When is a lawyer more than just a lawyer? It’s a question that insurers are facing with increased frequency as their outside counsel straddle the line between providing legal advice and playing a claims handling role. The challenge for lawyers is not running afoul of the “witness advocate rule,” which states that (subject to some exceptions) a lawyer shall not act as advocate at a trial in which he or she is likely to be a necessary witness. See, e.g., Rule 3.7 of the Model Rules of Professional Conduct.  Perhaps the bigger headache is being able to foresee when a lawyer will become a “necessary witness.” Must a lawyer assess at every twist and turn of a case whether they are taking steps that make them a possible witness in future litigation?  Must the client constantly ask themselves whether the tasks it assigns its lawyers cross the witness-advocate line when it involves outside counsel in the resolution of a claim?

Take the case of Utica Mutual Insurance Company v. Employers Insurance Company of Wausau, No. 6:12-CV-1294, 2014 U.S. Dist. LEXIS 132271 (S.D.N.Y. Sept. 22, 2014).  Utica had retained outside counsel to help it resolve coverage litigation with its insureds. Two of Utica’s excess reinsurers were kept apprised of the negotiations and following settlement, were asked to sign a confidentiality agreement so that privileged information could be shared with them. Before sharing any information, Utica initiated arbitration against its reinsurers for their failure to pay their share of the underlying settlement.  Utica wanted to use the same outside counsel to prosecute the arbitration against the reinsurers as it had to settle the underlying claim.

The case mostly centers on the reinsurers’ attempt to disqualify Utica’s outside counsel on the grounds that counsel was allegedly representing the reinsurers interests in regards to the underlying settlement (since the reinsurers had a stake in the outcome) and that an attorney-client relationship had formed between Utica’s outside counsel and the reinsurers. Given that alleged relationship, the reinsurers argued that Utica’s counsel could not be adverse to the reinsurers in the arbitration without their permission.

Tucked into the opinion was a secondary argument: that as the lead negotiators of the underlying settlement, Utica’s counsel would be “necessary witnesses” to the reasonableness of the settlement amount, an issue that would be directly in play during the arbitration.  This argument did not get much discussion in the Court’s opinion or the resulting press coverage of the decision.  Most analysts focused on whether outside counsel had really formed an attorney-client relationship with the reinsurers who had not retained them and who had not apparently divulged confidential information to counsel.  But the witness-advocate rule may have been the bigger threat to Utica and its counsel: who better to talk about the underlying settlement than the lawyers who had day-to-day responsibility for negotiating it?

The Utica settled before all these issues could be fleshed out so we did not get a lot of guidance on how the Court would have rules on the witness-advocate issue.  But the case raised important questions for insurers.  It is not at all unusual for insurers to cede claims negotiations to outside counsel.  In large, complex claims, outside counsel may become involved at the earliest stages of negotiations.  If something happens during those negotiations that later becomes a subject of litigation – whether it be a reinsurance dispute about settlement value, or a bad faith claim because of the manner in which the negotiations were handled – an attorney who plays the part of lawyer in negotiations may find themselves playing the role of witness down the road.  When that happens, insurers may find themselves without their preferred, and most knowledgeable, choice of counsel at the very moment the dispute heats up.