Tripartite relationship triumphs in California

The California Court of Appeal, Second District, has reaffirmed that state's adherence to the tripartite relationship in which defense counsel retained and paid by an insurer has two clients-the insurer and the insured-with the result that the insurer has standing to sue the retained law firm for legal malpractice. Gulf Insurance Co. v. Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone, 93 Cal.Rptr.2d 534 (Cal.App. 2000).

The case arose in the context of a legal services plan offered by American Express. A participant in the plan sued in a multi-count complaint, alleging that plan attorneys, who were listed as "approved counsel" by the plan, had bungled a bankruptcy case. In addition to a count for legal malpractice, this complaint included a count alleging breach of contract by the plan attorneys for failing to provide legal services of the promised quality. Gulf Insurance, which provided the plan with errors and omissions coverage, accepted defense of the action, but with a reservation of rights as to the contract count.

Ultimately, Gulf sued the plan attorneys for malpractice and for breach of contract to provide representation to the plan participant. The trial court granted the plan attorneys summary judgment on both counts, ruling on the first count that Gulf had no standing to the plan attorneys because it was not a client, and on the second count that there was no triable issue of fact presented as to whether Gulf suffered any harm.

The court of appeal reversed, declaring adherence to the tripartite relationship and quoting Bogard v. Employers Casualty Co., 210 Cal.Rptr. 578 (Cal.App. 1985): "The attorney hired by the insurance company to defend in an action against the insured owes fiduciary duties to two clients: the insurer and the insured." The court added its own statement: "Counsel retained by an insurer to defend its insured has an attorney-client relationship with the insurer."

In view of the dual attorney-client relationship, the court continued, Gulf had standing to sue the plan attorneys unless the reservation rights created a conflict of interest between the insurer and the insured that would prevent defense counsel from representing both. Not every reservation of rights creates a conflict, the court said, and here it found none that would preclude Gulf from suing. It pointed out that the reservation of rights was general in nature, that it looked to unknown eventualities, that Gulf had not sought reimbursement for defense costs for uncovered claims, and that there was no showing that liability could be transferred to the uncovered count because the same factual charged formed the basis of both the malpractice and contract counts.

In reversing the second prong of the trial court's summary judgment, the court of appeal concluded that there were factual triable issues as to whether Gulf had suffered any injury because of the plan attorneys' malpractice.