It seems like I get this question once every couple of months.

Hey Bill, my company just got sued. After paying premiums for years, I finally had to make a claim. My insurance company wrote me a “reservation of rights” letter. They offered to have one of their “panel counsel” defend my company, but then they listed 15 reasons why they don’t need to cover the lawsuit, including that there is no “covered claim,” the event was not an “occurrence” or accident but resulted from “intentional” conduct, and the damages may not have “occurred during a policy period.”

Needless to say, I’m worried that the insurance company’s “panel counsel” may be beholden to the insurance company and consciously or unconsciously hinder my coverage. I am concerned that the insurance company’s attorney may be more interested in protecting his future stream of new cases from the insurance company than me as our paths may never cross again.

Under what circumstances can I choose my own defense attorney? I want to raise the issue now so I don’t have to clean up a mess after the fact. Help!

  1. What state law governs the conflict of interest issue? The answer usually begins with an unsatisfying “it depends,” because conflict of interest laws vary by state. What might be a conflict of interest giving the policyholder the right to select counsel in one state may not be sufficient in another state.
  2. A “conflict of interest” doesn’t mean that the conflicted party is engaged in conduct harmful to the other party. It means their interests are divergent, which creates a potential for such harm. “When a potential conflict of interest between insured and insurer arises, the insurance company’s duty of good faith requires it to notify the insured. … Once notified …, the insured has the option of hiring a new lawyer, one whose loyalty will be exclusively to him. If he exercises that option, the insurance company will be obligated to reimburse the reasonable expense of the new lawyer.” C. Wegman Constr. Co. v. Admiral Ins. Co., 629 F.3d 724, 729 (7th Cir. 2011) (cleaned up).
  3. Generally, a policyholder may select defense counsel of their choice when the insurance company reserves the right to deny coverage on a basis that will be decided in the underlying litigation. So on the issue of whether the event was an “occurrence,” will the jury deciding the underlying case be required to decide whether the event resulted from an accident or an intentional act? If so, you as the policyholder should have the right to select your own defense attorney.
  4. Under Indiana law, a conflict of interest is sufficient to require the insurer to pay for the policyholder’s choice of defense counsel where there is a “significant risk that an attorney selected by and under the control [of the insurer] would be materially limited in the representation.” Armstrong Cleaners, Inc. v. Erie Ins. Exchange, 364 F. Supp. 2d 797, 817 (S.D. Ind. 2005). The issue is governed by Rule 1.7(a) of the Indiana Rules of Professional Conduct. Rule 1.7(a) states that unless a client gives informed consent, a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if there is a “significant risk” that the representation of one or more clients will be “materially limited” by the lawyer’s responsibilities to another client or another entity paying the bill. Courts have held that a concurrent conflict of interest exists when the handling of the underlying litigation may affect whether the claim is covered or not covered.
  5. You should raise the conflict of issue at the beginning of the representation. You don’t need to wait until an actual conflict arises. Rule 1.7(a) requires a significant risk of that the representation may be materially limited.

Here are some examples of concurrent conflicts entitling the policyholder to select defense counsel. A software company gets sued for invasion of privacy after having inserted software onto laptop computers that record a user’s every search. The insurance company agrees to defend and reserves the right to deny coverage on the grounds that the event did not result from an “occurrence” (or accident), but from an intentional act. Rule 1.7(a) may permit the policyholder to select defense counsel to be paid for by the insurance company.

Another common example occurs in environmental cases. The same “occurrence” versus intentional act issue may result in courts allowing the policyholder to select defense counsel.

In addition, the Indiana Supreme Court denied transfer of a Court of Appeals’ decision holding that under “those sums” commercial general liability policies, an insurer does not have to pay for bodily injury, property damage, or personal injury that did not “occur during the policy period.” This raises the issue of how a court should allocate the responsibility for covering long tail claims, like environmental claims, that can occur over decades.

“The ideal method is a fact-based allocation, under which courts would determine precisely what injury or damage took place during each contract period or uninsured period and allocate the loss accordingly.”

Thomson, Inc. v. Ins. Co. of N. Am., 11 N.E.3d 982, 1022 (Ind. Ct. App. 2014), trans. denied, 33 N.E.3d 1039 (Ind. 2015).

So consider a scenario where environmental contamination takes place over decades where the policyholder knows he bought insurance, but cannot remember or prove through check payments or other business records what company provided coverage in earlier time periods. An insurance company that provided coverage more recently under a “those sums” policy reserves the right to deny coverage on the ground that the loss did not occur during a covered policy period is now in direct conflict with its policyholder. The policyholder now has powerful incentives to show the loss occurred during a more recent covered period, while the insurance company has an equally powerful incentive to show the loss occurred during an earlier period in which it did not insure the policyholder. Under such circumstances, the policyholder should be afforded the right to choose the defense attorney to represent the policyholder’s interests in the underlying lawsuit or claim.