The Good, the Bad, and the Ugly: The Cooperation Clause, Medicare Secondary Payer Requirements, and the Tripartite Relationship. Donald Patrick Eckler Pretzel & Stouffer, Chartered One South Wacker Suite 2500 Chicago, IL 60606 312-578-7653. The Tripartite Relationship.
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The Good, the Bad, and the Ugly: The Cooperation Clause, Medicare Secondary Payer Requirements, and the Tripartite Relationship
Donald Patrick Eckler
Pretzel & Stouffer, Chartered
One South Wacker
Chicago, IL 60606
“[The] so-called tripartite relationship has been well documented as a source of unending ethical, legal, and economic tension.” State Farm v. Tarver, 980 S.W.2d 625 (Tex. 1998) (Gonzales, J., dissenting)
These issues are terribly important and must be managed correctly by insurance adjustors because the failure to properly recognize a conflict and to appoint independent counsel where appropriate could lead to the carrier being estopped. Employers Insurance Company of Wausau v. Ehlco Liquidating Trust, 186 Ill.2d 127 (1999).
Who is the client for counsel retained by an insurer?
Is the client of counsel retained by the insurer have two clients or just one?
To whom are the loyalties owed by counsel retained to represent the insured?
The majority of jurisdictions hold that counsel retained by the insurer to represent the insured has two clients, both the insurer and the insured. This is the majority position.
See Restatement of The Law Governing Lawyers Sections 26(1) and 215; Illinois Rules of Professional Conduct Rule 1.7; ABA Model Rule 1.7(b), comment 10, and Rule 1.8(f); Waste Management v. International Surplus Lines Insurance Company, 144 Ill.2d 178 (1991); Nandorf v. CNA Insurance Companies, 134 Ill.App.3d 134 (1st Dist. 1985); Cincinnati Insurance Company v. Wills, 717 N.E.2d 151, 161 (Ind. 1999); Nezley v. Nationwide Mutual Insurance CompanyCompany, 296 N.E.2d 550, 561 (Ohio App. 1971); Goldberg v. American Homes Assurance Company, 439 N.Y.S.2d 2, 5 (N.Y. App.Div. 1st Dep’t 1981); Lieberman v. Employers Insurance, 419 A.2d 417, 424 (N.J. 1980); Bogard v. Employer’s Casualty Co., 210 Cal.Rptr. 578, 582 (Cal.App. 1985); McCourt Co., Inc. v. FPC Properties, Inc., 434 N.E.2d 1234, 1235 (Mass. 1982).
The majority of jurisdictions, but it is a significant minority, reject the dual client relationship and hold that counsel retained by an insurer only represents the insured. In these jurisdictions there is no tripartite relationship
See Michigan: Atlanta InternationalCompany v. Bell, 448 N.W.2d 804 (Mich.Ct. App. 1989); Montana: In The Matter of the Rules of Professional Conduct and Insurer Imposed Billing Rules and Procedures, 299 Mont. 321, 333-34 (Mont. 2000); Connecticut: Higgins v. Karp, 687 A.2d 539, 543 (Conn. 1997); ContinentalCasualty Company v. Pullman, Comley, Bradley, & Reeves, 929 F.2d 103 (2nd Cir. 1998); In re A.H. Robins Co. Inc., 880 F.2d 709 (4th Cir. 1989); Colorado Bar Association Formal Ethics Opinion 91 (1993); Safeway Managing General Agent v. Clark & Gamble, 985 S.W.2d 166, 168 (Tex. App. 1998); Gibbs v. Lappies, 828 F.Supp. 6, 7 (D.N.H. 1993); Givens v. Mullikin ex. rel. McElwanney, 75 S.W.2d 383, 386 (Tenn. 2000); Finley v. Home Insurance Company, 975 P.2d 1145, 1153 (Hawaii 1998); Pine Island Farmers Coop v. Erstad & Reimer, P.A., 696 N.W.2d 444, 452 (Minn. 2002)(in the absence of conflict of interest between the insurer and the insured, “the insurer can become a co-client of defense counsel based on contract or tort theory if two conditions are satisfied. First, defense counsel or another attorney must consult with the insured, explaining the implications of dual representations and the advantages and risks involved ... [and] second, after consultation, the insured must give express consent to the dual representation.”)
Defense counsel has a duty not to disclose adverse coverage information to the insurer.
See Liability Insurance Company v. Superior Court, 38 Cal.App.3d 579, 592 (1974); Employers Casualty Company v. Tilley, 496 S.W.2d 552 (Tex. 1973); Illinois Rule of Professional Conduct Rule 1.8(b) and (f) and 5.4(c).
Insured has duty to cooperate even where the insurer has taken an adverse coverage position.
See Waste Management, Inc. v. International Surplus Lines Insurance Company, 144 Ill.2d 178 (1991).
a) Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if:
(1) the representation of one client will be directly adverse to another client; or
(2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client, a former client or a third person or by a personal interest of the lawyer.
b) Notwithstanding the existence of a concurrent conflict of interest under paragraph (a), a lawyer may represent a client if:
(2)the representation is not prohibited by law;
(3) the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal; and
(4) each affected client gives informed consent.
(a) A lawyer who has formerly represented a client in a matter shall not thereafter represent another person in the same or a substantially related matter in which that person’s interests are materially adverse to the interests of the former client unless the former client gives informed consent.
(b) A lawyer shall not knowingly represent a person in the same or a substantially related matter in which a firm with which the lawyer formerly was associated had previously represented a client
(1) whose interests are materially adverse to that person; and
(2) about whom the lawyer had acquired information protected by Rules 1.6 and 1.9(c) that is material to the matter; unless the former client gives informed consent.
(c) A lawyer who has formerly represented a client in a matter or whose present or former firm has formerly represented a client in a matter shall not thereafter:
(1) use information relating to the representation to the disadvantage of the former client except as these Rules would permit or require with respect to a client, or when the information has become generally known; or
(2) reveal information relating to the representation except as these Rules would permit or require with respect to a client.
(a) While lawyers are associated in a firm, none of them shall knowingly represent a client when any one of them practicing alone would be prohibited from doing so by Rules 1.7 or 1.9, unless the prohibition is based on a personal interest of the prohibited lawyer and does not present a significant risk of materially limiting the representation of the client by the remaining lawyers in the firm.
(b) When a lawyer has terminated an association with a firm, the firm is not prohibited from thereafter representing a person with interests materially adverse to those of a client represented by the formerly associated lawyer and not currently represented by the firm, unless:
(1) the matter is the same or substantially related to that in which the formerly associated lawyer represented the client; and
(2) any lawyer remaining in the firm has information protected by Rules 1.6 and 1.9(c) that is material to the matter.
(c) A disqualification prescribed by this Rule may be waived by the affected client under the conditions stated in Rule 1.7.
Blanchard v. State Farm Fire & Casualty Company, 2 Cal.App.4th 345, 350 (1991) (“not every reservation of rights creates a conflict of interest requiring appointment of independent counsel.”); Nisson v. American Home Insurance Company, 917 P.2d 488 (Okl.App. 1996); Northern County Mutual Insurance Company v. Davalos, 140 S.W.3d 685, 689 (Tex. 2004) (If the insured’s liability and the coverage issues turn on the same facts, the insured is entitled to independent counsel.)
In such a situation, make sure defense counsel advises the insured of the potential excess judgment.
R.G. Wegman Construction Company v. Admiral Insurance Company, 629 F.3d 724 (7th Cir. 2011); Allstate Insurance Company v. Campbell, 334 Md. 381, 397 (Md. App. 1994); Hartford Accident & Indemnity Company v. Foster, 528 So. 2d 255, 270-273 (Sup.Ct.Miss. 1988).
“A conflict arises when the divergent interests of the insurer and insured are apparent and the attorney representing the insured can no longer represent both clients’ interests without prejudice to either client. A conflict already exists here because [the insurer’s] interests would be served by fleshing out in discovery facts showing that the damage to the Begys’ home occurred prior to the inception of the Policy, while McNaughton’s interests would be served by fleshing out facts showing that the damage occurred after the inception of the Policy. In this regard, an attorney representing [the insurer’s] interests would be the enemy of McNaughton.”
(1) the attorney’s relationship to the insurer;
(2) the attorney’s own interests;
(3) the nature of the conflict between the insurer and the insured and how the defense may impact the coverage;
(4) limitation of the scope of representation to defending third-party claim only, thus limiting the ability to maximize coverage;
(5) the insured’s option to retain separate counsel to advise about coverage issues; and
(6) the insured’s right to independent counsel to defend, whose fees will be reimbursed by the insurance company. See David H. Anderson, “Balancing the Tripartite Relationship between Defendant, Defense Counsel and Insurer,” 88 Ill.Bar.J. 384, 288 (July 2000).
The Cooperation Clause in American Alliance’s policy states:
6. Assistance and Cooperation of the Insured. As a condition precedent to the Company’s duty of indemnity with respect to claims and lawsuits brought against the insured, the insured shall cooperate with the Company and upon request by the Company or attorneys hired by the Company to represent the insured, the insured shall assist in completing the Company’s investigations including answering questions and providing all reasonably available evidence and in the litigation of any lawsuit including attending hearings, trials, and examinations under oath, and assisting in making settlements, securing and giving evidence, obtaining the attendance of witnesses and in the conduct of any legal proceedings in connection with the subject matter of this insurance. During the pendency of any claim or lawsuit against an insured, the insured shall advise the Company in writing of his new residential address or new residential telephone number within 14 days of any change.
“Typically the insurer has little or no knowledge of the facts surrounding a claimed loss, while the insured has exclusive knowledge of such facts. The insurer is, therefore, dependent on its insured for fair and complete disclosure; hence, the duty to cooperate. While the insured has no obligation to assist the insurer in any effort to defeat recovery of a proper claim, the cooperation clause does obligate the insured to disclose all of the facts within his knowledge and otherwise to aid the insurer in its determination of coverage under the policy. The insurer is entitled, irrespective of whether its duty is to defend or to indemnify, to gain as much knowledge and information as may aid in its investigation, or as may otherwise be significant to the insurer in determining its liability under the policy and in protecting against fraudulent claims. To hold otherwise effectively places the insurer at the mercy of the insured and severely handicaps it in contesting a claim (citation omitted).” Waste Management, Inc., 144 Ill.2d at 204.
“In the case at bar, because of the failure of the insured to appear for deposition, her pleadings were stricken and the issue of liability was determined adversely. The opportunity to contest the issues of contributory negligence, due care, proximate cause, and of cross-examination, etc., were precluded. The circumstances concerning the degree of impact, res gestaereaction, if any, and incidents that might assist in the true determination of damages were denied to the defense. There can be no doubt that the conduct of the insured in failing to cooperate substantially and materially affected the insurer and its rights.”
We cannot do business as usual and leave these issues up to the plaintiffs.
What is Medicare’s current relationship to casualty insurance and self-insurance programs?
In late December 2007, Congress passed a new amendment to the Medicare Secondary Payer Statute known as Section 111 of the Medicare, Medicaid and SCHIP Extension Act of 2007 (MMSEA), requiring all primary payers to report settlements, judgments, awards or other payments to Medicare. See 42 U.S.C. 1395
Who is a “primary payer” or a “responsible reporting entity” (RRE)?
Who is a Medicare beneficiary?
7.Determining who is a Medicare beneficiary can be a challenge where future payments are involved. There is a lack of guidance in the regulations regarding whether liability settlements are required to account for future medical payouts. See Bradford Peterson, Medicare and Future Medical Expenses: Does the “Super Lien” Apply, Illinois Bar Journal, January 2010, Vol. 98, pp 26-30.
8.Workers compensation has been dealing with this issue for 15 years. If there is any doubt regarding the need for future medical treatment the most prudent thing to do is to account for future payments through a trust. See Peterson, pp 26-30.
Before that question can be answered we have to determine: What is Medicare’s interest?
Donald Patrick Eckler
Pretzel & Stouffer, Chartered
One S. Wacker Drive
Chicago, Illinois 60606