A federal judge in Indiana recently found that an insurer is not entitled to control the defense of its insured because a conflict of interest exists where the insurer is in litigation with the insured over an alleged policy breach arising out of the manner in which underlying litigation would be defended. Valley Forge Insurance Co. v. Hartford Iron & Metal Inc., et al., No. 1:14-cv-00006-RLM-SLC, N.D. Ind. (Dec. 7, 2015).

The insurer, Valley Forge, sought a declaration that it had the right to control both the defense and the remediation of the Hartford Iron site without interference by Hartford Iron. The insurance policies provided that Valley Forge had a right and duty to investigate and defend, and to settle covered claims against Hartford Iron. While investigating the Hartford Iron site, however, Hartford Iron and Valley Forge disagreed about how to remediate the site. The disagreement culminated in Valley Forge suing Hartford Iron to recover the same remediation costs that Hartford Iron sought coverage for under the policies. Although there was no dispute over the terms of coverage under the policies, the dispute over which party ultimately would be required to pay, according to the court, was a conflict sufficient to preclude Valley Forge from controlling the manner in which the underlying action should be handled.

The decision illustrates that policyholders are not beholden to their liability insurers when the insurer’s interests are not aligned with those of the insured. The decision serves as a reminder, therefore, that when an insurer takes a position that is inconsistent with or adverse to interests of the policyholder, even in the absence of a dispute over the terms or scope of coverage, the policyholder may be entitled to assume control of the defense and require the insurer to provide independent counsel to protect the policyholder’s interests.