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Section 16.04 of New Appleman on Insurance Law Library Edition deals with the relationship that exists between insureds, their insurers, and the insurer-directed legal counsel that insurers provide to their insureds. You can download a free copy of this section by clicking on the link below.
Section 16.04 begins as follow:
Individuals and businesses purchase insurance to shift financial risk to their insurers. To an insured, the cost of lawyers necessary to defend covered claims is part of the risk to be shifted. To the insurer, defense lawyers are critical to controlling insurance costs by defeating or limiting insureds' liability in covered claims. Even so, the cost of defense counsel is a cost ultimately passed on to the insurance-buying public as part of insurance premiums. Thus, it would be wasteful to spend more on defense activities than those activities are expected to yield in reduced indemnity costs, i.e. the cost of judgments or settlements. Both costs are ultimately borne by the insurance-buying public in premiums.
Insurers have more expertise than most insureds in managing litigation. They have stronger, more immediate incentives to manage litigation efficiently than would insureds who expect their insurers to pay defense counsel's bills. Thus, most liability insurance markets have settled on contract terms that provide for the insurer to manage the defense, and give it the "right and duty to defend."
This standard liability policy provision gives the insurer the right to control the defense of the claim and the insured has no right to interfere with the insurer's control of the defense. Where the insured has no personal exposure, that control is virtually absolute. The right to select and direct counsel includes the right to change counsel.
Except in the unusual case where insurer and insured have a conflict of interest precluding joint representation, the law in most jurisdictions recognizes both as clients of defense counsel. Thus, both as a client and pursuant to the insurance contract, the insurer usually has the right to make expenditure and strategic decisions.
This works well for insureds, who typically have no interest in how a claim is defended, so long as the insurer pays any resulting judgment or settlement. The vast bulk of cases defended by insurers are fully covered. And even where there is some risk of personal financial exposure to an insured, the latter typically relies willingly on the insurer to manage the defense. This is not surprising. The insured has significant protections in situations where the claim is not fully covered. These protections include (1) the insurer's obligation to pay covered settlements or judgments, (2) its duty to accept reasonable settlement demands within policy limits, and (3) its responsibility for any increased liability of the insured resulting from an inadequate defense.
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