102 N.J.L.J. 363
October 19, 1978
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.