By Christine Malafi

Liability insurance policies provide both indemnification and defense coverage to insureds when they are sued for injuries and/or damages. Insurance policies also contain various exclusions, or exceptions, from insurance coverage. After an insured notifies its insurance company of a lawsuit brought against it, the insurance company investigates the claim and the coverage provided to the insured under the terms of the applicable insurance policy. The insurance company then determines whether the suit is covered, not covered, or possibly covered under the terms of the policy.

If the lawsuit is covered by an insurance policy, and litigation defense coverage is provided for in the policy, the insurance company is obligated to protect its insured’s interests and rights.  Under most insurance policies, the insurance company has the right to determine the defense strategy in the suit, as well the right to settle the lawsuit.

If it is determined that the suit is covered under the policy, the insurance company assigns defense counsel to represent the insured. If the insurance company determines that no coverage is provided under the terms of the policy, it will not provide defense coverage and the insured is left to hire its own attorney.

So, what happens when the insurance company determines that its insured is “possibly” covered? In this case, the insurance company will issue a reservation of rights letter, outlining the potential policy exclusions for the insured, and providing a defense under that reservation of rights to later disclaim coverage to the insured for the suit. The insurer will assign defense counsel of its choice. The assigned defense counsel is, in all likelihood, an attorney or firm that is on a list of firms which the insurance company regularly deals with, provides files for defense regularly, and with whom the insurance company has a long relationship.

Under normal circumstances, i.e. a full coverage under the policy, the insurer, insured, and defense counsel all have the same interests and goals–the full and complete defense and indemnification of the insured in the lawsuit. However, in the case of a defense being provided under a reservation of rights, there is an implicit conflict of interest. The insured rightfully wants the insurance company to defend it throughout the lawsuit and to pay any and all settlements or judgments in connection with the lawsuit. However, the insurance company will be reviewing all facts as they are gathered in the lawsuit and constantly analyzing whether a disclaimer of coverage under one of the policy’s exclusions can assist the insurer in avoiding payments under the policy for indemnification or future defense costs.

So, where does that leave the assigned defense counsel? The assigned defense counsel is in the position of reporting to the insurer, and is dependent upon the insurer paying all legal bills. The assigned defense counsel is not, however, the attorney for the insurance company. The assigned defense counsel’s client is the insured, and all duties of loyalty are owed to that insured. It is a difficult position to be in as an attorney. Although many insureds don’t realize it, it is an even more difficult position for the insured to be in. The assigned defense counsel must do what is right for the insured, but is reporting to and billing the insurance company.

Fortunately, most insurance companies and assigned defense counsels understand this precarious position. If handled correctly, the insurance company must assign two separate claim representatives to oversee the two matters—the defense of the insured on the one hand and the insurance coverage issues on the other hand—and those two claims representatives will not communicate with each other regarding the defense, nor will their supervisors. The defense counsel will report to the claims representative handling the defense of the insured only and the claims representative on the insurance coverage issues will never see those reports or the defense file.

Because of this inherent conflict, there is a risk to the insured. The courts, therefore, hold that an insured is entitled to retain its own independent defense counsel to represent it in the defense of the litigation, at the full cost and expense of the insurance company. Therefore, it is in the insured’s power to insist on its own independent attorney to defend the matter. By insisting on your own attorney to defend you, you can rest assured knowing that your own attorney is doing everything possible to protect your rights so that you can reap the full benefits of the indemnification coverage for which you paid.

At Campolo, Middleton & McCormick, LLP, not only do we have the experience to defend you, but we also have the experience to work with you to make sure that your insurance company lives up to its full obligations under the insurance policy for which you have paid premiums.