Rights of Insurers When Dealing with Independent Counsel
Once counsel has been selected, “[t]he Cumis rule requires complete independence of counsel.” “Cumis counsel represents solely the insured.” The insurance contract does not govern the relationship between the insurer and defense counsel. But counsel who represents a policyholder and therefore speaks for a policyholder could injure a policyholder’s coverage by failing to act in accordance with the policyholder’s duties under a liability policy. This is so because a lawyer’s conduct is often attributable to a client, meaning that the law often treats a lawyer’s actions as having been taken by a client. Because independent counsel acts solely on a policyholder’s behalf, actions by independent counsel that violate a policyholder’s duties could put the policyholder in breach of the insurance contract and endanger the policyholder’s coverage.
Communications is perhaps the area in which dangers to coverage are most likely to arise. Even when independent counsel represents the policyholder, the carrier is still entitled to information. For example, the carrier is entitled to know about settlement demands and to receive copies of court filings and other public documents, including items received or produced in discovery. At least as long as consulting with the insurer does not entail any substantial risk of harm to the policyholder, counsel’s duties to the policyholder require counsel to engage in such consultation (if requested by the insurer) to avoid any risk of injuring the policyholder’s coverage interests. Moreover, disclosure to the insurer of information relating to the representation is impliedly authorized to the extent necessary to avoid the risk of breaching the insurance policy, as long as disclosure does not endanger any policyholder interests and as long as the policyholder has not directed that such information be kept confidential.
California Civil Code § 2860 codifies some of these obligations and imposes them directly on defense counsel:
(d) When independent counsel has been selected by the insured, it shall be the duty of that counsel and the insured to disclose to the insurer all information concerning the action except privileged materials relevant to coverage disputes, and timely to inform and consult with the insurer on all matters relating to the action . . . .
These duties to disclose relevant information and to consult with the insurer seem especially well founded in the insurance contract. Although a conflict of interest denies the insurer the right to direct counsel,  to receive information prejudicial to the policyholder on the subject of the conflict, and to impede actions beneficial to the policyholder on that issue, it does not eliminate the insurer’s interest in the defense. The insurer still desires the most effective and efficient defense, as the insurer is still obliged to pay defense costs and may be required to pay any judgment or settlement. The policyholder is still bound by the contractual duty of cooperation except insofar as that duty is excused by the conflict. Moreover, the insurer retains the right to settle at its own expense and the right to deny payment of any settlement not approved by it. Exercise of these rights requires full and timely information, so the insurer can consider settlement opportunities and actions that may be necessary to fulfill any duty to the policyholder to accept reasonable settlement demands.
Moreover, the insurer should at least be entitled to make suggestions on defense options and decisions and to have the information necessary to do so. Although the policyholder and defense counsel are not bound by any such suggestions, they cannot be harmed and may be helped by receiving them. As Dean Syverud observed with respect to common defense counsel guidelines, “[t]he advance consultation by defense counsel contemplated in the Guidelines is as minimal a form of cooperation as one can imagine.”
Consultation is valuable, in and of itself, in achieving an economical defense. Lawyers make money by delivering services. Their incentive is, therefore, to maximize service levels, which is antithetical to minimizing costs. “Even a lawyer who aims to provide only worthwhile defense efforts can subconsciously resolve doubts in favor of doing more, and so earning more.”
Consultation, even without an approval requirement, tends to restrain inefficient efforts:
The lawyer’s evaluation is sharpened by responding to the adjuster’s comments and questions. Consultation also allows the claims staff to consider with counsel whether the effort proposed could safely be postponed, particularly when there is still a possibility of settlement.
In short, consultation is valuable to the insurer and cannot be prejudicial to the policyholder (as long as any confidential information bearing on coverage is withheld from the insurer, as all agree it must be). Moreover, “[t]o the extent that such consultation avoids unnecessary discovery or motion practice, it also benefits the judicial system.”
Even in a case that most severely restricted the insurer’s use of prior approval requirements, it was conceded that requirements of advance consultation are permissible. At oral argument in In re Rules of Professional Conduct & Insurer Imposed Billing Rules & Procedures, Justice Gray had the following exchange with one of the petitioners’ counsel, Robert James:
Mr. James: Rule 1.8 is fairly straightforward. A lawyer shall not accept compensation for representing a client from one other than the client unless there is no interference with the lawyer’s independence of professional judgment. Rule 5.4 is very similar. It essentially says the same thing. A lawyer shall not permit a person who recommends, employs, or pays the lawyer to render legal services for another to direct or regulate the lawyer’s professional judgment. When the billing rules say that we need pre-approval to hire experts to conduct research to file a motion, to file pleadings, to engage in trial preparation, or to decide how to staff a case, we simply can’t agree to do so. Why? Our position is that the plain and ordinary meaning of these ethical rules prohibit us from allowing an insurance company from directing and regulating our judgment to do so. It’s just that simple.
Justice Gray: Counsel, if the billing rules said “consult” instead of “approve,” would they still violate the rules?
Mr. James: No, I think that we consult with the insurance company all the time, with insurance adjusters, and tell them here’s what we think should be done. So I think that one of the things that the insurance companies can expect defense counsel to do is to consult with them and find out what our thinking is, why we are thinking [that], and in many cases an adjuster may say let me question you about that. Maybe this isn’t a good thing at this particular time and maybe you will agree or maybe you will disagree.
Advance consultation on substantial expenses may also lead the insurer to settle to avoid that cost or to withdraw its reservation of rights to regain control of the defense. Either of these results would be beneficial to the policyholder.
Were the insurer unaware that independent counsel was representing only the insured, the provision of legal advice to the insurer could result in creation of an attorney-client relationship not intended by the lawyer (and creating the very conflicts that the counsel’s independence was intended to avoid). But that could occur only if the insurer had a reasonable belief that the lawyer was acting on its behalf, and the process by which independent counsel was retained ordinarily should negate any such expectation. Any communication or consultation between independent counsel and the insurer is purely informational. If there is any doubt about the lawyer’s relationship with the insurer, the lawyer should clarify that the insurer is not a client. And, in some jurisdictions, the fact that the lawyer is independent counsel will automatically preclude the existence of any attorney-client relationship with the insurer, without regard to the insurer’s belief.
Insurers Can Challenge Defense Expenditures and Activities
Even where there is a conflict of interest, an insurance policy is not a blank check requiring payment by the insurer for whatever work defense counsel chooses to do. An insurer is entitled not to pay for services that are overpriced or inappropriate to the case. The provider of services is not the sole judge of their necessity. Insurers must also be able to review all legal bills, including those submitted by independent counsel, to protect against fraud. For example, they must be able to determine that all services billed were actually performed or that lawyers are not turning expense items into profit centers by tacking surcharges onto them.
So, sooner or later, a representative of the insurer must decide whether particular services are appropriate and should be paid for. A preapproval requirement simply requires that question to be addressed before the services are rendered, instead of afterward.
In other words, the insurer is entitled to challenge defense activities and expenditures it regards as excessive or inappropriate, and to do so before they are executed, to the point of warning that it will not voluntarily pay for them. Accordingly, even where the policyholder is represented by independent counsel, insurers are still “entitled to apply billing Guidelines for purposes of obtaining the most effective, professional and efficient defense possible for their insureds.”
Of course, the insurer’s refusal to pay does not end the matter. The policyholder can direct counsel to execute the disputed recommendations for expenses or activities, and counsel will be obliged to do so. Either before or after that is done, the policyholder or counsel can seek to collect from the insurer for those expenses or services. If a court or arbitrator finds the expenses or services appropriate, the insurer will have to pay. Otherwise, the policyholder will have to pay, unless the inappropriateness of the expenses or services prevents counsel from collecting from anyone.
In short, neither party may sit as judge in its own case. If disputes cannot be compromised, they must be submitted to an outside adjudicator. Both sides must take account of the likely rulings of such an adjudicator on the facts presented, and disputes are unlikely to be pressed unless the parties have very different predictions about such a ruling.
Outright refusal to pay has significant risks for the insurer. If held to be incorrect, it is likely to be deemed a breach of the duty to defend, freeing the policyholder from policy restrictions on refusal to settle. To avoid these risks, an insurer may wish to advance the disputed funds, while reserving the right to seek to recoup them. But the ability to recoup may be illusory where the policyholder is impecunious, and counsel may have defenses to recoupment not available to the policyholder. If recoupment is to be sought, the insurer should either (1) obtain an agreement that the advances will be returned if the insurer prevails in later litigation or (2) seek prompt adjudication of the propriety of the expenses or services in question. Failure to do one or the other may prevent recoupment even if the expenses or services might be found beyond the insurer’s obligations to pay.
Apart from the possibility of freeing the policyholder to settle, an unreasonable refusal to pay could be the basis of a bad faith claim, as defense costs are a form of first-party benefit.
The Montana Supreme Court’s Rejection of Prior Approval Requirements
The Montana Supreme Court has held that any requirement of prior approval impermissibly interferes with a lawyer’s obligation to exercise independent judgment on behalf of the policyholder. We believe the decision is poorly reasoned, for reasons explained elsewhere. But even one who agrees with the decision should recognize that the decision focused on ordinary defense counsel and that the concern that motivated it does not justify an extension of the holding to representations in which independent counsel represent policyholders.
This is so because independent counsel recommend options to policyholders and follow policyholders’ instructions. They do not follow insurers’ instructions and, therefore, are not subject to insurers’ prior approval. They may learn that an insurer will not willingly pay for a defense-related service they believe should be employed, but they are nonetheless entirely free to recommend the service to the policyholder, to perform it at the policyholder’s request, to bill for it, and to help the policyholder sue for reimbursement. And unlike conventional defense lawyers who work with carriers repeatedly, they have no ongoing relationships with the insurer that might make them hesitant to adopt an adversarial posture toward it. Independent counsel thus stands in the same position as any other lawyer whose client has arguable contractual rights against another party that the latter disputes.
The propriety of this conclusion is reinforced by the similarity of the procedure to that approved by the ABA Standing Committee on Ethics for cases in which counsel is not independent. Its Opinion 01-421 assumes that the insurer has directed the lawyer to proceed in a particular way, rather than merely declining to pay for services the lawyer has recommended. Because actual direction of the lawyer creates no insurmountable problem, a mere threat to withhold payment can hardly do so.
Much of the ABA opinion addresses what the policyholder must be told about a representation in which the insurer expects to exercise a power to direct counsel. No such requirements apply to an independent counsel representation, so they need not be discussed here.
If counsel believes that an insurer decision poses a substantial risk to the policyholder, counsel should point that out to the insurer and request reconsideration. If the insurer will not reconsider, then counsel must inform the policyholder, fully describe the risks and benefits, and inquire whether the policyholder will consent to having counsel proceed on the basis the insurer requests. The Tennessee Bar describes such a consultation as follows:
Counsel should describe the decision and its risks and benefits from the standpoint of the insured. Of course, these will include whatever risks to the insured that counsel believes might result from the compliance. But objection to the insurer’s directive would also have risks and therefore, where appropriate, counsel should point out that the insurer might take the position that any unjustified refusal to permit counsel to follow its direction would breach the insurance contract. If the insurer were correct in so contending an objection would endanger the insured’s coverage. On the other hand, if the insured permits counsel to follow the insurer’s directive, the insured could also reserve the right to hold the insurer responsible for any resulting damage to the insured. (The insurer would be liable if the directive were found to breach its duties under the insurance policy.) The insured should be advised of the utility of obtaining independent counsel, at the insured’s own expense, in considering whether to acquiesce in the insurer’s directive (perhaps under protest). If the insured acquiesces, after being properly advised, counsel may comply with the insurer’s directive.
If the policyholder gives informed consent (perhaps coupled with a declaration of intent to hold the insurer responsible for any resulting injury), then counsel may comply with the insurer’s direction. If the policyholder refuses to consent, then counsel cannot proceed in the way the insurer requests. If the insurer will not rescind the disputed decision, counsel must then withdraw. (A request to withdraw will necessarily involve the court, which may resolve any dispute between insurer and policyholder.)
In an independent counsel situation, there will be no possible need for withdrawal and no need to get the insurer’s consent for proposed activities or expenses. The lawyer and the policyholder need only discuss whether to assume the risk of nonpayment and the burden of litigating for payment. If the policyholder is willing to advance the necessary funds or if the lawyer is willing to extend credit (possibly on a nonrecourse basis), they may proceed and pursue the insurer later. In the meantime, the insurer remains obligated to continue funding agreed expenses and activities.
Although the Montana Supreme Court presumably would reject the ABA analysis, its opinion is distinguishable when the problem is presented in an independent counsel context and should be rejected by other courts even where it is not distinguishable.
Insurers Are Entitled to Pay No More Than Market Rates
In a few states, statutes regulate the fees that insurers must pay independent counsel. Thus, in California,
[t]he insurer’s obligation to pay fees to the independent counsel selected by the insured is limited to the rates which are actually paid by the insurer to attorneys retained by it in the ordinary course of business in the defense of similar actions in the community where the claim arose or is being defended . . . .
Absent such a statute, lawyers are still limited to charging fees permissible under the applicable Rules of Professional Conduct. Most such rules are based on ABA Model Rule 1.5:
(a) A lawyer shall not make an agreement for, charge, or collect an unreasonable fee or an unreasonable amount for expenses. The factors to be considered in determining the reasonableness of a fee include the following:
(1) the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly;
(2) the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;
(3) the fee customarily charged in the locality for similar legal services;
(4) the amount involved and the results obtained;
(5) the time limitations imposed by the client or by the circumstances;
(6) the nature and length of the professional relationship with the client;
(7) the experience, reputation, and ability of the lawyer or lawyers performing the services; and
(8) whether the fee is fixed or contingent.
Insurers are likely to argue that a reasonable fee for defense services is established by the rates charged by lawyers from whom the insurers regularly purchase similar services. In their view, the cost of defending the insured ought not to be increased by the fortuitous existence of circumstances entitling the insured to independent counsel.
But lawyers not regularly retained by the insurer obliged to pay for independent counsel may resist accepting payment at the rates that the insurer normally pays for similar services. Insurers are able to provide their regular counsel with a volume of work warranting a significant discount in the rates charged for that work. Independent counsel do not receive a similar volume of work. If they have adequate business at rates not affected by such a discount, they have no incentive to accept the discounted rates charged by firms the insurer regularly retains.
If the insurer were obliged to pay no more than its customary discounted rates, a policyholder seeking independent counsel might find it necessary to supplement the insurer’s payments to obtain comparable counsel or accept the services of less able (and therefore less expensive) counsel than would normally be retained for the particular case. Accordingly, policyholders would argue that the insurer’s customary discounted rates are not adequate or reasonable for independent counsel.
One argument sometimes made in support of limiting the insurer’s obligation to payment of its customary rates is that providing a defense by independent counsel is a form of substitute performance where a conflict of interest has rendered the performance contemplated by the contract partially impracticable. One commentator summarizes this argument as follows:
[B]ecause the conflict does not excuse the insurer’s duty to defend, the doctrine of substitute performance should be understood to effectuate the terms of the contract, i.e., the insurance policy, without conferring an advantage on either party. “Substitute performance” should therefore be a minimal variation from the performance originally contemplated. This approach is said to track courts’ general recognition that a party injured by a contract breach should receive the benefit of its bargain but never a windfall.
Continuing, substitute performance advocates theorize that courts that allow an insured to select defense counsel and control the defense because of a conflict of interest rendering the insurer’s duty to defend impractical are supplying a substitute for the carrier’s performance so as to preserve the carrier’s remaining contractual obligations. As a substitute for the carrier’s duty to defend, it follows that the alternative performance must conform to the original. The insured’s defense should not be funded at a level substantially lower than the defense the carrier otherwise would have provided so that the insured receives the benefit of its bargain, but nor should the insured’s defense costs substantially exceed those which the carrier would have paid were it in control lest the insured be unjustly enriched. Therefore, the carrier cannot be obligated to pay independent counsel hourly rates greater than those it would pay panel counsel.
This argument has a number of flaws. Most fundamentally, the doctrine of impracticability applies to excuse performance only where “a party’s performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made.” Nonoccurrence of a conflict of interest can hardly have been a basic assumption by the insurer: The existence of conflicts in a significant number of cases and the need to provide a defense despite them is well known to insurers. Moreover, increased expense in performance generally is not considered to render performance even partially impracticable. An insurer drafts the policy, and it could contractually specify limits on the rates payable to independent counsel. If the insurer has failed to include such language, it can hardly claim surprise when it is called upon to pay more than its customary rates to retain independent counsel appropriate to the case. And the insurer is still protected by the limitation of the fees payable to a reasonable amount.
Putting the matter succinctly, “while the substitute performance approach is superficially appealing, it quickly unravels when closely scrutinized.”
The policy promises the policyholder an adequate and appropriate defense to any suit seeking any relief that, if established, would be covered. This is promised at no cost to the policyholder. To fulfill this promise, the insurer must be obliged to pay independent counsel fees equal to “the prevailing market rates in the relevant community” for the type and quality of services reasonably necessary for the defense of the particular lawsuit. The market rate will typically reflect the factors enumerated in Model Rule 1.5.
The market rate may or may not be the customary rate charged by the lawyer(s) the insured has chosen to retain, depending on whether the caliber of lawyer chosen is appropriate to the case:
[N]ot all cases are alike. The “novelty and difficulty” of a matter may be either factual or legal. A catastrophic injury, wrongful death, or professional liability case, for instance, is much different from a slip-and-fall or automobile case involving minor injuries. Insurers obligated to engage independent counsel chosen by an insured must acknowledge that the defense of difficult matters generally requires experienced and skilled lawyers and that such lawyers can command greater rates than lawyers who handle relatively minor or simple cases. Fortunately for all concerned, liability insurers, as professional litigants, understand this quite well. Most insurers factor the nature of a case into their defense assignments and they typically have strata of law firms on their panels. Thus, and by way of example, although Firms A and B on an insurer’s panel may receive simple cases to defend at very low hourly rates, Firms C and D are assigned complex matters or large losses, and are compensated at higher hourly rates.
If a policyholder chooses to use more capable attorneys than the case requires, the policyholder may have to pay the extra cost beyond what would be required for less capable, but adequate, attorneys. And disputes regarding the required level of capability (and the corresponding reasonable rate) may need to be adjudicated. Pending adjudication, insurer, policyholder, and lawyers need to have some agreement on payment of fees as the litigation proceeds.
Ethical Obligations of Independent Defense Counsel
Some issues affecting independent counsel, notably those just discussed, require particular attention to the interaction of the lawyer’s duties and the insurance law duties of the policyholder. Insurance law has a primary role in those issues, with lawyer duties a secondary consideration. This section addresses issues in which lawyer duties come to the fore and insurance law plays a secondary role.
A key feature of independent counsel is that the lawyer is paid by the insurer, even though the policyholder is the lawyer’s sole client. Such third-party payment implicates Model Rule 1.8(f):
A lawyer shall not accept compensation for representing a client from one other than the client unless:
(1) the client gives informed consent;
(2) there is no interference with the lawyer’s independence of 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.
Looking first to the requirement of “informed consent,” the Model Rules define that as “the agreement by a person to a proposed course of conduct after the lawyer has communicated adequate information and explanation about the material risks of and reasonably available alternatives to the proposed course of conduct.” It is not necessary to “inform a client . . . of facts or implications already known to the client . . . ; nevertheless, a lawyer who does not personally inform the client . . . assumes the risk that the client . . . is inadequately informed and the consent is invalid.”
Thus, although the process by which independent counsel was provided and selected will often have informed the policyholder about some aspects of independent counsel’s representation, it is wise for independent counsel to discuss the terms of that representation and some of the problems it can present at the outset and to have that consent and the underlying advice confirmed in writing. Of particular importance are any facts that might raise questions as to counsel’s independence of the insurer, such as representations of the insurer or its affiliates in other matters. Such facts might cause the policyholder to look elsewhere for counsel, if the policyholder makes the selection, or to object to the insurer’s selection, if the insurer makes the selection.
The policyholder should understand any significant limitations on the scope of the representation and some important aspects of the way in which the representation will be conducted. The policyholder should be informed of the extent to which the insurer will be consulted in defense planning and the general nature of the problems that can arise if the insurer disagrees with the defensive activities proposed by counsel. This information could affect the ways in which the policyholder chooses to be involved in defense planning, even where no dispute has yet arisen. The policyholder should be informed of the arrangements with the insurer regarding payment of fees or the need to negotiate such arrangements, and of any possibility that the policyholder might have to pay or advance some portion of the fees. The policyholder should be informed of the extent to which confidential information will be shared with or withheld from the insurer and of the problems that can arise from such sharing or withholding.
In an independent counsel situation, the insurer will have no right to control the defense so that counsel’s independence of judgment would seem assured. But the fee arrangement (or any collateral relationship with the insurer) may provide incentives that could affect counsel’s judgment. If so, these must be explained.
A matter likely to be of particular importance to a policyholder is the possibility that independent counsel will perform coverage-related services for which the policyholder will billed directly. Independent counsel need not undertake to perform coverage work, of course; the policyholder may retain separate counsel with coverage expertise for that purpose. But the roles of defense counsel and coverage counsel may be combined without creating any conflict, because independent counsel represents only the policyholder. However, the insurance policy does not obligate the carrier to pay for the policyholder’s coverage work (or, more generally, for any work independent counsel may perform relating to any subject other than the defense of the liability claim). The policyholder’s personal responsibility for fees incurred in connection with coverage-related work should be explained at the outset of the representation.
Handling Confidential Information and Cooperation with the Insurer
As in all representations, information relating to the representation must be kept confidential, as provided in Model Rule 1.6. However, disclosure of such information may be impliedly authorized if useful to the representation, not injurious to the interests of the policyholder, and not forbidden by the policyholder.
Disclosure is useful to the representation if necessary to comply with the policyholder’s duty of cooperation, thereby preserving the policyholder’s coverage. Even if disclosure may not be necessary to comply with the policyholder’s duty of cooperation, it may be useful if it avoids a risk that the duty might be breached. Disclosure may also be useful if it will help persuade the insurer to take or authorize some action favored by the policyholder (such as settling the case). As long as such disclosure does not implicate issues (such as coverage) on which the interests of insurer and policyholder diverge, the insurer should be considered a person of common interest, such that any attorney-client privilege will not be waived.
Disclosure would be injurious to the policyholder’s interests if it would assist the insurer in disputing coverage, so coverage-sensitive information must be kept from the insurer unless the policyholder gives informed consent to disclosure. (If defense counsel is not a coverage lawyer, it may be necessary to obtain coverage advice to determine what information is or is not coverage sensitive.) Disclosure may also be injurious to other interests of the policyholder, such as interests in reputation. And, of course, the policyholder may forbid disclosure of certain information even if not otherwise injurious to the policyholder.
If information to be withheld is not coverage sensitive, withholding it might breach the policyholder’s duty of cooperation. The policyholder should be advised of this risk. If defense counsel is not able to evaluate that risk, the policyholder should be warned of it and advised to consult other counsel if evaluation is desired.
Honesty and Avoidance of Fraud
Representation of a policyholder by independent counsel typically takes place in a context where the policyholder and the insurer are adversaries with respect to coverage. As a result, both policyholder and counsel are entitled to withhold from the insurer information relating to the defense representation that is coverage sensitive. But even in the context of an adversarial relationship, the lawyer is not permitted to lie to the insurer. Model Rule 4.1 provides that “[i]n the course of representing a client, a lawyer shall not knowingly . . . make a false statement of material fact or law to a third person” (i.e., someone other than the client). Moreover, Model Rule 8.4 provides that “[i]t is professional misconduct for a lawyer to . . . (c) engage in conduct involving dishonesty, fraud, deceit, or misrepresentation.”
Professor Fischer has noted the following implications of these rules:
An attorney may not make a misrepresentation and may not use the rule of confidentiality to justify the speaking of untruths. When the attorney speaks, the attorney must speak honestly. A statement that is a half-truth because it omits material facts needed to put the statement in its proper context may be deemed a misrepresentation subjecting the speaker to civil liability. As recently noted by the Montana Supreme Court, the privilege to withhold client confidential information does not provide a license or justification for misleading utterances. An attorney who discloses information to the insurer to enable the insurer to determine its duties and obligations under the insurance contract must take care to disclose accurately and truthfully or not disclose at all. Even a negligent statement may be actionable if it contains a material misrepresentation on which the recipient of the information (the insurer) reasonably relies to its detriment. The scope of a lawyer’s liability for negligent misrepresentation has been hotly debated and disputed. The fact that the identity of the recipient of the information is known and the specific end and aim of the communication is to induce action by the insurer are factors enhancing the likelihood that the court would find Cumis counsel owed a duty of candor to the insurer. Cumis counsel must be careful not to confuse the absence of a duty of care owed to the insurer with the existing duty to avoid making material misrepresentations to the insurer.
The lawyer need not even be the source of the false statement. Douglas Richmond notes that “a lawyer may violate Rule 4.1(a) by knowingly affirming or ratifying another person’s false statement, or by failing to correct it.”
These rules can be triggered by very limited culpability. The Rule 4.1 requirement that the misrepresentation be made “knowingly” requires only actual knowledge of the falsity, not any “evil intent or a bad purpose.” Many courts require knowing falsehood to establish violation of Rule 8.4(c). But others hold that even statements made with reckless disregard for their truth or falsity can constitute violations. Indeed, at least one jurisdiction will find a violation based on grossly negligent misstatements.
Nor does a violation of these rules require that anyone be misled or harmed by the misrepresentation. Rule 8.4(c) contains no express requirement of materiality, though some courts will infer one.
Thus, independent counsel must take care to avoid false or misleading statements or omissions in communicating with the insurer. Moreover, independent counsel must be careful in advocating the policyholder’s position to the insurer. Thus, in trying to induce the insurer to settle, it may be useful to argue that there is a great risk of excess liability if the case is tried. And it may be possible to argue that the likelihood or likely magnitude of the judgment is greater than counsel personally believes it to be. If so, counsel must avoid stating any opinion regarding the risk that does not reflect counsel’s actual beliefs.
Model Rule 1.2(d) forbids a lawyer to “counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent.” If independent counsel learns that the policyholder is perpetrating a fraud, counsel may not assist in doing so. The first step will usually involve remonstration with the policyholder to correct any prior misrepresentations and refrain from any in the future. If the policyholder will not do so, it may sometimes be sufficient for independent counsel to withdraw from the representation. But, as Professor Fischer points out, in some instances,
[o]ne may even argue that counsel has affirmative disclosure obligations here and may not simply remain silent if counsel is aware that the policyholder client is perpetrating a fraud on the insurer. Rule 4.1(b) provides that an attorney must disclose a material fact when necessary to prevent assisting a criminal or fraudulent act by the client, unless disclosure is prohibited by Rule 1.6. Traditionally, the Rule 1.6 confidentiality exception swallowed the rule. Recent amendments to Rule 1.6 have, however, added exceptions that “permit” the attorney to disclose client confidential information to prevent “the client from committing a crime or fraud reasonably certain to result in substantial injury to the financial interests or property of another and in furtherance of which the client has used or is using the lawyer’s services.” Disclosure is no longer “prohibited,” as that term is used in Rule 4.1(b) because Rule 1.6(b)(2)–(3) permits disclosure; therefore, the exception no longer significantly constrains the duties set forth in Rule 4.1(b), i.e., disclose material facts “to avoid assisting a criminal or fraudulent act by a client.”
Of course, even if that argument is accepted, it would still be necessary to determine when disclosure is necessary to prevent assisting a fraud.
Involvement in Policyholder Disputes with the Insurer
If there are disagreements with the insurer on the conduct of the defense, the policyholder will require advice on the risks and benefits of acceding to the insurer’s wishes or proceeding contrary to those wishes. Defense counsel is better positioned than any other lawyer in evaluating the impact on the lawsuit being defended of proceeding one way or another. After all, defense counsel may have considered both alternatives before making a recommendation and certainly considered both alternatives before concluding that another course was preferable to the one recommended by the insurer. Defense counsel might not be competent to advise on the risks of breaching insurance policy duties by proceeding contrary to the insurer’s wishes. But the insured will require advice on this subject, and if defense counsel is competent to provide that advice, defense counsel is the most logical person to do so.
Such advice might be considered coverage advice, for which the policyholder, rather than the insurer, should pay. But it might not be separable from advice regarding the defense, or any separable component might be too small to be worth trying to break out.
Disputes Regarding Coverage and Claim Handling
Because the insurer is not a client of independent counsel, there is no ethical obstacle to counsel also representing the policyholder on coverage and other disputes with the insurer. But there is an argument that, as a matter of insurance law, “an insurer is within its rights to insist that lawyers serving as independent counsel not advise insureds on coverage.”
This argument is not very strong. It relies on two cases, which both take the position that the insurer is entitled to approve the policyholder’s selection of defense counsel, such approval not to be unreasonably withheld. Those cases are therefore unlikely to be followed in jurisdictions holding that the policyholder is entitled to select independent counsel unilaterally.
More importantly, both cases proceed on the basis that the insurer is under a duty to provide only an impartial defense—not to sacrifice its own interests. [The policyholder’s] defense counsel must not be motivated to slant the defense in any manner relating to whether a claim is or is not in the scope of coverage. Allowing [the policyholder] to appoint as “independent counsel” a firm that bears its loyalty to [the policyholder] or any animus to [the insurer] would reintroduce, albeit in a converse manner, the very difficulties that necessitate in the first instance the appointment of independent counsel.
But this ignores the fact that defense counsel often must advocate a position on coverage-sensitive issues. Thus, when the policyholder is alleged to have harmed the plaintiff either negligently or intentionally, the policyholder surely does not receive a complete defense unless defense counsel argues that the injury was no more than negligent. A policyholder defended other than in this way could be subjected to both an unjustified finding of intentional injury (with the resulting increased damages) and, in consequence, a loss of coverage. Such a policyholder could wind up worse off than had there been no insurance The insurer’s protection is not some artificial “impartial” defense; it is the right not to be bound on coverage by the findings made in a case where control of the defense rested in the hands of a policyholder with coverage interests adverse to those of the insurer.
More generally, the right to independent counsel exists only because of a conflict arising out of the manner in which the defense can be conducted. The point of giving the insured independent counsel is to ensure that judgment calls relating to the defense are made in the way that benefits the policyholder rather than the insurer. Independent counsel must therefore be able to advise the policyholder as to how different defense choices could have an impact on coverage.
The insurer is entitled to have bills limited to services required to defend the policyholder, so it does not pay for the policyholder’s representation in coverage disputes. But there is no reason to deny the policyholder the right to the economies of using one law firm for both defense and coverage, if the lawyers in that firm are competent to render both types of service and the policyholder wishes them to do so.
Policyholders are asserting rights to independent defense counsel more frequently than in the past. Although the special duties of independent defense counsel are less complex than those of counsel selected and directed by an insurer, lawyers serving in the role of independent counsel need to be aware of those duties and careful that they comply.
Keywords: ethical obligations, independent defense counsel, fraud, honesty
William T. Barker is a partner with SNR Denton, Chicago. Charles Silver teaches law at the University of Texas School of Law.
 William T. Barker is a partner in the Chicago office of SNR Denton, with a nationwide practice representing insurers in complex litigation, including matters relating to coverage, claims handling, sales practices, risk classification and selection, agent relationships, duties of insurance defense counsel, and regulatory matters. Mr. Barker also provides expert consultant and witness services. Mr. Barker is a coauthor, with Ronald D. Kent, of New Appleman Insurance Bad Faith Litigation, Second Edition (LexisNexis). Mr. Barker is a member of the editorial board of The New Appleman on Insurance Law and a cochair of the Bad Faith Subcommittee of the Insurance Coverage Litigation Committee. Mr. Barker is also an adviser to the American Law Institute project on Principles of the Law of Liability Insurance.
Charles Silver holds the Roy W. and Eugenia C. McDonald Endowed Chair at the University of Texas School of Law, where he writes and teaches about civil procedure, professional responsibility, and health care law and policy. He is a leading academic authority on the professional responsibilities of insurance defense counsel and was one of the reporters for the DRI-IADC study of that subject. In 2009, he received the Robert B. McKay Award from ABA-TTIPS for outstanding scholarship on tort and insurance law.
 The only substantial treatments known to us are James M. Fischer, “The Professional Obligations of Cumis Counsel Retained for the Policyholder but Not Subject to Insurer Control,”43 Tort Trial & Ins. Prac. L.J. 173 (2008), and Douglas R. Richmond, “A Professional Responsibility Perspective on Independent Counsel in Insurance,” 33 Ins. Litig. Rep. 5 (2011). Our own thinking on these issues has benefited from those articles.
 The material in this article is drawn from the authors’ forthcoming book, The Professional Responsibilities of Insurance Defense Counsel (LexisNexis).
 State Farm Fire & Cas. Co. v. Superior Ct., 216 Cal. App. 3d 1222, 1226 (1989). See alsoMoiser v. S. Cal. Physicians Ins. Exch., 63 Cal. App. 4th 1022, 1042 (1998).
 Emp’rs Ins. Co. of Wausau v. Albert D. Seeno Constr. Co., 692 F. Supp. 1150, 1157 (N.D. Cal. 1988); Moiser,63 Cal. App. 4th at 1042 ; Assurance Co. of Am. v. Haven, 32 Cal. App. 4th 78, 87 (1995).
 See Hartford Cas. Ins. Co. v. A & M Assocs., Ltd., 200 F. Supp. 2d 84, 90 (D.R.I. 2002) (explaining that the insurer cannot control the litigation); Jacob v. W. Bend Mut. Ins. Co., 203 Wis. 2d 524, 536 (Wis. Ct. App. 1996) (explaining that unless the insurer is willing to accept coverage, it has no authority to affect independent counsel’s defense of the insured).
 Kent D. Syverud, “The Ethics of Insurer Litigation Management Guidelines and Legal Audits,” 21 No. 7 Ins. Litig. Rep. 180, 188 (1999).
 Opinion of Geoffrey C. Hazard, Jr., at 15, In re Rules of Prof’l Conduct & Insurer Imposed Billing Rules & Procedures,299 Mont. 321 (2000) [hereinafter Hazard Op.].
 Hazard Op. at 15; see Hazard Op. at 15–17 (expanding on the point).
 Hazard Op. at 4.
 Transcript of Oral Argument, In re Rules of Prof’l Conduct,299 Mont. 321 (2000).
 Restatement (Third) of the Law Governing Lawyers § 14 (2000).
 See Mosier v. S. Cal. Physicians Ins. Exch., 63 Cal. App. 4th 1022, 1043 (1998) (quoting First Pac. Networks, Inc. v. Atl. Mut. Ins. Co., 163 F.R.D. 574, 579 (N.D. Cal. 1995)).
 Mosier, 63 Cal. App. 4th at 1043 (quoting First Pac. Networks, Inc. v. Atl. Mut. Ins. Co., 163 F.R.D. 574, 579 (N.D. Cal. 1995)). See Bell Lavalin, Inc. v. Simcoe & Erie Gen. Ins. Co., 61 F.3d 742, 748 (9th Cir. 1995) (status reports and confidential information about defense provided by independent counsel do not create any duty of loyalty to insurer).
 Swiss Reinsurance Am. Corp. v. Roetzel & Andress, 163 Ohio App. 3d 336, ¶¶ 15–25 (2005) (concluding that conflict of interest precluded existence of attorney-client relationship between insurer and lawyer that it hired to defend insured). Of course, even without an attorney-client relationship, there may be an attorney-client privilege as to matters where the insured and insurer share a common interest. Restatement (Third) of the Law Governing Lawyers § 76 (2000).
 See, e.g., Ctr. Found. v. Chi. Ins. Co., 227 Cal. App. 3d 547 (1991) (upholding challenge to fees of Cumis counsel in case where conflict of interest divests insurer of right to control defense); see also Caiafa Prof’l Law Corp. v. State Farm Fire & Cas. Co., 15 Cal. App. 4th 800 (1993) (same).
 Sarchett v. Blue Shield, 43 Cal. 3d 1, 8–10 (1987) (medical insurance, requiring payment for all “necessary” services; collecting cases from other jurisdictions).
 Kent D. Syverud, “The Ethics of Insurer Litigation Management Guidelines and Legal Audits,” 21 No. 7 Ins. Litig. Rep. 180, 187 (1999); accord Hazard Opinion, at 3–4, In re Rules of Prof’l Conduct,299 Mont. 321 (2000).
 See 3 Jeffrey E. Thomas & Francis J. Mootz, III, New Appleman on Insurance Law Library Edition §§ 17.02, 20.04[b] (LexisNexis).
 Buss v. Superior. Ct., 16 Cal. 4th 35, 52 (1997). See also William T. Barker & Ronald D. Kent, New Appleman Insurance Bad Faith Litigation § 2.11 (2d ed. LexisNexis).
 E.g., Tibbs v. Great Am. Ins. Co., 755 F.2d 1370 (9th Cir. 1985); Cont’l Cas. Co. v. Royal Ins. Co., 219 Cal. App. 3d 111 (1990); Smith v. Am. Family Mut. Ins. Co., 294 N.W.2d 751 (N.D. 1980). See also Barker & Kent, New Appleman Insurance Bad Faith Litigation § 3.08 (LexisNexis 2d ed.).
 In re Rules of Prof’l Conduct & Insurer Imposed Billing Rules and Procedures, 299 Mont. 321, ¶¶ 43–51 (2000).
 The procedures approved in ABA Opinion 01-421 for handling particular conflicts in insurance defense representations appear to have been first recommended in Ellen S. Pryor & Charles Silver, “Defense Lawyers’ Professional Responsibilities: Part I—Excess Exposure Cases,” 78 Tex. L. Rev. 599, 644 (2000). But those procedures are logically implied by the conflicts rules applicable to all representations involving duties to multiple persons.
 Tenn. Bd. of Prof’l Responsibility, Formal Ethics Op. 2000-F-145, at 3.
 On the latter point, seeWilliam T. Barker, “Insurer Litigation Guidelines: What Now? (Part II),” 23 No. 17 Ins. Litig. Rep. 529 (2001).
 Cal. Civ. Code § 2860 (c); See also Alaska Stat. § 21.96.100 (d) (similar provision).
 Model Rules of Prof’l Conduct R. 1.5(a) (2011).
 See Restatement (Second) of Contracts § 270 (1981).
 Douglas R. Richmond, “A Professional Responsibility Perspective on Independent Counsel in Insurance,” 33 No. 1 Ins. Litig. Rep. 5, 9 (2011).
 Restatement (Second) of Contracts § 261.
 Allan Farnsworth, Contracts § 9.6, at 646 (3d ed. 1999). See, e.g., Carabetta Enters., Inc. v. United States, 482 F.3d 1360, 1366 (Fed. Cir. 2007) (finding that increased cost of performance did not make government agency’s performance impracticable); E. Capitol View Cmty. Dev. Corp. v. Robinson, 941 A.2d 1041 (D.C. 2008) (noting the rule). But seeHabitat Trust for Wildlife, Inc. v. City of Rancho Cucamonga, 175 Cal. App. 4th 1036, 1041 (2009) (excessive and unreasonable expense may render performance impracticable).
 See Mobil Oil Corp. v. Md. Cas. Co., 288 Ill. App. 3d 743, 759 (1997) (approving rate of $150/hour for independent counsel, even though insurer only paid its own, very experienced attorneys $94/hour).
 Douglas R. Richmond, “A Professional Responsibility Perspective on Independent Counsel in Insurance,” 33 No. 1 Ins. Litig. Rep. 5, 10 (2011).
 3 Jeffrey E. Thomas & Francis J. Mootz, III, New Appleman on Insurance Law, Library Edition § 17.01 (LexisNexis); Barker & Kent, New Appleman Insurance Bad Faith Litigation § 3.02- (LexisNexis 2d ed.).
 Blum v. Stenson, 465 U.S. 886, 900 (1984) (statutory fees under 42 U.S.C. § 1988).
 Douglas R. Richmond, “Independent Counsel in Insurance,” 48 San Diego L. Rev. 857, 885 (2011) (footnotes omitted).
 Model Rules of Prof’l Conduct R. 1.8(f) (2011). See also Model Rules of Prof’l Conduct R. 5.4(c) (“A lawyer shall not permit a person who recommends, employs, or pays the lawyer to render legal services for another to direct or regulate the lawyer’s professional judgment in rendering such legal services.”).
 Model Rules of Prof’l Conduct R. 1.0(e).
 Model Rules of Prof’l Conduct R. 1.6 (2011).
 Restatement (Third) of the Law Governing Lawyers § 76 (2000).
 Illinois law is exceptional on this issue, taking the view that the insurer and policyholder are persons of common interest on all aspects of a defense representation, even where there is a coverage dispute and the policyholder is represented by independent counsel. Waste Mgmt. v. Int’l Surplus Lines Ins. Co., 144 Ill. 2d 178, 194 (1991). Where this rule applies, the policyholder must be warned. As a practical matter, this results in an exception to what would otherwise be the applicable attorney-client privilege. Independent counsel subject to this rule should still not make disclosures of material damaging to the policyholder’s interests without a court order to do so.
 Model Rules of Prof’l Conduct R. 4.1 (2011).
 Model Rules of Prof’l Conduct R. 8.4 (2011).
 James M. Fischer, “The Professional Obligations of Cumis Counsel Retained for the Policyholder but Not Subject to Insurer Control,”43 Tort Trial & Ins. Prac. L.J. 173, 187–88 (2008) (footnotes omitted).
 Douglas R. Richmond, “A Professional Responsibility Perspective on Independent Counsel in Insurance,”33 No. 1 Ins. Litig. Rep. 5, 18 (2011).
 In re Edison, 724 N.W.2d 579, 584 (N.D. 2006).
 See, e.g.,Fla. Bar v. Mogil, 763 So. 2d 303, 309–11 (Fla. 2000); In re Firstenberger, 878 N.E.2d 912, 913–14 (Mass. 2007); In re Conduct of Skagen, 149 P.3d 1171, 1184 (Or. 2006).
 E.g., In re Ukwu, 926 A.2d 1106, 1113–14 (D.C. 2007); Iowa Sup. Ct. Att’y Discipline Bd. v. Gottschalk, 729 N.W.2d 812, 818 (Iowa 2007); Office of Disciplinary Counsel v. Surrick, 749 A.2d 441, 445 (Pa. 2000).
 Walker v. Sup. Ct. Comm. on Prof’l Conduct, 246 S.W.3d 418, 424 (Ark. 2007).
 Ansell v. Statewide Grievance Comm., 865 A.2d 1215, 1223 (Conn. App. Ct. 2005).
 In re Conduct of Skagen, 149 P.3d at 1184.
 Model Rules of Prof’l Conduct R. 1.2(d) (2011).
 James M. Fischer, “The Professional Obligations of Cumis Counsel Retained for the Policyholder but Not Subject to Insurer Control,”43 Tort Trial & Ins. Prac. L.J. 173, 189 (2008) (footnotes omitted).
 See, e.g., Maddox v. St. Paul Fire & Marine Ins. Co., No. 01-1264, 2002 U.S. Dist. LEXIS 26686, at *10 n.6 (W.D. Pa. May 29, 2002), appeal dismissed, 70 F. App’x 77, 2003 U.S. App. LEXIS 14715 (3d Cir. Jul. 22, 2003); Emons Indus., Inc. v. Liberty Mut. Ins. Co., 747 F. Supp. 1079. 1083–84 (S.D.N.Y. 1990). See also Douglas R. Richmond, “Independent Counsel in Insurance,” 48 San Diego L. Rev. 857, 894 (2011).
 Douglas R. Richmond, “Independent Counsel in Insurance,” 48 San Diego L. Rev. at 895.
 See N.Y. State Urban Dev. Corp. v. VSL Corp., 563 F. Supp. 187 (S.D.N.Y. 1983), aff’d in pertinent part, 738 F.2d 61, 65–66 (2d Cir. 1984); Maddox, 2002 U.S. Dist. LEXIS 26686.
 In VSL Corp., that position was based, in part, on policy language found to reserve that right. 738 F.2d at 65. That makes the case even less likely to be followed in the absence of such policy language.
 VSL Corp., 563 F. Supp. at 190 n.1, followed by Maddox, 2002 U.S. Dist. LEXIS 26686, at *8–9.
 Restatement (Second) of Judgments § 58(2) (1982).
 Emons Indus., Inc. v. Liberty Mut. Ins. Co., 747 F. Supp. 1079 (S.D.N.Y. 1990).