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Increased fiduciary duty of an attorney representing both the insurer and the insured

In the matter of Aryeh Insurance Company vs. Dov Cohen, the insurance company and it`s insured (Dov Cohen) were sued by a third party following a car accident in which the insured was involved. The insurance company appointed one joint defence attorney (Adv. Keen), who settled the matter out of court. The insured refused to pay policy deductible, claiming that Adv. Keen did not act in his best interests and should not have settled the claim, but rather should have defended the case and proven that the insured had no blame in the occurrence of the accident.

The insured argued that Adv. Keen and the insurer were not at liberty to settle the matter on the insured`s behalf without his explicit and prior consent and therefore, the settlement agreement is not binding upon him.

The insured asserted that Adv. Keen had betrayed his trust, had not represented him in good faith and had acted in breach of section 68 of the Insurance Contract Law (pursuant to which the insured must be notified of a settlement and his consent must be given).

In court it was proven that the settlement was reasonable for all parties, due to the circumstances of the accident, and that it was not clear cut that the insured was not at fault.

The insurer argued, that the Power of Attorney that the insured signed appointing Adv. Keen to represent him authorized Adv. Keen to settle the matter on his behalf (as well as on behalf of the insurer), while clearly stating, that "the insurer will have full discretion in the conduct of the legal proceedings or the settlement of any claim".

The court raised many questions with regards to the fiduciary duty of a lawyer who represents two clients in the same matter. This situation may raise issues of conflict of interests, as may often happen when an attorney represents both the insurer and the insured. The insured may often wish to prove that, despite the arguments made against him, he was not negligent, whilst the insurer wishes to reduce the risks and legal costs, by quick settlement of the matter – a right of the insurer that be denied. An attorney representing both the insured and the insurer who acts in accordance with the wishes of the insured to continue proceedings and not settle the matter, although in his professional judgment he believes that the path of settlement is preferable, may be found to have behaved in an unprofessional and/or unfit manner toward his other client – the insurer.

On the other hand, the court noted that it is unreasonable in cases in which the risk is very low, and is assumed mostly by the insured and not by the insurer, that the attorney act in accordance with his own discretion and in the best interests of the insurer, but against the wishes of the insured.

The court noted that it is obvious, that the insurer is the dominant client of the attorney, since it is his "regular" client with whom the attorney continues to work on a daily basis. As such, it is natural that the attorney`s desire to please such a client is greater than his desire to please the insured. On the other hand, the attorney has a direct fiduciary duty toward the insured, as his attorney. The court ruled that such fiduciary duty on the part of the attorney arises from the fact that the signing of a Power of Attorney by the insured to the attorney, creates an agreement between the attorney and client, by which the attorney must faithfully represent the client`s best interests while acting on his behalf, regardless of the question of the identity of the entity who pays the attorney his fees.

In this case, the court ruled that in accordance with the terms of the agreement between the attorney and the insured, i.e. the Power of Attorney (which included a clause by which the attorney was authorized to reach any settlement in accordance with his own discretion on behalf of the insured), the attorney was at liberty to act on behalf of the insured as his representative and as such, was at liberty to agree to the settlement on the insured`s behalf. Since the insured did not restrict the mandate of the attorney to settle the matter in accordance with his own discretion, the court ruled that the attorney acted in accordance with the agreement between him and the client, and within the scope of his authority. Therefore, the settlement agreement was binding on the insured, whom the court obliged to pay the policy deductible to the insurer.

The court did not directly address the question of whether the attorney breached his fiduciary duty toward the insured, noting that this was a separate matter that need not be addressed in this case.

This judgment demonstrates the complex issue of the increased fiduciary duty of an attorney who represents both insurer and the assured. Although this is a common situation, clear cut judicial guidelines have yet to be handed down. Each case and its particular circumstances should therefore be carefully examined.

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