Tripartite Relationship Put to the Test

The so-called “tripartite” relationship exists when an insurer retains defense counsel to represent the interests of the insured. Against this backdrop, it is relatively uncommon for an insurer to maintain a successful claim against defense counsel. In the majority of states, direct malpractice claims by an insurer are disfavored. The theory behind these decisions stems from the sanctity of the attorney-client relationship and a hesitation to interfere with defense counsel’s duty to the insured in the tripartite scenario. Accordingly, few claims of this nature succeed. A recent decision by the Washington Supreme Court is no exception.

In Stewart v. Sterling Savings Bank, (October 3, 2013), a title insurer hired a defense firm to defend its insured in a foreclosure action. During the course of its defense, the firm opted not to raise a particular defense but instead stipulated as to a disputed fact. The title insurer and the firm disagreed over the firm’s decision and the insurer ultimately retained new counsel. Subsequently, the new firm was precluded from asserting the defense in light of the previous firm’s stipulation. The title insurer then brought a direct action for legal malpractice against the former firm.

The firm moved for summary judgment. On appeal, the Washington Supreme Court held that the law firm’s “only client” was the insured as opposed to the insurer. The court agreed that the firm did not owe a duty to the title insurer. In reaching this conclusion, the court focused on whether the work performed by defense counsel was intended to benefit the plaintiff/insurer.  Although the insurer and the insured had “aligning interests,” the court concluded that the insurer was not an intended beneficiary of the firm’s representation of the insured.

The court also noted that finding a duty of care by defense counsel to an insurer merely because it pays the bills would violate the rules of professional conduct governing payment for legal services: “A lawyer shall not permit a person who recommends, employs, or pays the lawyer to render legal services for another to direct or regulate the lawyer’s professional judgment in rendering such legal services.”

This decision continues the trend of prohibiting insurers from maintaining legal malpractice actions against counsel assigned to defend their policyholders. According to some, this is the only logical outcome given the attorney’s absolute obligation to defend the insured. Nonetheless, defense counsel must tread very carefully when a potential conflict arises between the interests of the insured and those of the insurer.

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