Insurer Can’t Locate The Insured: What To Do About Its Duty To Defend 

Sometimes an insurer has a duty to defend its insured but, despite all manner of efforts, it cannot locate the person or a representative of an insured-entity.  The insurer needs its insured’s involvement in the defense.  Does the insurer have the obligation to defend an insured that it cannot locate?  Albeit under unusual facts, issues surrounding the defense of a missing insured were before the Supreme Court of Hawaii in Franco v. Reinhardt. 

As an aside, if a defense is being provided under a reservation of rights, the insurer also needs to get the letter into the insured’s hands.  Franco was not a reservation of rights situation.  In addition, the missing insured scenario can also give rise to duty to cooperate issues.  That was also not a factor in Franco.

Putting aside the issues that were not addressed, Hawaii’s top court in Franco discussed, in detail, whether an insurer is obligated to retain counsel for an insured that it cannot locate -- and whether appointed defense counsel is ethically permitted to represent a client with whom he or she cannot communicate and obtain authority for actions taken.

This is a situation that insurers and defense counsel sometimes face but there is not a lot of case law addressing it.  Franco, being a detailed supreme court decision addressing these issues -- not to mention that the court did not limit its analysis to the rules of professional conduct, but also examined an insurer’s good faith obligations to an insured – led me to choose the decision as one of the year’s ten most significant. 
 
The facts at issue in Franco are not complicated but are unusual.  In 2011, Sabio Reinhardt crashed his girlfriend’s pick-up.  His front seat passenger, Tiare Franco, died.  Her family sued Reinhardt for wrongful death. 

National Interstate Insurance Company, insurer for the pick-up, retained counsel for Reinhardt and filed an action seeking a declaration that it had no duty to defend or indemnify him.  The court granted National Interstate’s motion for summary judgment and Reinhardt’s counsel withdrew. 

The Francos appealed the dismissal of the coverage action.  [There is no discussion of how they were able to do that procedurally.]  While the appeal of the coverage case was pending, the underlying motor vehicle case went to trial.  Reinhardt did not show up.  He had left prison a month before jury selection – having pleaded guilty to negligent homicide in connection with the accident – and nobody knew where he was.  No lawyer represented Reinhardt.  He was found negligent and the jury awarded damages in the amount of $3,562,000.

Ten months later, the dismissal of the coverage action was reversed.  Now, with a determination that National Interstate was obligated to defend Reinhardt, the insurer retained the same counsel for him.  The time to appeal had long passed so Reinhardt’s counsel sought to file a motion to set aside the judgment.  A deadline to do so was looming. 

Despite many efforts – letters, voice mails and the services of an investigator -- Reinhardt’s counsel could not locate Reinhardt.  Counsel, believing that he should not “sit on [his] hands” while the time to file a motion to set aside the judgment lapsed, filed the motion.

The Francos opposed the motion and also moved to disqualify Reinhardt’s counsel, saying that he broke several of the Hawaii Rules of Professional Conduct.
 
The trial court denied the motion to disqualify Reinhardt’s counsel and granted the motion to set aside the judgment.  The appeals court reversed, concluding that Reinhardt’s counsel lacked authority to represent Reinhardt and move to set aside the judgment.  As the court of appeals saw it, counsel needed express consent of Reinhrdt to move to set aside the $3.652 million judgment.  The Hawaii Supreme Court agreed to take the case.

Its first order of business was to exonerate Reinhardt’s counsel, whose conduct the court of appeals had been critical of.  Its view of counsel was described by the supreme court as follows: “Reinhardt’s counsel had no business representing him, the ICA rules. The client didn’t consent after consultation — not to the attorney-client relationship and not to the filing of the Rule 60(b) motion to set aside. The lawyer was practicing law without a client, the ICA suggests.”

Following a discussion of several rules under the Hawaii Rules of Professional Conduct, the supreme court concluded that, not only did Reinhardt’s counsel not violate the rules, but “[h]e did the right thing.” 

The court explained its decision as follows:

“One of a lawyer’s foremost duties is to advocate diligently for the client’s interests.  HRPC Rule 1.3 (eff. 2014). The Comments to Rule 1.3 state that the lawyer should ‘take whatever lawful and ethical measures are required to vindicate a client’s cause’ and act ‘with commitment and dedication to the interests of the client and with zeal in advocacy upon the client’s behalf.’ HRPC Rule 1.3 cmt. 1. Allowing an uncontested $3.56 million judgment to stand unchallenged skirts this duty.

“Strategic decisions are part of a lawyer’s job. Not every decision needs a sign-off. The HRPC talks about the big things - unilateral case-ending decisions, like settling a civil case or taking a plea deal. HRPC Rule 1.2(a). On those issues, the client has the ultimate authority.  The lawyer shall abide by their decision. Id.; HRPC Rule 1.2 cmt. 1. As to how to carry out representation, the lawyer may take actions that are impliedly authorized.” (italics in original).   
 
But, more importantly, for purposes of the discussion here, the court also tied its decision to an insurer’s obligations, noting that Reinhardt’s counsel “was obligated by [National Interstate’s] duty of good faith to Reinhardt” and the “special good faith duties on the insurer” created by the tripartite relationship:

“Here, NIIC owes a duty of good faith to Reinhardt as an alleged insured. Nothing in the record shows that counsel acted in anything but Reinhardt’s best interests by moving to set aside the judgment against him. . . . Counsel had a duty ‘to provide competent, ethical representation to the insured.’ Both NIIC and counsel must act to protect Reinhardt’s rights. Moving to set aside the judgment against Reinhardt satisfied these duties. Not moving to set aside ignores these duties. Even without Reinhardt’s express consent to file the motion, counsel fulfilled NIIC’s duty of good faith towards Reinhardt.” (citations omitted).

Reinhardt’s counsel’s actions, the supreme court concluded, were implicitly authorized by the representation, as required by National Interstate’s duty of good faith and “crucial to protecting Reinhardt’s interests.”