102 N.J.L.J. 363
October 19, 1978
OPINION 407
Conflict of Interest
Insurance Carrier's Attorney Representing
Insured he Opposed in Declaratory Action
In a number of prior opinions this Committee has considered
the delicate relationship between attorneys retained by insurance
carriers by virtue of liability insurance policies and the insured.
It is not uncommon to encounter situations where, by reason of the
scope or amount of coverage afforded by the policy, the interests
of the insured are not perfectly coincident with those of the
insurance carrier.
In this matter the inquirer was retained by the insurance
carrier to defend the insured in a negligence action. One of the
counts of the complaint sought punitive damages. The carrier
asserted that the policy did not afford coverage for punitive
damages and tendered a reservation of rights agreement to the
insured in accordance with the principles of Merchants Inc. Corp.
v. Eggleston, 37 N.J. 114, 179 A 2d 505 (1962). The insured
declined to enter into such an agreement and the inquirer command
a do judgment action against the insured as attorney of record for
the carrier. We are advised that the original action did not
proceed, presumably because it was stayed until disposition of
declaratory judgment action. This procedure has been sanctioned by
the New Jersey Supreme Court. Burd v. Sussex Mut. Ins. Co., 56
N.J. 383. 391, 267 A.2d 7, 11 (l970).
The declaratory judgment action, in which the insured was
represented by person counsel, ultimately became moot because the
attorney representing the plaintiff in the negligence case
consented to a dismissal of the count of the complaint under which
punitive damages were sought. The inquirer asks whether he may now
undertake and carry to a conclusion the defense of the negligence
action, assuming that the insured has consented to such
representation after having been fully informed.
On these facts, since the issue projected in the declaratory
judgment action plainly did not require the investigation or
resolution of any facts relevant to the suit for damages, we see no
reason why the inquirer cannot defend the negligence case. In
Opinion 165, 92 N.J.L.J. 831 (1969), we held that, where the
coverage question depends upon an issue material to the litigation
to be defended, the attorney retained by the carrier may not appear
for any of the parties in the declaratory judgment case. Speaking
of the declaratory judgment case, we then said:
In such a collateral proceeding, all
interested parties would have the benefit of
independent counsel and the resolution of the
disputed facts would ordinarily be binding.
Under no circumstances may the original
attorney proceed with the defense of the
insured in the main case until the disputed
facts have been finally determined. If the
original action is stayed pending
determination of the issue in dispute, the
original attorney may, with the consent of
both the insured and the carrier continue as
counsel of record for the insured.