Providing a defense when the insurer reserves its rights
The most common problem that arises in the “tripartite relationship” occurs when the carrier undertakes the defense of the insured pursuant to a reservation of rights. In such cases, it is possible for an insurer to take less interest in paying for a vigorous defense, because the insurer may ultimately prevail on the coverage issue and withdraw its defense. Additionally, if defense counsel is aware of the coverage issues, defense counsel may gather discovery or steer the case toward a coverage result that is favorable to the insurer (for example, by eliciting deposition testimony that supports a particular coverage defense). In these cases, conflicts can generally be avoided where:
- appointed defense counsel withdraws
- the insured is allowed to select independent counsel
When defending under a reservation of rights, the insurer should not hire attorneys who provided the coverage opinion as defense counsel for the insured. Instead, independent defense counsel with no involvement in the coverage issue should be appointed to avoid the conflict.
Damages Exceed Coverage Available Under the Policy
In a case where an insured has a solid liability defense but the claimed damages exceed policy limits, conflicts arise for defense counsel. An insurer may want to aggressively litigate a case in hopes of receiving a defense verdict or a judgment below policy limits. Such a course of action puts at risk the insured’s personal assets, because a plaintiff’s verdict may result in a judgment in excess of policy limits. The defense attorney may find herself in a conflicting situation, where settling is in the best interest of the insured client, but the insurer may think twice about continuing a business relationship with a defense attorney who is unwilling to try hard cases.3 In addition, defense counsel may be personally liable for failing to settle within the policy limits. This conundrum can create the need to hire separate, independent defense counsel to represent the interests of the insured. Similar conflicts may arise where the insured has a self-insured retention (SIR) that requires the insured to bear the first dollars of loss (insurance is excess over the SIR). The SIR may apply to defense costs as well as judgments or settlements.
In claims where the damages may exceed the policy limits, defense counsel should be on the lookout for “conflict clues” – signs that clients have unusual interests that must be protected. One of these signs is the existence of the excess exposure itself, as the insured may have uninsured assets at risk and have an unusually strong interest in the outcome. Another “conflict clue” is a request from one client to persuade another client of the merits of a particular course of action, such as when an insured requests that the defense lawyer pressure the carrier to accept a demand within the policy limits. Defense counsel should conspicuously inform the insured of the risk of a judgment in excess of policy limits and advise the insured of the right to retain independent coverage counsel.Of course, merely informing the insured of the right to retain independent counsel does not relieve the insurer of the duty to act in good faith.