chevron-down Created with Sketch Beta.


Conflicts and the Tripartite Relationship

Christina Culver, S. Alice Weeks, and Lisa A. Szymanski


  • Guidance on how to handle the conflicts when an insurer hires staff counsel or outside counsel to defend the insured.
  • Avoid the ethical dilemmas that may arise by understanding the roles and duties of all the players.
  • The insurer’s right to control the defense is an essential part of the business of insurance.
Conflicts and the Tripartite Relationship
Sunyixun via Getty Images

The tripartite relationship is the relationship among the defense lawyer, the insurer, and the policyholder that is created when the defense lawyer is hired by an insurer to defend a suit against the policyholder. In some jurisdictions, like Minnesota and Alabama, the policyholder and the insurer have been considered dual clients. Other jurisdictions, like Arizona and California, consider the policyholder the “primary client,” implying that the lawyer at least has a secondary obligation to the insurer. In Texas, Montana, Michigan, and Connecticut, the law is clear that the policyholder is the only client. This article provides guidance on how to handle the conflicts that will inevitably arise when an insurer hires staff counsel or outside counsel to defend the insured, with a focus on Texas and Florida law. This article is not exhaustive, and an analysis of conflict issues in the tripartite relationship should be considered on a jurisdictional basis.

The Insurer’s Duties in the Tripartite Relationship

The players in the tripartite relationship can become somewhat of a dysfunctional family when the insurer agrees to defend the policyholder but does so under a reservation of rights. This becomes a problem when the potential exists for the defense lawyer to develop a case toward a result favorable on a coverage issue to either the insurer or the policyholder. For example, if an underlying complaint alleges mutually exclusive theories of recovery, such as negligence (covered) and intentional torts (not covered), both the carrier and the defense lawyer are put into difficult positions with potential ethical pitfalls.

There are at least four main conflicts that may arise when there is a potential coverage dispute: (1) whether the insurer or the policyholder controls the defense, (2) whether the insurer or policyholder controls the flow of information, (3) the reasonableness of attorney fees and expenses and attempts by an insurer to manage litigation costs, and (4) whether the insurer or policyholder controls settlement. One of the best ways to deal with and avoid ethical dilemmas that may arise out of the tripartite relationship is to understand the roles and duties of all the players before engaging in the relationship.

The Right to Control the Defense

Certain policy language grants the insurer the right and duty to defend. Several provisions in a liability insurance policy state that the insurer, and not the policyholder, has the right to control the defense—specifically the insuring agreement, the supplementary payments clause, the cooperation conditions, and the voluntary payments and obligations condition. Typical liability insurance contracts attempt to vest in the insurer broad control of the defense. Certain manuscript forms provide that the insurer has the right to select defense counsel. The availability of such language in the marketplace can provide policyholders the grounds to argue, in the event of a conflict of interest, that if such language is absent, it means that the right and duty to defend does not automatically include the unilateral right to control the appointment of defense counsel.

Absent coverage issues, the insurer’s right to control the defense is an essential part of the business of insurance because the insurer needs to be able to manage its risks under the policy and predict its potential exposure. Moreover, when there are no coverage issues, the insurer, who will ultimately have to pay any judgment within the policy, has an economic incentive identical to that of the insured. The disadvantages to this arrangement surface, however, when the insurer tries to restrict the lawyer’s defense of the insured based on cost control or other considerations, such as when the insurer and insured are not in agreement regarding a settlement. Tensions may arise when the insurer is providing a defense under a reservation of rights to disclaim its coverage obligation. In that instance, the insurer’s motivation to establish that the claim does not fall within the policy’s coverage may be perceived as overriding or interfering with its incentive to minimize the policyholder’s liability.

The Right to Select Defense Counsel

Texas. An insurer’s “right to defend” a lawsuit “encompasses the authority to select the attorney who will defend that claim and to make other decisions that would normally be vested in the insured as the named party in the case.” Not every reservation of rights creates a conflict of interest allowing an insured to select independent counsel. Rather, the existence of a conflict depends on the nature of the coverage issues as they relate to the underlying case. If the insurance policy gives the insurer the right to control the defense of a case, the insured cannot choose independent counsel and require the insurer to reimburse the expenses unless “the facts to be adjudicated in the liability lawsuit are the same facts upon which coverage depends.” If the issue on which coverage turns is independent of the issues in the underlying case, counsel selected by the insured is not required. A true conflict of interest does not arise unless the outcome of the coverage issue can be controlled by counsel retained by the insurer for the defense of the underlying claim. This rule allows insurers to control costs while permitting insureds to protect themselves from an insurer-hired attorney who may be tempted to develop facts or a legal strategy that could ultimately support the insurer’s position that the underlying lawsuit fits within a policy exclusion.

Florida. Conversely, Florida allows the policyholder to retain independent counsel under certain circumstances. However, unlike certain other jurisdictions that allow independent counsel where the insurer has reserved rights (e.g., California), Florida puts a great deal more onus on the policyholder to establish why the insurer’s counsel of choice is unacceptable. For example, a federal district court concluded that the policyholder must show actual prejudice, harm, or some equally compelling reason why the insurer’s appointed counsel was not agreeable. Moreover, the policyholder must affirmatively reject the carrier’s defense offered under a reservation of rights before the policyholder can retain his or her own lawyer. The insured’s right to independent counsel when the insurer has asserted a coverage defense is codified in Section 627.426 of the Florida Statutes.

Withdrawing a Defense

Texas. Pursuant to Texas law, when a defense is undertaken through a valid reservation of rights, the insurer may withdraw its defense when it becomes clear there is no coverage under the policy. Proper notice must be given by the insurer when it discovers a valid policy defense and intends to withdraw. An insurer withdrawing a defense should provide its insured with a detailed explanation of the insurer’s coverage position. Moreover, the insurer should allow the insured sufficient time to respond and provide the insurer with evidence the insured may have that it would like considered in the carrier’s coverage analysis.

Florida. Under Florida law, an insurer may withdraw a defense under a reservation of rights only when there are no longer any covered claims.

Control of Information

Once in litigation, additional difficulties can arise regarding the responsibilities of the insurer, the policyholder, and defense counsel with respect to information generated and accumulated as the litigation unfolds. Difficult questions often arise concerning the duties of the policyholder and defense counsel to share with the insurer information discovered in the underlying action.

In Texas, the defense counsel has a duty to disclose to the insurer all information concerning the action relevant to the underlying lawsuit and to timely inform and consult with the insurer on all matters relating to the action. This duty does not, however, require disclosure of privileged or confidential information pertaining to coverage to the insurer. For example, Texas Civil Procedure Rule 192.4 specifically states that insurers are protected by the work-product doctrine. Status reports and other information prepared for the carrier by defense counsel may be privileged.

Other jurisdictions, however, hold that where an insurer has reserved its rights, the insurer does not share a common interest with the insured that entitles it to privileged defense material. For example, under Ohio law, if an insurance company is not funding a defense or where it has reserved its rights to deny coverage, no common interest exists. In Buckeye Corrugated, Inc. v. Cincinnati Insurance Co., the Court of Appeals of Ohio ruled that an insurance company that had reserved its rights to deny coverage could not use the common interest privilege to force the policyholder to surrender privileged materials from the underlying litigation. In so holding, the court opined that the common interest exception should be narrowly construed and applies only where the “‘disclosures are made in the course of formulating a common legal strategy.’” Because the policyholder had retained its own counsel in light of the insurer’s reservation of rights, no common interest existed. Indeed, courts across jurisdictions have rejected forcing policyholders to choose between losing coverage or compromising confidentiality.

The Insurer’s Duty to Settle

Liability insurance contracts generally provide that the insurer may assume control over the settlement of any litigation against its insured. When a settlement offer is made that may favor one party’s interest over the other party’s interest, difficult questions arise relating to the varying, and often conflicting, interests of the insurer, on the one hand, and those of the policyholder and defense counsel, on the other. Under the terms of most liability policies, when a settlement offer is presented, the insurer has the right to receive all relevant information necessary to evaluate the settlement offer in the context of the litigation. Some jurisdictions impose a duty on insurers to consider the policyholder’s interest at least equally with its own when considering a potential settlement. Moreover, the insurer may be held liable for damages in excess of policy limits if it fails to accept a settlement within policy limits without making a diligent assessment of the issue.

Rule 1.2 of the Model Rules of Professional Conduct states that “[a] lawyer shall abide by a client’s decision whether to accept an offer of settlement of a matter.” In most liability claims, the insurer has the right to settle a matter without the consent of the insured. The insured usually does not have a say in the matter except in the limited circumstances involving professional liability insurance. Even though the insurer does not require the insured’s consent before settlement, the defense attorney’s role is problematic especially in cases where (a) the relevant jurisdiction considers both the insured and the insurer to be clients of the attorney or (b) the insurer and the insured are not in agreement on whether or not to settle the matter.

Although liability insurance contracts generally provide that the insurer may assume control over the settlement of any litigation against its insured, certain situations may arise that create questions as to whether the insurer or the policyholder should assume control over the settlement negotiations or decisions when a true coverage conflict exists. For example, if a policyholder has assumed control of its own defense because of a true coverage conflict with the insurer, it can be argued that the policyholder should also be vested with the authority over settlement decisions as well. On the other hand, it has been argued that, because the duty to defend is distinct from the duty to indemnify, the policyholder should not be afforded the same control over settlement as it has over the defense.

Texas. Under the Stowers doctrine, the insurer must act with “that degree of care and diligence which an ordinarily prudent person would exercise in the management of his own business” in responding to settlement demands within policy limits. According to Stowers, the policyholder is exposed to the additional risk of an excess judgment when the insurer was presented with a reasonable opportunity to settle within policy limits but failed to do so. There are several other criteria relevant to the Stowers doctrine and whether a policy limit demand meets those criteria.

Florida. An insurer in Florida has an affirmative duty to attempt a settlement of a third-party claim within the policy limits. Failure to do so will expose the insurer to bad-faith liability. Moreover, the lack of a formal offer to settle does not preclude a finding of bad faith, although an offer of settlement was once considered a necessary element of a cause of action for bad-faith failure to settle. In General Accident Fire & Life Assurance Corp. v. American Casualty Co. of Reading, Pennsylvania, a Florida appellate court held that an offer to settle is not a prerequisite to the imposition of liability for an insurer’s bad-faith refusal to settle; instead, it is merely one factor to be considered. Bad faith may be inferred from a delay in settlement negotiations if the delay is willful and without reasonable cause. Where liability is clear and injuries so serious that a judgment in excess of the policy limits is likely, an insurer has an affirmative duty to initiate settlement negotiations.

The Insurer’s Right’s to Reimbursement

Texas. On February 1, 2008, the Texas Supreme Court issued its second opinion in Excess Underwriters at Lloyd’s, London v. Frank’s Casing Crew & Rental Tools, which recognizes a policyholder owed no implied obligation to reimburse the insurer for a settlement. The court reaffirmed its conclusion in Texas Association of Counties County Government Risk Management Pool v. Matagorda County, that “when coverage is disputed and the insurer is presented with a reasonable settlement demand within policy limits, the insurer may fund the settlement and seek reimbursement only if it obtains the insured’s clear and unequivocal consent to the settlement and the insurer’s right to seek reimbursement.” This is because, according to the court, “[o]therwise, the insured is forced to choose between rejecting a settlement within policy limits or accepting a possible financial obligation to pay an amount that may be beyond its means, at a time when the insured is most vulnerable.” According to the court, that fundamental concern is unaffected by the fact that the excess underwriters had no duty to defend in this case.

Florida. Generally, an insurer is not entitled to attorney fees in such cases, but an exception exists under the facts and circumstances of Colony Insurance Company v. G & E Tires and Service, Inc. Under Colony Insurance, an insurer is entitled to reimbursement for all costs and fees incurred in defending the underlying suit if the defense was initially provided under an expressed reservation of rights providing for attorney fees and costs if the insurer prevailed in a subsequent coverage action—and if the insured accepts such defense. To potentially avoid this situation, when accepting a defense, an insured should expressly reject the insurer’s right to recoup defense costs.


The tripartite relationship can have its difficulties. In many cases, the goals of the insured and insurer are perfectly aligned. In cases in which the insurer defends under a reservation of rights and the jurisdiction recognizes only the policyholder as the attorney’s client, the insured can take comfort in the fact that defense lawyers are, by and large, trustworthy and ethical and follow the mandates of the law and the Professional Rules of Conduct to zealously represent the insured’s interest, and only the insured’s interest.