110 N.J.L.J. 349
September 23, 1982
Conflict of Interest
Representation of Insurance Carrier and
Insured where Question of Coverage is in Issue
This inquiry asks us to "refine" Opinions 165 and 407, both of
which deal with the duty of an attorney retained by an insurance
carrier where there is a question of coverage raised by the carrier
at the inception of the suit. In a nutshell, the inquirer asks
whether it is proper for the same attorney engaged by the carrier
to file an Answer on behalf of the insured in order to maintain the
status quo in the liability case and contemporaneously to commence
Declaratory Judgment proceedings as counsel for the insurance
company against the insured and to secure an Order staying all
proceedings in the liability case until the Declaratory Judgment
case has been concluded.
In order to resolve the question, it is necessary for us to refer to the substantive law of New Jersey, but we remind the Bar that we do so only for the purpose of deciding questions of ethics. In the typical case the relationship of the parties is beyond dispute; the rights and duties of the insured and the carrier arise out of contract, and liability policies commonly obligate the carrier to provide the insured with a defense - a duty distinct from the obligation to indemnify. Danek v. Hommer 28 N.J. Super 68
[The insurer] acts at its peril and if such defense is
found to be lacking then for purposes of liability
[coverage, not defense], it is bound by the judgment...
against its insured.
Id. at 667. The Burd court recognized this distinction by noting that the difficulty presented by a mixed claim (partial coverage) would evaporate if the insured successfully defended himself entirely on all aspects of the claim. In that instance, the coverage or indemnification issue would be mooted and the insurer, without a hearing, would be required to reimburse the insured for the costs of defense.
[I]f an action charging intentional injury is wholly defeated, the insured can well argue the claim thus found to be "groundless, false or fraudulent" was for bodily injury or property damage within the covenant to pay and did not cease to be such a claim merely because the claimant added the further "groundless, false or fraudulent" allegation of an intent to injure. In that situation, the carrier may fairly be required to reimburse the insured for the cost of the successful defense even though the carrier would not have had to pay the judgment if the case had gone against the insured on a finding of intentional injury.
The New Jersey Supreme Court in the case of Dunne v. Fireman's
Fund Am. Ins. Co., 69 N.J. 244 (1976) somewhat clarified the prior
holding in Burd by making it clear that there was no need for a
coverage hearing when the tort claim is defended in accordance with
the procedure prescribed therein by the Dunne court. The Dunne
court was faced with the situation of a partly covered claim and a
potential conflict for the insurer in undertaking the defense.
Unlike Burd, supra, the tort action had not been adjudicated so
that an opportunity still exists to establish a format whereby the
trial of the tort action would negate the need for a coverage
hearing and a relitigation of the issues of the tort case. The
Dunne procedure provided for the selection of counsel acceptable to
both the insured and insurer or, if they could not agree, counsel
selected by the assignment judge in the county in which the action
Under the terms of the policy [the insurer] is under a duty to defend the suit against its insured since the allegations in the complaint include some subject matter negligence, which clearly falls within the coverage. We envision possible conflicts in this defense because coverage may not exist if liability is fixed on some other predicate, such as violation of right of privacy. Therefore, in the first instance the insured should select their own counsel, subject to the carrier's approval. In the event such approval is not forthcoming the selection should be made by the assignment judge. Reasonable counsel fees and costs of defense are to be paid by [the insurer]. At the trial interrogatories should be submitted to the jury to ascertain the precise factual basis for any conclusion of liability so that the coverage issue may be resolved. If a jury trial is waived, then the trial court will make those findings.
Id. at 252. It is clear that the insurer was to be bound by the findings in the tort case insofar as the coverage issue was concerned and , in any event, the carrier was to be responsible for defense costs incurred by its insured.
We are aware of the case of Sussex Mut. Ins. Co. v. Hala Cleaners, Inc., 75 N.J. 117 (1977) and we believe that our opinion herein is not inconsistent with the Supreme Court opinion in that case.
All things considered, we are of the opinion that the attorney hired by the carrier to file a protective pleading in the liability
case ought not to appear for the carrier in the Declaratory Judgement case. Ideally, the insured would be represented by his personal attorney in both matters and the attorney hired by the carrier ought to recommend this course to the insured immediately, since it is at once apparent that the insured must have independent counsel with respect to the coverage dispute. In so holding, we do not wish to be understood as modifying our holdings in Opinions 165 or 407 nor do we wish to be understood as in any way transgressing upon the contractual rights of an insurance carrier and its insured. We simply conclude that where there is a question of coverage at inception of the liability case, the attorney hired by the carrier to file defensive pleadings on behalf of the insured ought to promptly advise the insured to retain his own personal attorney for all purposes, but in no case ought to appear for the carrier against the insured in a Declaratory Judgment case brought to resolve the question of coverage.