Risky Business: Attorney Liability in Insurance Defense Litigation-A Review of the Arizona Supreme Court's Decision in Paradigm Insurance Co. V. Langerman Law Offices

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I. INTRODUCTION

The unique nature of the tripartite relationship, created when an insurer hires a lawyer to represent an insured, has created confusion on the part of many insurance defense attorneys.1 In such circumstances, it can be unclear how to ethically proceed with insurance defense litigation in order to avoid the pitfalls of malpractice liability. Although intended to simplify the ethical dilemmas for lawyers, a tripartite relationship often creates a situation in which the lawyer retained by the insurer to represent the insured does not know who her client is-the insurer, the insured, or both.2 Often, the divergent interests of the insurer and the insured magnify the attorney's dilemma of loyalty.

In the absence of concrete and consistent common law decisions regulating the procedural aspects of insurance defense, some courts have recently begun to rely heavily upon the newly enacted Restatement (Third) of the Law Governing Lawyers ("Restatement") to determine the ethical boundaries of lawyer conduct.3 IMAGE FORMULA3

Unfortunately, inconsistencies among some jurisdictions have only perpetuated the problems in this area of the law. One prominent author has noted, "[t]he rules [surrounding insurance defense litigation] fail to provide clear and defensible answers to the most basic questions, such as whether an attorney-client relationship exists between the insurance company and the lawyer retained to handle the lawsuit against the insured.4 Consequently, "the obvious danger is that insurance defense lawyers will act improperly, even when they attempt to adhere to the law."5

Recently, some courts have unsuccessfully attempted to clarify both the procedural standards governing insurance defense litigation and the ethical boundaries of the attorney-client relationship.6 Paradigm Insurance Co. v. Langerman Law Offices, decided by the Arizona Supreme Court in June of 2001, is such a case.7 Although the Langerman court may have achieved an equitable result, it failed to advance the proper analysis in reaching its result. If the inconsistent procedural standards are not clarified, uncertainty and ambiguity regarding the duties of insurance defense attorneys will continue to result in inconsistent representation and possible injury to the insurer, the insured, and especially the attorney. Insurance defense lawyers will continue to flounder as to whom they actually represent and where their duties of loyalty lie.

Part II of this Note reviews the facts and the reasoning of the court surrounding the Langerman decision. Part III discusses the history of the tripartite relationship between the insured, the insurer, and the lawyer hired to represent the insured. In order to elucidate IMAGE FORMULA5

the basic procedural standards that should govern this area of the law, this Note will discuss the origin of the tripartite relationship itself, the attorney-client privilege, the potential conflicts of interest unique to the tripartite relationship, and the definition of a client. Part IV reviews the scholarly thought with regard to attorney liability in the insurance defense context, asserting that the retainer agreement should define the scope of liability for the attorney.8 Part V will apply the retainer agreement theory and will discuss the application of this theory to Langerman. This Note ultimately concludes that the retainer agreement should be the operative document all parties in the tripartite relationship look to for clarification regarding an insurance defense attorney's duties to the client. Such a standard is critical in minimizing attorney malpractice liability for lawyers engaged in the risky business of the tripartite relationship.

II. BACKGROUND AND FACTS SURROUNDING LANGERMAN

The issue before the Arizona Supreme Court in Langerman was "whether an attorney may be held liable to an insurer, which assigned him to represent an insured, when the attorney's negligence damage[d] only the insurer. …