On Missing Insured in South Carolina

Attorneys here at Collins & Lacy act as defense counsel. That means we represent individuals and businesses who have been sued. More often than you may think, we have a hard time finding a person who is being sued.

Last week, the South Carolina Bar’s Ethics Advisory Committee issued Ethics Advisory Opinion 2019 19-04, discussing an attorney’s ethical obligations under South Carolina Rules of Professional Conduct 1.2, 1.4, and 1.8, following retention to defend an insurer who cannot be located.

The Question

The inquirer asked if an attorney is allowed to “appear on behalf of Insured, filing pleadings, conducting discovery and otherwise defending the case on behalf of the Insured at the request of the Insurance Carrier?”

The committee said it boils down to whether the insurance contract gives a carrier the “right to retain counsel to defend claims made against the Insured.” If such rights are delegated under the contract to the insurer, then defense attorneys can act pursuant to the instructions of the insurance carrier to defend and settle the case within the policy limits, without any direction from person named in the suit.  The committee noted that an insurer always has duty of good faith to its insured and that the attorney’s fiduciary duty is to the insured, who remains the client regardless of their lack of participation in the defense.

The committee goes on to remind defense attorneys of a variety of circumstances under which a “missing insured” may have an appointed representative who can be located and provide direction in defending the claim. 

Why a “Missing Insured” Matters

Even though this ethics opinion confirms that defense counsel can proceed with the representation of an insured who cannot be located, it is far from an ideal circumstance. 

First, it is often difficult to defend a claim without cooperation of the person or entity who is insured, as it often hampers the ability to prove fact-based defenses.  In such case, the insurer may be faced with choosing between a settlement despite questionable liability and the increased risk of a large verdict. Verdicts that exceed insurance policy limits can increase the cost of insurance, result in personal liability for the insured (including a civil judgment that affects credit-worthiness), and are often followed by further litigation regarding whether the insurer acted in good faith.    

What’s more, insurance policies often have what’s called a cooperation clause.  Such a clause dictates that an insured must participate in the investigation and defense of a claim. If a carrier determines that an insured’s lack of cooperation inhibits the defense of the claim, this could lead to a dispute over coverage.  It would be up to the courts, typically in a declaratory judgment or breach of contract action, to decide if the absence of the insured justified the denial of coverage for the claim.  Lack of cooperation can also be a basis to deny future coverage.

For these reasons, the insurer and defense counsel both have an interest in making reasonable efforts to locate the insured and in documenting their files regarding the efforts made. Likewise, the insured has an interest in being found.