Dueling Loyalties: The Right to Independent Counsel

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.