Ethical Issues for Defense Counsel in Employment Practices Liability Insurance Litigation

Article excerpt

This article originally appeared in the January 2013 Employment Law Committee newsletter.

I. Employment Practices Liability Insurance Overview

Employment Practices Liability Insurance ("EPLI") covers a broad range of discrimination and harassment claims including indemnity and coverage for the cost of defense. EPLI extends to the business itself as well as its officers and employees. Coverage is typically triggered by an administration charge, lawsuit, or simple demand letter. EPLI policies typically cover a wide array of employment claims including 1) wrongful termination, 2) discrimination, and 3) retaliation. Most EPLI policies also provide coverage for violations of the Family and Medical Leave Act and various forms of harassment. EPLI coverage normally defines "damages" as amounts in excess of the retention including settlements, judgments, prejudgment and post-judgment interest, attorney fees and costs, defense expenses, and back and front pay awards. EPLI policies almost always exclude coverage for workers compensation, ERISA, unemployment, COBRA, wage and hour, NLRB, and breach of contract. The policies also exclude fines, penalties, taxes, amounts due under an express employment contract, stock options and deferred compensation, and injunctive relief. Additional exclusions in EPLI policies exist for bodily injury and property damage and intentional wrongdoing.

II. Common Ethical Issues that Arise from EPLI Insurance

The insurer's notice of assignment of a new law firm to defend the insured invokes a myriad of ethical issues that have implications for the insured, the insured's day-to-day lawyers, the assigned panel counsel, and the insurance company. These issues cannot be fully analyzed in a short article. Rather, the purpose of this article is to identify some of the prominent and ethical issues involved in many EPLI cases. Some of these ethical issues include: 1) identifying the client; 2) determining who controls the selection of defense counsel; 3) analyzing whether a reservation of rights changes who controls the selection of counsel; 4) complying with litigation management guidelines; 5) determining who manages the litigation; and 6) analyzing who controls the decision to settle.

A. Who is the Client?

Every EPLI claim that triggers coverage will involve 3 players--the insurance company, the policyholder, and the defense attorney. This is referred to as the tripartite relationship. Additionally, there is often a fourth player when the policyholder has a regular outside law firm that advises it on day-to-day matters and sometimes serves as outside general counsel. Depending on the jurisdiction, defense counsel retained by the insurance company will have either one client (the insured) or two clients (both the insured and the insurer). The prevailing view in most jurisdictions is the "Two-Client Theory" in which the insured and the insurer are considered clients of the defense attorney. Under the Two-Client Theory, the primary client is the insured. A growing minority of jurisdictions follow the "One-Client Theory," which provides that the insured is the attorney's only client. Many legal commentators note that the One-Client Theory is consistent with ethical rules that govern attorneys and require them to have undivided loyalty to their client.

B. Who Controls the Assignment of Counsel?

Most EPLI policies are duty to defend policies. Absent any significant coverage issues that might give rise to a conflict of interest between the insured and the insurer, the insurer may generally rely on the policy contract language providing it with the right to select defense counsel. (1) One issue that significantly alters the insurer's right to appoint counsel is when the insurer defends pursuant to a reservation of rights.

C. The Reservation of Rights Dilemma

It is fairly common for an employment complaint filed against an insured to state both covered and non-covered claims or to be written ambiguously so it is difficult to determine whether a particular EPLI policy exclusion applies. …