PowerPoint Ethical Considerations for Defense Counsel, FINAL

ETHICAL ISSUES RELATED TO
DEFENSE COUNSEL REPRESENTATION
OF SURETIES AND PRINCIPALS
Prepared and presented to Chicago Surety Claims Association for educational purposes only by:
Brandon G. Hummel
312-663-9400
bhummel@rmp-llc.com

DEFENSE COUNSEL REPRESENTATION OF
SURETIES AND PRINCIPALS
• Relationships Between Sureties, Principals and Defense
Counsel
• RPC Rule 1.2(c)
• RPC Rule 1.4
• RPC Rule 1.6(a)
• RPC Rule 1.7
• RPC Rule 1.8
• RPC Rule 3.1
• RPC Rule 5.4(c) and 1.8(f)(2)
2

Representing the Surety and Principal
Overlap of Surety and Principal Obligations and Defenses
• A Surety is “[o]ne who undertakes to pay money or to do any
other act in the event that his principal fails therein.”
• Because the Principal and Surety are both liable under the
same agreement, they will have many of the same defenses.
• The Surety, however, may have its own, unique defenses not
available to the Principal.
• Under what circumstances should the Surety tender defense to
the Principal?
3

Tendering to the Principal Contains Inherent Risks
• Some common risks for the Surety include:
 Financial stability of Principal;
 Relationship between Surety and Principal;
 Whether Principal appears to have valid defenses to
claims; and
 Whether the Principal’s chosen counsel is competent.
 In addition, the tender of the Surety’s defense can
give rise to a broad range of ethical issues.
4

Common Reasons Why Sureties Tender Defense
 Avoids risks of alienating customer in good standing
 Avoids risk of courts not awarding Surety’s attorneys fees
from indemnitor if Surety “unnecessarily” engages its
own counsel.
5

RPC Rule 1.7 - Conflict of Interest
(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.
6

RPC Rule 1.7 - Conflict of Interest Cont.
(b) Notwithstanding the existence of a concurrent conflict of
interest under paragraph (a), a lawyer may represent a client if:
(1) the lawyer reasonably believes that the lawyer will be
able to provide competent and diligent representation to each
affected client;
(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.
7

Key Points from RPC Rule 1.7
▫ Rule 1.7(a) requires that the attorney be able to represent
each client fully and without limitation by the interests of
the other client.
▫ Rule 1.7(b) addresses other situations where an attorney’s
duty of loyalty might be compromised by simultaneous
representation.
▫ Funding of the Surety’s defense by the Principal is not an
ethical issue if certain safeguards are utilized.
8

Concurrent Representation of Surety and Principal
In some instances, concurrent representation of Principal and
Surety may not be possible due to material conflicts of
interest.
9

Concurrent Representation – Surety Specific Defenses
A common conflict situation arises where Surety wishes to
assert a personal Surety defense to liability under the Bond
that may adversely affect Principal’s position. Such
defenses might include:
 an overpayment defense by an Obligee, especially
when the Principal claims that it was underpaid for the
same work;
 that Surety was fraudulently induced to write bonds at
issue;
 joint-venture defense;
 material alteration defense.
10

Concurrent Representation – Unfulfilled Collateral Request
▫ Another common conflict situation arises where Surety seeks
collateral from Principal and Principal refuses.
 “[A] lawyer cannot undertake common representation of
clients where contentious litigation or negotiations between
them are imminent or contemplated.” See MODEL RULES OF
PROF’L. CONDUCT RULE 1.7, Cmt. 29
▫ Very little case law exists that addresses the attorney’s ethical
responsibilities when the Principal refuses to provide collateral.
▫ However, there are cases that recognize the importance of
depositing collateral so as to confirm that the interest of the
Surety and Principal remain aligned. See Central Towers, 453
S.W. 2d 789, 800 (Tenn. Ct. App. 1970).
11

Bad Faith Claims Against Surety May Also Prevent
Concurrent Representation
• A tender by Surety to Principal’s counsel also may not be
possible where there are bad faith allegations against the
Surety or where there are penalties claimed against Surety for
its failure to comply with a Bond’s requirements.
• But what about situations involving less severe conflicts?
• Can ethical requirements be satisfied through disclosure of
potential conflicts to client(s) and consent from client(s)?
12

Informed Consent
RPC Rule 1.0(e): “Informed consent” denotes the agreement
by a person to a proposed course of conduct after the lawyer has
communicated adequate information and explanation about
the material risks of and reasonably available alternatives to
the proposed course of conduct.
13

Informed Consent Cont.
RPC Rule 1.0(e) – Comment 6: “The communication
necessary to obtain such consent will vary according to the
Rule involved and the circumstances giving rise to the
need to obtain informed consent. The lawyer must
make reasonable efforts to ensure that the client
or other person possesses information reasonably
adequate to make an informed decision.”
14

RPC Rule 1.0(e) – Comment 6: “In some circumstances it may
be appropriate for a lawyer to advise a client or other person to
seek the advice of other counsel. A lawyer need not inform a
client or other person of facts or implications already known to
the client or other person; nevertheless, a lawyer who does not
personally inform the client or other person assumes the risk
that the client or other person is inadequately informed and
the consent is invalid.”
15

RPC Rule 1.0(e) – Comment 6: “Ordinarily, this will require
communication that includes a disclosure of the facts and
circumstances giving rise to the situation, any explanation
reasonably necessary to inform the client or other person of
the material advantages and disadvantages of the proposed
course of conduct and a discussion of the client’s or other
person’s options and alternatives.”
16

▫ An attorney’s communication regarding potential conflicts
and scope of representation should be made as soon as possible.
▫ If multiple clients understand and acknowledge in writing the
risks associated with concurrent representation by the same
attorney, the attorney may be able to comply with his or her ethical
responsibilities to both.
▫ ABA Committee on Professional Ethics of the Association of the
Bar of New York City Opinion 2001-2 states that a lawyer “may
represent multiple clients in the same manner where the interests of
the clients are generally aligned or not directly adverse, provided
the clients are fully advised of the potential conflict and give
informed consent….”
17

▫ However, in some jurisdictions, lawyers are barred from
representing multiple clients with conflicts of interest, regardless
of disclosure and consent.
▫ For example, the Oregon State Bar Legal Ethics Committee
concluded that it is never appropriate to represent the insurer and
insured when there are conflicts of interest, even when the
lawyer receives informed consent. OR. STATE BAR LEGAL
ETHICS COMM., Opinion 49894 (1984).
18

Full Disclosure Usually Includes:
• Relationship of Attorney to Principal and Surety
Allstate Ins. Co. v. Carioto, 194 Ill. App. 3d 767 (1st Dist. 1990) (insurer/insured
context but applicable to principal/surety situation)
• Self Interests of Attorney
Illinois Municipal League Risk Management Assoc. v. Seibert,
223 Ill. App.3d 865, 871 (4th Dist. 1992)(financial interests such as prior client
relationship with surety, insurer, insured or principal)
• Nature of the Conflict and Coverage Implications under Bond or Insurance Policy
• Limitations on Representation
RPC 1.2(c) – “if the limitation is reasonable under the circumstances
and the client gives informed consent”
ABA Formal Op. 96-403 – requires the attorney to inform the insured that
the attorney “intends to proceed at the direction of the insurer in accordance
with the terms of the insurance contract[,] and what this means to the insured.”
19

20

RPC Rule 5.4(c) and RPC 1.8(f)(2) - Source of Payment of
Attorney Should Not Affect Duties to Client(s)
▫ Thus, a lawyer shall not permit a person who recommends,
employs, or pays the lawyer to render legal services for another to
direct or regulate the lawyer’s professional judgment in rendering
such legal services.
▫ This issue often arises in the context of surety/insurer litigation
guidelines and surety/insurer billing practices.
21

Surety/Insurer Litigation Guidelines
• ABA Ethics Opinion 01-421 (February 2001) (A lawyer must
not permit compliance with "guidelines" and other directives
of an insurer relating to the lawyer's services to impair
materially the lawyer's independent professional judgment in
representing an insured)
• ABA Ethics Opinion 96-403 (1996) (defense counsel may
accept insurer instructions regarding settlement so long as
insured acquiesces in insurer direction)
22

Outside Bill Reviewers
• ABA Ethics Opinion 01-421 (A lawyer may not, however, disclose
the insured's confidential information to a third-party auditor hired
by the insurer without the informed consent of the insured)
• ISBA has not yet issued an opinion as to whether the release of
billing information without the insured’s informed consent violates
the duty of confidentiality (RPC 1.6) or impairs the attorney’s
exercise of independent judgment (RPC 5.4)
• Disclosure may result in waiver of attorney-client privilege
U.S. v. South Chicago Bank, 1998 WL 774001 at *3 (N.D.Ill. 1998)
23

Surety/Insurer Litigation Guidelines Cont.
• Tenn. Bd. Of Prof. Resp., Formal Ethics Op. 2000-F-145, 2000 WL 1687507
(September 8, 2000)
“….an attorney may not accept employment by an insurer on behalf of an
insured with conditions limiting or directing the scope and extent of his or
her representation of the insured in any manner, including the decision
whether or not to appeal a judgment against the insured, whether or not to
demand a jury, or whether or not to participate in mediation on the insurer’s
behalf, unless the client-insured has expressly agreed with any or all of the
conditions limiting the nature or scope of the representation, and such agreement
is confirmed in writing by the client-insured to the attorney. Counsel receiving a
retention purporting to require undeviating compliance should inform the
insurer that such compliance cannot be assured, but that counsel will comply
to the extent permitted by counsel’s duties to the insured.”
24

Even with Informed Consent, Concurrent Representation Can Still
Violate RPC Rules 3.1 and 4.1
• General contractor gives notice it is tendering its defense and Surety’s
defense to same attorney. Discussions between Surety and claimant cease.
Claimant files a complaint to perfect bond claim. Complaint names
subcontractor, general contractor, and Surety as defendants who are jointly
liable for the debt.
• Surety has an obligation to the claimant, absent valid defenses, to timely
resolve bond claim. General contractor does not have any valid defenses
under the law, but wants to delay the proceeding to avoid payment. Under
these circumstances, may one lawyer represent both the Surety and the
general contractor in defense of the claim? (2003 ETH. OP. 1, 2003 WL
24306940 (N.C. St. Bar). No. It is unethical for an attorney to assert invalid
defenses or unnecessarily delay legal proceedings.
25

When Surety May Be Entitled to Independent Counsel
In Central Towers Apartments, Inc. v. Martin, 453 S.W. 2d 789, 800 (Tenn. Ct. App. 1970)
the court laid out a 12 factor analysis to evaluate whether the surety acted in good faith in
retaining its own counsel. Some of these include:
 The amount of risk to which the Surety was exposed;
 Whether the Principal was solvent;
 Whether the Surety demanded collateral;
 Whether Principal refused to deposit collateral;
 Whether Principal was notified of the action and given the opportunity to defend
itself and the Surety;
 Whether the Principal hired the attorney for itself and the Surety;
 Whether the Principal notified the Surety of the hiring;
 The diligence displayed by the Principal and its attorney in the case;
 Whether there is a conflict of interest between the Principal and the Surety;
 The amount charged and diligence of the attorney hired by the Surety.
26

When Surety May Be Entitled to Independent Counsel Cont.
▫ United Riggers v. Marathon Steel Co., 725 F.2d 87 (10th Cir. 1984) (holding
that surety entitled to reimbursement of its separate attorneys’ fees where
indemnitor refused to post collateral on demand and because of availability of
separate surety defenses)
▫ Gulf Ins. Co. v. AMSCO, Inc., 889 A.2d 1040, 1049 (N.H. 2005) (holding
that surety’s claim of unique defenses from that of principal provided no
viable basis for it to retain separate legal counsel).
27

Duties of Confidentiality
▫ RPC Rule 1.6(a) prohibits a lawyer during or after
representation from disclosing client confidences without the
client’s consent.
▫ But lawyer may make disclosures under the “implied
authorization” exception to Rule 1.6, such as disclosure of
billing statements and periodic status reports.
28

Duties of Confidentiality Cont.
RPC Rule 1.8(b): A lawyer shall not use information relating to
representation of a client to the disadvantage of the client unless the
client gives informed consent, except as permitted or required by these
Rules. Attorney should seek the insured’s informed consent under
Rule 1.6 whenever the disclosure of information to the insurer
may have an adverse effect on “a material interest” of the
policyholder, such as coverage issues or implicates a conflict
between the parties.
29

Duties of Confidentiality Cont.
▫ Comment 31 to Rule 1.7 describes the tension of disclosure
of confidential information this way:
 [C]ontinued common representation will almost certainly
be inadequate if one client asks the lawyer not to disclose
to the other client information relevant to the common
representation. This is so because the lawyer has an
equal duty of loyalty to each client, and each client has
the right to be informed of anything bearing on the
representation that might affect that client's
interests[.]
30

Disqualification Motion by Principal Rejected
• Cornish v. Superior Court, 257 Cal. Rptr. 383, 387 (Cal. App.
1989), the court rejected a motion to disqualify a law firm that
previously represented both the contractor and surety because
the contractor could not have had a reasonable expectation that
the confidences of the contractor would not be shared with the
surety, the firm’s primary and long-time client.
31

Duty to Communicate with Client
RPC Rule 1.4
(a) A lawyer shall:
(1) promptly inform the client of any decision or circumstance with respect to which the
client’s informed consent, as defined in Rule 1.0(e), is required by these Rules;
(2) reasonably consult with the client about the means by which the client’s objectives are
to be accomplished [see also RPC 1.2(a)];
(3) keep the client reasonably informed about the status of the matter;
(4) promptly comply with reasonable requests for information; and
(5) consult with the client about any relevant limitation on the lawyer’s conduct when the
lawyer knows that the client expects assistance not permitted by the Rules of Professional
Conduct or other law.
(b) A lawyer shall explain a matter to the extent reasonably necessary to permit the
client to make informed decisions regarding the representation.
32

Duty to Communicate with Client Cont.
▫ The Rule requires the attorney to inform Surety of facts
necessary to make informed decisions regarding its
representation.
▫ But Principal’s counsel may sometimes fail in this
obligation.
▫ Rule 1.4 is therefore sometimes in conflict with Rule
1.6, which requires an attorney to maintain a client’s
confidences.
33

▫ Situations where such tension between Surety and Principal may exist
include:
 Principal admits to its attorney that it has no defense to claims in
litigation, but asks the attorney to delay resolution of the claims;
 The attorney is informed, or determines based on access to
confidential information, that the Principal and/or indemnitors are
insolvent, which could later adversely affect the Surety’s
indemnification rights;
 The attorney is informed of the potential for other claims beyond
those known to the Surety that could exceed the Surety’s anticipated
losses; and
 Where the attorney fails to inform the Surety of settlement offers.
34

Rule 1.6 often creates the most tension in the attorney’s
concurrent representation of the Surety and Principal. The
commentary to the Rule provides:
35

▫ The attorney’s obligation to keep communications confidential is
often at odds with Rule 1.4’s requirement that both clients be kept
informed of relevant information.
▫ The attorney may therefore breach his or her ethical duty to Surety
for not disclosing facts adverse to its position, but, on the other hand,
may breach that duty to Principal for communicating confidential
information.
▫ Comment 30 to Rule 1.7 of the ABA Model Rules of Professional
Responsibility provides:
 A particularly important factor in determining the appropriateness of common
representation is the effect on client-lawyer confidentiality and the attorney-client
privilege. With regard to the attorney-client privilege, the prevailing rule is that, as
between commonly represented clients, the privilege does not attach. Hence, it must be
assumed that if litigation eventuates between the clients, the privilege will not protect
any such communications, and the clients should be so advised.
36

▫ However, an attorney in this predicament must inform both parties
of:
 The information the attorney learned;
 The Attorney’s determination to share it; and
 Need to receive informed consent to continue as attorney for both parties.
▫ Otherwise, the attorney must withdraw from representation of
both parties.
 See MODEL RULES OF PROF’L. CONDUCT RULE 1.7, Cmt. 29
(“Ordinarily, the lawyer will be forced to withdraw from representing all
of the clients if the common representation fails”)
▫ The potential for conflict arises in many situations, including
settlement offers and when the attorney learns, or the Principal
discloses to him or her, information it does not want to be shared
with the Surety.
37

• The comments to Rule 1.7 cautions:
38
Comment 29 to Rule 1.7 of the ABA Model Rules of
Professional Responsibility provides:
“Generally, if the relationship between the parties has already
assumed antagonism, the possibility that the clients' interests can
be adequately served by common representation is not very good.”
See MODEL RULES OF PROF’L. CONDUCT RULE 1.7, Cmt. 29

Ramifications of Principal’s Failure to Pay Attorney Representing Surety
▫ Knowledge of Principal’s inability to pay constitutes a good reason to decline or
rescind tender of defense.
▫ Recall that Rule 1.4 requires the attorney to keep Surety informed of facts that
affect Surety’s interests. Failure to pay attorneys’ fees is an important fact that
Surety should be aware of.
▫ Although not always an ethical issue, there are legal consequences flowing from
Principal’s failure to pay its attorneys that could affect the Surety’s ability to
defend itself. For example:
 Retaining liens. An attorney's retaining lien on a client's papers and files is a
possessory lien that the attorney holds until the fee has been paid or until
adequate security for payment has been posted. See Fingar v. Braun & May
Realty, Inc., 807 So. 2d 202, 203 (Fla. 2d DCA 2002).
▫ This creates a very difficult situation for the Surety because any new counsel will
need to review the entire file.
39

Refusal of Principal to Furnish Collateral Can Also Justify
Surety’s Rescission of Tender
▫ Several courts have held that a Surety is justified in its refusal to
tender its defense to the Principal when the Principal fails to deposit
collateral.
▫ For example, in Troporoff Engineers, P.C. v. Fireman’s Fund Ins. Co.,
2006 WL 1539341, *2 (S.D.N.Y. 2006), the court held: “Although the
Court was initially skeptical about the necessity of the Sureties' conducting
its own independent defense, the Court finds that there is sufficient
evidence indicating that the Sureties' separate defense was not completely
unnecessary. Specifically, the Court pays considerable credence to the
letters drafted by Sureties' counsel, in which collateral is requested by the
Sureties as a requirement for tendering the defense[.]” (2006 WL 1539341
(S.D.N.Y. June 5, 2006) (emphasis added))
40

Refusal of Principal to Furnish Collateral Can Justify Surety’s
Refusal to Tender Cont.
▫ This case illustrates the importance of a Surety’s demand for collateral
and the effect it has on the litigation.
▫ If Principal fails to deposit the collateral an irreconcilable conflict likely
exists that prohibits an attorney from representing both Surety and
Principal in a matter.
▫ Sureties and Principals can, and of course, often do, disagree on how a
claim should be handled and/or settled.
▫ Surety should determine whether there are good faith defenses
(including Surety defenses) to a claim when considering whether to
tender a defense to the principal.
41

Additional Cases Addressing Collateral Requests and Tender
▫United Riggers & Erectors, Inc. v. Marathon Steel Co., 725 F.2d 87,
90 (10th Cir. 1984)(recognizing that in circumstances where the
Principal is unable to post collateral, pay subcontractors, and has
exposed the Surety to a large performance bond loss, surety’s
engagement of separate counsel to defend itself justified)
▫ James Constructors, Inc. v. Salt Lake City Corp., 888 P.2d 665, 671
(Utah Ct. App. 1994)(affirming trial court’s finding that Surety’s own
defense was necessary because of the Principal’s “stubborn refusal to
post collateral or to provide other adequate and acceptable security.”)
42

THANK YOU
43
Brandon G. Hummel
Main: 312.589.6018
Fax: 312.663.1028
Email: bhummel@rmp-llc.com
Education & Certifications
John Hopkins University (B.A.)
Northwestern University School of Law (J.D.)
Bar Admissions
State of Illinois
U.S. District Court for the Northern District of Illinois
U.S. Court of Appeals for the 7th and 9th Circuits
Memberships & Volunteering
American Bar Association
Tort & Insurance Practice Section
Forum on Construction Law
Chicago Bar Association
Chicago Building Congress
The Rotary Club, Glenview, IL
Boy Scout Troop 32, Assistant Scoutmaster, Glenview, IL
St. David's Episcopal Church, Glenview, IL
Awards
In 2015, Brandon was selected as an Emerging Lawyer in Construction and Surety Law by
Leading Lawyers Magazine, a division of the Chicago Law Bulletin. Fewer than 2 percent of
registered lawyers in Illinois under the age of 40 are so recognized by the Leading Lawyers
division of Law Bulletin's Publishing Company.

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