Double trouble

Facing a claim is bad enough. Conflict with your insurer can be even worse. Derek Holwill and Helen Ager report

Imagine the nightmare situation if you were to find yourself in conflict with your insurer. Your professional indemnity insurer will usually appoint lawyers to represent you, but who is its client, you or the insurer? The answer is that the lawyers concerned are usually jointly retained by the insurers and the insured, and so both are ‘clients’.

What happens, though, if your interests conflict with those of your insurer? Will your lawyers inform your insurer if they discover something detrimental to your insurance cover? The answer is that they can, perhaps must, report to insurers matters that are relevant to coverage, notwithstanding that it is positively detrimental to the interests of you, a client.

There is, however, protection for the insured. The jointly retained lawyers must act in good faith. They cannot set out to use their privileged position as your lawyers to extract information that may be useful to their other client, the insurer – a protection which is important when one considers that the insurer is likely to be an important source of business.

In Brown v Guardian Royal Exchange plc (1994), it was held that if jointly retained solicitors do happen to learn of something potentially prejudicial to the insured’s interests, the solicitors can report that to the insurers. The case turned upon the particular wording of the professional indemnity policy in question.
However, the Court of Appeal in TSB Bank plc v Robert Irving & Burns (2000) suggests that, in the classic ‘joint retainer’, the position is that the insured waives ‘solicitor-client’ privilege in that they appear to accept that insurers are entitled to know what passes between the solicitors and itself.

TSB, however, limits the extent of this waiver. TSB’s claim against Robert Irving & Burns (RIB), a firm of surveyors, concerned an overvaluation provided by a Geoffrey Burns. RIB’s insurers, Colonia, duly instructed Reynolds Porter Chamberlain (RPC) to represent RIB. The Colonia policy excluded any liability in respect of any work undertaken by a former partner, Michael Braier. When RPC first met Burns, he accepted that, in reaching his valuation, he had been heavily reliant on an earlier valuation of the same property carried out by Braier. RPC considered coverage issues, but initially decided that there was insufficient evidence that the work in issue was substantially Braier’s work.

The case progressed. A pre-trial conference was arranged with Burns. So far as he was concerned, this was to prepare for trial. Unknown to him, however, RPC had also instructed counsel to advise on policy issues. Counsel accordingly used the conference, among other things, to question Burns about the extent of his reliance on Braier’s work, but without warning Burns that his answer might lead to a repudiation of cover.
Colonia then refused to indemnify RIB in respect of the claim, relying largely upon what Burns had said in conference. RIB brought proceedings against Colonia and sought to prevent Colonia from relying upon anything said by Burns in conference on the basis that it was privileged.

The Court of Appeal held that Colonia was not entitled to rely upon anything said by Burns at the conference. While it was implicit in the joint retainer of RPC that RIB had agreed to waive legal professional privilege vis-à-vis insurers, that agreement was subject to a further implied term that the waiver ceased the moment an actual conflict of interest arose between the insurers and RIB. It was further held that an actual conflict had arisen at the time when RPC sought further advice from counsel about the possibility of Colonia being entitled to refuse to indemnify RIB, and that accordingly the statements made by Burns were privileged.

The court’s view was that RPC should have notified Burns that policy issues were actively being considered, and that counsel conducting the conference was considering these issues. Burns would then have had the chance to get advice and would have been aware of the possibility that what he said in conference might be used by the insurers against RIB. The court made it clear that if, having been notified of an actual conflict, RIB had chosen to continue to instruct RPC rather than instruct separate solicitors to represent its interests on policy issues, RIB might thereby once again have impliedly waived privilege vis-à-vis Colonia.

Interestingly, the Court of Appeal seemed to accept that it was permissible for the original, jointly retained solicitors to continue to act for the insurers against the insured in relation to policy issues once the insured had instructed his own solicitors. It is surprising that the Court of Appeal was content that a solicitor who had previously acted for an insured could, in the context of the same case, act against him in relation to policy issues.

The important point is, however, that even where insurers have, under the policy, complete control over the conduct of litigation, a jointly retained solicitor nevertheless has an obligation not to favour the interests of one client over the other. When a solicitor discerns an actual conflict of interest between clients, the solicitor must inform them. While this still begs the question of when an actual conflict has arisen on the facts of a particular case, it is a valuable protection for the insured. An insured must still be aware that, at any time before an actual conflict has arisen, information relevant to policy issues which they give to jointly retained solicitors will be reported to the insurers.
However, at least the insured can know that their solicitor is not deliberately trying to extract information damaging to their interest on policy issues.

Many insureds, particularly those who are not lawyers, reasonably believe that their solicitor will never take action contrary to their interests. It would be helpful, therefore, if the initial letter, setting out the terms of the retainer, notified the insured of the practical implications of the ‘joint’ nature of the instructions.

If you do find yourself facing a claim, and having solicitors appointed to represent you, those solicitors should make clear to you if they are also actively considering, and advising insurers about, policy issues.

If, however, correspondence from those solicitors to you is not clear about this one way or the other, it is well worth asking for clarification. If there are any policy issues, you should consider appointing your own solicitors. It is clearly in everyone’s interests for such issues to be addressed sooner rather than later.

The last thing that anyone wants is for there to be live policy issues shortly before the defence has to be served (or worse, shortly before a trial), with the result that meetings to obtain instructions have to be cancelled because the insured wants time to instruct their own solicitors – an unfortunate situation which has, in our experience, come up more than once in recent months.

Derek Holwill is a junior at Hailsham Chambers and Helen Ager is a partner at Crutes Solicitors