstanding question regarding who is the insurance defense attorney's client - the insured, the insurer, or both? The Court determined that, in the absence of informed consent by the insured to dual representation, the insured is the sole client of insurer-retained defense counsel. Having made this pronouncement, however, the Court in Pine Island proceeded to set forth the circumstances under which an insurer could become defense counsel's co client: The insurer may become a co client if three requirements are met: 1) there is no conflict of interest between the insurer and the insured; 2) defense counsel or another attorney explains to the insured the advantages and risks of dual representation; and 3) after consultation, the insured gives its express consent to dual representation.

Although the Court characterized this as a "bright-line rule," the issues surrounding whether and when insurer-retained defense counsel may represent both the insurer and the insured are anything but clear. A number of important questions remain unresolved.

The Underlying Case

The Pine Island case arose out of an action brought by a dairy farmer, Windhorst, against Pine Island Farmers Coop. ("Pine Island") alleging that Pine Island failed to properly install a milk-metering machine which contaminated Windhorst's dairy herd. Pine Island tendered the complaint to its insurer, Farmland Mutual Insurance Company ("Farmland") who retained Erstad & Riemer to defend Pine Island. At trial the jury found Pine Island 90 percent at fault and awarded damages to Windhorst, who subsequently settled.

Approximately a year later, Farmland and Pine Island initiated a malpractice action against Erstad & Riemer, alleging that the failure to assert certain defenses and commence a third-party action against the manufacturer of the machine constituted malpractice. With respect to Farmland's claims against Erstad & Riemer, the trial court held that there was no attorney-client relationship between Farmland and Erstad & Riemer; therefore, Farmland had no standing to bring a direct claim for malpractice against defense counsel. The trial court held, however, that Farmland could bring a malpractice claim against defense counsel under the doctrine of equitable subrogation.

Stating that "the insured is the sole client of the defense attorneys hired by the insurer," the Court of Appeals affirmed the district court's decision that there was no attorney-client relationship between Farmland and Erstad & Riemer and that Farmland could not bring an action on its own against defense counsel. The Court of Appeals reversed the district court's decision that Farmland could maintain a malpractice action against Erstad & Riemer under the doctrine of equitable subrogation. The Court of Appeals stated that prohibiting malpractice claims under the doctrine of equitable subrogation was consistent with Minnesota law prohibiting assignment of malpractice claims, and noted that because of its settlement without Erstad & Riemer's permission, Farmland had unclean hands, which prohibited a remedy in equity.

The Minnesota Supreme Court granted Farmland and Pine Island's petition for review to address two issues: 1) whether Farmland had an attorney-client relationship with Erstad & Riemer; and 2) if not, whether Farmland could maintain a legal malpractice action against the firm under the doctrine of equitable subrogation.

Attorney-Client Relationship

The Court began its analysis of the attorney-client issue by noting that in order for Farmland to maintain a legal malpractice action on its own behalf against defense counsel, Farmland must establish the existence of an attorney-client relationship between itself and Erstad & Riemer. The Court acknowledged that it is well-established under Minnesota law that defense counsel represents the insured. Noting that a number of courts have held that defense counsel cannot have an attorney-client relationship with both the insured and the insurer, the Court stated that it had never gone that far and would not do so in this case. Rather, the Court referred to its previous decision in Shelby Mutual Insurance Co. v. Kleman, 255 N.W.2d 231 (Minn. 1977). In Kleman, despite alleged conflicts of interest between the insurer and the insured, the Minnesota Supreme Court had permitted the dual representation for three reasons: 1) there was no apparent conflict of interest between the insurer and the insured; 2) the insured had consulted with an independent attorney who had advised that separate counsel was unnecessary; and 3) the insured had given his express consent to the dual representation "with knowledge of the circumstances."

The Pine River Court noted that consultation and consent are important because the interests of the insured and the insurer may conflict, making it difficult for defense counsel to represent each client. The Court further observed that applying the general rules regarding creation of an attorney-client relationship would not adequately address the dangers of dual representation. Under either the tort or contract theory, said the Court, the exchange of information that normally occurs between defense counsel and the insurer would establish an attorney-client relationship. Applying this analysis would result in the conclusion that defense counsel represented the insurer in virtually every case. Additionally, it would permit defense counsel to represent the insurer without the consent of the insured.

The Court decided that, in cases where there is no conflict between the insurer and the insured, permitting dual representation only after there has been consultation and consent strikes an appropriate balance. First, it comports with a lawyer's ethical obligations to consult with and obtain consent in multiple representation situations as required under Rule 1.7(b) of the Minnesota Rules of Professional Conduct ("M.R.P.C."). Additionally, by prohibiting the creation of an attorney-client relationship between the insurer and defense counsel when there is a conflict of interest, it protects the insured from a situation in which defense counsel might favor the insurer. Yet, it avoids the harsh position that there can never be dual representation.

Since Pine Island had never been informed of the risks and advantages of dual representation and had not consented to such, the Minnesota Supreme Court concluded that there was no attorney-client relationship between Farmland and Erstad & Reimer and that Farmland had no right to bring a malpractice action on its own behalf against defense counsel.

Equitable Subrogation

The Court then addressed whether Farmland could maintain a legal malpractice action against defense counsel under the doctrine of equitable subrogation. The Court distinguished Atlanta International Insurance Co. v. Bell, 475 N.W.2d 294 (Mich. 1991), a case on which the trial court had relied. The Michigan court in that case had reason to permit the insurer to pursue a malpractice action under the doctrine of equitable subrogation because the insured had not initiated an action and defense counsel would escape liability if the company was not permitted to go forward with the claim. Because Pine Island had initiated a malpractice claim against defense counsel, the reasoning in Bell did not apply. Accordingly, the Court held that Farmland was not entitled to pursue a claim for malpractice under the doctrine of equitable subrogation.

Unanswered Questions

As stated above, in Pine Island the Minnesota Supreme Court stated that the insurer can become a co client when three requirements are met: 1) there is no conflict of interest between the insurer and the insured; 2) defense counsel or another attorney explains to the insured the advantages and risks of dual representation; and 3) after consultation, the insured gives its express consent to dual representation. Each requirement, however, is rife with uncertainty.

Conflict of Interest

The first issue is whether or not there is a conflict of interest between the insurer and the insured. If there is such a conflict, dual representation is not permitted, and defense counsel does not even reach the issue of consultation and consent. But what does the Supreme Court mean by "conflict of interest"?
Potential Conflict One definition of "conflict of interest" might be "potential conflict". This definition, however, does not appear to make sense. At the outset of the Pine Island decision Justice Page noted, "The problems caused by conflicts of interest are particularly acute in the insurance defense context, where the potential for conflict exists in every case and actual conflicts are frequent". (emphasis added). If "conflict of interest" were defined as "potential conflict" and potential conflict exists in every case, dual representation would never be permitted. Clearly, the Supreme Court did not intend this to be the result, given that they set forth the circumstances under which dual representation could be permitted.

M.R.P.C. Conflict It may be that the Supreme Court intended "conflict of interest" to be determined in accordance with the Rules of Professional Conduct. M.R.P.C. 1.7 addresses when an attorney may represent clients who have conflicting interests. Determining whether an attorney may represent two clients under Model Rule 1.7 is a two-step process.1 First, the lawyer must determine whether the joint representation of both clients would adversely affect the representation of either client. Second, if the lawyer believes representation would not be adversely affected, the clients must consent to the joint representation after consultation.

The procedure adopted by the Minnesota Supreme Court in Pine Island closely parallels the procedure adopted in Rule 1.7: the attorney must first assess the conflict and then, if he or she determines that joint representation will not impair the representation of either client, each client must give informed consent to the joint representation. If the Court meant Rule 1.7 to govern, then what constitutes a "conflict of interest" precluding dual representation under Pine Island would appear to be determined by the same test used in Rule 1.7. The test is: "Would a disinterested lawyer conclude that a client should not agree to the representation under the circumstances?" If a disinterested lawyer would counsel a client against dual representation, then the attorney may not represent both clients, and may not even ask for the consent of the client.

Thus, when faced with a request by an insurer to be a co client in a case, the first question that defense counsel would have to ask is whether a disinterested attorney would counsel the insured against dual representation. If so, defense counsel would conclude that there is a conflict of interest and that the insurer cannot be a co client.

There are problems in concluding that the test set forth in Rule 1.7 defines "conflict of interest" in Pine Island. After noting that the requirement of consultation and consent "[c]omports with a lawyer's ethical obligations to consult with and obtain the consent of both clients when the lawyer seeks to represent multiple clients in the same matter" (649 N.W.2d at 451), the Pine Island Court proceeds in footnote 5 to suggest that the test is not identical to Rule 1.7. In footnote 5 the Court states: "By citing Rule 1.7(b), we do not mean to suggest that the existence of an attorney-client relationship between defense counsel and an insurer is conditioned on defense counsel's compliance with the rules of professional conduct." By this statement the Court implies that the test provided in Pine Island is different, and likely something more than required under the Rules of Professional Conduct.

Actual Conflict. A third definition of "conflict of interest" could be "actual conflict". What constitutes an "actual conflict" of interest between an insurer and an insured has been addressed in cases involving the right to independent counsel. In Mutual Services Casualty Insurance Co. v. Luetmer, 474 N.W.2d 365, 368 (Minn. App. 1991), the Minnesota court held that an insurer would not be liable for the fees of independent counsel unless there was an "actual conflict of interest". Significantly, the Minnesota Court of Appeals held that: (1) an attorney's prior representation of the insurer; (2) the insurer's intended involvement in the main action; and (3) the insurer's insistence on selection of defense counsel did not constitute an "actual conflict." In the absence of the opportunity for manipulation of liability toward uncovered claims, the court held there was no "actual conflict" requiring different counsel.

Under Luetmer an "actual conflict" exists if the claim against the insured involves both covered and uncovered claims and the defense counsel could manipulate the case to establish liability for the uncovered claims and away from the covered claims, thereby favoring the insurer over the insured. This does not appear to be what the Supreme Court meant in Pine Island. Under Luetmer, if there is an "actual conflict" the insured has a right to independent counsel, therefore, counsel selected by the insurance company would presumably not be assigned the case. In other words, insurer-retained defense counsel would arguably never be assigned to a case involving an actual conflict and so would never reach the issue of whether an "actual conflict" existed. Therefore, defense counsel would never be in a situation involving a "conflict of interest" (only cases involving independent counsel would involve "actual conflict") and so dual representation, after consultation and consent, would be permitted in every case assigned to insurer-retained defense counsel. Again, that is clearly not what the Supreme Court intended; otherwise the Court would not have included the requirement that there be no conflict of interest. In other words, by prefacing when an attorney could seek consent with the requirement that there be no conflict of interest, the Court clearly presumed that there would be times when defense counsel was assigned cases involving a conflict of interest.

Who Can Provide the Consultation?
Assuming that defense counsel determines that there is no conflict of interest and that dual representation is permissible after consultation and consent, the next issue that arises is whether defense counsel should be the attorney who advises the insured about the "risks and advantages of dual representation." Although the Supreme Court in Pine Island expressly stated that defense counsel could provide the explanation, previous decisions of the Court as well as decisions around the country suggest that whether defense counsel is the appropriate party is debatable.

In order to ensure unwavering allegiance to the insured and avoid the possibility that defense counsel might prefer the interests of the insurer over the insured, courts and commentators have repeatedly cautioned that defense counsel retained by the insurance company should refrain from involvement in any coverage dispute between the insurer and the insured.2

Advising the insured of the advantages and disadvantages of dual representation would presumably involve informing the insured of the coverage issues in the case. In order to fully understand the coverage issues in the case defense counsel would likely have to consult with the insurance company regarding its coverage position. Insurance defense counsel consulting with the insurer about the coverage issues between the insurer and the insured is precisely the communication that courts and commentators have sought to discourage. The mere existence of such a conversation, regardless of its content, could later be used by the insured as evidence that defense counsel breached his or her fiduciary duty to the insured. Similarly, were an insurance company to make a request of defense counsel it retained that resulted in a discussion of coverage issues involving the insurer, the insured could later cite this as evidence that the insurer breached its duty to the insured.

Explaining the Advantages and Risks
In Pine River the Court stated that in order for the insurer to become a co client of defense counsel, the advantages and risks of dual representation must be explained to the insured. This is easier said than done. This is because it is difficult, if not impossible, to foresee all of the consequences of joint representation at the outset of the relationship.

A close analysis of the reasons most commonly advanced in support of, and against, dual representation demonstrates that even these arguments do not definitively point one way or the other on the issue.

Protecting Communications. The most common reason advanced in favor of including the insurer as a co client of defense counsel is the necessity of protecting communications between these two from discovery. The argument proceeds as follows: In light of the insurance company's extensive experience in claims handling, it is an advantage to have the insurer's active participation in the case. The insurer may be a reluctant participant if its communications with defense counsel are not protected under the attorney-client privilege. Therefore, in order to ensure its full participation, the insurer must be a client of defense counsel.

On closer analysis, however, dual representation may not be necessary to preserve the confidentiality of communications between the insurer and defense counsel. It is generally believed that communication to a third-party (i.e., communication by defense counsel to the insurer) will act as a waiver of both the attorney-client privilege and/or the work product privilege. Under the "common interest doctrine" however, these privileges are preserved if the communication at issue is made to a third party that has a "common interest" with the insured. A "common interest" is considered to exist if the person with the privilege and the third party receiving the communication "have an identical legal interest with respect to the subject matter of a communication between an attorney and client concerning legal advice .... The key consideration is that the nature of the interest be identical, not similar, and be legal, not solely commercial." 3

The insurer and the insured have a common interest in defeating the plaintiff's claim against the insured. Thus, with respect to communications between the defense lawyer and defense counsel relating to defense of the insured, it would appear that these communications would be protected from disclosure under the common interest doctrine. If this were true, then the insurer's status as co client would not be necessary to ensure maximum participation of the insurer, and so would not necessarily qualify as an advantage of dual representation.

Insurer Control of the Defense. The risk most commonly advanced against including the insurer as a co client of defense counsel is the fear that the insurer will then control the litigation to the disadvantage of the insured. In reality, whether or not the insurer is a client makes no difference to its ability to control the defense of the action.

Who has the right to control litigation, the insurer or defense counsel, has been the subject of a number of recent judicial and state ethics opinions. The issue has arisen in cases involving the use of "litigation management guidelines" which are usually a set of written rules sent by the insurer to defense counsel as a means to control the cost of litigation by requiring prior consultation with, and sometimes prior approval by, the insurer of certain defense activities, including research, depositions, and the retention of experts. Courts and ethics boards have concluded that guidelines which require prior approval (as distinguished from those merely requiring prior consultation) violate the Rules of Professional Conduct and an attorney's duty of independence.4 The issue has also arisen in the context of a malpractice claim where the insured claims that the insurer is vicariously liable for the malpractice of the defense counsel it retained to defend the insured. The issue arises because vicarious liability is based on agency principles, and agency is based on control. Many courts reason that because under the Rules of Professional Conduct defense counsel are not subject to the control of the insurer, the defense attorney is an independent contractor and the insurer is not vicariously liable for its malpractice.5

Given that defense counsel are required to exercise independent judgment, whether or not the insurer is a co client of the insured would be irrelevant to whether the insurer controlled the defense.

Whether the insurer is a client of defense counsel will have little impact on the insurer's control of the defense for another reason: the language of the insurance contract is usually relied on as the source of the insurer's right to control the defense. Thus, whether or not the insurer is a client of defense counsel would have no effect on the insurer's control because, if challenged, the insurer would point to the language of the contract to demonstrate its right to control.

Conclusion

In Pine Island the Minnesota Supreme Court answered one question but in doing so raised a number of others. What constitutes a conflict of interest prohibiting dual representation, whether defense counsel may really provide the required consultation, and what advantages and risks must be conveyed to the insured, are all questions that remain. Until these, and other issues not yet identified, are resolved by the Minnesota Supreme Court, the tripartite relationship will remain a "tortuous, perilous path."

Notes
1 Rule 1.7, which addresses when an attorney may represent clients who have conflicting interests, provides as follows:

(a) A lawyer shall not represent a client if the representation of that client will be directly adverse to another client, unless:
(1) the lawyer reasonably believes the representation will not adversely affect the relationship with the other client; and
(2) each client consents after consultation.
(b) A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer's responsibilities to another client or to a third person, or by the lawyer's own interests, unless:
(1) the lawyer reasonably believes the representation will not be adversely affected; and
(2) the client consents after consultation. When representation of multiple clients in a single matter is undertaken, the consultation shall include explanation of the implications of the common representation and the advantages and risks involved.

2 See Prahm v. Rupp Constr. Co., 277 N.W.2d 389, 390 (Minn. 1979); Newcomb v. Meiss, 263 Minn. 315, 116 N.W.2d 593 (1962); Employers Cas. Co. v. Tilley, 496 S.W.2d 552 (Tex. 1973); Robert E. O'Malley, "Ethics Principles for the Insurer, the Insured and Defense Counsel: The Eternal Triangle Reformed," 66 Tulane L. Rev. 511 (1991).
3 Pittston Co. v. Allianz Ins. Co., 143 F.R.D. 66, 69 (D.N.J. 1992) (citing Duplan Corp. v. Deering Milliken, Inc., 397 F.Supp. 1146, 1172 (D.S.C. 1974)); Metro Wastewater Reclamation Dist. v. Cont'l Cas. Co., 142 F.R.D. 471, 476 (D. Colo. 1992). See also James M. Fischer, "The Attorney-Client Privilege Meets the Common Interest Arrangement: Protecting Confidences While Exchanging Information for Mutual Gain," 16 Rev. Litig. 631 (Summer 1997); Michael Keeley, "The Attorney-Client Privilege and Work Product Doctrines; The Boundaries of Protected Communications Between Insureds and Insurers," 33 Tort & Ins. L.J. 1169 (Summer 1998); Amy L. Fischer, "The Attorney-Client/Work Product Privileges And Surety Investigative Information: Applying Old Rules To Turn New Tricks," 34 Tort & Ins. L.J. 1009 (Summer 1999).
4 See e.g. In re Rules of Prof'l Conduct & Insurer-Imposed Billing Rules & Procedures, 2 P.3d 806 (Mont. 2000); Michael F. Aylward, Insurance Ethics: The Future Of The Tripartite Relationship, s g004 ali-aba 17 (2001).
5 State Farm Mut. Auto. Ins. Co. v. Traver, 980 S.W.2d 625, 627 (Tex. 1998); Ingersoll-Rand Equip. Corp. v. Transp. Ins. Co., 963 F. Supp. 452 (M.D. Pa. 1997); Feliberty v. Damon, 527 N.E.2d 261 (N.Y. 1988); Aetna Cas. & Sur. Co. v. Protective Nat'l Ins. Co. of Omaha, 631 So. 2d 305 (Fla. Dist. Ct. App. 1993); Brown v. Lumbermens Mut. Cas. Co., 369 S.E.2d 367, 368 (N.C. Ct. App. 1988); Merritt v. Reserve Ins. Co., 110 Cal. Rptr. 511 (Cal. Ct. App. 1973); Marlin v. State Farm Mut. Auto. Ins. Co., 761 So. 2d 380 (Fla. Dist. Ct. App. 2000).

Jeanne Unger is a partner in the litigation department at Rider, Bennett, Egan & Arundel, is chair of the dri Insurance Law Committee, and focuses her practice in insurance coverage litigation.

Shawn Harris is an associate in Rider Bennett's litigation department. He focuses his practice in the areas of products liability and insurance and commercial litigation.