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Some are calling it a turf war between the defense bar and insurance carriers demanding ever more loyalty from their outside attorneys. But that’s not how California Defense Counsel lobbyist Mike Belote sees the struggle over AB 2069, a California bill that will be heard before the state’s Senate Judiciary Committee Aug. 8 when legislators return from their summer break. The bill seeks to amend a 1999 California appellate court decision that defense attorneys say could wreak havoc on their ability to represent clients. Insurers, on the other hand, were content to let the decision stand, saying it enforced a duty of loyalty they were owed by the counsel they retained. At the heart of State Farm v. Federal Insurance Co., 72 Cal.App.4th 1422 (1999), was this question: Are insurance companies that retain attorneys for their clients also clients for purposes of establishing conflict of interest? The court said yes, citing a tripartite relationship among attorneys, insurers and insureds established under California case law dating from the late ’60s. That could mean automatic disqualification of attorneys who file cross-complaints in complex litigation. Here’s how, says Belote: Suppose a law firm takes on the defense of a roofer insured by Allstate in a construction defect case with a typically vast array of subcontractor-defendants. Suppose State Farm later hires the same firm to defend policyholders involved in a 100-car pileup in the tule fog. If the attorney in that second case has to file a cross-complaint against a driver insured by Allstate, the firm can now be thrown off the first — and totally unrelated — case for conflict of interest. “It would take a supercomputer to sort out relationships we never thought were a problem,” contends Belote. Of course, defense lawyers have always thought of the insurance carriers that pay the bills for policyholder cases as having a quasi-client relationship, he says. After all, insurers have a contractual right to control the litigation or even urge settlement of a case, but the attorney’s ultimate duty has been to the insured party being represented. Hence, the defense bar didn’t generally think of the insurer as a client for purposes of possible conflict of interest — unless the carrier retained the attorney to represent it directly. After the decision, however, the defense bar faces a new landscape. “It gives someone on the other side the ability to disqualify us on the basis of a perceived or technical conflict that is not really there,” says Thomas Keating Jr., president of the California Defense Counsel, and a partner in San Rafael’s Freitas, McCarthy, MacMahon & Keating. “It creates an impossible situation to deal with,” adds Edith Matthai, of Los Angeles’ Robie & Matthai. The president-elect of the Association of Southern California Defense Counsel, she says, “The rights we’re adjudicating are the rights of the insured, though the carrier is writing the check. But if the carrier is deemed to be our client, the conflict rules include anything adverse to their economic interests.” From the defense bar’s perspective, State Farm created innumerable problems. Often, attorneys don’t immediately know all the parties involved when they file responses by deadline; hence, they risk discovering conflicts months later — or even years into a case, if new litigants come on board. Or as Keating notes, carriers can assign cases as poison pills. “It becomes a tactical move that can be made to get the case out of the hands of a firm that could be too effective or has already invested a lot of time,” he says. ‘ONE THOUSAND YEARS OF PRECEDENT’ The defense bar’s initial solution was a bill reversing the State Farm decision by declaring that an insurance company that hires an attorney to defend one of its insureds was not a “client” of that attorney, who thus could not be subject to disqualification for conflict of interest. But insurers went ballistic: “You’d have thought I was legalizing child molestation,” says Belote. “One insurance lawyer accused me of repealing 1000 years of precedent.” Basically, the insurance industry liked the State Farm decision and saw no need to overturn it. Under the Bar’s rules of professional conduct, attorneys have a duty to be loyal to their clients as well as to notify them of potential conflicts, says Phyllis Marshall of the Personal Insurance Federation of California. “If they don’t,” she adds, “they do so at their own peril.” But gradually, according to Jeffrey Fuller, general counsel and vice president of the Association of California Insurance Companies, insurers began to come around. “Lots of times defense counsel in large firms are unaware of other cases,” acknowledges Fuller. “[Maybe we do] have to get rid of the risk of hundreds of unintentional technical violations that do nothing harmful, create no real prejudice, even though there’s a failure to disclose.” But for Fuller, too, issues of attorney loyalty were paramount. Lawyers going after a carrier’s client in an unrelated case enjoy “a tremendous litigation advantage” knowing how a company keeps its records and where to get them, he says. “If you routinely represent State Farm, you’d be a fool to take a case against it,” he says. “You’d be seen to bite the hand that feeds you, and not likely to be retained.” While insurers wanted the tripartite relationship that guaranteed loyalty left intact, the State Bar weighed in with its concerns that the defense bar was trying to carve out exceptions to its own rules on conflict of interest. In a compromise version of the bill that has neutralized opposition and even won the support of some industry groups, the defense bar dumped conflict-of-interest language. Instead it proposes a new law that bars automatic disqualification of an attorney retained by an insurer on behalf of a policyholder solely because that attorney represents someone else in another case against that same insurer. That leaves open the possibility of disqualification for other reasons. “Our association supports this bill as a good clarification of the proper relationship between the defense counsel and insurers with respect to the disqualification issue,” says Bill Gausewitz of the American Insurance Association, a national trade group with 300 members. He vows to work with Belote to help pass AB 2069. “This was a good lobbying exercise,” he notes, adding, “Mike and I stand in the middle of a bridge over a fairly wide chasm” between insurers wanting the State Farm decision to stand as is and the defense bar, which wants to abolish the attorney-client relationship between lawyer and insurer when representing a policyholder. NEW ACTIVISM But don’t expect the fireworks between the two groups to stop anytime soon. The defense bar’s sponsorship of AB 2069 represents a growing militancy on its part in the wake of a decade of increasing tension Keating estimates about a third of civil defense firms have closed their doors as insurers increasingly handle defense in-house. Or they aggressively audit private bills under the assumption they’re being overcharged. He concedes some attorneys have overcharged some carriers, but denies that’s been a general practice. “Carriers have overreacted and furthered the rift,” he says. “Trust is waning.” And that has spurred new activism. “Historically, we just watched legislation made by others,” says Keating. “Now we can hit right at the heart of what we want to change.” But what about the risk of incurring the displeasure of their major customer, the insurance industry? In the wake of so many losses, “we don’t have as much to lose as we did,” says Keating. Matthai is even more militant: “Insurers are afraid we’ll stop being slaves,” she laughs. Because of its clout, she says, the insurance industry has long hired defense lawyers for $100 to $200 an hour, far below the amount paid by other corporate consumers. Her hope? “As the defense bar shrinks and gets more active, we may gain the ability to force under-market fees up.”

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