A three-way dilemma: Frank’s Casing and insurance defense

As an insurance coverage lawyer, I have always found that one of my natural allies is the insurance defense lawyer handling the underlying case. While I represent the insurance company in a capacity that is potentially adverse to the insured/defendant, the defense lawyer usually shares the same goal of trying to defeat or limit the value of the plaintiff’s claim against the insured. Further, my client very often has selected the counsel, so we know the lawyer’s reputation, ethics and ability. We often rely upon counsel’s insights as to the potential for liability and extent of damages in the case. The relationship is one that is usually cooperative and mutually beneficial.

There are, of course, natural tensions in this relationship, which arise from the fact that the defense lawyer owes a duty of complete loyalty to the insured/
defendant, and not to the insurance carrier, as explained by the Texas Supreme Court in Employers Cas. Co. v. Tilley, 496 S.W.2d 552 (1973) and State Farm Mut. Auto Ins. Co. v. Traver, 980 S.W.2d 625 (Tex. 1998). Accordingly, where there are significant issues of coverage, usually memorialized in a reservation of rights letter, the defense lawyer often has to be very careful regarding the information that he provides to the carrier and its coverage counsel, so as to avoid becoming em-broiled in any coverage disputes. Similarly, when the plaintiff makes a Stowers demand, a dispute may arise because defense counsel may be required to recommend, and potentially pressure, the insurance carrier to accept a settlement, despite unresolved coverage issues.

The complex relationship of the insurance carrier, defense counsel and the insured is referred to as to the tripartite (or three-way) relationship. Although the insurance carrier often selects defense counsel, pays defense counsel and requires that defense counsel abide by litigation guidelines, defense counsel still owes complete loyalty to, and only to, the insured. Even so, defense counsel must provide detailed reports, analysis and often recommendations to the carrier as part of the insured’s duty to cooperate under the insurance policy. The insured, on the other hand, is directly responsible to handle insurance coverage disputes with the carrier. Thus you have a complicated, interlinking set of relationships. Unfortunately, these relationships are often very amorphous and fuzzy, leaving the parties confused as to their relative obligations and duties. And the case law is not always helpful in sorting out these issues.

Yet another conflict

Of the three parties involved in the tripartite relationship, it is defense counsel who is often confronted with the most difficult decisions. For instance, the defense lawyer is asked to balance the carrier’s requirements and the insured’s needs. Some carriers’ litigation guidelines only allow taking a certain number of depositions in a case, so if the defense lawyer believes that many more depositions are necessary in order to properly defend a case, he may find himself at odds with the carrier who sends him business. However, the defense lawyer frequently receives a large part, and sometimes all, of his work from one particular carrier. Thus, there is a real tension between wanting to satisfy the carrier and at the same time to defend the insured zealously and fully.

By the same token, the insured will often want the case settled regardless of the amount of the demand or its reasonableness, as long as insurance covers the payment. The carrier, on the other hand, wants to pay only what is absolutely necessary and reasonable, and not one penny more. How should the defense lawyer deal with the insured’s insistence that the carrier accept the demand to settle the case? Additionally, insurance policies require that the insured, and therefore the insured’s counsel, provide thorough, detailed and comprehensive reports so as to allow the carrier to evaluate the potential for liability and the extent of covered damages. Such reports often require defense counsel to make careful distinctions in the information provided. For instance, what if one set of damages is clearly covered and another is clearly not? Does the defense lawyer run a significant risk of malpractice if she characterizes the nature of the damages so that the carrier can deny some or all of the claim? All of these are traditional conflicts that bedevil defense counsel.

Yet another conflict has been added recently. Last year the Texas Supreme Court rendered a potentially historic decision in Excess Underwriters at Lloyd’s, London v. Frank’s Casing Crew and Rental Tools, 48 Tex. S.Ct. J. 735 (May 27, 2005); re-hearing granted, 49 Tex. S.Ct. J. 241 (Jan. 6, 2006). The decision, which may be altered in whole or in part upon re-hearing, creates significant new difficulties for defense counsel that are only now becoming understood.

Frank’s Casing involved a situation where the lawsuit against the insured sought damages that were covered, as well as damages that were potentially uncovered by insurance. The excess carrier participated in the defense of the underlying lawsuit subject to a reservation of rights. During the trial, the underlying plaintiff made a Stowers demand; that is, an offer to settle within policy limits that a reasonable person should accept. This, of course, is a scenario that has played itself out again and again in hundreds of cases. In the pre-Frank’s Casing world, the carrier was faced with the difficult question as to whether to settle the case and potentially forego its coverage defenses or to reject the offer, deny indemnity and potentially litigate both coverage and bad faith issues if there were an adverse verdict against the insured.

A dramatic change

Frank’s Casing dramatically changed this traditional scenario. The Texas Supreme Court held that if the insured demands that the carrier accept a settlement offer within policy limits, or expressly consents to the settlement, then the carrier may make the settlement payment without foregoing its coverage defenses. The carrier may then subsequently litigate its coverage defenses against the insured and, if there was no coverage, recover the settlement payment from the insured. In other words, a significant risk of settlement has now shifted to the insured.

Frank’s Casing may make it more difficult for defense lawyers to avoid participating in the coverage dispute. For example, when the defense lawyer has to decide whether to recommend to the carrier and her client whether they should accept a settlement proposal, may she do so without advising the client (the insured) of the potential risks in a future coverage action? May she make a recommendation to the carrier without taking into consideration the potential effect on the insured? Of course, she can simply say that the settlement proposal makes sense purely on the liability issues and potential damages, but is that zealously representing the insured’s interests? This is an instance where avoiding the coverage issues may directly affect the reasonableness of the proposal to the insured.

As a coverage lawyer, I believe that the insured should always obtain competent insurance coverage representation in such circumstances. Clearly, the Texas Supreme Court anticipates that insureds will seek competent coverage advice where it is appropriate. So at a theoretical level, this dilemma is arguably mitigated. But it seems to me that every defense lawyer will be calculating whether he or she will be sued for malpractice for recommending settlement to the client, the insured, if he or she does not take into consideration the potential that the insured may ultimately have to reimburse the carrier for the settlement. Very interesting-and difficult-for defense attorneys.

Topics Carriers Texas