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It is inappropriate to look solely to the general rules to determine whether defense counsel has an attorney-client relationship with an insurer. Instead, it is more appropriate to supplement the general rules with the factors that motivate the appellate court to permit dual representation. These factors are: the absence of a conflict of interest between insured and insurer and the fact that the insured expressly consents to the dual representation after consultation with counsel. This approach provides a bright-line rule to determine whether defense counsel represents the insurer as well as the insured. Without consultation and the express consent of the insured, the insured remains defense counsel's sole client. The twin requirements of consultation and consent make it impossible for the insurer to become defense counsel's co-client without the knowledge of the insured. It also comports with a lawyer's ethical obligations to consult with and obtain the consent of both clients when the lawyer seeks to represent multiple clients in the same matter. Minn. R. Prof. Conduct 1.7(b). Moreover, this approach protects insureds against the risk that defense counsel will favor the insurer in a conflict-of-interest situation by prohibiting the creation of an attorney-client relationship between defense counsel and the insurer when there is a conflict.
Appellant Farmland Mutual Insurance Company brought a legal malpractice action against defense counsel, respondents Erstad & Riemer, P.A., and attorneys Lawrence J. Skoglund and John R. Thomas (collectively, Erstad & Riemer), arguing that Erstad & Riemer represented both the insured, appellant Pine Island Farmers Coop (Pine Island), and Farmland in an action brought by Duane Windhorst against Pine Island. The district court concluded that Erstad & Riemer did not represent Farmland, and that Farmland therefore could not maintain a legal malpractice action on its own behalf against Erstad & Riemer. The district court went on to conclude that Farmland, however, could maintain such an action on behalf of Pine Island under the doctrine of equitable subrogation. On appeal, the court of appeals affirmed the district court's conclusion that Erstad & Riemer did not represent Farmland. However, the court of appeals reversed the district court with respect to the issue of whether Farmland could maintain a legal malpractice action under the doctrine of equitable subrogation. The court of appeals held that the district court's conclusion on this point was inconsistent with Minnesota law, and that, in any event, Farmland had unclean hands and was therefore barred from seeking recourse in equity. Appellant challenged the decision.
The court held that in the absence of a conflict of interest between the insured and the insurer, the insurer can become a co-client of defense counsel based on contract or tort theory if two conditions are satisfied. First, defense counsel or another attorney must consult with the insured, explaining the implications of dual representation and the advantages and risks involved. Second, after consultation, the insured must give its express consent to the dual representation. In this case, the records did not contain any evidence indicating that defense counsel or another attorney consulted with Pine Island regarding the possibility of dual representation. Nor was there any evidence that Pine Island, after being informed of the risks and advantages of dual representation, consented to dual representation. Based on these facts, the court concluded that defense counsel did not represent Farmland in the Windhorst matter. Therefore, the defense counsel was entitled to summary judgment with respect to the legal malpractice action brought by Farmland on its own behalf. Anent the second issue, the court held that because Pine Island has sought to vindicate its own rights by bringing a malpractice action in its own name, there was no need to allow Farmland to step into Pine Island's shoes to assert Pine Island's rights. Therefore, based on the particular facts and circumstances of this case, the court declined to apply the doctrine of equitable subrogation. The court affirmed the district court’s order dismissing with prejudice all of Farmland's claims.