A Primer on Independent Counsel

By Jonathan T. Viner

The right to choose defense counsel for an insured is a right reserved for the insurer pursuant to the policy provisions.  See, e.g., Carolina Cas. Ins. Co. v. Bowling, Walter & Gawthrop, 2005 WL 1367096 (N.D. Cal. 2005) (citing State Farm Mut. Auto. Ins. Co. v. Federal Ins. Co., 86 Cal. Rptr. 2d 20 (Cal. Ct. App. 1999)); Finley v. The Home Ins. Co., 975 P.2d 1175 (Hawai’i 1998); Davenport v. St. Paul Fire and Marine Ins. Co., 978 F.2d 927 (5th Cir. 1992).  Under most states’ law, however, there are certain situations in which a conflict, or potential conflict, of interest between insurer and insured requires the insurer to offer the insured the right to choose its own defense counsel to be paid by the insurer, subject to counsel’s agreement upon a reasonable billing rate.  The typical situation entitling the insured to retain its own chosen, or “independent” counsel is where the insurer has reserved its rights to deny coverage and the coverage issues hinge upon facts that are relevant to the insured’s liability in the underlying litigation and, therefore, will be litigated in the underlying lawsuit.  See, e.g., Maryland Cas. Co. v. Peppers, 355 N.E.2d 24 (Ill. 1976).   Thus, where there is a potential for defense counsel hired by the insurer to manipulate the insured’s defense in such a way as to reduce or eliminate coverage, unless the insurer agrees to defend without reservation or the insured agrees to waive such a conflict, the insured has the right to be defended, at the insurer’s expense, by an attorney of its own choosing, who shall have the right to control the conduct of the defense.  Id.
Different jurisdictions have reached different conclusions regarding when and whether the insured is entitled to retain such “independent” counsel.  California has a statute governing this issue.  California Insurance Code Section 2860 provides in part: "If the provisions of a policy of insurance impose a duty to defend upon an insurer and a conflict of interest arises which creates a duty on the part of the insurer to provide independent counsel to the insured, the insurer shall provide independent counsel to represent the insured unless ... the insured expressly waives, in writing, the right to independent counsel."  See, e.g., Wittmack v. Federal Ins. Co., 2005 WL 2633071 (Cal. Ct. App. 2005).

A conflict of interest may exist when an insurer reserves its rights on a given issue and the outcome of that coverage issue can be controlled by counsel first retained by the insurer for the defense of the claim."  Id.  Courts in California have repeatedly recognized, though, that a conflict of interest does not arise every time the insurer proposes to provide a defense under a reservation of rights. Id. (citations omitted).  There must also be evidence that the outcome of the coverage issue can be controlled by counsel first retained by the insurer for the defense of the underlying claim.  It is only when the basis for the reservation of rights is such as to cause assertion of factual or legal theories which undermine or are contrary to the positions to be asserted in the liability case that a conflict of interest sufficient to require independent counsel, to be chosen by the insured, will arise.  A mere possibility of an unspecified conflict does not require independent counsel. The conflict must be significant, not merely theoretical, actual, not merely potential."  Furthermore, the potential for conflict requires a careful analysis of the parties' respective interests to determine whether they can be reconciled or whether an actual conflict of interest precludes insurer-appointed defense counsel from presenting a quality defense for the insured."

California Insurance Code Section 2860 (known as the Cumis statute after the decision that clarified it) also includes certain parameters.  Most significantly, an insurer can reject defense counsel chosen by the insured if counsel cannot demonstrate that he or she has five years of experience defending claims such as those at issue.  Furthermore, theoretically at least, the insurer is obligated to pay hourly rates that are no higher than the rates it ordinarily pays counsel it retains (i.e. panel counsel) to defend similar cases in the same community where the suit at issue is pending.

Numerous other states have adopted an approach similar to the one adopted in California, though not pursuant to statute.  Such states include New York, Texas and, apparently, Ohio.  See, e.g., Public Service Mut. Ins. Co. v. Goldfarb, 442 N.Y.S.2d 422 (N.Y. 1981) (where insurer's interest in defending action brought against dentist by patient alleging sexual abuse during course of dental treatment was in conflict with dentist's own interest, as insurer was liable only upon some grounds for which recovery was asserted and not upon others, dentist was entitled to defense by any attorney of his own choosing, whose reasonable fee was to be paid by insurer); Britt v. Cambridge Mut. Fire Ins. Co., 717 S.W.2d 476 (Tex. Ct. App. 1986)(where suit alleges intentional acts and negligent acts, a reservation of rights serves to notify insured of potential conflict, and insured has “privilege” of rejecting insurer’s defense and hiring his own lawyer to be paid for by insurer); Red Head Brass Inc. v. Buckeye Union Ins. Co., 735 N.E.2d 48 (Ohio App. 9 Dist. 1999) (where an insurer’s and insured’s interests are “mutually exclusive,” insurer must pay for independent counsel of insured’s choosing).

Similarly, under New Jersey law, an insured arguably is entitled to personal or “independent” counsel, at the insurer’s expense, to defend claims based on intentional conduct, even though the insurer has retained counsel to defend claims in that suit based on negligent or non-intentional conduct by the insurer.  Aquino v. State Farm Ins. Cos., 793 A.2d 824 (N.J. Super. App. Div. 2002) (although ordinarily insurer has obligation to defend insured with respect to only potentially covered claims or counts, where based on similar allegations, insurer has obligation to provide defense with respect to claims for both negligent and intentional conduct; because of conflict of interest, however, insurer may be obligated to pay for independent counsel with respect to defense of intent-based claims).

Not all states accept the idea that the insured is ever entitled to independent counsel.  For example, under Hawaii law, the onus is on defense counsel to determine whether he/she has a conflict in representing the insured and to avoid that conflict.  The Supreme Court of Hawaii rejected the California Cumis doctrine, holding instead that it is best to “refrain from interfering with the insurer’s contractual right” to select counsel.  Finley v. Home Ins. Co., 975 P.2d 1145, 1151 (Hawaii 1998).  Observing that a liability policy’s language generally provides the insurer with the contractual right to control the insured’s defense, the Supreme Court of Hawaii explained that an insurer can best ensure adequate representation of its insured at a reasonable cost by selecting the insured’s attorneys.  Notwithstanding this contractual right, the Supreme Court of Hawaii recognized that the insured has the right to reject the insurer’s choice of defense counsel and select his or her own defense counsel.  If the insured does so, however, the insured is responsible for all attorneys’ fees related thereto. 
It should be noted, though, that under this approach the insurer’s ability to control the defense of the case is not unfettered.  The court in Finley noted with emphasis that the insured is defense counsel’s sole client and that the insurer's desire to limit expenses must yield to the attorney's professional judgment and his or her responsibility to provide competent, ethical representation to the insured.

Other states may also adopt such an approach.  For instance, a federal court applying South Carolina law concluded, like the court in Finley, that the best result is to refrain from interfering with the insured’s contractual right to retain counsel and leave the resolution of the conflict up to the integrity of the retained defense counsel.  Twin-City Fire Ins. Co. v. Ben Arnold-Sunbelt Beverage Co., 336 F.Supp.2d 610 (D.S.C. 2004).

Some states take an approach that is somewhere in the middle.  Under Washington law, the existence of a conflict of interest between insurer and insured apparently does not necessarily entitle the insured to retain independent counsel.  Rather, in the event of a conflict caused by a reservation of rights, an insurer is entitled to choose defense counsel, so long as it fulfills its “enhanced obligation of fairness.”  Johnson v. Continental Casualty Co., 57 Wash. App. 359, 361, 788 P.2d 598, 600 (Wash. Ct. App. 1990).  As set forth in Johnson, an insurer providing a defense to its insured under a reservation of rights must meet the following criteria to fulfill its “enhanced obligation of fairness”: (1) the insurer must thoroughly investigate the claim; (2) it must retain competent defense counsel for the insured, and both retained defense counsel and the insurer must understand that only the insured is the client; (3) the insurer must inform the insured of the reservation of rights and all developments relevant to policy coverage and progress of the lawsuit; and (4) the insurer must refrain from any activity that would show a greater concern for its monetary interest than for insured's financial risk.  Id. 
Moreover, specific criteria must be met by the defense counsel hired by the insurer.  First, the attorney must understand that he represents the insured, not the company. Second, the attorney owes an ongoing duty to the insured to disclose (1) conflicts of interest; (2) all information relevant to the insured's defense; and (3) all offers of settlement as they are presented.  Id.

As long as it complies with the foregoing requirements, under Washington law, it appears that an insurer may retain counsel of its choosing to represent the insured.  Depending on the situation and the posture of the underlying lawsuit, adhering to this “enhanced obligation of fairness” may be more trouble than allowing the insured to retain independent counsel, particularly where the insured is an additional insured who is already being represented by counsel who was selected by the additional insured’s own insurer (in other words, is panel counsel for another insurer).  In that situation, although the “additional insured” insurer loses some measure of control over the defense of the additional insured – control that it may have given up anyways under its “enhanced obligation of fairness” – at least there is some assurance that counsel’s rates will be in line with customary insurance defense rates and that the other insurer will maintain a certain amount of control over what discovery and other activities defense counsel does or does not undertake and the amount of time defense counsel spends on those activities.

Although there are a few situations where independent counsel is likely to be required (e.g. allegations of intentional injury), determining whether and when the insured is entitled to independent counsel and whether the insurer is obligated to advise the insured of that right can be a complex, fact-intensive determination that must be done on a case-by-case basis.  Furthermore, ordinarily a thorough choice-of-law analysis must be conducted, because whether and when independent counsel is required varies from state to state. 

For example, in Peppers, the underlying lawsuit sought to impose bodily injury liability upon the insured for his allegedly intentional conduct.  The insurer defended under a reservation of its right to decline coverage in the event that the insured was shown to have intentionally caused the alleged injury.  The Illinois Supreme Court held that in such a situation, defense counsel hired by the insurer had a potential conflict of interests with the insured defendant and therefore cannot defend the case without the informed consent and waiver of the insured.