A conflict of interest refers to the ethical problems that may arise between parties with a preexisting relationship. In law, a conflict of interest arises between an attorney and a client if the interests of the attorney, a different client, or a third-party conflict with the interests of the present client.
Attorneys have a duty to zealously represent the interests of their client(s). In the event that the attorney has two or more clients, these duties can conflict such that it is impossible for the attorney to fulfill both at once. For example, if an attorney has both the plaintiff and defendant in a given case as clients, advocating on behalf of one will inherently be advocating against the interests of the other.
Attorneys must take care to check for potential conflicts prior to accepting an individual as a client. As established by ABA Rule 1.7, an attorney who believes themselves subject to a potential conflict of interest has a duty to notify their potential client or current client of that conflict. An attorney can only proceed with representing that client if they obtain written, informed consent from all clients affected by the conflict.
Conflicts of interest are particularly relevant in the field of insurance due to the duty to defend. In a standard insurance policy, like the one in Swanson v. State Farm General Insurance Company, the insurance company includes terms which grant them the right to control any insurance claim related lawsuit the policyholder is involved in. In this scenario, the attorney(s) provided by the insurance company represent both the policyholder and the insurer, creating a potential conflict of interest.
While the insurance company and policyholder’s interests are aligned in some scenarios, both parties would prefer the opposing side of the lawsuit to be unable to recover, the insurance company is sometimes incentivized to take actions that harm the interests of the policyholder. For example, in cases where it is unclear if the policyholder’s conduct is covered by the insurance policy, the insurance company may want to decline an early settlement offer in the hope that the court will ultimately conclude they are not responsible for the damage. Rejecting this settlement, however, may expose the policyholder to greater liability should they lose at trial.
To resolve the issue of conflicts of interest in the field of insurance, insurance companies are sometimes required by statute to appoint cumis counsel, or separate counsel which exclusively represents the interest of the policyholder. For example, California Civil Code §2860 requires insurance companies who wish to reserve their right to contest whether the harm in question is covered by a given policy to pay for the policyholder’s choice of cumis counsel.
See also: 12 CFR § 19.8 - Conflicts of Interest
[Last updated in February of 2023 by the Wex Definitions Team]