Procrastinators’ Programs SM

Ethics: Representing the Insured and Insurer

John E. McAuliffe, Jr. Frederick A. Miller & Associates

Course Number: 0200131227 1 Hour of Ethics CLE

December 27, 2013 9:00 – 10:00 a.m.

ETHICS: REPRESENTING THE INSURED AND THE INSURER

NEW ORLEANS BAR ASSOCIATION PROCRASTINATORS’ PROGRAM

December 27, 2013 New Orleans, Louisiana

Presented by:

John E. McAuliffe, Jr. Frederick A. Miller & Associates

Metairie, LA

I. Statutory Considerations

A. Rules of Professional Conduct

1. Rule 1.7 – Conflict of Interest

(a) Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if:

(1) the representation of one client will be directly

adverse to another client; or (2) there is a significant risk that the representation of

one or more clients will be materially limited by the lawyer’s responsibilities to another client, a former client or a third person or by a personal interest of the lawyer.

2. Rule 1.8(f) – Attorney Fees Paid By Insurer

(f) A lawyer shall not accept compensation for representing a client from one other than the client unless:

(1) the client gives informed consent, or the

compensation is provided by contract with a third person such as an insurance contract or a prepaid legal service plan;

(2) there is no interference with the lawyer’s

independence or professional judgment or with the client-lawyer relationship; and

(3) information relating to representation of a client is

protected as required by Rule 1.6.

3. Rule 1.6 – Confidentiality of Information

(a) A lawyer shall not reveal information relating to the representation of a client unless the client gives informed consent, the disclosure is impliedly authorized in order to

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carry out the representation or the disclosure is permitted by paragraph (b).

4. Rule 1.8(b) – Use of Client Information to Disadvantage of Client

(b) A lawyer shall not use information relating to representation of a client to the disadvantage of the client unless the client gives informed consent, except as permitted or required by these Rules.

B. Louisiana State Bar Opinion No. 342-1974 If an insurer denies coverage or provides a defense under a reservation of

rights, the same attorney is prohibited from representing the insurer and the insured. (Attachments A and A1)

Cited in: Dugas Pest Control vs. The Mutual Fire, 504 So.2d 1051 (La.

App. 1st Cir. 1987); Emery vs. Progressive Cas. Ins. Co., 49 So.3d 17 (La. App. 1 Cir. 2010); Steptore vs. Masco Construction Co., Inc., 643 So.2d 1213 (La. 1994)

II. The Dilemma – Duty to Defend

A. General Rules

“ ‘…the insurer’s obligation to defend suits against its insured is broader than its liability for damage claims.’ ‘The insurer’s duty to defend suits brought against its insured is determined by the allegations of the injured plaintiff’s petition, with the insurer being obligated to furnish a defense unless the petition

unambiguously excludes coverage.’ Id. (Citing American Home Assur. Co. v. Czarntecki, 255 La. 251, 230 So.2d 253 (1969); Meloy v. Conoco, Inc., 504 So.2d 833 (La. 1987). ‘Thus, if assuming all the allegations of the petition to be true, there would be both (1) coverage under the policy and (2) liability to the plaintiff, the insured must defend the insured regardless of the outcome of the suit.’ Id. The allegations of the petition are liberally construed to determine whether they set forth grounds which bring the claim within the insurer’s duty to defend. Id.” Arceneaux vs. Amstar Corp., 66 So.3d 438 (La. 2011)

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“Further, it must be noted that the duty to defend is distinct from the scope of coverage. Johnson v. Misirci, 06-1136, p. 4 (La. App. 4 Cir. 3/28/07), 955 So.2d 715, 718. It is settled that when an exclusion to a policy is applicable, the insurer owes no duty to defend or indemnify the insured. Crabtree v. Hayes-Dockside, Inc., 612 So.2d 249, 251 (La. App. 4 Cir. 1992). However, a duty to defend may exist if there is a single allegation in the plaintiff’s petition under which coverage is not unambiguously excluded. Johnson, 06-1136, p. 5, 955 So.2d at 719.”

Louisiana Citizens Prop. Ins. Co. vs. Age, 104 So.3d 675 (La. App. 4 Cir. 2012) “ ‘The duty to defend is broader than an insurer’s liability for damage claims.’ Allstate Ins. Co. v. Roy, 653 So.2d 1327, 1333 (La. App. 1 Cir. 1995). ‘The duty to defend arises whenever the pleadings against the insured disclose even a possibility of liability under the policy.’ Matheny v. Ludwig, 742 So.2d 1029, 1035 (La. App. 2 Cir. 1999). ‘Once a complaint states one claim within the policy’s coverage, the insurer has a duty to accept defense of the entire lawsuit…’ Treadway v. Vaughn, 633 So.2d 626, 628 (La. App. 1 Cir. 1993).” Looney Ricks Kiss Architects, Inc. vs. State Farm Fire & Cas. Co., 677 F.3d 102 (5th Cir. 2012)

“An insurer’s duty to defend suits brought against its insureds is determined by the allegations of the injured plaintiff’s Petition, with the insurer being obligated to furnish a defense unless the Petition unambiguously excludes coverage.” Alombro vs. Salman, 536 So.2d 764 (La. App. 5th Cir. 1988)

MAXIMS 1) The duty to defend is broader than the insurer’s liability.

2) If the petition does not unambiguously exclude coverage, a defense

is owed.

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3) The duty to defend is separate and distinct from the scope of coverage.

4) The duty to defend arises if the pleadings disclose even a

POSSIBILITY of coverage under the policy.

5) Courts will liberally construe the allegations of the petition in deciding if there is a duty to defend.

6) If only one allegation in the petition raises a question of coverage,

the insurer owes a defense.

B. Eight Corners Rule

“The insurer’s duty to defend is governed by the ‘eight corners rule.’ The insurer looks at the ‘four corners’ of the petition and the ‘four corners’ of the policy to determine if there is a duty to defend.” Adams vs. Frost, 990 So.2d 751 (La. App. 2 Cir. 2008), writs den., 999 So.2d 755 (La. 2009) George S. May Int. Co. vs. Arrowpoint Capital Corp., 97 So.3d 1167 (La. App. 1 Cir. 2012) “The ‘eight corners’ rule is to be applied without resorting to extrinsic evidence.” CMP Coatings vs. Tokyo Marine, 2012 WL 3901625 (E.D. La. 2012) Martco Limited Part. Vs. Wellons, Inc., 588 F.3d 864 (5th Cir. 2009) Southern Snow Manufacturing vs. Snow wizard Holdings, Inc., 2012 WL 4423887 (E.D. La. 2012)

C. BURDEN OF PROOF – COVERAGE VS. EXCLUSION

1) Coverage – Insured Bears Burden of Proof “Insured must show the existence of the policy and coverage.”

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Tunstall vs. Stierwald, 809 So.2d 916 (La. 2002) at page 921

Winfrey vs. Louisiana Carnival Club, 907 So.2d 159 (La. App. 4th Cir. 2005) Adams vs. Pro Sources, Inc., 231 F.Supp. 2d 499 (USDC M.D. La. 2002) George S. May Interr., supra

2) Applicability of Exclusion – Insurer Bears Burden of Proof

Tunstall, supra Winfrey, supra Adams, supra Romano vs. Altentaler, 77 So.3d 282 (La. App. 1 Cir. 2011)

D. SEVERABILITY CLAUSE

1) Examples:

“Severability of Insurance. This insurance applies separately to each insured. This condition shall not increase our limit of liability for any one occurrence.” “SEVERABILITY OF INSURANCE. This insurance applies separately to each insured against whom claim is made or suit is brought, subject to our limits of liability for each occurrence.”

2) Cases “The severability provision of a policy mandates that ‘each insured has separate coverage as if each were separately insured for the distinct policy of insurance.” Sanders v. Ashland Oil, Inc., 656 So.2d 643 (La. App. 1 Cir. 1995), writ denied, 661 So.2d 1389 (La. 1995)

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“A severability clause must be considered in determining if an ‘additional insured’ has coverage under a policy.” Roundtree v. New Orleans Aviation Board, 896 So.2d 1078 (La. App. 4 Cir. 2005) BUT: “An exclusion which is applicable to ‘any’ insured may preclude coverage even if a severability provision is in effect.” United Fire & Cas. Co. v. Reeder, 9 F.3d 15 (5th Cir. 1993)

E. Any Insured vs. The Insured “Where an exclusion to coverage employs the term ‘any insured’, the severability clause will not affect application of that exclusion. However, where the exclusion uses the term ‘the insured’ in the severability clause, the exclusion will not bar coverage based on the excluded acts of some other insured. Stewart Title Guaranty v. Kiefer, 984 F.Supp. 988 (USDC E.D. La. 1997) American Home Assurance Co. v. Liberty Mutual Ins. Co., 554 F.Supp. 2d 593 (USDC E.D. La. 2005) III. Preservation of Policy Defenses

A. Non-Waiver Agreement or Reservation of Rights Letter “A non-waiver agreement or reservation of rights letter is a document, indicating that the insurer retains its right to defend itself based on the alleged insured’s lack of coverage under the policy. Even though, initially, the insurer may provide the potential insured with a defense against the claim, this is not an admission that the policy covers that person…However, when an insurer undertakes to defend the potential insured, without reserving its rights to assert coverage defenses, it does so at the

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risk of waiving those defenses.” W.T.A. v. Yeager, 832 So.2d 1217 (La. App. 3rd Cir. 2002) Non-Waiver Agreement (Attachment B)

B. Waiver of Defenses “If an insurer obtains knowledge of facts indicating that coverage may be an issue and continues defense of the insured without a non-waiver agreement or reservation of rights, the insurer waives any policy defenses.” Arceneaux v. Amstar Corp., 921 So.2d 189 (La. App. 4 Cir. 2002)

C. Procedural Tools for the Insurer

1) Insurer Named as a Defendant

Opinion 342 – retain separate counsel for insured and insurer

2) Insurer Not Named as a Defendant

a) File Separate Declaratory Judgment Action

- Federal Court - ?

b) Intervene for a Declaratory Judgment

- Bamert v. Johnson, 909 So.2d 705 (La. App. 2 Cir. 2005)

- Beck v. Burgueno, 996 So.2d 404 (La. App. 2 Cir. 2008)

- participate in discovery

- shape ? discovery

- insurer gains immediate knowledge of facts

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- MSJ - ?

c) Wait

- Early dispositive motion

- Knowledge of insurance coverage

- Early settlement

- How long?

- Monitor

D. Timing of Reservation of Rights (Attachments C and D)

“Insurer issued reservation of rights letter within one month of learning the basis for non coverage. The court held that the reservation of rights was timely.” Ideal Mut. Ins. Co. vs. Myers, 789 F.2d 1196 (5th Cir. 1986) Before suit was filed, the insurer was aware of the facts indicating there was no coverage. Suit was filed and the insurer retained the attorney who had been representing the insured pre-suit as its own attorney. Two months after suit was filed, the insurer finally issued a reservation of rights . That attorney continued to represent the insurer for over four additional months. The court held that the company had waived its defenses.” Peavey Company vs. M/V ANPA, 971 F.2d 1168 (5th Cir. 1992) IV. Representation of the Parties (Attachments E and F)

A. The Insured

1) “Plaintiffs alleged injuries from exposure to toxic chemical. Gabriel Chemicals was insured by

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Lexington. Lexington asserted its pollution exclusion but agreed that it had a duty to defend Gabriel. Lexington offered Gabriel two separate attorneys to provide a defense for its insured. Lexington refused the assistance of these attorneys and retained its own counsel. The court held that Gabriel was entitled to select its own independent counsel. However, Lexington

was only required to pay Gabriel’s attorneys based on the rates the insurer paid to the attorneys it retained in defense of similar claims. Belanger vs. Gabriel Chemicals, Inc., 787 So.2d 559 (La. App. 1st Cir. 2001), writ den., 802 So.2d 612 (La. 2001) “Once the insurer denies coverage, the insured has the right ‘to assume control of the defense of the tort action and to select its own counsel’.” Smith vs. Reliance Ins. Co., 807 So.2d 1010 (La. App. 5th Cir. 2002)

2) Cumis Endorsement (Clause) A clause or endorsement in an insurance policy which sets parameters regarding the activities, qualifications and fees of any independent attorney retained by an insured.

See: San Diego Navy Fed Cr. U. vs. Cumis Ins. Soc., 162 Cal. App. 358, 208 Cal. Rptr. 494 (1984) “Application of the Cumis endorsement requires by its plain language that the attorney fees and all other litigation expenses Lexington must pay to counsel selected by Gabriel Chemicals are limited to the rates Lexington actually pays to counsel the insurer retains in the ordinary course of business in the defense of similar claims. And that Lexington may exercise the right to require that such counsel have certain minimum qualifications with respect to their competency including experience in defending claims similar to this one; and to require such counsel, to have errors and omissions

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insurance coverage. Based on the contents of this record, the issues of whether present independent counsel has the minimum qualifications with respect to competency and the requisite errors and omissions insurance, as well as the quantum of any reimbursement claim incurred thus far cannot be, and are not, decided.” Belanger, supra BUT: “An insurer is not required to pay the fees of additional counsel retained by an insured where the insurer provided competent defense counsel. Trinity Universal Ins. Co. vs. Stevens Forestry Serv., Inc., 335 F.3d 353 (5th Cir. 2003) THEN AGAIN: “If the attorney provided by the insurer to represent the insured is ‘objectively inadequate’, the insurer may be required to pay the fees of the additional attorney retained by the insured.” National Union Fire Ins. Co. vs. Circle, Inc., 915 F.2d 986 (5th Cir. 1990)

3) Duties of Insured’s Counsel Retained by the Insurer

(a) The attorney retained by the insurer to represent the insured on liability issues is not required to represent the insured on coverage issues. W.T.A., supra Steptore, supra Dowden vs. Leebo’s Stores, Inc., 877 So.2d 353 (3rd 2004), writ den., 887 So.2d 482 (La. 2004)

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Shaffer vs. Stewart Constr. Co., 865 So.2d 213 (5th 2004), writ den., 869 So.2d 886 (La. 2004) Audubon Trace Condominium Assoc. vs. Brignac-Derbes, 862 So.2d 157 (5th 2003), writ den., 869 So.2d 822 (La. 2004) Howell vs. American Casualty Co., 691 So.2d 715 (4th 1997), writs den., 700 So.2d 512, 515 & 518 (La. 1997) Henry’s Marine Service, Inc. vs. Fireman’s Fund Ins. Co., 2004 U.S. Dist. LEXIS 8782 (USDC E.D. La. 2004)

(b) But… “The insured’s attorney (retained by the insurer) failed to raise as a defense to the coverage issue issue the failure of the insurer to obtain a non-waiver agreement. The Court raised the question of whether the attorney’s failure to raise that issue was ‘due to conflicting loyalties’.” Johnson vs. Canale, 769 So.2d 833 (La. App. 5th Cir. 2000)

4) Pre-Notification Defense Costs

(a) The insurer’s duty to defend does not begin until notice of the claim is received.

Gully & Assoc. vs. Wausau Ins. Co., 536 So.2d 816 (La. App. 1 Cir. 1988)

(b) Insurer is not liable for pre-notification defense costs.

Gully, supra

(c) Insurer is liable for pre-notification defense costs unless the insurer can show prejudice.

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Rovira vs. LaGoDa, Inc., 551 So.2d 790 (La. App. 5th Cir. 1989), writ den., 556 So.2d 36 (La. 1990) Anco Insulations, Inc. vs. Royal Ind. Co., 2010 WL 4394147 (M.D. La.) American Safety & Risk Serv. vs. Legion Ind. Co., 153 F.Supp.2d 869 (E.D. La. 2001) Liberty Mut. Ins. Co. vs. Jotun Paints, 2009 WL 86669 (E.D. La.)

5) Limited Appearance

Rules for Louisiana District Courts – Rule 9.12 Must file into the court record a Notice of Limited Appearance if the attorney’s services are limited “…by subject matter, proceeding, date, or time period.” See: Rules of Professional Conduct Rule 1.2(c) (Attachments G and H)

6) Practical Guidelines

(a) Engagement Letter (detailed)

(b) Communication with Insurer and/or counsel for Insurer

(c) Notification of Motions or other matters involving coverage

(d) Communication with Insured’s personal attorney

B. The Insurer

1) Become a Party or Not

2) Policy of Insurance

3) MSJ or …

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4) Participation in Discovery

5) Relationship and communication with attorney for Insured

6) Coverage issue resolved

V. Cases Re Waiver

Steptore vs. Masco Construction Co., Inc., 643 So.2d 1213 (La. 1994)

Plaintiff was injured while working aboard a vessel. A crane barge was moored alongside the vessel and plaintiff was injured when a steel cable on the barge broke and hit him in the face. Plaintiff filed suit against Masco, the barge owner, and its insurer, Ocean Marine. OM retained one attorney to represent Masco and OM. Six months after undertaking the defense of Masco, OM denied coverage on the grounds that the insured had breached a navigation warranty because the barge had been moved from its designated location. The original attorney withdrew from the representation of Masco but continued as the attorney for OM. The Court found that OM and its attorney possessed information indicating a possible defense to coverage based on the breach of that navigation warranty at the outset of the litigation. The Court stated that OM had waived any policy defenses because OM did not reserve its rights to deny coverage and did not retain separate counsel for Masco in order to avoid a potential conflict. North American Capacity Ins. Co. vs. Brister’s Thunder Karts, Inc., 2001 U.S. Dist. LEXIS 9994 (U.S.D.C. E.D. La. 2001), aff’d, 287 F2d 412 (5th Cir. 2002) The insured was sued in state court and the insurer retained an attorney to defend the insured without issuing a reservation of rights letter. In a subsequent declaratory action filed in federal court by the insurer, Judge Fallon held that the company waived its policy defenses. “North American assumed and continued the defense of the insured in the face of facts indicating that it had a right to deny coverage…Furthermore, North American did not obtain a non-waiver agreement to reserve its right

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to deny coverage…As a result, the Court finds that North American waived any coverage defense it may have had under the policy.” Carruth vs. State Farm Mut. Auto. Ins. Co., 113 So.2d 56 (La. App. 2nd Cir. 1959) The insurer could not locate the insured, and it did not learn of the coverage defense until after obtaining a statement from the insured. Thus, the insurer did not issue the reservation of rights until after the statement was given by the insured. The court held that State Farm acted properly but stated the following: “Had the company been in a position to immediately communicate with the named insured and then failed to secure a ‘reservation of rights’ letter, its course of conduct thereafter might be construed as constituting a waiver of its right to rescind the policy.” T.H.E. Insurance Co. vs. Larsen Intermodel Services, Inc., 242 F.3d 667 (5th Cir. 2001) The insurer determined early on that the tractor owned by Larsen and involved in the accident was not covered under the policy. The insurer sent a letter to Larsen advising them that the tractor was not a covered vehicle and further advising that the insurer could claim reimbursement from Larsen for any amounts it paid. Plaintiffs filed suit, and the insurer, having not heard any objections from the insured after receipt of the above letter, retained an attorney to represent the insurer and Larsen in the litigation. The insurer settled and then filed suit against its insurer for reimbursement. (The policy contained a MCS-90 endorsement which, under federal law, required that the insurer defend and pay, but also allow a claim for reimbursement.) The court distinguished Steptore and held that the insurer had adequately reserved its rights under the policy. North American Specialty Ins. Co. vs. Debis Financial Services, 2007 U.S. App. LEXIS 25079 (5th Cir. 2007) Offshore Marine owned a jack-up barge, and Debis held a mortgage on that barge. Debis was a loss payee under a policy covering the barge. The policy was written by North American Specialty. The barge traveled from Cameron to an offshore site where it sank. The insurer retained an attorney and an investigator to look into the mishap. The attorney

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represented both the insurer and Offshore. During the course of the initial investigation, the attorney and the investigator reported to the insurer that there was some evidence that there had been a problem with one of the jack-up mechanisms before the barge left port, and that Offshore had knowledge of that problem before the barge set sail. Knowledge of a pre-voyage problem with the jack-up system would have been a breach of the warranty of seaworthiness which would have voided coverage. The insurer did not issue a reservation of rights letter or request a non-waiver agreement. The insurer then paid Offshore and Debis. A limitation action was then filed with the same attorney representing both Offshore and the insurer since there were several personal injury and property damage claims arising from the sinking. Upon completion of discovery, the attorney reported to the insurer that indeed, Offshore had knowledge of the problem in the jack-up mechanism prior to the barge’s departure. The third party claims were settled and North American then sued Offshore and Debis claiming that it was entitled to reimbursement of the monies paid to them. The district court ruled that the insurer waived any claim of non-coverage because it failed to issue a reservation of rights letter. The Fifth Circuit affirmed. The insurer had enough information to at least cause it to continue to investigate. The insurer could have preserved its rights to assert the coverage defense by issuing a reservation of rights letter. Ricks vs. Butler, 991 So.2d 1046 (La. App. 4th Cir. 2007) Plaintiff claims she was injured as a result of a practical joke played upon her by Butler, the President and CEO of her employer. One attorney answered for Butler and Zurich, the employer’s insurer. This dual representation continued for approximately one year after which the attorney withdrew from representation of both Butler and Zurich. Zurich then filed a Motion for Summary Judgment claiming that there was no coverage for Butler under the policy as a result of certain exclusions. Zurich then filed a Motion for Summary Judgment based on the exclusions contained in the policy and a trial court granted that Motion. The Fourth Circuit reversed. The Court stated the following: “Zurich clearly waived its right to assert a coverage defense of its insured by assuming Butler’s defense for a year in the face of the policy provision indicating that it had a right to deny coverage for the incident. Prejudice must be assumed when, without reservations,

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an insured is provided with dual representation during the first year of the litigation, the time in which the key depositions were taken, including the insured’s and, presumably, when key litigation strategy decisions were made.” Arceneaux vs. Amstar Corp., 969 So.2d 755 (La. App. 4th Cir. 2007), writs den., 977 So.2d 952 and 953 (La. 2008) Claims were made by approximately 300 present and former employees for occupational hearing loss. Continental, the employer’s insurer, retained a firm to defend the employer in the lawsuit. Continental did not issue a reservation of rights letter. Some four years into the litigation, Continental, for the first time, disclaimed coverage based on certain exclusions included in its policy. Additionally, Continental reserved its right to disclaim coverage to the extent some of the claims took place after the policy period. By this time, the employer had negotiated settlements with many of the plaintiffs. In a prior ruling (Arceneaux I), the Fourth Circuit had ruled that Continental had waived its policy exclusion defenses. The issue in this second Arceneaux appeal was whether Continental had waived its policy period and whether Continental had waived its coverage exclusions and/or policy period for those plaintiffs who did not assert a claim until after Continental denied coverage. Continental likened the “policy period” issue to that of the issue of a “policy limit” which is not waived if the insurer assumes the insured’s defense. The appellate court disagreed. The Court concluded that by providing the employer an unconditional defense for four years, Continental had waived its policy period, with respect to those claims which were presented prior to the denial of coverage. With respect to the post denial plaintiffs, Continental had disclaimed coverage and had issued a reservation of rights and had ceased providing the employer with a defense by the time those claims arose. As a result, Continental’s waiver did not include the claims which were filed after its denial of coverage. Sosebee vs. Steadfast Ins. Co., 701 F.3d 1012 (5th Cir. 2012) Sosebee was a passenger on a chartered fishing boat when that boat collided with a utility boat owned by Harvest Oil. Steadfast Ins. Co. had issued a CGL policy and an umbrella policy to Harvest. Zurich had issued an auto policy to Harvest. Steadfast was part of the Zurich North American group. Steadfast sent a “reservation of rights” letter to Harvest

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on a Zurich letterhead. That letter made reference to both Zurich and Steadfast. The letter also made reference to the specific Steadfast policy and also cited the “watercraft” exclusion of that policy. Within a week of the accident, St. Paul, the insurer of the fishing boat filed a declaratory judgment action against the owner and operator of the fishing boat and against Sosebee. In turn, Sosebee filed a third party demand against Harvest. Harvest answered through its atty., Slattery. Harvest then filed for bankruptcy and a stay was in place. The proceeding begun by St. Paul was then administratively closed due to the stay. In June 2009, Sosebee filed a complaint against the owner and operator of the charter, St. Paul and Steadfast. In that lawsuit, Steadfast did NOT make reference to its watercraft exclusion in its original answer. During the course of the Sosebee lawsuit, three separate adjusters for Steadfast had mistakenly interpreted the Steadfast policy as providing coverage for Harvest in this accident. In 2011 an amended complaint was filed by plaintiff to add a claim against the umbrella policy. At this point a different adjuster realized that coverage was excluded under the Steadfast policy and in an answer to that amended complaint, Steadfast, for the first time, asserted the watercraft exclusion. Steadfast filed a Motion for Summary Judgment claiming there was no coverage. Sosebee filed a Motion for Summary Judgment claiming that Steadfast had waived its coverage defense. The district court granted the Motion for Summary Judgment filed by plaintiff and denied the Steadfast Motion for Summary Judgment. The appellate court reversed. --The ROR letter was effective even though it was on Zurich letterhead. The letter put Harvest on notice of the exclusion. Louisiana “follows a functional approach to reservation of rights” and the court rejected requirements for technical language. Although the letter did not specifically state that it was reserving rights as to the defense of Harvest (the letter stated it was reserving re investigation), it was still an effective ROR. --Under Steptore, for an insurer to waive a policy provision through inconsistent conduct, that insurer must have “an actual intention to relinquish the right” OR the conduct must be “so inconsistent with the intent to enforce the right so as to induce a reasonable belief that the right has been relinquished.” Since Steadfast had no intention to relinquish the provisions of the watercraft exclusion, the court was required to determine if the actions of the insurer reached the required level of inconsistency. And, the court stated that the test for inconsistency is part “objective” (i.e.

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the insured’s belief must be “reasonable”) and part subjective (i.e. the conduct of the insurer must “induce” or “cause” the insured’s belief that the right was relinquished.) With respect to the reasonable part of the test, the court stated that it was a close question. However, the court was not required to resolve that question since it determined that the “subjective” part of the test was not met. “Once Steadfast reserved its rights under the watercraft exclusion, it did not need to again inform Harvest that it might not be covering Sosebee’s claim.” The actions of Steadfast did not induce any belief by Harvest. Harvest’s careless reading the ROR was the problem. --Prejudice to a third party (i.e. Sosebee) is irrelevant to the question of waiver by an insured vis-á-vis its insured. --And, plaintiff produced no evidence of “real harm”/prejudice to Harvest. Steadfast never deprived Harvest of the opportunity to “assume and manage its own defense”. Emery vs. Progressive Cas. Ins. Co., 49 So.3d 17 (La. App. 1 Cir. 2010) Progressive insured T&T. While in the course and scope of his employment, a T&T employee was involved in a MVA. Progressive sent a ROR to T&T after it was notified of the claim. Once suit was filed, Progressive retained one attorney to represent itself and T&T. The attorney then filed an Answer for both defendants which included the claim that there was no coverage under the policy. The defendant’s attorney then took the deposition of the T&T employee involved in the accident and asked him questions relating to the coverage issue. After that deposition, Progressive split the defense by retaining a separate attorney to represent only T&T. Then, the Progressive attorney met with the owner of T&T to have him sign an affidavit relating to the coverage issue. This was done without the knowledge or permission of the attorney for T&T. With that affidavit in hand, Progressive then filed a Motion for Summary Judgment on coverage. T&T filed its own Motion for Summary Judgment claiming that Progressive had waived its coverage defenses. The court ruled in favor of T&T

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Breazeale v. T.T., 117 So.3d 192 (La. App. 1 Cir. 2013)

Plaintiff, a special education teacher, was injured when she was attacked by a special education student. Bankers Specialty Insurance Company had issued a Homeowners Policy to the parents of that student. Bankers claimed that there was no coverage based on the intentional act exclusion. The parents claimed that Bankers had waived any coverage issues when it retained one attorney to file an Answer for the parents and Bankers. Bankers asserted its coverage defenses for the first time in a Supplemental and Amending Answer filed six weeks after the joint Answer was filed. At that point, Bankers retained separate counsel for the parents. Thereafter, a reservation of rights letter was sent to the parents and the original attorney retained by Bankers continued to represent them. The Court held that there was no waiver. The Court stated the following with respect to the waiver issue:

“But there is no evidence in the record that J.T.’s parents’ legal representation was ever compromised , that J.T.’s parents were prejudiced in any way, that J.T.’s parents relied on any representation by Bankers that there definitely was insurance coverage for the Breazeales’ claims, or that Bankers’ assertion of its coverage defense/policy exclusion was untimely. When J.T.’s parents filed their separate answer to the School Board’s intervention, they did so with knowledge of Bankers’ coverage defense as clearly set forth in the reservation- of-rights letter that was sent to them by certified mail. Thus, by filing this separate answer, J.T.’s parents implicitly agreed that Bankers had reserved its coverage defense.”

VI. Consent to Settle In re: Zuber, 101 So.3d 29 (La. 2012)

This was a disciplinary proceeding against two defense attorneys. The complainant (Teague) was a medical doctor who was sued for medical malpractice and his professional liability policy did not contain a “consent to

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settle” provision. The underlying case settled after a mediation. The doctor was unhappy with the result and he filed a legal malpractice claim against the attorneys. A jury ruled in favor of the doctor. On appeal, the case was dismissed. Teague v. St. Paul Fire and Marine Ins. Co., 10 So.3d 806 (La. App. 1 Cir. 2009), writ den., 10 So.3d 722 (La. 2009) The doctor then filed the disciplinary complaint saying that his attorneys had not communicated with him nor advised him of the intent to settle the case. The charges were dismissed against both attorneys, but read the following: “In this case, we are called upon to decide the scope of a lawyer’s duties to a client, where the client’s rights are contractually limited by the terms of the client’s insurance policy. This issue has not been addressed in detail in our disciplinary jurisprudence. The crux of the charges against respondents revolves around their alleged failure to properly communicate with Dr. Teague as required by Rule 1.4. However, we find Rule 1.2 is the more specific rule governing a lawyer’s duties in a limited representation context. At the time of this case, Rule 1.2(b) permitted a lawyer to “limit the objectives of the representation if the client consents after consultation.” In the context of the tripartite relationship between lawyer, insurer, and insured, we interpret Rule 1.2 as requiring a lawyer who will represent the insured at the direction of the insurer to make appropriate disclosure sufficient to apprise the insured of the limited nature of the representation as well as the insurer’s right to control the defense in accordance with the terms of the insurance contract. As written, Rule 1.2 does not provide much detail concerning the nature of the consultation the attorney must provide in order to secure the client’s consent to the limited representation. However, we find guidance in ABA Formal Ethics Opinion 96-403 (1996), which discusses Rule 1.2(c) of the Model Rules of Professional Conduct as follows: ‘A short letter clearly stating that the lawyer intends to proceed at the direction of the insurer in accordance with the terms of the insurance contract and what this means to the insured is sufficient to satisfy the requirements of Rule 1.2 in this context. We do not believe extended discussion is required or, indeed, that any oral communication is necessary. As long as the insured is clearly apprised of the limitations on the representation being offered by the insurer and that the lawyer intends to proceed in accordance with the directions of the insurer, the insured has sufficient information to decide whether to accept the defense offered by the insurer or to assume responsibility for his own defense at his own

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expense. No formal acceptance or written consent is necessary. The insured manifests consent to the limited representation by accepting the defense offered by the insurer after being advised of the terms of the representation being offered. Once the lawyer has apprised the insured of the limited nature of his representation and that he intends to proceed in accordance with the directions of the insurer, he has satisfied the requirements of Rule 1.2(c). A prudent lawyer hired by an insurer to defend an insured will communicate with the insured concerning the limits of the representation at the earliest practicable time. For example, basic information concerning the nature of the representation and the insurer’s right to control the defense and settlement under the insurance contract reasonably could be incorporated as part of any routine notice to the insured that the lawyer has been retained by the insurer to represent him. Alternatively, so long as it is early in the representation, the lawyer may wait until there is some other reason for communication with the insured in connection with the claim such as developing relevant facts, answering a complaint, responding to interrogatories, or scheduling a deposition. Failure to make appropriate disclosures near the outset of the representation may generate wholly unnecessary, but difficult, problems for the insured, the insurer, and the lawyer. Thus, if the lawyer fails to advise the insured of the limited nature of the representation and his intention to proceed in accordance with the directions of the insurer early in the representation, the lawyer may find himself trying to advise the insured of a proposed settlement at the last minute under short time constraints, when the insured will have little practical opportunity to reject the defense offered by the insurer and assume responsibility for his own defense.’ Consistent with this guidance, we interpret Rule 1.2 as requiring a lawyer who represents an insurer and insured in a case involving a “consent to settle” clause to advise the insured as soon as practicable (generally at the inception of representation) of the limited nature of the representation the attorney will provide to the insured. Once the lawyer has made appropriate disclosure to the insured of the limited nature of the representation being offered under the insurance contract and the insured indicates consent by accepting the defense, the lawyer may then proceed with the representation at the direction of the insurer in accordance with the terms of the insurance contract, including settling the claim within the limits of the policy at the insurer’s sole direction. However, the lawyer should make efforts to keep the insured reasonably apprised of developments in the case. See Mitchum v. Hudgens, 533 So.2d 194, 202 (Ala. 1988) (explaining that even though the insured has no direct financial interest when a settlement is within policy limits, “appointed counsel should keep his

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client, the insured, apprised of all developments in the case, including settlement negotiations.”) Turning to the facts of this case, it is apparent respondents did not consult with Dr. Teague in order to explain the limited nature of the representation as required by Rule 1.2. Nonetheless, considering the absence of any controlling jurisprudence from this court, the extent of the lawyer’s duties in this situation was not entirely clear. Both respondents testified they assumed Dr. Teague was already aware of the policy’s “consent to settle” clause based on his prior experiences in malpractice cases and did not believe any additional notice was necessary. While we now reject respondents’ position, we find their testimony supports the conclusion that their actions were taken in good faith and were not intended to cause prejudice to Dr. Teague. Similarly, we accept Ms. Nobile’s testimony that her lack of communication with Dr. Teague, particularly with regard to the mediation, was inadvertent under the circumstances. In summary, given the lack of controlling jurisprudence at the time of respondents’ actions in this case and considering the totality of the circumstances, we decline to find clear and convincing evidence of any violation of the Rules of Professional Conduct on their part. Accordingly, we will dismiss the formal charges. However, we take this opportunity to make it clear to respondents and all members of the bar that limited representation situations are fraught with potential dangers to all parties, as readily illustrated by the instant case. Henceforth, lawyers should be scrupulous in adherence to their obligations under Rule1.2 to ensure that all clients in such a relationship are fully apprised of the nature of the representation and indicate consent by accepting the defense. Such communications will ensure that the client’s rights are protected and minimize any potential for future disagreement over the nature of the representation.” (All footnotes omitted.) Colonial Freight Sys., Inc. vs. Adams & Reese, 2012 WL 1570103 (E.D. La. 2012), aff’d, 2013 WL 2097591 (5th Cir. 2013) Adams and Reese had represented Colonial in an underlying lawsuit in CDC. After that case settled, Colonial sued Adams and Reese for malpractice and excessive billing. Colonial was upset that their attorney had not requested a jury which resulted in an “unfavorable” settlement. Adam and Reese’s Motion for Summary Judgment was granted. Colonial was unable to prove any loss caused by Adams and Reese.

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BIOGRAPHY

John E. McAuliffe, Jr. is with Frederick A. Miller and Associates where he practices in the field of insurance defense. He received his undergraduate degree from the University of New Orleans and his law degree from Loyola University. He is a member of the Louisiana State Bar, the Louisiana Association of Defense Counsel, New Orleans Association of Defense Counsel (Past President) and the New Orleans Bar Association. He is admitted to practice in the Supreme Court of the United States, the U.S. Fifth Circuit Court of Appeals and the Eastern, Western and Middle U.S. District Courts. He is currently Chairman of the Public Access and Consumer Protection Committee of the L.S.B.A. In 2012 he received the LSBA’s President’s Award.

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ATTACHMENTS

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