Ethics Opinions from the Bar Association of San Francisco

OPINION 1979-2

An attorney who is a director, but not counsel, for an insurance company and who desires to represent the carrier's insured in a third party claim against the insured, is subject to the same rules governing the representation of conflicting (or appearing to be conflicting) interests as apply to counsel for the carrier.

QUESTION:

Attorney X, who is a director of Insurance Company Y, wishes to represent Z (Y's insured) in connection with a third party claim against Z. May he ethically do so?

OPINION
In the unanimous opinion of the Committee, the inquiring attorney should decide for himself whether he can comply with the Rules of Professional Conduct and section 310 of the California Corporations Code, in light of the following discussion and on the basis of the facts which are known to him, but not to this Committee. In the further (unanimous) opinion of the Committee, such dual representation should not be undertaken even with an informed consent, unless the potential conflict or appearance thereof is so remote as to be negligible.

The relevant authorities governing the question presented are set forth in the Rules of Professional Conduct (Rules 4-101 and 5-102), the California Corporations Code (section 310) and Klemm v. Superior Court (1977) 75 Cal.App.3d 893:

RULES OF PROFESSIONAL CONDUCT (Effective January 1, 1975)

Rule 4-101. Accepting Employment Adverse to a Client

A member of the State Bar shall not accept employment adverse to a client or former client, without the informed and written consent of the client or former client, relating to a matter in reference to which he has obtained confidential information by reason of or in the course of his employment by such client or former client."

Rule 5-102. Avoiding the Representation of Adverse Interests

(A) A member of the State Bar shall not accept professional employment without first disclosing his relation, if any, with the adverse party, and his interest, if any, in the subject matter of the employment. A member of the State Bar who accepts employment under this rule shall first obtain the client's written consent to such employment.

(B) A member of the State Bar shall not represent conflicting interests, except with the written consent of all parties concerned.

CALIFORNIA CORPORATIONS CODE
Section 310. Transactions between corporations and directors

No contract or other transaction between a corporation and one or more of its directors . . . is either void or voidable because such director [is]a party.if

1. The material facts as to the transactions and as to such director's interest are fully disclosed or known to the shareholders and such contract or transaction is approved by the shareholders (Section 153) in good faith, with the shares owned by the interested director not being entitled to vote thereon, or
2. The material facts as to the transaction and as to such director's interest are fully disclosed or known to the board or committee, and the board or committee authorizes, approves or ratifies the contract or transaction in good faith by a vote sufficient without counting the vote of the interested director . . . and the contract or transaction is just and reasonable as to the corporation at the time it is authorized, approved or ratified, or
3. As to contracts or transactions not approved as provided in Paragraph (1) or (2) of this subdivision, the person asserting the validity of the contract or transaction sustains the burden of proving that the contract or transaction was just and reasonable as to the corporation at the time it was authorized, approved or ratified.

RECENT CASE LAW
Rule 4-101 and 5-102 were both considered in Klemm v. Superior Court (1977) 75 Cal.App.3d 893, [1] where the Court distinguished between a matter which was "contested" and one which was not, stating:

"As a matter of law a purported consent to dual representation of litigants with adverse interests at a contested hearing cannot be regarded as either intelligent or informed. Such representation would be per se inconsistent with the adversary position of an attorney in litigation, and an attorney may not assume a position at trial or hearing where he could not advocate the interests of one client without adversely injuring those of the other." (Page 898)

However,

"If a conflict of interest between parties represented by an attorney is merely potential, there being no existing dispute or contest between the parties represented as to any point in litigation, there may be a dual representation by the attorney at a hearing or trial provided full disclosure to both clients is given and informed consent of both clients is received." (Page 899)

The Court then held that the conflict in Klemm (a marital dissolution case) was "merely potential" since the parties had settled their differences by agreement. Therefore, it was permissible, the Court said, for a single attorney to represent both husband and wife, subject to the following caveat:

"Attorneys who attempt dual representation of parties with divergent interests owe the highest duty to each to make a full disclosure of all facts and circumstances necessary to enable the parties to make a fully informed decision regarding the subject matter of the litigation, including the area of potential conflict and the possibility and desirability of seeking independent legal advice." (Page 901)

and

"Failing full disclosure by an attorney of all facts and circumstances necessary to enable clients with divergent interests that he represents to make a fully informed decision regarding areas of potential conflict and the desirability of seeking independent legal advice, the attorney is civilly liable to the client who suffers loss caused by lack of disclosure and exposes himself to charges, whether well founded or not, of unethical and unprofessional conduct. Moreover, the validity of any agreement negotiated without separate and independent representation of each of the parties is vulnerable to attack as having been procured by misrepresentation, fraud and overreaching." (Page 901)

Klemm is cited with approval in Spindle v. Chubb/Pacific Indemnity Group (1979) 89 Cal.App.3d 706 at page 713. In Spindle, the Court discusses the difference between "divergence in interest " and "conflict of interest":

"Divergence in interest requires counsel to disclose to each of his jointly represented clients whatever is necessary to enable each of them to make intelligent, informed decisions regarding the subject matter of their joint representations." (Page 713)

Whereas,

"Conflict of interest between jointly represented clients occurs whenever their common lawyer's representation of the one is rendered less effective by reason of his representation of the other." (Page 713)

The plaintiff in Spindle v. Chubb/Pacific Indemnity Group, supra, is a doctor who sued his malpractice carrier for fraud and bad faith arising out of the carrier's use of a single law firm to defend both plaintiff and another doctor in a medical malpractice case. The plaintiff alleged a conflict of interest by reason of the dual representation.

The Court acknowledged a divergence of interest, but held that there was no conflict of interest, notwithstanding that the potential liability of the second doctor was greater and his coverage narrower than that of the plaintiff.

CONCLUSION:

No case or ethics opinion [2] was found dealing squarely with the question presented. It is submitted, however, that the guidelines of Klemm would probably be applicable.

Among the "facts and circumstances" which should be disclosed (in the opinion of the Committee) are the potential areas of conflict wherein the insurance carrier denies coverage, or refuses "in bad faith" to settle within policy limits, or contends that misrepresentations were made by the insured in the policy application. Closely related would be the question of the attorney's fees (if any), which would be due in the event these or other conflicts necessitate X's eventual withdrawal from the case.

In Opinion No. 352 dated January 15, 1976, the Los Angeles County Bar Association's Ethics Committee concluded (in a different but related context) that "while rule 5-102 would permit such representation, the Committee believes that the difficulties of explaining all the possible conflicts and adverse interests involved may, as a practical matter, preclude obtaining the knowledgeable consent of the client, except in extraordinary cases." The Committee left it up to the inquiring attorney to decide whether he could satisfy the burden of explaining the possible conflicts and adverse interests to the client, after setting forth the relevant ground rules.

While attorney X in the present case is a Director of Insurance Company Y and not "representing" Y within the context of the foregoing authorities, it is submitted that the dual relationship is tantamount to a representation and, accordingly, the foregoing strictures dealing with informed consent should apply.

In the unanimous opinion of the Committee, the inquiring attorney should decide for himself whether he can comply with the Rules of Professional Conduct and section 310 of the California Corporations Code, in light of the foregoing points and authorities, and on the basis of facts which are known to him, but not to this Committee.

In the further (unanimous) opinion of the Committee, such dual representation should not be undertaken even with an informed consent, unless the potential conflict or appearance thereof is so remote as to be negligible.