Why it matters: A policyholder was able to maintain its selected defense counsel after a federal court judge ruled that the insurers’ objection was too late. After being sued over allegedly defective windows, the policyholder requested defense coverage from its insurer but selected its own counsel. Although the insured maintained an open line of communication with the insurer about the progress of the case, the insurer waited more than four months before trying to install its own counsel in the underlying litigation and over ten months before intervening in the suit and filing a motion with the court. The policyholder objected and a federal court in Wisconsin determined the insurer was equitably estopped from making the change. The insurers’ “own inaction” after the policyholder’s selected firm had worked on the case for such a length of time would be prejudicial, the court said. “The insurers’ insouciance regarding the developments in a pending lawsuit in a fast-paced court is simply not justified,” the judge wrote.

Detailed discussion: Kolbe & Kolbe Millwork Co. purchased general liability insurance policies from Fireman’s Fund Insurance Company and United States Fire Insurance Company. Both policies included language that the insurers have the “right and duty to defend the insured against suit seeking … damages” that are covered by the policies.

In February 2014, a group of plaintiffs sued Kolbe & Kolbe, claiming the company sold them defective windows. The next day, the company tendered defense to the insurers. One week later, the insured notified its insurers that it had selected outside counsel and reached out to coordinate a discussion of the case.

The insurers, the policyholder, and its selected counsel all took part in a conference call to discuss the firm’s rates, credentials, and fees. The insurers did not make any objections, but did note they were still investigating coverage.

The policyholder retained counsel in early March and informed the insurers, which did not object or otherwise respond to the notice. By the end of the month, Kolbe & Kolbe had received its first invoice from the law firm and wrote to the insurers again, asking for their coverage positions. Again, the policyholder received no response.

In June, the insurers informed Kolbe & Kolbe that they would “agree to the appointment” of one of two law firms, neither of which were the policyholder’s selected firm. By that time, the selected firm had already answered the original complaint, prepared initial disclosures and a Rule 26(f) report, filed a motion for a protective order, conducted internal interviews, issued discovery requests to the plaintiffs and reviewed their responses, and retained an expert and begun inspections of the plaintiffs’ homes.

Based on the extent of the attorneys’ work, Kolbe & Kolbe told the insurers that they had forfeited their right to choose counsel and that the company intended to move forward with its selected law firm. The parties continued to exchange letters until November, when the insurers filed a motion to intervene in the underlying litigation. The court allowed the motion on the issue of Kolbe & Kolbe’s choice of counsel, but the insurers requested multiple extensions of time before finally filing their brief.

While U.S. District Court Judge Barbara B. Crabb acknowledged the general principle that the insurer gets to control the defense when it agrees to defend and indemnify an insured in a lawsuit, she found that Fireman’s Fund and United States Fire Insurance Company “lost whatever right they had through their own inaction.”

Over the course of four months – during which time the insured remained in constant contact with its insureds through the process of selecting counsel, retaining counsel, filing initial motions in the underlying litigation, and receiving its first legal bill – the insurers maintained their silence. Not until four months after defendant tendered its defense did the insurers inform Kolbe & Kolbe that they did not want to use the company’s selected counsel and provided the names of two other firms.

“Even then, the insurers provided no information to defendant about those firms except for their names,” the court said. “Although the insurers referred to the firms as ‘independent,’ the insurers did not provide any foundation for that statement.”

Although the insurers argued that Kolbe & Kolbe could not have reasonably relied on anything the insurers did or did not do, the court said they failed “to cite any evidence that they gave defendant any indication that they wanted to select different counsel until April 22, 2014, when Fireman’s Fund wrote that it ‘is in contact with [the] other carriers to coordinate the defense and discuss the retention of independent counsel.’ ”

Further, even if that letter constituted notice that the policyholder’s selected firm might be replaced, the court said it did not defeat an argument of reliance by Kolbe & Kolbe.

“Regardless of when the insurers told defendant that they may be selecting their own counsel, there was little that defendant could do to ready itself until the insurers actually provided counsel,” Judge Crabb wrote. “In other words, the prejudice to defendant was not simply a matter of not knowing that the insurers might choose another firm, but rather that the insurers failed to make a selection until defendant’s counsel had already invested significant time and resources into the case.”

If the court adopted the insurers’ position, they “would be free to take as much time as they wished to make a decision regarding counsel, up until the day of trial, regardless of the disruption that it would cause to the defense.”

Forcing the insured to switch in June “could have jeopardized the work that defendant’s counsel had done up to that point or at least caused significant delays as new counsel attempted to get up to speed,” the court added. “Particularly because defendant would have no way of knowing whether the court would grant extensions of time while new counsel attempted to catch up, it is not surprising that defendant resisted the insurers’ efforts to make the switch. Further, because the insurers did not provide defendant any information about the law firms it chose, defendant was not in a position to accept the insurers’ offer.”

The insurers should have known that a decision on counsel could not wait four months, Judge Crabb said, and although they claimed to have been diligently investigating the merits of coverage, they provided the court with few details about what they were actually doing.

Compounding the problem, the insurers also delayed in seeking relief from the court when the policyholder rejected their efforts to switch counsel. They waited three weeks to even respond to Kolbe & Kolbe’s refusal and spent months exchanging letters “at a leisurely pace” before intervening in the case.

“By the time that the insurers filed their motion for summary judgment on the selection of counsel issue, the case had been proceeding for more than ten months,” Judge Crabb wrote, and the defendant had already filed a 70-page motion for partial summary judgment.

“[A]t this point, it would be impossible to grant the insurers’ motion without causing substantial prejudice to defendant or completely resetting the schedule in this case, which is already on a slower track than the vast majority of cases in this court,” she said. “Under these circumstances, it would not be fair to defendant (or plaintiffs) to allow the insurers to stall the proceedings by substituting new counsel. The insurers’ insouciance regarding the developments in a pending lawsuit in a fast-paced court is simply not justified.”

The court deferred the issue of the reasonableness of the selected counsel’s fees for another day and denied the insurers’ motion to dismiss Kolbe & Kolbe’s claims for bad faith and breach of the duty to defend as premature.

To read the opinion in Haley v. Kolbe & Kolbe Millwork Co., click here.