No.33 Acting for insured and insurers

1. Introduction

1.1. Who should read this Guidance Statement?

This Guidance Statement is for solicitors and law practices acting on the instructions of insurers to act in the defence of an insured, or to prosecute a subrogated recovery in the name of an insured.

1.2. What is the issue?

The purpose of this Guidance Statement is to outline some of the scenarios in which a solicitor may find themselves when acting for or on behalf of an insured on the instructions of an insurer where the interests of the insurer and the insured my diverge and potentially come into conflict under the Australian Solicitors’ Conduct Rules (‘ASCR’) and the common law. 

1.3 Status of this Guidance Statement

This Guidance Statement is issued by the Queensland Law Society (‘QLS’) Ethics and Practice Centre for the use and benefit of solicitor

This Guidance Statement does not have any legislative or statutory effect. By having regard to the content of this Guidance Statement it may be easier for you to account for your actions if a complaint is later made to the Legal Services Commission.

This Guidance Statement is not legal advice, nor will it necessarily provide a defence to complaints of unsatisfactory professional conduct or professional misconduct. 

This Guidance Statement represents a standard of good practice and is endorsed by the QLS Ethics Committee.

2. Ethical principles

ASCR  

Rules 3, 4, 8, 9, 11, 13 and 22.4 apply to this Guidance Statement. Rule 4.1.1 expressly states that a solicitor must act in the best interests of a client and rule 4.1.4 specifies that a solicitor must avoid any compromise to their integrity and professional independence. These fundamental duties need to be considered when acting for an insurer and insured particularly with regard to an insured who is an individual or, where not an individual, is unlikely to be familiar with proceedings of this kind (referred to as an ‘unsophisticated client’ in this Guidance Statement)^[1].

Rule 22.4, while not directly relevant to the issues covered by this Guidance Statement, also states that:

A solicitor must not confer or deal with any party represented by or to the knowledge of the solicitor indemnified by an insurer, unless the party and the insurer have signified willingness to that course.

Practitioners must therefore obtain the consent of the insurer before communicating with the insured party.

These Rules impose a professional obligation on all solicitors.

3. Solicitor acting on instructions of insurer to advise on coverage and conduct the defence of a claim against an insured^[2]

A solicitor in these circumstances acts for both the insurer and insured and has the following competing duties:

• to act in the interests of the insured in the conduct of the defence;
• to act in the interests of the insurer in the conduct of the defence; and
• to act in the interests of the insurer in relation to coverage issues.

These duties have the potential to come into conflict. This Guidance Statement identifies some of the circumstances in which a conflict of interest may arise, and the issues that a solicitor should consider if that occurs. 

Generally, conflicts will arise for solicitors in one of two ways:

• coverage conflicts; and / or
• conduct of litigation conflicts.

The inherent issue is whether a solicitor should represent two or more parties whose interests may not always align but where appropriate disclosure and informed consent is called for in their ethical duties to those parties. 

In order for an unsophisticated client to provide informed consent, there is an obligation on the solicitor to provide all relevant information and explain the limitations contained in the retainer, some of which are identified below in clauses 3.1 and 3.2 of this Guidance Statement

3.1  Possible coverage conflicts

Coverage conflicts may arise when a solicitor acting in the defence of an insured becomes aware of information that may result in an insured being refused indemnity. The solicitor in these circumstances may, in their capacity as solicitor for the insurer, wish to:

• pass documents to the insurer that may be privileged or otherwise confidential;
• question the insured with a view to establishing whether the insured is entitled to cover under the policy; or
• provide advice to the insurer with respect to its right to refuse indemnity under the policy.

In this situation the solicitor should consider:

• the scope of its instructions from the insurer and explain them to the insured at the start of the retainer if the insured is an unsophisticated client; 
• the extent to which the insured has waived any right to privilege or confidentiality under the terms of the insurance policy, or by agreeing to the terms of any letter of appointment from the solicitor acting for the insurer – this should specifically be brought to the attention of the insured (if an unsophisticated client) at the start of the retainer and it should be explained to them that the solicitor has the insured’s informed consent to provide the relevant and necessary information to the insurer;
• the retainer which is entered into by the clients should specifically address the issue of disclosure (that is material information which is received and relevant to the scope of instructions) and the issue of confidentiality. Both of these issues will require modification in the retainer whenever a solicitor is acting for two or more clients; 
• whether privilege has been waived over documents provided to the insurer;^[3] 
• whether joint privilege^[4] applies to documents obtained in the claim; and
• whether a warning should be given to the insured that the responses to questions in relation to the material may result in cover being unavailable under the policy. 

The solicitor should also:

• Advise the insured of the potential conflict of interest and inform them that they may wish to seek independent legal advice in relation to indemnity, at the insured’s own expense.
• Consider whether they can continue acting for the insurer in relation to coverage and whether informed written consent from both the insurer and the insured is required. Rule 11.5 states that:

If a solicitor or a law practice acts for more than one client in a matter and, during the course of the conduct of that matter, an actual conflict arises between the duties owed to two or more of those clients, the solicitor or law practice may only continue to act for one of the clients (or a group of clients between whom there is no conflict) provided that the duty of confidentiality to other client(s) is not put at risk and the parties have given informed consent. 

It should be noted that this sub-rule will be exceptionally difficult to satisfy. 

• Consider how privilege may be maintained over communications with the insured.
• In the event of an actual conflict - ascertain whether the insurer wishes to continue to participate in the defence of the claim and in that event, consider advising the insurer to appoint a fully independent solicitor to act for the insured.^[5]
• In the event of a potential conflict - if the insured objects to the solicitor continuing to act for the insurer while it conducts the defence then the solicitor should either:
• cease acting for the insurer in relation to coverage and, if the insured consents, continue to act in the defence of the insured; or
• cease acting for the insurer in relation to coverage and cease acting for the insured altogether – this particular ground for termination should be specified in the retainer.  

3.2  Conduct of litigation conflicts

Conflicts of interest between insurer and insured may arise in relation to the manner in which the insurer wishes to conduct litigation on behalf of an insured. 

Examples (not exhaustive) of such conflicts include:

The naming of other parties as concurrent wrongdoers, or joinder of those parties to the litigation

The interests of the insurer and insured may conflict or potentially conflict in this situation for a number of reasons including:

• the insured and insurer having differing views as to the costs associated with, and the benefit to be obtained from naming another party;
• the insured or insurer having a commercial relationship with the other party; or
• the insurer insuring the other party.

In these circumstances solicitors should consider:

• the terms of the insurance policy, including any terms dealing with conduct of the defence and dispute resolution and the existence and effect of any cross-liability clause; and
• the quantum of the claim, and the possibility that the claim against the insured may exceed the limit of cover. There are significant risks for the solicitor, the insurer and the insured if the solicitor does not take steps to limit the liability of the insured by reference to the contribution to the loss of the other party.

Agreements to settle and the terms of settlement

The insurer and insured may have different interests when it comes to whether a claim should be defended at hearing and may have different views on this issue for a number of reasons including:

• different views as to the level at which a settlement should be considered; 
• the potential for adverse publicity for an insured flowing from a trial; or
• commercial arrangements between the insured and other party/ies. 

In these circumstances solicitors should consider:

• the terms of the insurance policy (or any statutory policy), including any terms dealing with conduct of the defence and dispute resolution; 
• the quantum of the claim, and the possibility that the claim against the insured may exceed the limit of cover; and 
• if the claim has the potential to exceed the limit of cover there are significant risks for the solicitor, the insurer and the insured if the solicitor does not take all reasonable steps to limit the liability of the insured.  

Terms of settlement and potential recovery proceedings by the insurer wishing to exercise rights of subrogation, or the insured seeking to recover uninsured losses

The views of the insurer and the insured may differ as to which parties should be released from further liability as part of the terms of settlement. Both the insurer and insured may wish to preserve claims in respect of their own interests. Conflicts may arise for a number of reasons including:

• the desire of the insured to preserve commercial relationships with parties against whom recovery may be sought;
• the reluctance of the insurer to pursue recovery claims having regard to their prospects of success; or
• the insurer may insure those parties from whom recovery may be sought.

In these circumstances solicitors should consider:

• the terms of the insurance policy, including any terms dealing with conduct of the defence, exercising rights of subrogation and dispute resolution; 
• whether the causes of acting being considered arise from insured or uninsured losses; and
• sections 64-68 of the Insurance Contracts Act 1984 (Cth) or such other statutory provision applicable to rights of recovery.

Multiple insureds under a policy may have potentially conflicting interests

A solicitor needs clients’ informed consent^[6] to act for more than one party. A solicitor needs to identify whether insureds’ interests have the potential to conflict, and not act for insureds whose interests may conflict with one another where this would be contrary to the Rules and the common law.

4. More Information

Solicitors are also referred to The Australian Solicitors Conduct Rules 2012 in Practice: A Commentary for Australian Legal Solicitors, Queensland Law Society (2014).

For further assistance, including difficulties you may be experiencing as either a supervisor or as a solicitor who is being supervised, please contact an Ethics Solicitor in the QLS Ethics and Practice Centre on 07 3842 5843 or ethics@qls.com.au or a QLS Senior Counsellor.^[7]

*Updated 24 October 2024

^[1] Note that this is intended to be broader than clients who are not ‘sophisticated clients’ under the Legal Profession Act 2007, s 300, which is a term relevant to costs disclosures under part 3.4 of that Act.

^[2] This Guidance Statement is not intended to address the position of solicitors acting solely on the instructions of an insured to whom defence costs are being advanced under an advance of defence costs wording under the relevant policy.

^[3] See eg, Asahi Holdings (Australia) Pty Ltd v Pacific Equity Partners Pty Ltd (No 2) 2014 FCA 481.

^[4] See Farros Mortgage Services Pty Ltd (in liquidation) v Webb (1996) 39 NSWLR 601; Mercantile Mutual Insurance (NSW Workers Compensation) Ltd v Murray [2004] NSWCA 151.

^[5] The Law of Liability Insurance 3^rd edition 2013 9-130, Golden Eagle Ins. Co v Foremost Ins. Co (1993) 20 Cal App 4^th 1372, 1395.