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Conflict of Interest when making an insurance claim

The Conflict Game

It is human nature that when things go wrong or you feel like you are or could be in trouble, you are inclined to turn to your family and friends for guidance or assistance. It is not dissimilar in the working world. When a business or individual (Insured) receives a claim or demand, civil or criminal proceedings, government or regulatory notice or some other correspondence asserting some form of wrongdoing, the Insured’s first port of call would be their own solicitor or a solicitor friend who may have worked with the Insured in the past and understands their business and staff. This approach is fraught with risk – the risk of an inherent conflict of interest between the Insured and their solicitor. This could have significant ramifications for not only the claim process but also on insurance coverage. This paper canvasses a solicitor’s obligations, some examples and how law firms used by Berkley Insurance Australia (BIA) addresses this risk. The potential for conflicts of interest is something which you, the insurance broker should be alive to from the outset and prudently raised with the Insured. It is also a strong reason why the claim/demand should be notified to BIA without undue delay.

Solicitor Obligations

Every solicitor will agree that it is their obligation to protect their client’s interest whilst operating at all times within the scope of their overarching duty to the court and the administration of justice. In NSW, Regulation 3 of the Legal Profession Uniform Law Australian Solicitors’ Conduct Rules 2015 (Rules) states:

3  Paramount duty to the court and the administration of justice

3.1         A solicitor’s duty to the court and the administration of justice is paramount and prevails to the extent of inconsistency with any other duty.

Regulations 10 to 12 of the Rules deal with a solicitor’s obligation to avoid conflict with former clients, current clients and its own interest respectively. For example:

12  Conflict concerning a solicitor’s own interests

12.1       A solicitor must not act for a client where there is a conflict between the duty to serve the best interests of a client and the interests of the solicitor or an associate of the solicitor, except as permitted by this Rule.

There are similar provisions, regulations, law or rules in other jurisdictions (and at common law). However, sometimes due to human emotion, error or lack of understanding, inherent bias and/or inadvertence, the duty to avoid conflict is underappreciated, ‘pushed aside’ or not considered by the acting solicitor (or advised fully to the Insured). It is important for you, the insurance broker to be aware of this and be the ‘voice of reason’. The following examples illustrate how such conflict situations may arise.

Examples

  1. The Insured received advice from law firm ABC in relation to the terms of its agreements with its subcontractors. ABC drafted the subject agreements. A subcontractor later commences a claim for under-payment of wages and entitlements alleging the agreement was a ‘sham’ contract (and  it was really an employer/employee relationship). The Insured engages ABC to defend the claim.  ABC is in a clear position of conflict because they are the solicitors that had previously advised on the veracity of the subject agreement which is now the very subject of the claim. The Insured may think that because ABC understands its business and knows the agreement, it is in the best position to defend the claim (a view likely shared by ABC).
  2. The Insured receives a letter of demand from one of its suppliers (Supplier) alleging property damage caused by one of the Insured’s drivers. The Insured does not consider itself to be liable and retains law firm DEF to respond to the letter (which DEF is happy to do). DEF had previously acted for Supplier in relation to a similar incident and is aware that the cause of a previous (similar) damage is arguably due to a different reason. By acting for the Insured and using the knowledge it had obtained confidentially whilst acting for Supplier in the past should have caused red lights to flash. DEF would be in conflict by using confidential information it obtained while working for Supplier, against Supplier (a former client).
  3. While driving a forklift, the Insured’s employee accidentally runs into a third party at the Insured’s workplace. The Insured and employee are both served with a Writ and Summons from the DPP in relation to alleged work, health and safety (WHS) breaches. The Insured engages its company lawyer GHI to represent both it and the employee in the WHS prosecution. GHI has a long standing business relationship and previously advised the Insured on its WHS obligations/processes and risk assessment. The Insured believes the cause of the accident was due to its employee’s carelessness and not following set procedure. In addition to GHI’s likely conflict arising from its relationship and previous WHS advice to the insured (like example 1 above), there are further complications. GHI is conflicted from representing the employee because the interests of the company and the employee may well not be aligned and therefore clearly in conflict given a solicitor has to act in the best interest of its clients (in this case, both the company and employee are its clients).

A conflict of interest is a serious matter and may be detrimental to the Insured’s interest (or defence of a matter). It is likely to prejudice the Insured’s (and Insurer BIA) rights under the policy (for example, BIA might decline to cover the insured solicitor’s incurred costs). In example 1 above, the Insured is conceivably paying ABC to defend its own advice or position on the subject agreements, a ludicrous proposition. If BIA had been notified early and appointed an independent panel solicitor to assist (instead of ABC), that solicitor would objectively, thoroughly and as I have mentioned independently consider the subject agreements and advise on the risks faced by the insured in defending the claim. Often there are prejudice issues arising from the late notification as an insured’s personal solicitor frantically tries to resolve a claim before the advice they have given which has (or may) proved to be wrong comes to light. This happens when the solicitor is preferring their own interests to the interest of the Insured (or BIA). Example 3 highlights a situation where legal costs may be wasted (and possibly uncovered) if GHI was later unable to act for both the company and/or the employee in the WHS prosecution (this is because GHI would be privy to information from the employee). It may be helpful to the audience to explain how a conflict of interest is likely to prejudice the insured’s cover under the policy of insurance. For example, can the amount BIA indemnifies be reduced?

As the insured’s broker (and an entity separate to the dispute or insurance claim), this risk should be on your mind in such situations and it would be prudent to advise the Insured to notify BIA or any relevant insurer without delay rather than dismissing the insured’s tendency to engage their own solicitor and notifying later / not notifying BIA. The lesson is simple. As the insurance broker, it is also important to consider what may happen if the amount the insurer pays is reduced due to prejudice and broker advice which could have been given to the Insured to avoid the Insured looking to recover from their service provider.

Berkley Insurance Australia panel law firms

BIA has a panel of dedicated large multidisciplinary law firms in every State and Territory. These firms have been handpicked based on their performance over many years including their results, expertise, experience, and understanding of BIA’s Insureds and policy wordings.  All BIA’s panel law firms have controls in place to ensure that before they accept instructions they perform a conflict check. By performing this check, BIA’s panel law firms can detect and avoid conflicts of interest before an engagement is accepted.  If necessary, BIA will appoint separate firms to represent the interests of multiple Insureds who may be involved in the same claim or proceedings. BIA will always exercise its rights under the policy to appoint one of its panel solicitors to assist or act for the Insured once a claim is made and indemnity extended.

Conclusion

There can be times when a conflict of interest may not be readily apparent to the Insured and its own solicitor. This can later lead to complications with its case (which were likely avoidable) or, worse, prejudice the insured in relation to both its defence and indemnity position with the insurer (and also likely leading to a formal complaint against the solicitor for acting under a conflict of interest). It’s easy, avoid this situation by notifying BIA early and advising your client of the risk!

Darren Quek | Senior Claims Adjuster


Important Notice
The content of this article is intended to provide general educational information only. You should not rely on it for the purposes of any type of legal advice or financial product advice. You should always obtain legal or other professional advice appropriate to your own circumstances, objectives and needs before acting or relying on any information.