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August 11, 2016 Articles

Dueling Loyalties: The Right to Independent Counsel

An examination of the factors an insurer should consider when it offers to defend its insured under a reservation of rights--and the potential consequences of failing to comply with the insurer's obligations in offering or affording the right to independent counsel

by Brian C. Bassett [1]

When a claim is made against a policyholder and tendered to its insurance company, the primary goal of the insurer and its coverage counsel should be a determination of whether a duty to defend is owed to the insured. If a defense is owed but the insurer desires to preserve its coverage defenses in connection with any indemnity owed for a judgment or settlement, the insurer’s next step will be the assignment of defense counsel to protect the insured subject to a reservation of rights. The reservation of rights letter will outline the coverage defenses available to the insurer and remind the insured of the boundaries of coverage under the policy in the context of the underlying claim.

Insurers generally prefer to assign the defense of their insureds to a firm that is panel counsel, as the insurance company and the panel firm have an established relationship conducive to defending lawsuits at the expense of the insurer. It is important to note that issuing a reservation of rights letter may trigger certain rights available to an insured, specifically with respect to the insured’s right to retain defense counsel of its own choice at the expense of the insurer. In that vein, it is critical that an insurer and coverage counsel understand the carrier’s obligations in connection with offering and affording independent counsel to the insured. Although the issue is often overlooked, the policyholder’s rights to independent counsel can have far-reaching implications. This article discusses when the insured’s right to independent counsel may be implicated and what rights an insurer may forfeit in those circumstances.

The Threshold Issue—Which State’s Law Applies?

As discussed below, each jurisdiction has its own set of rules addressing the insured’s right to independent counsel at the expense of the insurer. Thus, as with most coverage issues, the right to independent counsel initially hinges on which state’s laws control the issue. This conflict-of-laws analysis will often arise where the insured’s covered activities reach beyond the state in which it is domiciled. In a rather common scenario, the interpretation of an insurance policy will be governed by the state where the policy is issued to the insured, while the insured may be sued in a different state where an accident occurred. In that scenario, the state where the policy was issued may recognize the insured’s right to defense counsel of its own choice, whereas the state where the lawsuit is filed may allow the insurance company to designate defense counsel. The insurer must therefore initially assess which state’s law controls its duties to afford the insured the right to independent counsel.

Certain jurisdictions find that the right to independent counsel is an issue that concerns the loyalties of defense counsel and, therefore, is an ethical issue to be dictated by the law where the litigation against the insured is pending.[2] More specifically, defense counsel is bound by the ethical rules of the state in which he or she is licensed; therefore, the jurisdiction where the litigation occurs will have a more significant interest in the independent counsel issue. Conversely, courts from other jurisdictions find that the right to independent counsel is derivative of the duty to defend under the insurance policy, and the jurisdiction that controls policy interpretation should also govern who has the right to select defense counsel for the insured.[3] As the insured’s right to independent counsel can vary significantly from jurisdiction to jurisdiction, the initial choice-of-law assessment is a crucial first step in the insurer’s assessment of its obligations owed to the insured.

What Constitutes a Conflict

After determining which jurisdiction controls the right to independent counsel, an evaluation of what circumstances trigger the insured’s right to designate its own counsel at the expense of the insurer must be undertaken. There are a number of states that have not addressed in detail whether and when a policyholder has a right to insist on defense counsel of its own choice. In the absence of guiding case law, both insureds and insurers should evaluate their respective positions to determine whether an actual conflict exists such that independent counsel should be afforded.

Most jurisdictions do provide some instruction on the issue. Certain state legislatures have codified the right to independent counsel,[4] while others rely on common law to articulate the right. At least one state, Hawaii, has rejected the notion that independent counsel should ever be afforded to the insured, finding that the defense counsel’s ethical obligations sufficiently protect the insured’s interests in defending the case.[5] Conversely, other jurisdictions find that the insurer’s mere reservation of rights—regardless of the coverage defenses raised—creates the insured’s right to independent counsel.[6] This approach is grounded in the fact that the insurer should not be able to maintain control over the defense of litigation when it is simultaneously positioning itself to reject coverage owed for any judgment or settlement entered against the insured.

Falling in the middle of those two extremes, most jurisdictions require that the coverage defense raised in the insurer’s reservation of rights letter place defense counsel in an actual conflict in representing the insured at the direction of the insurer.[7]

Put another way, if, in the underlying suit, insurer-retained counsel would have the opportunity to shift facts in a way that takes the case outside the scope of policy coverage, then the insured is not required to defend the underlying suit with insurer-retained counsel. Rather, the insured is entitled to defend the suit with counsel of its choosing at the insurer’s expense.[8]

A common example involves a situation where the lawsuit against the insured asserts claims sounding in both negligent and intentional conduct. The defense counsel who suspects the insured may be found liable might steer the defense of the case toward a finding of liability on the intentional conduct, knowing that such a verdict would free the insurer from any duty to pay a judgment or settlement.[9] Courts also cite other claims that present a similar inherent conflict to defense counsel, such as a claim for punitive damages[10] or the timing of the alleged damage suffered by the plaintiff.[11] The laws of each jurisdiction should be consulted in determining whether the coverage defenses raised by the insurer create a disqualifying conflict of interest.

Finally, a relatively recent development in Illinois suggests that the potential value of the claim may justify independent counsel regardless of the coverage defenses raised by the insurer. In R.G. Wegman Construction Co. v. Admiral Insurance Co., the Seventh Circuit Court of Appeals held that under Illinois law, an insured is entitled to independent counsel when there is a “nontrivial probability” that the verdict in the case will exceed the insurer’s policy limit.[12] In Wegman, the Seventh Circuit noted that among the facts supporting a “nontrivial” probability of an excess verdict were (1) the nature and severity of the plaintiff’s injury, (2) the settlement demand in excess of policy limits, (3) the fact that the case had been slated for trial (and in fact tried), (4) the plaintiff’s securing at trial an award double the policy limit, (5) the insurer’s admission that its primary defense strategy was to downplay the insured’s responsibility rather than to deny liability, and (6) the insurer’s failure to warn the insured that it had adopted a strategy that placed the insured in jeopardy of an excess judgment. The court held that the insurer’s “gamble” that its retained defense counsel could obtain a damages award below the Admiral policy limits “created a conflict of interest that entitled [the insured] to choose its own attorney to represent its interests.” Notably, this right has been recognized even when the insured has excess coverage available beyond the primary policy.[13]

It is important to note that in most jurisdictions, a conflict of interest does not exist simply because an insurer has an interest in negating coverage.[14] Instead, each case should be evaluated based on its own facts, with a focus on whether the insurer’s retained defense counsel will encounter an actual conflict, as opposed to a mere hypothetical conflict, in the defense of the suit.

How Should the Right Be Communicated?

In the event the insurer’s coverage position implicates the insured’s right to independent counsel, the insurer must evaluate whether it is required to affirmatively advise the insured of its right to independent counsel or whether the onus is on the policyholder to formally invoke the right. Some courts have recognized that the insured should be saddled with the insurer-retained defense counsel only when it provides informed consent to the insurer.[15] Illinois courts have found that the reservation of rights letter to the insured must adequately explain the nature of the conflict between the insurer and the insured by virtue of the insurer reserving its rights on certain issues and must specifically inform the insured that it has the right to independent counsel at the expense of the insurer[16] As discussed below, the failure to inform the insured of that right can result in harsh consequences to the insurer. Other jurisdictions do not provide clear instruction as to what language, if any, must be included in the reservation of rights letter. In those venues, a carrier may not be obligated to advise the insured of its right to independent counsel, and it may be up to the insured to invoke that right. Whether the onus is on the insurer to affirmatively advise the insured of its rights to choose counsel will be jurisdiction-dependent.

Compliance with the Insurer’s Rates and Guidelines

The consequences of an insured invoking its right to independent counsel can place the insurance company outside its comfort zone. When faced with a lawsuit against its insured, an insurer often has an interest in enlisting panel counsel to defend the insured in order to ensure qualified counsel is representing the insured’s interest, in addition to capping defense counsel rates and maintaining a right to control defense strategy and settlement negotiations. Where an insurer’s position vests the insured with the right to choose counsel, the insurer’s ability to control the defense of the case, and the costs associated with that defense, can be significantly impaired.

The rates charged by independent counsel will often differ from those charged by panel counsel routinely appointed by the insurer. Panel counsel rates are usually the result of a long-term business relationship between the insurer and the panel firm. The insurer has the power to enlist a panel of law firms according to the insurer’s preferences, including the rates to be charged by those firms, how defense cases are staffed within the firm, and how the rates will increase over time. Independent counsel, on the other hand, may charge rates much higher than those charged by panel counsel as they do not feel compelled to compete with the insurer’s panel firms. Independent counsel may also contend that the proper staffing of a case depends on the nature of the claim, and certain cases will require activity from multiple partners and associates. The difference in rates will often be a point of contention between the insurer, its insured, and the insured’s chosen defense counsel.

The other advantage to enlisting panel counsel is that those firms often agree to comply with litigation and billing guidelines set by the insurer. Those guidelines contain restrictions on what litigation activity requires carrier approval, and they outline proper reporting procedures and methods of litigating a case from inception through trial. The guidelines can also define what services an attorney can bill for in defending an insured. Independent counsel will often disclaim any obligation to comply with such guidelines, if they are not written into the policy.

The fact that an insurer is required to afford independent counsel does not require that it cede all control of the underlying litigation and simply be prepared to write a check at the end of the underlying lawsuit. An insurer should not be bound to pay whatever rates the independent counsel identifies; instead, it should be willing to pay what is reasonable for the type of case within the market.[17] Moreover, an insurer should insist on compliance with litigation and billing guidelines unless the insured, independent counsel, or both, can explain why those guidelines will impair the defense of the case. In the end, a measured approach should be taken by both the insurer and the policyholder with the goal of creating a working relationship that best serves the defense of the insured while recognizing the insurer’s vital role in that process.

Compliance with Consent to Settle Provisions

In addition to complicating the administrative rights of the insurer, independent counsel can also affect the insurer’s substantive rights under the policy. For example, independent counsel may be able to deprive the insurer of the right to exercise control over the potential settlement of an underlying lawsuit against the insured, a right that is often identified in the policy.[18] In its recent decision in Central Mutual Insurance Co. v. Tracy’s Treasures Inc., an Illinois appellate court addressed whether an insurer who neither breached its duty to defend nor controlled the defense of the underlying action can challenge a settlement in the underlying action orchestrated by the insured’s independent counsel. Tracy’s was insured by Central Mutual under a number of primary and excess commercial liability insurance policies. Plaintiff Idlas brought a class action lawsuit against Tracy’s under the Telephone Consumer Protection Act after he and others received unsolicited fax advertisements from Tracy’s.

Tracy’s tendered Idlas’s suit to Central, and Central assigned an attorney to provide a courtesy defense, who Central subsequently agreed to substitute with Tracy’s choice of counsel due to a conflict of interest created by Central’s coverage position. Shortly following the substitution, Tracy’s and Idlas moved for approval of a $14 million settlement against Tracy’s, which was enforceable only against Central’s policies. The court approved the deal but without any notice to or participation by Central.

In challenging the ability of the plaintiff to collect the settlement in the declaratory action, Central argued that the settlement reached between Tracy’s and Idlas was, as a matter of law, collusive and unreasonable under the standards articulated by the Illinois Supreme Court in Guillen v. Potomac Insurance Co. of Illinois.[19]

The court first acknowledged that “where an insurer cedes control of the defense of an action against its insured, the insured may enter into a reasonable settlement agreement without the insurer’s consent.” Thus, Tracy’s decision to settle was not subject to the approval of Central and did not violate the voluntary payment provision of the policy. Nevertheless, the court recognized that the settlement did not necessarily bind Central. The court held that because Central did not breach its duty to defend, and because it acquiesced to Tracy’s independent counsel, it maintained the right to challenge the reasonableness of the settlement and whether the settlement was covered by the policies.

The holding in Tracy’s Treasures illustrates the challenges an insurer may face once it relinquishes the defense of an insured to the insured’s chosen counsel. Even beyond the insurer’s ability to insist that it consent to any settlement, independent counsel may argue that the carrier should play no role in making strategic decisions about how the case should be defended.

The Failure to Afford Independent Counsel
Although there are challenges associated with working with defense counsel chosen by the insured, the alternative approach (i.e.,not allowing the insured’s chosen counsel to defend the lawsuit) is also perilous. For instance, the failure to properly advise the insured of its right to independent counsel, where necessary, can result in a waiver of the insurer’s coverage defenses.[20] To be sure, certain jurisdictions confine this remedy to situations where the insured has suffered actual prejudice as a result of the lack of independent counsel.[21] Nevertheless, this remedy can be particularly punitive on insurers.

In jurisdictions where a conflict of interest will implicate an insured’s right to independent counsel, it is important for an insurer to be strategic about issuing a reservation of rights letter. Although no insurer wants to forfeit its coverage defenses, it should be cognizant of the actual value of the rights being reserved. Put another way, issuing a reservation of rights letter should not be perfunctory——especially in those jurisdictions where independent counsel is soundly recognized. Where a reservation of rights letter is necessary and appropriate, an insurer should be mindful of its obligations to advise an insured of its right to independent counsel so the insurer’s rights are properly protected. Where the policyholder invokes its right to independent counsel, the insurer should consider appointing counsel of its own choice to associate with the insured’s independent counsel or assigning monitoring counsel to oversee the litigation. Through proactive measures, the insurer can respect the insured’s right to independent counsel while simultaneously ensuring that its own rights are safeguarded.

Keywords: litigation, insurance, coverage, independent counsel, reservation of rights, duty to defend, conflict of interest

Brian Bassett is a partner in the Chicago, office of Traub Lieberman Straus & Shrewsberry LLP.


[1] Brian Bassett, a partner in the Chicago office of Traub Lieberman Straus & Shrewsberry LLP, concentrates his practice in the areas of insurance coverage, excess monitoring, professional liability, and general liability. He represents insurance companies in complex claim disputes, declaratory judgment actions, and appeals.
[2] Bethlehem Constr., Inc. v. Transp. Ins. Co., 2006 U.S. Dist. LEXIS 70357 (E.D. Wash. 2006).
[3] Hartford Underwriters Ins. Co. v. Found. Health Servs., 524 F.3d 588, 591 (5th Cir. 2008); Hartford Cas. Ins. Co. v. A&M Assocs., 200 F. Supp. 2d 84, 93 (D.R.I. 2002).
[4] See, e.g., Cal. Civ. Code § 2860; Alaska Stat. § 21.96.100.
[5] Finley v. Home Ins. Co., 975 P.2d 1145, 1151 (Haw. 1998).
[6] Northland Ins. Co. v. Heck’s Serv. Co., Inc., 620 F. Supp. 107, 108 (E.D. Ark. 1985); Med. Protective Co. v. Davis, 581 S.W.2d 25 (Ky. Ct. App. 1979); Moeller v. Am. Guar. & Liab. Ins. Co., 707 So. 2d 1062, 1070–71 (Miss. 1996); Nat’l Mortg. Corp. v. Am. Title Ins. Co., 41 N.C. App. 613, 622–23, 255 S.E.2d 622, 629 (1979).
[7] 69th St. & 2nd Ave. Garage Assocs., L.P. v. Ticor Title Guar. Co., 207 A.D.2d 225, 227–28 (N.Y. App. Div. 1st Dep’t 1995); Pub. Serv. Mut. Ins. Co. v. Goldfarb, 53 N.Y.2d 392, 401 (1981).
[8] Am. Family Mut. Ins. Co. v. W.H. McNaughton Builders, Inc., 363 Ill. App. 3d 505, 511 (2006); see also Cty. Mut. Ins. Co. v. Davalos, 140 S.W.3d 685, 688–89 (Tex. 2004).
[9] See Md. Cas. Co. v. Peppers, 64 Ill. 2d 187, 191–92 (1976).
[10] Ill. Mun. League v. Siebert, 223 Ill. App. 3d 864, 873 (1992).
[11] Ill. Masonic v. Turegum Ins. Co., 168 Ill. App. 3d 158, 167–68 (1988); but see Fed. Ins. Co. v. MBL, Inc., 219 Cal. App. 4th 29 (Cal. App. 6th Dist. 2013) (no duty to appoint independent counsel when dealing with the timing of the alleged damages).
[12] 2011 U.S. App. LEXIS 679 (7th Cir. Jan. 14, 2011); see also Addus Healthcare, Inc. v. Auto-Owners Ins. Co., 2011 U.S. Dist. LEXIS 124938 (N.D. Ill. 2011).
[13] Perma-Pipe, Inc. v. Liberty Surplus Ins. Corp., 2014 U.S. Dist. LEXIS 54867 (N.D. Ill. Apr. 21, 2014).
[14], Inc. v. Hartford Fire Ins. Co., 426 F. Supp. 2d 546, 559 (S.D. Tex. 2006); Shelter Mut. Ins. Co. v. Bailey, 160 Ill. App. 3d 146, 154, 513 N.E.2d 490, 112 Ill. Dec. 76 (1987).
[15] Fla. Stat. § 627.426; Cont’l Ins. Co. v. City of Miami Beach, 521 So. 2d 232, 233 (Fla. 3d Dist. Ct. App. 1988); Richmond v. Ga. Farm Bureau Mut. Ins. Co., 140 Ga. App. 215, 219, 231 S.E.2d 245, 248 (1976).
[16] Standard Mut. v. Lay, 975 N.E.2d 1099 (Ill. App. Ct. 2012); Cowan v. Ins. Co. of N. Am., 22 Ill. App. 3d 883, 896, 318 N.E.2d 315, 326 (1974) (“bare notice of a reservation of rights is insufficient unless it makes specific reference to the policy defense which may be asserted and to the potential conflict of interest”).
[17] Magoun v. Liberty Mut. Ins. Co., 346 Mass. 677, 685, 195 N.E.2d 514, 519 (1964); Allstate Ins. Co. v. Campbell, 334 Md. 381, 392, 639 A.2d 652, 657 (Md. App. 1994); Fireman’s Fund Ins. Cos. v. Ex-Cell-O Corp., 790 F. Supp. 1339, 1346 (E.D. Mich. 1992); Aquino v. State Farm Ins. Co., 349 N.J. Super. 402, 793 A.2d 824 (2002); Prashker v. U.S. Guar. Co., 1 N.Y.2d 910, 136 N.E.2d 871 (1956); see also Cal. Civ. Code § 2860(c); Alaska Stat. § 21.96.100(d).
[18] Cent. Mut. Ins. Co. v. Tracy’s Treasures Inc., 2014 IL App (1st) 123339 (Sept. 30, 2014); Truck Ins. Exch. v. Prairie Framing, LLC, 162 S.W.3d 64, 88 (Mo. Ct. App. 2005).
[19] 203 Ill. 2d 141 (2003).
[20] Md. Cas. Co. v. Peppers, 64 Ill. 2d 187, 196, 355 N.E.2d 24 (1976); Doe v. Ill. State Med. Inter-Insurance Exch., 234 Ill. App. 3d 129, 134, 599 N.E.2d 983, 174 Ill. Dec. 899 (1992).
[21] Liberty Mut. Ins. Co. v. Tedford, 644 F. Supp. 2d 753, 764 (N.D. Miss. 2009); Am. Home Assurance Co. v. Evans, 589 F. Supp. 1276, 1278 (E.D. Mich. 1984).


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