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                                         92 N.J.L.J. 831
                                        December 18, 1969


Appointed by the New Jersey Supreme Court


Conflict of Interest
Insurance Policy
Disputed Facts re Coverage

    The inquirer submits the following hypothetical set of facts which, in one form or another, is recurrent in the field of defending insurance cases:
            The Complaint (or Petition in Workmen's Compensation cases) alleges facts which, if true, invoke the duty of the insurance company to defend the insured. The attorney retained by the carrier to defend the matter ascertains facts which suggest that the allegations of the Complaint (or Petition) are not true and that the true facts would expose the insured to liability not covered by the policy.

            A sample situation; date of accident alleged to be June 1, 1968. The policy was issued on May 30, 1968, and the actual date of the accident was May 25, 1968.

    The attorney asks whether he may ethically continue in the case and endeavor to prove the true state of facts if he first notifies the insured of his intention to do so (to protect the insurance carrier), by this means inviting the insured to secure personal counsel.
    The New Jersey Supreme Court in Williams v. Bituminous
Casualty Corporation, 51 N.J. 146 (1968), said:
            Thus the coverage question does not depend upon an issue material to the litigation between the employee and the employer. The resolution of the employee's claim against the employer would not have settled the coverage problem. More than that, if the Division of Workmen's Compensation somehow accepted the issue in the trial of the employee's claim against the employer, the carrier could not have asserted its position in the employer's name, for a carrier may not so defend an insured as to leave him liable and uncovered. An attorney, engaged by the carrier to defend in the insured's name, could not ethically seek such a result. See Szabo v. Standard Commercial Body Corp., 221 App. Div. 722, 225 N.Y.S. 332 (3d Dept. 1927)."

    In A.B.A. Comm. on Professional Ethics and Grievances, Opinion

282 (1950), it was held that:

            The essential point of ethics involved is that the lawyer so employed shall represent the insured as his client with undivided fidelity as required by Canon 6.

    See also American Employers Ins. Co. v. Goble Aircraft

Specialties, 205 Misc. 1066, 1075, 131 N.Y.S. 2d 393, 401 (1954),

where the Court said:

            When counsel, although paid by the casualty company, undertakes to represent the policyholder and files his notice of appearance, he owes to his client, the assured, an undeviating and single allegiance. His fealty embraces the requirement to produce in court all witnesses, fact and expert, who are available and necessary for the proper protection of the rights of his client.

            The Canons of Professional Ethics make it pellucid that there are not two standards, one applying to counsel privately retained by a client, and the other to counsel paid by an insurance carrier.

    Adherence to this standard forbids the attorney taking a position adverse to the interest of the insured. However, his duty to the carrier requires that he disclose the situation to it. Obviously, the true state of facts should be established by appropriate judicial proceeding such as the institution of a declaratory judgment suit by the carrier against its insured as well as the plaintiff or petitioner. The attorney may not appear for any of the parties in the declaratory judgment case. See A.B.A. Comm. on Professional Ethics Informal Opinions 728 (l963), 822 (1965), 873 (1965), 948 (1966).
    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.

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