Independent Counsel Triggers and Requirements

By David A. Gauntlett*

Introduction

When an insurer’s duty to defend is triggered by a lawsuit against the insured, the “normal” outcome is that the insurer will assume complete control of the defense by selecting counsel and paying any fees incurred. In ideal circumstances, this can work out as the insured, insurer, and appointed counsel are all theoretically aligned in their goals. In reality, complications often arise. Recognizing this, most states have articulated standards for determining when an insured is entitled to independent counsel and what an insurer must do to discharge its defense duty in those circumstances.

Independent Counsel Is Triggered by a Conflict of Interest

The prototypical example of a conflict triggering a right to independent counsel is when a policy covers negligent acts but not intentional ones, and the attorney’s decisions will inevitably push toward one of those results.[1] Aspen Am. Ins. Co. v. Ou, No. CV182312DSFGJSX, 2019 WL 1950293 (C.D. Cal. Mar. 14, 2019) addressed an analogous scenario. There, the insurer appointed counsel to defend the insured doctor in a wrongful death suit. The policy as issue contained an exclusion for any claim arising out of “[a]n incident which, prior to the inception of this policy, any insured had a reasonable basis to believe . . . that a professional duty had been breached.”[2] The court acknowledged that the facts needed to prove applicability of the exclusion would also prove liability. The insurer argued that independent counsel was unnecessary because it would not be in the insurer’s interest to prove Dr. Ou’s negligence, but the court disagreed:

It is in [the insured’s] interest in the [underlying action] that [appointed counsel] marshal facts that establish [the insured’s] actions did not amount to a breach of his professional duties. But it is in [the insurer’s] interest here to marshal facts that establish the contrary — or at the very least, undermine [the insured’s] defense with facts that establish [the insured] had at least a reasonable basis to believe that his medical treatment of Limon would result in a lawsuit. This results in an incentive for [the insurer] to attach liability to [the insured]. Therefore… there is an actual conflict of interest and [the insured] has met his burden to show that, as a matter of law, he has a right independent counsel at [the insurer’s] expense.

Under California law, lawyers are bound by rules of professional conduct that prohibit representing adverse parties.[3] This was arguably implicated because “Aspen require[d] Kiefer to submit to Aspen detailed reports that include Ou's own comments and reactions to evidence in the case,”[4] which the insurer could potentially use as a basis for asserting an exclusion or otherwise denying coverage. The court deemed this a bridge too far due to the requirement that a conflict actually manifest and, at the time of the decision, “none of the reports or communications between Aspen and Kiefer directly or indirectly address any coverage issue or defense.”[5] Other cases, as outlined below, have presented compelling logic to suggest that even the potential for a conflict should be deemed sufficient to trigger independent counsel.[6]

Broad Reservation of Rights May Be a Sufficient Trigger

It is common practice for an insurer to include a statement at the end of a Reservation of Rights (“ROR”) letter stating that it reserves all rights to assert new grounds for potentially denying coverage in addition to any mentioned in the ROR. In Cunniff v. Westfield, Inc., 829 F. Supp. 55, 56 (E.D.N.Y. 1993), the insurer “‘reserve[d] the right to any policy defenses not heretofore raised.’”  Applying New York law on the right to independent counsel, the court held:

[T]he Court agrees with Westfield that a clear conflict of interest is present between itself and Maryland. As noted … Maryland may continue to attempt to avoid coverage of any liability assessed against Westfield in the underlying action by invoking policy exclusions.  Furthermore, Maryland can present Westfield’s case in such a way as to defeat liability based upon the ground of Westfield’s [uncovered conduct]. Indeed, as implicitly recognized by Maryland, a finding of Westfield’s affirmative negligence would trigger the policy’s exclusion and thereby relieve Maryland of any obligation to indemnify Westfield.  That the loyalty of the insurer’s attorney would consequently be divided can hardly be questioned.  See [Klein v. Salami, 545 F. Supp. 175, 179 (E.D.N.Y. 1982)].  Accordingly, the conflict presented herein requires independent counsel on behalf of Westfield.

California courts have typically required an ROR to note specific rights reserved by the insurer that lead to a conflict, but none of those cases have addressed the arguments raised in Cunniff. Nor have they addressed the logic of cases like Long v. Century Indem. Co., 163 Cal. App. 4th 1460, 1471 (2008), where the court concluded independent counsel is triggered “whenever a conflict or potential conflict of interest between the insurer and the insured exists or may arise.” (emphasis added). As a result, those cases holding that a general ROR do not create a right to independent counsel under California law cannot be accepted as governing precedent. Rosen v. State Farm Gen. Ins. Co., 30 Cal. 4th 1070, 1076 (2003) (“‘It is a well-established rule that an opinion is only authority for those issues actually considered or decided.’”)

Insurer Must Pay for Competent Counsel

Unsurprisingly, insurers who begrudgingly accept their obligation to provide independent counsel are not enthusiastic about paying for the best possible defense team. Accordingly, they will often insist that the insured’s chosen counsel will only compensated according to panel rates, which are typically much lower than the rates charged by counsel experienced in complex litigation.[7]

The insurer’s duty to provide “competent” defense counsel includes hiring defense counsel specialized in particular fields of law where required to by the case. As the Supreme Court recognized, “[w]ith the increasing complexity of legal practice, perhaps the strongest trend in the profession today is toward specialization.” Bates v. State Bar of Ariz., 433 U.S. 350, 403 n.13 (1977). “[Representation] frequently involves highly practical considerations as well as specialized knowledge of the law.” People v. Brown, 177 Cal. 3d 537, 549 (1986) (citing Tollett v. Henderson, 411 U.S. 258, 268 (1973)). “Many small firms will limit their practice to intensely specialized areas; the larger, institutionalized firms are likely to have a variety of departments, each devoted to a special area of law.” Bates, 433 U.S. at 403 n.13.

For example, in Lesher, the Court interpreted the insurer’s duty to hire competent defense counsel as to mean competent antitrust counsel in an antitrust suit. Travelers Ins. Co. v. Lesher, 187 Cal. App. 3d 169, 181-82, 186-87, 190-91 (1986). The insurer in that case “accepted the defenses under a reservation of rights” and “appointed [a] personal injury defense firm … to represent [the insured] in the antitrust actions.” Id. at 182.

In Amato, which discusses the Lesher case, the Court explains that Travelers had been held liable for breach of its “duty to conduct the defense with due care” by, among other acts, “providing a new attorney who was not prepared for trial of one of the antitrust actions.” Amato v. Mercury Cas. Co., 53 Cal. App. 4th 825, 836 (1997).

Conclusion

Many policyholders mistakenly believe that there are no battles left to fight once an insurer accepts it has a duty to defend. In a perfect world, there would be no issue in being represented by counsel appointed by the insurer. In reality, it often leads to a poor defense or, worse, a delayed denial as new facts supporting non-coverage are developed in the underlying litigation. The inevitable conflicts faced by any insurer-appointed counsel mean it is always in your best interest to push for independent counsel. Coverage counsel can assist in enforcing those rights and securing the best possible defense team for the underlying action.

*David A. Gauntlett is a principal of Gauntlett Law and represents policyholders in insurance coverage disputes regarding intellectual property, antitrust, and business tort claims, as well as in the underlying actions. Mr. Gauntlett can be reached at (949) 553-1010 by voicemail or dag@gauntlettlaw.com. For more information, visit Gauntlett Law at www.gauntlettlaw.com.

[1] San Diego Fed. Credit Union v. Cumis Ins. Soc'y, 162 Cal. App. 3d 358, 364 (1984) (“Opposing poles of interest are represented on the one hand in the insurer's desire to establish in the third party suit the insured's ‘liability rested on intentional conduct,’ and thus no coverage under the policy, and on the other hand in the insured's desire to ‘obtain a ruling . . . such liability emanated from the nonintentional conduct within his insurance coverage.’”) (Quoting Gray v. Zurich Ins. Co., 65 Cal. 2d 263, 279 (1966)).

[2] Id. at *6.

[3] CA ST RPC Rule 1.7.

[4] Aspen Am. Ins. Co. v. Ou, 2019 WL 1950293 at *4.

[5] Id.

[6] See also David A. Gauntlett, Policyholder’s Right to Challenge Insurer’s Control of Counsel, https://www.gauntlettlaw.com/blogs/policyholders-rights-to-challenge-insurers-control-of-counsel (Nov. 18, 2021).

[7] See David A. Gauntlett, Battling for Equity – Securing Appropriate Fee Rates in C.C. § 2860 Disputes, https://www.gauntlettlaw.com/blogs/battling-for-equity-securing-appropriate-fee-rates-in-c-c-2860-disputes (Mar. 31, 2022); S. White, Challenging Insurer Rate Limits, LA Lawyer, Jan 2021, pp. 15-17.