(Editor's Note: The following article has been contributed by Eric J. Schreiner, partner of the litigation department and practice leader of the employment group at Kleinbard Bell and Brecker LLP.)

Insurers routinely appoint defense counsel to defend the interests of their insureds against claims by third parties. Defense counsel is charged with protecting the interests of the insured. At the same time it has reporting obligations to the insurer, and the insurer typically is involved in discussions regarding strategy and potential resolution of claims.

This joint relationship between the insurer, insured, and defense counsel sometimes is referred to as the “tripartite relationship.” One concern of both insurers and insureds in the “tripartite relationship” is the ability to protect communications with appointed defense counsel. It generally is in the interest of both insurers and insureds to prevent such communications from being subject to disclosure to third parties, particularly a plaintiff in an underlying lawsuit where the insurer is providing a defense to its insured. Therefore, a critical issue for the parties is how to protect communications between an insurer, its insured, and appointed defense counsel from disclosure to third parties.

The discussion that follows is based upon an analysis of Pennsylvania law. The scope of protection provided to communications between an insurer, its insured, and appointed defense counsel by the attorney-client privilege will vary depending on the applicable law. This article, however, raises issues that are important for insurance professionals and the defense counsel with whom they work to consider and review regardless of the applicable law.

Who Represents Whom

A threshold question underlying the issue of protecting communications between an insurer, its insured, and appointed defense counsel is whom defense counsel represents. Some courts have found that both the insurer and the insured are considered to be the clients of defense counsel [1], while other courts have suggested that the insured is the client.[2] Whether defense counsel is deemed to represent both the insured and the insurer or just the insured, however, defense counsel's ultimate duty is to the insured. In the event that a conflict arises between the insurer and the insured, defense counsel's obligation is to the insured alone. Defense counsel must therefore act in the best interests of the insured at all times.

In the absence of a conflict, however, courts generally have found that communications and documents shared between an insurer, its insured, and defense counsel in the context of the “tripartite relationship,” which otherwise would be privileged, can be protected from disclosure to third parties.[3] The ethical obligations of defense counsel to ultimately protect the interests of the insured if those interests are inconsistent with the interests of the insurer play a critical role in the ability to protect communications made in the “tripartite relationship” from disclosure based on the attorney-client privilege.[4]

Indeed, in order for the attorney-client privilege to protect communications made within the context of the “tripartite relationship,” courts have required defense counsel to represent that throughout defense counsel's representation of the insured, the relationship that counsel established with the insured and the insurer provided for defense counsel to protect the interests of the insured against the insurer.[5] One court even required defense counsel to submit an affidavit, confirming counsel's understating that its ultimate duty was to the insured, in order for the attorney-client privilege to survive disclosure of communications to the insurer.[6] These requirements obviously impose certain limits upon defense counsel's ability to communicate with the insurer. For example, defense counsel should be careful not to provide an insurer with information from the insured that could be used to defeat the insured's entitlement to coverage.

A Case Example

The Pennsylvania case of O'Brien v. Tuttle, 21 Pa. D.&C.3d 319 (Pa. Com. Pl. 1981), provides an example of how courts deal with the attorney-client privilege in the context of communications shared between an insurer, its insured and defense counsel. In that case, the court reached the conclusion that communications shared between an insurer, its insured and defense counsel were protected by the attorney-client privilege. The court based this conclusion on its determination that defense counsel represented both the insurer and the insured, finding that the parties' relationship constituted a joint representation by a common attorney for the mutual benefit of the insured and insurer.[7] The court also noted that, if any conflict between the insurer and the insured arises, defense counsel's ethical obligations impose a duty to protect the insured's interests and preclude defense counsel from providing the insurer with any information from the insured that could defeat the insured's claim for coverage.[8]

The parties to the “tripartite relationship” must recognize the possibility that a conflict may develop between the insurer and the insured, which effectively will end their ability to invoke the attorney-client privilege to protect communications. As mentioned above, in the event that a conflict arises between the insurer and the insured, defense counsel's obligation is to the insured alone and defense counsel must act in the best interests of the insured.[9] The question of when an actual conflict develops is fact sensitive, but generally a conflict exists when the insurer's pursuit of its own best interests is incompatible with the best interests of the insured.[10] The mere existence of a reservation of rights by the insurer, however, does not always give rise to a conflict.[11] The determination of whether a conflict exists, which could require independent counsel to be appointed for the insured, will be dependent upon the circumstances of a given case.

As the preceding discussion demonstrates, protecting communications and documents shared as part of the “tripartite relationship” presents numerous challenges. The parties to the “tripartite relationship” have the ability to use the attorney-client privilege to protect their communications but need to take be proactive to ensure that this protection will be applicable.

Insurers and defense counsel should make it clear at the outset of the “tripartite relationship” that they understand that defense counsel's ultimate obligation is to protect the interests of the insured. They should consider including appropriate language to this effect in any retainer agreements or other initial written communications between defense counsel and the insurer or the insured. In addition, insurers and defense counsel must proceed carefully during the course of defense counsel's representation of the insured in an underlying third-party claim, keeping in mind the guiding principle that defense counsel's ultimate obligation is to the insured.

Insurers and defense counsel must balance the need to provide information to the insurer related to the defense of claims with defense counsel's obligation to avoid providing information that could be prejudicial to an insured's interests, such as information that would adversely impact an insured's entitlement to coverage. Similarly, insurers must recognize that they cannot rely on defense counsel to provide them with information that could impact coverage but instead must conduct their own independent investigations if coverage issues exist. The parties also must be aware that a conflict could arise that could end their ability to rely on the attorney-client privilege to protect communications from disclosure to third-parties. If insurers, insureds and defense counsel follow these steps, they will maximize their ability to invoke the attorney-client privilege to protect communications made within the context of the “tripartite relationship.”

Eric J. Schreiner is Partner of the Litigation Department and Practice Leader of the Employment Group at Kleinbard Bell and Brecker LLP. He may be reached at eschreiner@kleinbard.com.

[1] See Graziani v. One Beacon Ins., Inc., 2 Pa. D. & C. 5th 242, 247 (Pa. Com. Pl. 2007); O'Brien v. Tuttle, 21 Pa. D.&C.3d 319, 322 (Pa. Com. Pl. 1981); Nedrow v. Pa. National Mutual Casualty Insurance Co., 31Pa. D. & C.3d 456, 459 (Pa. Com Pl. 1981).

[2] See Bedwell Company v. D. Allen Bros., 2006 WL 3692592 at *3 (Pa. Com. Pl. Dec. 6, 2006); Kvaerner U.S. Inc. v. One Beacon Ins. Co., 74 Pa. D.&C.4^th 32 (Pa. Com. Pl. 2005).

[3] Smith v. St. Luke's Hospital, 40 Pa. D.&C.3d 54, 61 (Pa. Com. Pl. 1984); Serago v. East Urban Hospital, 30 Pa. D.&C.3d 221 (Pa. Com. Pl. 1983); O'Brien, 21 Pa. D.&C.3d at 327.

[4] Smith, 40 Pa. D.&C.3d at 61; Serago, 30 Pa. D.&C.3d at 225; O'Brien, 21 Pa. D.&C.3d at 323 and 327.

[5] Smith, 40 Pa. D.&C.3d at 61; Serago, 30 Pa. D.&C.3d at 225.

[6] Smith, 40 Pa. D.&C.3d at 61.

[7] O'Brien, 21 Pa. D.&C.3d at 327.

[8] Id. At 323.

[9] Graziani, 2 Pa. D. & C. 5th at 247; Bedwell, 2006 WL 3692592 at *3; Kvaerner, 74 Pa. D.&C.4^th at 32.

[10] Kvaerner, 74 Pa. D.&C.4^th at 32.

[11] Eckman v. Erie Ins. Exchange, 21 A.3d 1203, 1209 (Pa. Super. 2011); Bedwell, 2006 WL 3692592 at *3.

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