Solving the conundrum of the Canadian tripartite retainer

(le sommaire français suit)

Discussion of the 2000 Court of Appeal for Ontario decision, Fellowes McNeil v. Kansa, in my recent article, “No Unbundling of Negligence,” has tapped into a continuing discussion of the precise ethical obligations of lawyers and law firms retained by liability insurers to defend parties in lawsuits, and who “stumble upon” information that may jeopardize the coverage and the insurer’s provision of a defence.  The Supreme Court did grant leave to appeal, but the case was settled before Canada’s top court could hear it.  Eleven years later, you’ll hear it here first, folks: Fellowes was wrongly decided.

Despite this question’s apparent simplicity, lawyers of all vintages constantly have trouble with the so-called “tripartite relationship” in insurance defence litigation.  Canadian commentators have imported the phrase from American law, where the insurer-attorney retainer has all but disappeared in relation to the one between the lawyer and the insured.  A 2003 article by Graeme Mew and Reena Lalji (extracted here) advocated adopting the American articulation of the law, in order to avoid the result in Fellowes, where the court held that the lawyer owed a duty to advise the insurer about a ground for withdrawal of coverage.  True, the fictional solution so offered relieves lawyers of an ethical conundrum, but at the expense of both clients.  Lawyers develop business relationships with insurers.  To hold that a lawyer owes loyalty solely to the insured is therefore not transparent about the potential conflict of interest – it merely sweeps the issue under a positivist carpet.

Personally, the author of this blog prefers to call the Canadian version of this arrangement a “tripartite retainer.”  The phrase better focuses attention on the actual nature of the defence lawyer’s professional responsibilities, as opposed to what the courts may want it to be.  The most common example of the tripartite retainer occurs in motor vehicle accident litigation.  However, the arrangement occurs in many other settings, such as commercial business liability, tenant liability in fires and floods, and professional negligence.

How relevant is this discussion to junior lawyers?  Fellowes was a dramatic and exceptional example of an issue that occurs quite frequently and in a wide range of cases, although the problem may often may fly under most counsel’s radar.  In motor vehicle accident litigation, facts triggering coverage exclusions often come to light on examination for discovery, such as the allegedly at-fault driver’s use of an automobile without the driver’s consent.  In the case of defences provided under business general liability policies or homeowner policies examples include activities such as marijuana grow-ops causing fires and property damage to neighbouring properties, excluded business uses of residences, and certain types of drainage.  Often, such activities remain hidden until litigation is underway.  In Canada, there is actually little judicial guidance about what the defence lawyer is supposed to do when information comes to light which may jeopardize coverage.

In the United States, the courts have taken the general approach that the lawyer’s sole responsibility is to the insured defendant.  There, the dilemma does not really arise, because it is not a true tripartite retainer by operation of legal positivism (in simplistic terms, court-made law seeking a desired outcome, as opposed to the actual justice of the case).  The courts there have held that insureds deserve more judicial help than insurers, even though both are interested in the issue.  Some logistical problems do arise, where it is an in-house lawyer, because of conflicting duties of loyalty between the lawyer-client and employer-employee relationships.  Under no circumstances could the lawyer disclose the conflict-creating information to the insurer, once the lawyer becomes aware of the significance of the information.

In Canada, the courts have, for the most part, treated the tripartite retainer as a joint retainer, if for no other reason than the fact that it is a joint retainer.  The U.S. courts have decided, as a matter of policy, the duty of good faith owed by the insurer is paramount over the duty owed to the employing insurer.  Factually, however, the insurer hires the lawyer.  That fact is inescapable.  Once the insured complies by permitting the lawyer to defend, the retainer is a joint one.  As noted by Nigel Kent in his article, the Law Society of British Columbia specifically treats the tripartite insurer-insured retainer as a joint one.  In Ontario, one has to connect the dots as in any multi-party retainer.

Under subrule 2.04 (6) of the current Ontario Rules of Professional Conduct, the joint retainer rule applies any time a lawyer agrees to be employed by more than one client in a matter or transaction.  Unless this rule changes, one cannot avoid the obligations owed to both the insurer and the insured.  These obligations include the absence of lawyer-client confidentiality as between the two.  Once a conflict of interest becomes apparent, subrules 2.04(9) and (10) apply.  Unless the insured consents under subrule (10), the insurer’s choice of defence counsel shall do the following, if a contentious issue between them arises:

(a)  not advise them on the contentious issue, and

(b)  refer the clients to other lawyers, unless

(i)  no legal advice is required, and

(ii)  the clients are sophisticated,

in which case, the clients may settle the contentious issue by direct negotiation in which the lawyer does not participate.

Unlike the British Columbia rule, the Ontario rule does not stipulate that the lawyer must then withdraw from acting on the defence file.  Rather, he or she is required to refer the clients to independent counsel on the “contentious issue.”  (In the case of impecunious insureds, one might ultimately see a court requiring an insurer to retain independent counsel for the insureds.)  Arguably, the rule preserves the defence retainer.

It is, both from a practical and a principled perspective, hard to imagine how the lawyer is supposed to refer the two clients to independent counsel without disclosing the nature of the contentious issue.  As a joint retainer, the lawyer is not prohibited from sharing information between the clients.  This, in the view of this author, has an impact on the law arising from the Fellowes decision.

In Fellowes, the lawyer felt he was retained to look after the excess insurer Kansa’s interests only, and that he owed that obligation to Kansa even though the scope of the retainer may not have included coverage.  The problem with this analysis is that the exposure of Kansa to indemnify for liability was Kansa’s interest, only because the insurer stepped into the insured’s shoes for the exposure to liability in excess of the primary insurance limits.  Counsel retained by excess insurers to associate in the defence of a claim generally do not become lawyers of record.  Usually that is the function of lawyers retained by primary insurers.  If an excess insurer retains liability counsel to deal, for example, with damages exceeding primary limits, it is for both the insured and the insurer, because it remains a function of defending the insured against liability.  (Cf. defending the insurer against liability, which is coverage.)

The other side of the transaction is that an insured defendant would allow that lawyer into his confidence as part of the defence counsel team.  If the lawyer were not acting for the insured’s interest as well as the insurer’s, the lawyer would be obliged to spell this out in clear terms, as a matter of professional ethics.  If the insured was not agreeable to the lawyer acting for the insurer’s interest only, the lawyer retained by the excess carrier could arguably be excluded from the defence team, because such participation would not be part of the excess insurer’s right or duty to take part in the defence of the insured.  (We must not forget the insurance contract.)

The conclusion, therefore, is that both the defendant lawyer and the Court of Appeal were incorrect, at paragraph 53 of the Fellowes decision, in concluding that he was solely acting for the insurer:

One of the surrounding circumstances that the trial judge considered in coming to her conclusion was that [the lawyer] had raised the issue of coverage on his own initiative when acting for Kansa in the past. More importantly, [the lawyer] admitted on his examination for discovery that, at this stage of the litigation and at this time, [the lawyer] was “… retained to protect Kansa’s interests, as opposed to the insured’s interests until [it] undertook the defence of the insured.”  Kansa’s interests at this time included not just the question of liability but coverage as well.  [The lawyer’s] acknowledgement put the question of coverage within the scope of his retainer.

The lawyer in Fellowes had a misapprehension of the scope of his obligations, in that he did not feel any loyalty owed to the insured.  However, the Court of Appeal was incorrect in upholding the trial judge’s finding that the lawyer was negligent “by reason of his failure to canvass with and advise” the insurer of a ground to avoid coverage.  It would have been contrary to the Law Society’s rule to “canvass with and advise” the insurer, Kansa, on the issue.  (The current iteration of the rule, effective November 1, 2000, was merely a stylistic revision of the existing Rule 5, Commentary 6.  That text, in force during the facts of the Fellowes matter, was perhaps even more forceful in that it expressly provided the lawyer “would be in breach of the Rule [against conflicts] if the lawyer attempted to advise them on the contentious issue.”)

Neither the Court of Appeal’s reasons nor the trial decision show whether either court considered the lawyer’s actual obligations under the Law Society rule, or that they were brought to the court’s attention by the lawyer’s counsel.  (For this reason, it is possible the decisions were per incuriam.)  Perhaps the Law Society of Upper Canada’s rule needs to follow the lead of British Columbia’s, and clarify the rule as it applies to insurance retainers.  However, there was enough specificity in the rule to provide defence counsel with guidance.  The root of the error was in the acceptance of the lawyer’s characterization of the nature of the retainer as non-tripartite, from his incorrectly perceived lack of obligation to the insured.  Once one sees the tripartite nature of the retainer, the rest is rather easy to see.  The court found the lawyer liable for having failed to do what the regulator’s code of ethics in fact prohibited him from doing.

It is undoubtedly logical that, had the lawyer referred the insurer and the insured to independent counsel, the insurer may have denied coverage.  However, on the face of the record before it, it was not up to the court to conclude that result.  Between the lawyer’s responsibility and the likely practical outcome is a narrow space of no negligence.  Lawyer negligence is based on a breach of the standard of care which causes damage.  If the lawyer’s obligation forbade him from advising the insurer of the off-coverage circumstances, he should not have been held liable in negligence for having failed to provide the advice.  If one can see daylight in the gap between the correct standard of care and the prejudice to Kansa, it would have been enough to find Kansa had failed to establish the elements of negligence.  The hypothetical nature of the issue would have been down to the litigation strategy of the plaintiff and not due to judicial misdirection.  Consequently, the appropriate appellate remedy would have been to dismiss the action.

~   ~   ~

Sommaire français:

La publication de mon article, « Pas de dégroupage de négligence », est tombée dans une discussion des obligations déontologiques des avocats et des cabinets d’avocats retenus par les assureurs de responsabilité pour défendre les parties en procès, et qui aperçoivent des détails qui pourrait compromettre la couverture donnant lieu à la défense.  L’exemple le plus commun d’un tel contrat « tripartite » survient presque toujours dans les litiges d’accidents de véhicules automobiles. Cependant, la disposition se produit dans de nombreux autres paramètres, tels que la responsabilité des affaires commerciales, la responsabilité des locataires dans les incendies et les inondations, et la négligence professionnelle.

Quelle est la pertinence de ce sujet aux avocats juniors?  La question ne se pose pas fréquemment dans les litiges automobiles de nos jours. Toutefois, dans le cas des moyens de défense prévus par les assurances d’affaires de responsabilité civile générale ou des assurances propriétaires, les faits peuvent souvent venir à la surface qui mettent la garantie de couverture en péril. Les exemples incluent des activités telles que des plantations de marijuana qui provoquent des incendies et des dommages matériels aux propriétés voisines, les entreprises exclues dans les résidences, et le drainage. Au Canada, il est en réalité très peu de directives sur ce que l’avocat de la défense est censée faire si, au cours d’agir pour l’assuré dans la défense, l’information apparaît qui mettrait en péril la couverture.

Aux États-Unis, les tribunaux ont adopté l’approche générale que la seule responsabilité de l’avocat est à la partie assurée. Là, le dilemme ne se pose pas vraiment, parce que ce n’est pas un vrai mandat tripartite à force d’un régime imposé. Quelques problèmes de logistique se posent, où il est un avocat-employé de la société de l’assureur, en raison de leurs obligations contradictoires de loyauté entre l’avocat et son client et relations employeur-employé. En aucun cas, l’avocat pourrait divulguer les informations de conflit de création à l’assureur, une fois que l’avocat prend connaissance de l’importance de l’information.

Au Canada, les tribunaux ont, pour la plupart du temps, traités de le mandat tripartite comme un double mandat, si pour aucune autre raison que le fait que c’est un double mandat. Les tribunaux américains ont décidé, comme une question de politique, que le devoir de bonne foi due par l’assureur est primordiale sur le devoir envers l’assureur. Mais, en fait, c’est l’assureur qui engage l’avocat. Une fois que l’assuré respecte en permettant à l’avocat pour défendre, le mandat est conjointe. Comme l’a noté Nigel Kent dans son article, le Barreau de la Colombie britannique traite spécifiquement du mandat tripartite entre l’avocat, l’assureur et l’assuré comme une responsabilité conjointe. En Ontario, on doit relier les points comme dans tout mandat entre multiples parties.  Au sous-paragraphe 2.04 (6) des Règles de déontologie (l’homologue de la règle 5, commentaire 6, qui s’appliquait avant le 1 novembre, 2000) la règle des doubles mandats s’applique chaque fois qu’un avocat accepte d’être employé par plus d’un client dans une matière ou une transaction. A moins que cette modification des règles, on ne puisse pas se soustraire aux obligations dues à la fois l’assureur et l’assuré. Ces obligations comprennent l’absence de la confidentialité avocat-client entre les deux. Une fois qu’un conflit d’intérêts devient apparent, les sous-paragraphes 2.04 (9) et (10) s’appliquent. Sauf dans le cas du consentement de l’assuré en vertu du paragraphe (10), le choix de l’assureur de l’avocat de la défense est obligé de faire ce qui suit:

a) il ne doit pas continuer à conseiller les parties sur la question qui les oppose;

b) il renvoie les clients à d’autres avocats, sauf si les conditions suivantes sont réunies :

(i) la question ne requiert pas de conseils juridiques,

(ii) les clients ont l’expérience nécessaire.

Dans ce cas, les clients peuvent négocier une solution entre eux, sans l’intervention de l’avocat.

Contrairement à l’obligation décrite dans l’article de Kent sur les règles en Colombie-Britannique, les règles de l’Ontario ne stipulent pas que l’avocat doit alors se retirer de agissant sur le fichier de la défense. Plutôt, il ou elle est tenu de renvoyer les clients à un conseil indépendant sur la « question litigieuse ». (Dans le cas d’assurés impécunieux, on pourrait finalement envisager un tribunal ordonner à un assureur d’embaucher un avocat indépendant pour les assurés.)

Il est, à la fois d’une pratique et une perspective de principe, difficile d’imaginer comment l’avocat est censé renvoyer les deux clients d’un avocat indépendant, sans divulguer la nature de la question litigieuse.  Quand même, les règles défend l’avocat de conseiller des parties au sujet qui les oppose.  Ceci, à la vue de cet auteur, a un impact sur la loi découlant de la décision de Fellowes.

En Fellowes, l’assureur exédentaire, Kansa, a embauché le cabinet d’avocats pour s’occuper des intérêts de Kansa seulement, et qu’il devait l’obligation professionelle à Kansa, même si la portée du mandat n’a pas inclus la couverture. Le problème avec cette analyse est que la résponsabilité de Kansa d’indemniser est l’intérêt de Kansa seulement parce que l’assureur doit indemniser l’assuré. L’avocat retenu par l’assureurs excédentaire pour s’associer dans la défense d’une réclamation n’est généralement pas l’avocats du dossier. Habituellement, c’est la fonction des avocats retenus par les assureurs primaires. Si un assureur excédentaire conserve la responsabilité conseils pour faire face, par exemple, avec des dommages dépassant les limites primaire, il est à la fois pour l’assuré et l’assureur.

L’autre côté de la transaction est que le défendeur-assuré permettrait que l’avocat soit inclus dans sa confiance et dans le cadre de l’équipe de défense. Si l’avocat n’ agit pas pour les intérêts de l’assuré ainsi que de l’assureur, l’avocat serait obligé de le préciser en termes clairs, comme une question d’éthique professionnelle. Si l’assuré n’a pas été agréable à l’avocat agissant pour l’intérêt de l’assureur seulement, l’avocat retenu par l’assureur excès pourrait sans doute être exclu de l’équipe de défense, parce que cette participation ne serait pas partie du droit de l’assureur l’excès ou le devoir de prendre part à la défense de l’assuré. (Nous ne devons pas oublier le contrat d’assurance.)

La conclusion est donc que, dans l’arrêt Fellowes, l’avocat défendeur et la Cour d’appel étaient tous les deux incorrects, au paragraphe 53, en concluant que l’avocat agissait seulement pour l’assureur:

One of the surrounding circumstances that the trial judge considered in coming to her conclusion was that [the lawyer] had raised the issue of coverage on his own initiative when acting for Kansa in the past. More importantly, [the lawyer] admitted on his examination for discovery that, at this stage of the litigation and at this time, [the lawyer] was “… retained to protect Kansa’s interests, as opposed to the insured’s interests until [it] undertook the defence of the insured.”  Kansa’s interests at this time included not just the question of liability but coverage as well.  [The lawyer’s] acknowledgement put the question of coverage within the scope of his retainer.

L’avocat de Fellowes avait mal compris la portée de ses obligations, en ce sens qu’il ne sentait aucune loyauté envers l’assuré. Néanmoins, l’avocat n’était pas obligé de divulguer à Kansa que la conduite de l’assuré est tombée en dehors des termes de la politique. Néanmoins, la chaîne des événements suivant à la conduite de l’avocat aurait basculé. Entre la responsabilité de l’avocat et l’issue probable et pratique se voit un espace étroit d’aucune négligence. La négligence du juriste est basée sur une violation de la norme de diligence qui cause des dommages. Si l’obligation de l’avocat était de ne pas aviser l’assureur des circonstances hors de couverture, il ne devrait pas avoir été tenu responsable pour négligence.

Le comportement de l’avocat en deçà de l’obligation actuelle ne cause pas nécessairement Kansa de renoncer à sa position de couverture. Il aurait suffi de trouver que Kansa avait omis d’établir les éléments de la négligence. Le caractère hypothétique de la question aurait été vers le bas pour la stratégie de l’instance du demandeur et n’est pas due à une erreur judiciaire. Par conséquent, le remède approprié en appel aurait été de rejeter l’action.

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