Risky business: Attorney liability in insurance defense litigation--a review of the Arizona Supreme Court's decision in Paradigm Insurance Co. v. Langerman Law Offices

Brigham Young University Law Review, 2002 by Andersen, Nathan

I. INTRODUCTION

The unique nature of the tripartite relationship, created when an insurer hires a lawyer to represent an insured, has created confusion on the part of many insurance defense attorneys.1 In such circumstances, it can be unclear how to ethically proceed with insurance defense litigation in order to avoid the pitfalls of malpractice liability. Although intended to simplify the ethical dilemmas for lawyers, a tripartite relationship often creates a situation in which the lawyer retained by the insurer to represent the insured does not know who her client is-the insurer, the insured, or both.2 Often, the divergent interests of the insurer and the insured magnify the attorney's dilemma of loyalty.

Unfortunately, inconsistencies among some jurisdictions have only perpetuated the problems in this area of the law. One prominent author has noted, "[t]he rules [surrounding insurance defense litigation] fail to provide clear and defensible answers to the most basic questions, such as whether an attorney-client relationship exists between the insurance company and the lawyer retained to handle the lawsuit against the insured.4 Consequently, "the obvious danger is that insurance defense lawyers will act improperly, even when they attempt to adhere to the law."5

Recently, some courts have unsuccessfully attempted to clarify both the procedural standards governing insurance defense litigation and the ethical boundaries of the attorney-client relationship.6 Paradigm Insurance Co. v. Langerman Law Offices, decided by the Arizona Supreme Court in June of 2001, is such a case.7 Although the Langerman court may have achieved an equitable result, it failed to advance the proper analysis in reaching its result. If the inconsistent procedural standards are not clarified, uncertainty and ambiguity regarding the duties of insurance defense attorneys will continue to result in inconsistent representation and possible injury to the insurer, the insured, and especially the attorney. Insurance defense lawyers will continue to flounder as to whom they actually represent and where their duties of loyalty lie.

the basic procedural standards that should govern this area of the law, this Note will discuss the origin of the tripartite relationship itself, the attorney-client privilege, the potential conflicts of interest unique to the tripartite relationship, and the definition of a client. Part IV reviews the scholarly thought with regard to attorney liability in the insurance defense context, asserting that the retainer agreement should define the scope of liability for the attorney.8 Part V will apply the retainer agreement theory and will discuss the application of this theory to Langerman. This Note ultimately concludes that the retainer agreement should be the operative document all parties in the tripartite relationship look to for clarification regarding an insurance defense attorney's duties to the client. Such a standard is critical in minimizing attorney malpractice liability for lawyers engaged in the risky business of the tripartite relationship.

II. BACKGROUND AND FACTS SURROUNDING LANGERMAN

representation." "During the course of representation, Langerman advised Paradigm that it believed there was no viable theory of liability against Samaritan. Langerman, however, failed to investigate whether Vanderwerf was covered by Samaritan's liability insurance and, thus, was unable to advise Paradigm whether the defense could be tendered to Samaritan.",4

When Paradigm later learned that Langerman had a conflict of interest with Paradigm, Paradigm terminated Langerman as Vanderwerf's counsel and hired a new attorney.15 The new counsel discovered that, in addition to being covered by Paradigm, Vanderwerf was also covered by Samaritan Insurance Funding ("SIF") and that SIF was Vanderwerf's primary coverage.16 However, when Vanderwerf's new counsel attempted to tender the claim to SIF, SIF rejected the claim "on the grounds that the tender was untimely," leaving Paradigm with the obligation to pay Dr. Vanderwerf's entire liability.17 Although Langerman's negligence did not injure Dr. Vanderwerf (the insured) it allegedly increased Paradigm's (the insurer) costs tremendously by forcing Paradigm to take sole responsibility of the settlement without the opportunity of turning to SIF for contribution or indemnification.18 Thus, when Langerman requested payment for his services, Paradigm refused to pay, citing Langerman's negligence as justification. Langerman then sued for collection of his fees, and Paradigm filed a counterclaim for damages.19

court accordingly found that "Langerman owed no duty of care to Paradigm and could not be held liable for negligence that injured only Paradigm but not Langerman's sole client, Vanderwerf."21 The court of appeals reversed in part on the theory of an implied, rather than express, attorney-client agreement, holding that where no "real or apparent conflict between the insured and the insurer" existed, insurance defense counsel actually represented both, thus creating a duty of care on the part of the attorney not only to the insured but also to the insurer.22 Because the trial court had granted summary judgment in Langerman's favor, the Arizona Supreme Court assumed that Langerman was actually negligent in causing financial harm to Paradigm.23