By DAN REYNOLDS, senior editor of Risk & Insurance«
Large insurance companies are vast business empires with dozens of subsidiaries representing a myriad of competing and at times conflicting interests. No surprise, then, that the very law firms that practice in the insurance law field also wrestle with the same conflicts.
Risk managers trying to select a law firm that will represent the interests of their employer first and foremost in an insurance case don't have it easy. Whether it be a claim against a workers' compensation or general liability policy, or a claim against an insurer for nonpayment on a policy matter, how do risk managers hire a firm free of conflict of interest?
"Good luck," critics insist.
Some firms that do insurance work are so large that it's impossible for them to represent a client without bumping into conflicts. Indeed, the law firm itself may not know that it represents a parent company as plaintiff and the parent company's subsidiary as a defendant.
A law firm, for example, could be doing tax work in Germany for a Europe-based insurer and willingly represent an insured in a recovery action against a U.S.-based subsidiary of that very same insurer.
The insured would never even know it. It could even be the case that the law firm might not even know it.
Others say lawyers are governed against conflicts of interest not only by American Bar Association rules of ethics but by conflict-of-interest regulations in each state. Lawyers and their firms for the most part abide by those rules, despite what the cynics say, according to representatives of the legal profession.
Insurance companies are also no slouches at protecting their own interests, according to the pragmatists. Carriers are rigorous in their insistence that no law firm that does work for them will keep that work if it brings an action against the carrier on behalf of a policyholder.
Conflict waivers from an insurer they work for authorizing lawyers to represent a policyholder against that same insurer are usually turned down, legal experts said.
"Most firms to my knowledge that do a lot of work for insurance companies generally do not take work for policyholders against insurance companies," said Jim Shanman, a commercial insurance litigator and a Stamford, Conn. and New York-based partner with Edwards Angell Palmer & Dodge LLP.
"I won't say it never happens, occasionally you might have a very good client that you are loathe to turn away. But generally speaking, most of the big insurance (law) firms will not take matters for insureds against insurers, certainly not litigation matters," Shanman said.
Complicating things though, Shanman said, is that conflicts in legal insurance work may be business, rather than ethical, in nature.
"There are many firms, for example, who have important clients who take positions on certain issues and they will not represent anyone taking an adverse position," Shanman said.
There are law firms, for example, that refuse to represent generic drug manufacturers in intellectual-property cases for fear of alienating a brand-name drug manufacturing client.
On the policyholder side, those law firms that bring enforcement actions against insurers for nonpayment of claims stake their reputation and their market position, frankly, on the fact they represent the policyholder and the policyholder only.
"We are probably the most 'pure' of the firms that call themselves policyholder law firms in that we do not represent insurance companies in any capacity," said Michael Nannes, the chairman of Washington, D.C.-based Dickstein Shapiro LLP.
Nannes said that by not choosing to work for the insurers, his firm is of course turning its back on the revenue that insurers can provide. But by the same token, the fact that the firm represents policyholders only is a business angle in and of itself.
"We are adverse to the insurance companies regularly and on a very committed basis," said Nannes.
Yet there is straddling among those who seek to represent policyholder firms; some indicate they are committed to policyholders but from time to time represent insurance companies.
"There is one firm that we ran into that has a policyholder-side practice," said Nannes. "Then one of our partners was arguing for a policyholder in a claim in a high-profile case, and that firm, which was supposedly a policyholder firm, was on the other side," Nannes said.
"If they were successful in that case, they could have made law that would have hurt their policyholder clients."
From an ethical perspective, representing both sides raises a host of questions, said Bob Horkovich, managing shareholder with the New York-based policyholder firm of Anderson, Kill & Olick PC. "I think big law is ignoring conflict," Horkovich said.
"If you go on some of the big law firms' Web sites and you type in 'insurance,' you will see that a lot of the big law firms are playing both sides and it does not appear that they are disclosing it to either side," he also said.
"They give new clients information on a need-to-know basis, and they don't give it firm wide," Horkovich said. "So an attorney may be working on a matter against Allianz and not even know that a Munich office is doing Allianz' tax work."
A LACK OF VIGIL?
Apathy, or na´vetÚ, perhaps, on the part of some policyholders plays a part too.
"They are relying on their law firm to come to them and say, 'I've got a conflict,' and their law firm is not because their law firm profits from nondisclosure," said Horkovich.
In cases where the insurer knows there is a law firm conflict and the insured doesn't, the carrier can bide its time and then assert a conflict on the part of the law firm at a point in the case where it most stands to benefit.
"The fact of the matter is that an insurance company at a strategic moment in the case can pull the plug on the policyholder and assert a conflict and the policyholder is toast, and that's when we get called," Horkovich said.
Horkovich recalls one case in which his firm was called by the state of California one year before a trial on a huge environmental cleanup was to take place because the insurer had "pulled the plug" on the insured's trial council.
Risk managers, of course, are paid to be vigilant about avoiding exactly these kinds of conflicts of interest.
Fred Pachon, a vice president of risk management and insurance with Santa Barbara, Calif.-based Select Staffing, knows a thing or two about how to handle law firms. After years of wrestling with litigation surrounding workers' comp claims, he has the following advice.
One, make sure the law firm understands who the customer is and be bold about asserting your rights and expectations.
"We need to be able to define who really is the client," said Pachon.
In cases of managing claims against his own company's policies, many lawyers have told Pachon that their client is the person paying their bill, and that means the insurance company.
"We are going to take the position that, 'No, we are the actual client,' " said Pachon. "And the reason why I believe that is that you hire the insurance company to protect (you). And they on our behalf hire the lawyer, which is an extension of that protection," said Pachon.
What about when a law firm representing you in a claim against one of your policies asks you to sign a waiver of conflict? Pachon said not to do it.
"My position has always been, the minute they ask for that, I say, 'No,'" Pachon said.
Instead, Pachon advised, insureds are better off lobbying the insurer to provide the name of a law firm free of any such conflicts. That, he said, is the best way to look out for the best interests of an insured.
In his contracts with insurers, Pachon also won't allow language that gives the insurer the exclusive right to pick the legal panel.
"Insurers don't want to end up paying for two sets of attorneys to defend one matter," Pachon said. "But they also want to avoid the issue altogether, which in my opinion is a little disingenuous."
A lot of what Pachon proposes he admits is just common sense. For other risk managers thinking of hiring a law firm to do their insurance work, Pachon said they should ask for references, lots of them.
"Do take the time to talk to them," Pachon said.
"Many take the references on face value. We on our end definitely scrutinize that, and we are very careful," Pachon said.
A little digging may turn up that the policyholder lawyer under consideration once worked for insurers. That's not a bad thing, Pachon said, but it's important to know.
"Actually, the way I see it, that's a great thing because now you can see both sides of the spectrum," said Pachon.
And that can work for insurers too, said Edwards Angell Palmer & Dodge's Shanman.
"Sometimes, but not always, but sometimes, the client will give you the waiver because they want somebody on the other side who at least knows what they're doing so there won't be a lot of time and effort wasted," said Shanman.
December 1, 2009
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