In Coats Rose Yale Ryman & Lee PC v. Navigators Specialty Insurance Co., 2012 WL 4858194 (5th Cir. October 15, 2012), the U.S. Court of Appeals for the Fifth Circuit upheld a lower court’s grant of summary judgment to Navigators. This was an action brought by an insured law firm seeking a declaration that Navigators had a conflict of interest and, therefore, must pay for independent counsel to defend the firm in a malpractice case.

The parties had cross-moved for summary judgment before the U.S. District Court for the Northern District of Texas. The insured (a law firm) argued that, although Navigators had yet to reserve its right to disclaim coverage based upon the dishonesty exclusion, its ability to do so in the future created a conflict of interest.  Navigators maintained that it had not reserved its right, and would not, to deny coverage based on the exclusion.   The District Court explained that a “potential” conflict of interest was not sufficient to trigger an insured’s right to select independent counsel and, therefore, held that the insured had failed to establish that there was a conflict of interest.

The insured also argued that a conflict of interest existed because the Navigators’ policy covered compensatory damages, but not the return of fees, and an attorney chosen by Navigators would be able to steer any award toward uncovered damages.  The court rejected this argument because, among other things, it would not be in Navigators’ interest for the attorney defending the firm to concede facts that would lead to a return of fees award because such a concession would acknowledge wrongdoing, likely increasing any compensatory damages award.

The Appellate Court, in a relatively short decision, based its decision on “substantially the same reasons” set forth in the District Court’s decision.