[textbook]Traversing the Ethical Minefield Problems, Law, and Professional Responsibility by Susan R. Martyn (z-lib.org)(1) (1)

complete with expensive expert witnesses, perhaps because his or her professional
reputation might be at stake. Some professional insurance policies solve this conflict by
specifically assigning the right to decide whether and when to settle to the insured or the
insurer. 19 In situations where the insurer has the contractual right to settle, the insured who
disagrees has another option: to release the insurer of its obligations under the policy and
defend the action at the insured’s own expense. The lawyer’s failure to advise the insured of
this option creates liability. 20
Communication Model Rule 1.4 applies to a number of recurring circumstances in
insurance defense practice. Initially, Rules 1.7 and 1.8(f) require the lawyer to inform the
insured that the insurer is a third-party payer or joint client, and explain that certain
conflicts might develop during the course of the representation. A few jurisdictions have
created required disclosure statements regarding an insured client’s rights and have
mandated that each insured receive such a statement at the beginning of each
representation. Typical required disclosures run the gamut of the six C’s, including the
lawyer’s obligation to identify clients; to provide competent service; to keep clients
informed, including the insured’s right to control the representation when the interests of
the insured and insurer conflict; to maintain confidentiality; and to identify and respond to
conflicts of interest. 21
Confidentiality Confidentiality issues also occur when a lawyer discovers facts suggesting
that coverage is at issue, such as facts that tend to establish that the insured’s conduct was
intentional rather than negligent. Most courts require separate counsel for the insured when
this occurs.
Lawyers who disclose such information without obtaining the insured’s express
informed consent will be subject to malpractice or breach of fiduciary liability if the insured
is injured by disclosure to the insurer. 22 Further, the insurer will be estopped to deny the
policy coverage if this information is used to promote a policy defense before the
underlying case is properly defended. 23 An insurer also might be liable for bad faith if it
refuses to settle the case due to the leaked policy defense. 24
Conflict of Interest Resolution Using an insured’s confidences to create a policy defense
constitutes one of at least four situations that courts have characterized as actual conflicts of
interest that require defense lawyers to represent one client only, the insured. Paradigm
identifies several other actual conflicts that require defense counsel to shift allegiance
exclusively to the insured, and if necessary, notify the insurer to retain its own counsel in
the matter. In one-client/third-party payer jurisdictions, these same conflicts require special
attention to prevent interference with the lawyer’s independent professional judgment.
The second actual conflict occurs when multiple claims are alleged against an insured,
some of which may involve conduct that the insurer asserts is not covered by the insurance
policy. Here, courts hold that the duty to defend extends beyond the duty to indemnify,
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