James W. Bryan of Nexsen Pruet, L.L.C. on “Right to Independent Counsel?”

In his article appearing in the May/June 2009 issue of Coverage, James W. Bryan of Nexsen Pruet, L.L.C. explores the question of whether ─ and under what circumstances ─ an insurer’s reservation of rights to contest coverage creates a conflict of interest for which the insured has a right to retain its own counsel ─ independent of the insurer ─ to defend a liability claim at the insurer’s expense. The answer may depend on the jurisdiction of the forum and the state’s law that governs the issue.
In some jurisdictions, there is a “per se” disqualification rule under which the insurer’s issuance of a reservation of rights letter automatically disqualifies the insurer’s defense counsel and entitles the insured to retain independent counsel at the insurer’s expense. The article explains the reasoning of the courts that apply this per se rule. In short, they reason that an insurer’s reservation of rights triggers a conflict of interest as a result of the underlying lawsuit against the insured alleging both covered and uncovered conduct by the insured. They note that the insurer would lack incentive to “vigorously” defend its insured on a portion of the claims that that appear not to be covered by the policy.
In many other jurisdictions, the courts undergo a case-by-case analysis in a reservation of rights situation to determine if the insurer is required to honor the insured’s selection of independent counsel at the insurer’s expense. Such court decisions are examined. They set forth criteria under which counsel retained by the insurer must act in such situations.
The article proceeds to discuss pertinent conflict of interest ethics rules and the cases that interpreted and applied them. As the article notes, “The problem is governed at its core by the Rules of Professional Conduct that address conflicts of interest where an attorney has multiple clients or where a third party is paying the attorney to represent a client (such as the insured).
The article further imparts practice tips from (1) the standpoint of the insured in deciding whether to assert a right to independent counsel and in choosing what to do if the insurer declines to consent to it; (2) the standpoint of the insurer in deciding whether to issue a reservation of rights letter, and how to respond to a demand for independent counsel, such as filing a declaratory judgment action; and (3) from the standpoint of insurance defense counsel, such as in terms of what communications to have and not to have with the insured and the insurer.