How many of us gloss over the federally mandated MCS-90 liability coverage? We know it is important – very important – but do we consider the ethical ramifications when we get a call like this:

After hearing the words "We will pay top dollar!" the typical attorney resolves that no apparent conflict of interest exists. Later the following facts come to light:

-Hit-M-Hard Cartage ("HMHC") operates interstate routes;

HMHC’s tractor was involved in an automobile accident, but the tractor was never listed on the schedule of covered automobiles. HMHC could not prove that it requested coverage on the tractor within 24 hours of its acquisition. XYZ submitted a letter to HMHC that there was no coverage and that if XYZ settled any claims that it could possibly seek reimbursement for its costs and settlement. HMHC submitted no objection to XYZ’s reservation of rights. Ultimately, XYZ settled with some of the plaintiffs while other plaintiffs filed a lawsuit. Consequently, XYZ calls a "top-notch" transportation lawyer familiar with federal regulations, but a little rusty on the ethical guidelines. So what do you think? Are there any ethical concerns?

Clearly, to defend the factual claim, there appear to be no conflicts of interest; however, if XYZ were to seek reimbursement pursuant to MCS-90, the attorney may be obligated to withdraw from representing XYZ and defend HMHC under any coverage dispute.

Perhaps the conflict is more complex in states which allow a direct action against the insured. Because Louisiana’s direct action statute permits the assertion of claims against liability insurers¹, Louisiana lawyers often represent both the insured and the insurer in litigation. As a result, the conflicts issues that arise in Louisiana insurance defense practice are potentially more vexing than those in jurisdictions that do not permit direct actions. Joint representation of the insured and insurer typically does not present a conflict of interest. After all, both the insured and the insurer have a common interest in resolving the claim quickly and inexpensively. However, the interests of the insured and the insurer conflict when the insurer contends that there is no coverage for the claim asserted against the insured. In such a circumstance, the insurer typically provides a defense to the insured, but does so under a "reservation of rights." It is absolutely clear that a lawyer may not represent both the insured and insurer when the insurer denies coverage or reserves its right to deny coverage at a later date.²

There are other ethical ramifications in this fact pattern:

1. If XYZ had no duty to defend HMHC, did XYZ waive its rights for reimbursement if it assumed HMHC’s defense?
2. Did XYZ waive its rights for reimbursement when it failed to obtain separate counsel for HMHC?
3. Should defense counsel have withdrawn from representation of both XYZ and HMHC when he learned of the conflict?
4. Should the attorney advise XYZ that it may not be able to seek reimbursement from HMHC if it provides a defense to HMHC?
5. If the attorney advises XYZ of the reimbursement complications while providing a defense to HMHC, does the attorney risk the possibility that HMHC will be obligated to reimburse the insurer for the defense costs?
6. If the attorney says nothing to XYZ, can XYZ assert a malpractice or ethical claim against the attorney?
7. If the attorney intervenes and HMHC is adjudged obligated to reimburse XYZ, does HMHC have a malpractice or ethical claim against the attorney?

Without specifically addressing the ethical issues, the Federal Fifth Circuit Court of Appeals ruled last year that an insurer’s failure to retain separate and distinct counsel for the insured and insurer did not constitute a waiver of denying coverage.³ Consequently, the insurer was allowed to assert a claim for reimbursement; HOWEVER, the Court also ruled that the insurer had a duty to defend the insured. Because of the duty to defend, the insurer was not entitled to reimbursement. So, it seemed the Court was ruling that even though the insurer had not waived its claim then it had no claim, because of its obligation to provide a defense.

From an ethical perspective, the appellate court analyzed that if an insurer fails to obtain separate counsel when it intended to deny coverage then:

However, failure to obtain separate counsel would not vitiate an insurer’s reservation of rights. The facts of the case in Fifth Circuit showed that the defense counsel for the insured did not know that the insurer had denied coverage and the coverage issue was never an issue in the underlying litigation. Because the same attorney was not used to address both the coverage issue and the liability issues, and there was no waiver of the coverage defense, the insurer could seek reimbursement.

Fortunately for the defense attorney, the Court also reasoned that because the insurer had a duty to defend, that it had no right to seek reimbursement for defense costs. The Court noted that the MCS-90 does not alter the duty of the insurer to provide a defense under Louisiana Law.

Believe it or not, this case does provide us with a multitude of ethical considerations:

1. Ensure that you do not discuss coverage issues with the insurer if you are retained to defend the insured (we all know that, but it never hurts to restate it);
2. Advise the insured that the insurer may be able to seek reimbursements of defense costs pursuant to MCS-90 endorsements;
3. Depending upon the breadth of your state’s duty to defend, the insurer’s duty to defend may cancel out its right to seek reimbursement pursuant to MCS-90;
4. If you get wind of any payments being made pursuant to MCS-90, rather than terms of the insurance policy, you should immediately demand that separate counsel be retained for the insurer and insured;
5. The attorney may be obligated to withdraw from representing both the insured and the insurer if any settlement is made pursuant to MCS-90 endorsement.

A lawyer sometimes may attempt to cure a potential conflict of interest by dropping a current client in order to undertake the representation of another, perhaps more lucrative, client in another matter.⁴ By doing so, lawyers hope to convert a "current" client into a "former" client whom they may then permissibly sue in an unrelated matter. However, when the lawyer’s primary motivation for dropping the current client is the desire to represent the prospective client, the discharge often will not cure the conflict.⁵

Absent aggravating or mitigating circumstances, the following sanctions are generally appropriate in cases involving conflicts of interest: disbarment, when the lawyer without informed consent undertakes representation of a client when he knows that doing so presents a conflict of interest, the lawyer intends to benefit himself or another, and the lawyer causes serious or potentially serious injury to the client; suspension, when the lawyer knows of a conflict of interest, does not fully consult with the client about it, and the lawyer causes injury or potential injury to the client; reprimand, when the lawyer is negligent in determining whether a conflict exists, and the lawyer causes injury or potential injury to the client; and admonition, when the lawyer engages in an isolated instance of negligence in determining whether the representation may present a conflict of interest, and the lawyer’s conduct causes little or no actual or potential injury to the client.⁶

Bottomline: Watch out if you are asked to defend the insurer and insured if any payments are made under MCS-90, rather than the terms of the insurance policy.

^1. L.R.S.A. § 22:655.
^2. Storm Drilling Co. v. Atlantic Ritchfield Corp., 386 F. Supp. 830, 832 (E.D. La. 1974).
^3. T.H.E. Insurance Company v. Larsen Intermodal Services, Inc., 242 F.3d 667 (Fifth Circuit 2001).
^4. Ronald D. Rotunda, Legal Ethics § 8-5 (2000).
^5. Restatement (Third) of the Law Governing Lawyers § 132, cmt. C (2000).
^6.  ABA Stds. For Imposing Lawyer Sanctions std. 4.3 (1986).