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A Dangerous New Twist in the Tripartite Relationship

By Karen Painter Randall – December 11, 2012


The relationship among an insurer, its insured, and defense counsel retained by the insurer to defend the insured against third-party claims is commonly referred to as the “tripartite” relationship. This relationship can present actual or potential conflicts between the insurer and the insured, placing defense counsel in a difficult position. On one hand, the attorney’s relationship with the insurer is contractual, thus, defense counsel has an obligation to report fully and candidly about the progress of the case. On the other hand, the insured is the client for all intents and purposes. As a result, a situation fraught with potential problems occurs when defense counsel acquires information from the client that may affect the client’s insurance coverage. As discussed in more detail below, while an attorney may have previously felt comfortable, by virtue of the litigation privilege, divulging relevant but potentially detrimental information to the insurance carrier, a recent New Jersey Appellate Division decision has held that the litigation privilege may not serve as a bar in certain circumstances of a legal-malpractice case, and therefore may not protect an attorney from revealing potentially damaging information relevant to the client.


History of Litigation Privilege
Generally, the litigation privilege protects an attorney from civil liability arising from words he or she utters in the course of judicial proceedings. The privilege has deep roots in the common law, dating back to medieval England. Further, the privilege has long been embedded in New Jersey’s jurisprudence and precludes litigants from filing subsequent actions based upon the conduct of an attorney, or party to a litigation. The privilege has been described by courts as being indispensable to the due administration of justice, as its purpose is to allow both lawyers and litigants the ability to speak and write freely without restraint for fear of an ensuing defamation action. Moreover, courts have called the litigation privilege the backbone to an effective and smoothly operating judicial system.


In 2006, the New Jersey Supreme Court noted in that “the public policy rationale for the litigation privilege has not changed in half a millennium” and carries a broad application in furtherance of an essential immunity. Loigman v. Township Committee of Tp. of Middletown, 185 N.J. 566, 579–80 (2006). Over time, the litigation privilege has been extended to not only protect attorneys from defamation actions, but also from a host of other tort-related claims. See Rickenbach v. Wells Fargo Bank, N.A., 635 F. Supp. 2d 389 (D.N.J. 2009) (noting that litigation privilege has broad application to nearly all tort claims except claims for malicious prosecution). With this broad application in hand, New Jersey Courts have firmly established that the privilege applies to “any communication: (1) made in judicial or quasi-judicial proceedings; (2) by litigants or other participants authorized by law; (3) to achieve the objects of the litigation; and (4) that have some connection or logical relation to the action.” Hawkins v. Harris, 141 N.J. 207 (1995). 


The Buchanan Decision
Despite the litigation privilege’s broad application, a recent unpublished decision has put a dent in the privilege’s protection. In Buchanan v. Leonard, 2012 N.J. Super. LEXIS 162 (App. Div. Oct. 9, 2012), the New Jersey Appellate Division held that the litigation privilege did not shield an attorney from a legal-malpractice suit brought by his or her former client based upon the attorney’s alleged improper communications with the client’s liability carrier. In Buchanan, attorney William Buchanan agreed to file a fraudulent Chapter 13 bankruptcy petition on behalf of his clients, the Kerrs, with the understanding that if the trustee, the court, or any other party determined that the petition was false in any way, the Kerrs would be responsible for the liability for same.


Thereafter, the Kerrs filed a lawsuit against Buchanan, claiming that he was negligent in handling their bankruptcy filings, causing them to lose their home. Upon being sued, Buchanan’s insurance carrier appointed defendant Jeffrey Leonard and his law firm to represent and defend Buchanan. During the course of Buchanan’s representation, the insurance carrier never asserted that he was not entitled to coverage under the policy, nor did it provide a defense subject to a reservation of rights.


As the trial date was approaching, Leonard completed and submitted to Buchanan’s insurance carrier a form seeking authorization to settle the Kerr litigation. In the form, Leonard noted that Buchanan had written a letter to the Kerrs, confirming a conversation they had about the bankruptcy case. Specifically, Leonard wrote that the letter was


an admission of bankruptcy fraud by [Buchanan] and [the Kerrs]. If the statute of limitations on the crime had not run, [Buchanan] would be subject to up to [five] years in prison and/or a fine of up to $5,000. If the letter is disclosed at trial, the insured is still subject to discipline, which could include a period of suspension of his license.


In response, one week before trial in the Kerr litigation, the insurance carrier advised Buchanan that it was withdrawing coverage and would not defend him in the lawsuit. The withdrawal of coverage was prompted by his letter to the Kerrs where he “agreed and in fact did knowingly file a Chapter 13 petition on behalf of the Kerrs containing material misrepresentations of fact.” As a result, the insurance carrier declined coverage pursuant to a provision of the policy, which excluded coverage for any claim arising out of dishonest, fraudulent, criminal, or malicious acts or omissions.


Following a bench trial in a declaratory judgment action filed by the insurance carrier, the Law Division held that Buchanan was entitled to coverage. Thereafter, Buchanan filed a lawsuit against Leonard and his law firm, contending they were negligent and careless in their representation of him in the Kerr litigation because they failed to protect his interest, deliberately expressed an opinion contrary to his best interest, and violated “any semblance of their duty to maintain” his confidences.


In November 2011, Buchanan filed a motion for partial summary judgment on his legal-malpractice claim. The defendants opposed the motion and filed a cross-motion for summary judgment on all claims in the complaint. The trial court granted the defendants’ motion, holding that all of Buchanan’s claims failed as a matter of law because they were based on Leonard’s statements in the settlement memo, which were protected by the litigation privilege.


However, on appeal, the Appellate Division reversed the trial court’s decision, holding that the litigation privilege did not bar Buchanan’s legal-malpractice claim. The court explained:


We recognize that attorneys must be free to vigorously represent their clients without fear of being ensnared in costly litigation. However, the litigation privilege should not be extended to protect an attorney from civil liability where his or her client claims that the attorney’s representation did not meet the applicable standard for legal practice.


Buchanan, supra, 2012 N.J. Super. LEXIS at *15. Thus, the court held that the privilege did not protect attorneys from discipline for violating the Rules of Professional Conduct. Moreover, the litigation privilege did not protect an attorney from a claim by his or her client based upon statements the attorney made in the course of a judicial proceeding where, as in this case, it was alleged that the attorney breached his or her duty to the client by failing to adhere to accepted standards of legal practice.


Ramifications of the Buchanan Decision
Despite the tripartite relationship, the New Jersey Supreme Court has characterized as “paramount” the loyalty owed to the insured by the attorney. Lieberman v. Employers Ins. of Wausau, 84 N.J. 325, 338 (1980). A lawyer is duty-bound to represent the insured with undivided fidelity, and his or her ethical obligation is in no sense diminished by reason of his or her relationship with the insurer. In light of this view, in conjunction with the Buchanan decision, an attorney must be sure to exercise care in representing the client, as well as be conscious of that duty when communicating with the insurance carrier. While the insurance carrier is paying for the defense along with any judgment or settlement paid, and therefore must be kept abreast of significant developments in the case, the Buchanan decision makes clear that an attorney’s first duty is to his or her client.


Practice Tip
Therefore, in the event that defense counsel becomes aware that his or her client has engaged in conduct that is illegal and/or unethical, the defense attorney must exercise care in reporting these circumstances to the insurer. For example, as a practical matter, defense attorneys should provide the client with drafts of any significant development reports that may contain sensitive information for approval prior to sending it to the insurance carrier. Additionally, to the extent the defense is being provided pursuant to a reservation of rights, the client should be advised to retain personal counsel to protect his or her interests. Ultimately, it is unlikely that the Buchanan decision marks the beginning of the end of the tripartite relationship. However, one thing is clear: An attorney who chooses to ignore his first and foremost duty to the insured does so at his own peril.


Keywords: professional liability litigation, litigation privilege, tripartite relationship, duty to insured, Buchanan v. Leonard


Karen Painter Randall is a partner of Connell Foley LLP in Roseland, New Jersey.


 
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