Fall-09 Lizza Paper - P1 (00315257).DOC

American Bar Association

Forum on the Construction Industry

“Two’s Company, Three’s a Crowd? When Insurance Defense Counsel

Arrives at the Party Under a Reservation of Rights”

Robert V. Lizza, Esq.*

Hinckley, Allen & Snyder LLP

28 State Street

Boston, MA 02109

Presented at the 2009 Fall Meeting

“The Two-Way Street of Construction Counseling:

Learning From the Ins & Outs”

October 15-16, 2009

Philadelphia, Pennsylvania

*The Author acknowledges the contributions of Paul C. Connors, Suffolk University Law School ’10, for his contributions to the research and editing of this paper.

“Two’s Company, Three’s a Crowd? When Insurance Defense Counsel

Arrives at the Party Under a Reservation of Rights”

I. Introduction: Good News, Bad News

“We finished that condo project in phases, with occupancy of the last phase about six years ago to the day, and our contract was just under $9,000,000 with change orders,” the project executive said to the general counsel of a medium-sized building contractor. “Over the years we’ve been back to address a number of warranty items for the developer, a few leaks here and there, and some mechanical issues, but no one ever mentioned anything about ‘negligence’ or ‘wide-spread structural failure,’ ‘major water intrusion,’ and ‘mold’ like it’s alleged in this complaint by the condo association,” he continued, “and I don’t know how they come up with $5,000,000 in damages. Wow!”

“Wow is right. This is a big problem,” replied the general counsel. “Please get all the files from archives and I will put our outside litigation lawyers on this right away.”

Immediately upon reviewing the complaint, the contractor’s outside law firm recommended notifying the contractor’s general liability insurer, as well as the carriers for subcontractors whose work might arguably be implicated by the allegations of negligence in the condo association’s complaint. Letters demanding coverage went out that day.

About two weeks later the outside lawyer called his client: “I have good news and bad news,” he said. “The good news is that your general liability insurer has agreed to provide a defense, and they have assigned the case to one of their panel counsel.”

“That is good news,” replied the general counsel. “What’s the bad news?”

“The bad news is that the carrier is providing defense with a reservation of rights, including the ‘your work’[1] exclusion and the ‘mold’[2] exclusion,” said the outside lawyer.

“Well, this should still save us a bundle in legal fees, even with a reservation,” replied the general counsel, “so let’s get that panel counsel over here for a meeting right away and get started on a defense.”

“Okay,” said the outside lawyer, “but one more thing, which I think you already know: your GL coverage for the relevant years had coverage limits of only $3,000,000, which is less than the demand in the complaint, and there is a reservation for that as well.”

“I remember,” said the general counsel, “and that makes the demands on the subcontractors’ carriers for additional insured status all the more important. Please follow up on those ASAP, and thanks.”

As he hung up the phone, the general counsel’s thoughts started to focus on the implications of the news he’d just received. The more he thought about it, the more it troubled him. “Instead of my trusted regular litigation firm,” he thought, “we will be entering into a new relationship with panel counsel. Who are these lawyers and do they know what they are doing?”

“Will the insurance defense lawyers zealously defend us,” he wondered, “or will they have incentive to develop facts that support a declination of coverage by the insurer who is, after all, paying their bills?”

“Now that I think about it,” his temples began to throb, “we haven’t even looked at the documents yet—what if there is something in the files that could be used against us to support the insurance carrier’s defense to coverage?”

Later that day, after his heart rate returned to normal, the general counsel considered the other side of his conundrum: “How can we control these lawyers if the strategy that they and the insurer recommend is too aggressive?” he wondered. “Plus, we can’t have our people tied up in depositions for days on end, or worse, off line at a trial for weeks or months. We need our lawyers to consider the many good business and reputation reasons why our company, and the insurer, should settle this suit quickly,” he thought.

Then he thought about a worst case scenario: “What if the insurer and its panel counsel insist on trying the case and we lose, badly, and the judgment exceeds the coverage? Is our balance sheet at risk? Is there anything we can do to control that risk?”

“How do I make sure that all of my business and legal concerns are addressed and the interests and goals of the company and our lawyers are aligned?” the general counsel wondered.

As the above example suggests, while the assumption of defense by an insurance carrier in response to an insured’s demand for indemnity can be a welcome relief for a defendant in a civil action and its cost-conscious in-house counsel, adding insurance defense attorneys to the team has the potential to add complexity to both the management of the defense and the relationship between inside counsel and its regular outside legal team.

An understanding of the conflicts inherent in the role of insurance defense counsel, in general, and the implications of a reservation of rights to coverage, in particular, is essential to the development of strategies to optimize the benefits of insurance coverage, to enhance the efficiency and effectiveness of the defense effort, and to minimize the possibility of collateral disputes about the zealousness and competence of representation.

II. The Inherent Conflict Among the Insured, the Insurer, and Counsel

The standard general liability policy imposes upon the insurer two separate and distinct obligations for the benefit of the insured: the duty to indemnify and the duty to defend.[3] In the typical policy, the insurer agrees to pay damages for which the insured is responsible and to provide a defense against a claim for damages, including the cost of engaging a lawyer for the insured. The insurer maintains the right to control the defense and to make decisions on settlement. The insured, in turn, agrees to cooperate with the defense. Thus is begotten the common three party relationship among an insured, an insurer and the lawyer paid by the latter to represent the former which one legal ethicist has referred to as “unavoidably vexing” and so troubling that it would “tax Socrates.”[4]

The causes of this vexation are many, but the most obvious is the duality inherent in the lawyer’s service of two masters, one of whom is paying and one of whom is not, coupled with the very separateness of the insurer’s duty to indemnify and its duty to defend. In the circumstance where at least one or a portion of the claims asserted against the insured is covered by the policy, the insurer has a duty to defend all of the claims that might possibly be covered.[5] When this happens, the insurer will notify the policy holder that it will provide a defense subject to a reservation of rights on the issue of coverage for specific aspects of the claim against the insured which the insurer contends are not or may not be covered. When this happens, the interests of the insurer and the insured naturally diverge.

The myriad conflicts inherent in this construct are not hard to imagine. For example, if the insurer contends that a particular loss is not covered under the policy, the insured could be concerned that the lawyer hired by the insurer might offer a less than strident defense of the potentially non-covered claim or conduct the case in a way that increases the likelihood of a decision in favor of the plaintiff on the non-covered claim. Or, the lawyer hired by the insurer might become privy to otherwise confidential information during the defense that the insurer could use to contest coverage. It is even possible to imagine that, either overtly or subliminally, the lawyer retained to defend the claim might tend to favor the company over the policy holder due to a desire to receive future legal work from the insurer. Given the often subtle distinctions over insurance contract definitions, such as “property damage,” “your work,” and “occurrence,” the potential exists for conscious or unconscious shading of the facts and legal argument to the detriment of the insured.

Courts across the country have addressed this situation in one of two ways. Several courts have adopted a per se rule, holding that when an insurance company reserves the right to deny coverage for a particular claim, then a conflict of interest between the insurance company and insured necessarily exists.[6] Other courts have adopted the less drastic view that defending an insured with a reservation of rights to coverage does not create a per se conflict.[7] These courts hold that not every reservation of rights creates a conflict and an assessment must be made case by case.

When a conflict is found, either on a per se or “case-by-case” basis, many courts have given the insured the right to select its own counsel at the insurer’s expense.[8] Other courts have acknowledged the insured's right to separate independent counsel without specifying who is entitled to make the selection.[9] And still other courts have concluded that the mere fact that the lawyer is paid for by the insurer, without more, is not grounds to deny the insurer its contractual right to select counsel for the insured. In Fed. Ins. Co. v. X-Rite, Inc., 748 F. Supp. 1223, 1229 (W.D. Mich. 1990), the court held:

Public policy requires the insurer to act with the utmost good faith. As long as this standard is observed, the Court may not interfere with the terms of the parties' agreement. To hold that the insurer who, under reservation of rights, participates in selection of counsel, automatically breaches its duty of good faith is to indulge the conclusive presumption that counsel is unable to fully represent its client, the insured, without consciously or unconsciously compromising the insured's interests. The Court is unable to conclude that Michigan law professes so little confidence in the integrity of the bar of this state.

Similarly, in Twin City Fire Ins. Co. v. Ben-Arnold Sunbelt Beverage Co., 433 F.3d 365, 373-74 (4th Cir. 2005), relying on the rules of professional conduct and faith in the integrity of the state bar, the Fourth Circuit reached the same conclusion:

Rigorous ethical standards govern South Carolina attorneys . . . . [which] . . . mandate[ ] that a lawyer cannot accept compensation for representing a client from a third party unless certain conditions are met, including that the lawyer's judgment must remain independent . . . . A lawyer shall not permit a person who recommends, employs, or pays the lawyer to render legal services for another to direct or regulate the lawyer's professional judgment in rendering such legal services. As part of exercising the lawyer's professional judgment, an attorney in South Carolina who represents an insured owes the insured a duty of loyalty and cannot, for example, communicate information detrimental to the insured to the insurance company . . . . [A] violation of these rules could lead to sanctions such as suspension, public reprimand, or disbarment . . . These possibilities, coupled with the threat of bad faith actions or malpractice actions if a lawyer violates these rules, provide strong external incentives for attorneys to comply with their ethical obligations (citations and internal quotation marks omitted).

Id.[10]

The Twin City case is instructive on the downside of assuming that a reservation of rights confers upon the policy holder an unfettered right to select counsel, control the defense, and settle the claim while the carrier just pays the bills. After receiving the reservation of rights letter in that case, the insured announced its intention to continue with its own lawyers, and later rejected a proposal by the insurance company to allow its selected lawyers and the insured’s lawyers to share control of the defense. The insured’s lawyers then proceeded to manage the case without consulting the carrier, ran up over $1,400,000 in legal bills, and eventually settled the underlying actions for over $800,000. On subsequent cross-motions for summary judgment in a declaratory judgment case on the policy, the U.S. District Court for the District of South Carolina held that the insured breached its duty of cooperation and that the insurance company was materially prejudiced by that breach. On appeal, the Fourth Circuit affirmed.[11]

III. Structuring a Response When the Insurer Offers to Defend with a Reservation of Rights

The standard insurance policy obligates the policy holder to provide notice of a covered claim and to cooperate with the insurance company in defending against any claim that might be covered.[12] Typically, as shown in Twin City, when an insured makes an inadvertent, pre-mature, or ill-informed decision to take over the control of defense of a claim, it runs the risk of breaching either or both the obligation to notify and the obligation to cooperate. As with any business interaction with legal consequences, the key to defending the merits of a chosen course of action is to develop a record that supports that action. Dealing with reservation of rights letters is no different. A well-developed record that demonstrates appropriate notice to the insurer and a good faith effort to cooperate will prove very helpful if needed to establish fulfillment of notice and cooperation obligations in a subsequent declaratory judgment action against the insurer, should it come to that. In most cases, however, the insured and its regular legal team should be able to negotiate a reasonable accommodation with the carrier.

Additional insured status is a common circumstance that adds complexity to litigation management in the construction context. A general contractor and owner are often named as additional insureds on the policies of their subcontractors. In many states, the general contractor and owner may be entitled to indemnity and defense from the subcontractor’s insurers on a primary and non-contributory basis. More often than not, the insurer for the subcontractor will defend only with a reservation of rights. Making things even more complex, many subcontractors use manuscript endorsements that limit their insurer’s coverage to the work of that subcontractor. This is another factor that will encourage the parties to negotiate a workable plan early in the process.[13]

In the construction industry, in particular, the circumstance also arises when the dispute between the plaintiff and the insured includes contract claims and counterclaims in addition to tort claims, all under the umbrella of one legal proceeding. When claims that cannot possibly be covered by the insurance policy are combined in the same action with covered or arguably covered claims, the insured and the insurer will have no choice but to reach an accommodation that protects their mutual and separate interests via some form of litigation management/cost sharing arrangement.

As with all claims that may have the potential to be covered by insurance, the insured needs to provide notice to its insurers of any potentially covered claims as promptly as possible. In the event that an offer to defend subject to a reservation of rights to coverage letter is received in response to a claim, the insured should: (1) consider whether the governing jurisdiction applies a per se rule or a “case by case” rule; (2) investigate the potential for actual and perceived conflicts that might arise from the insurer’s reservation with respect to arguably covered claims; and (3) determine the appropriateness of a counterclaim. The answers to these questions will dictate how aggressive the policy holder can be in demanding to control the selection of counsel and the defense.

The insured should promptly provide to the insurer its appraisal of the appropriate legal standard and an analysis of the conflicts. The letter challenging the reservation should firmly state the policy holder’s intention to engage independent counsel at the carrier’s expense if the carrier does not withdraw the reservation. A good faith effort should then be made to negotiate an arrangement for the control and management of the defense that is appropriate to the order and magnitude of the conflict, the prominence of other, non-tort causes of actions or counterclaims, and the locally prevailing law. This arrangement should include an understanding about the absolute independence of the lawyers working for the insured and how those lawyers will interact with the insurance company, corporate counsel, and, when needed, other independent counsel representing other interests at the insurer’s expense. The plan should also include an understanding about how strategy and settlement decisions will be communicated and how legal bills will be reviewed and paid.[14] In any event, special care should be taken to make sure that legal bills that may be submitted to the carrier (or to the court where fees are recoverable) are drafted (or redacted) with respect for the attorney-client relationship as it might pertain to both covered and non-covered claims. If one of the options considered is accepting the insurer’s proposed counsel for portions of the defense, the level of due diligence should include an inquiry into the competence, experience, and reputation of the lawyers proposed by the carrier. In fact, most carriers will be amenable to providing a list of lawyers they find appropriate and will work with the insured to select counsel that are acceptable to both parties, should that be the agreed course of action.

Joint defense arrangements between the insured and the insurer can take a wide range of forms depending on the circumstances, including the relative leverage of the parties regarding the coverage issue which is the subject of the reservation of rights and the practical merits of the conflict. Sometimes the arrangement is as simple as having the insured’s outside law firm file a notice of appearance with the court solely to monitor and advise on the defense at the insured’s expense, while the insurer’s panel counsel provides the defense. This is typical when the only source of conflict is a sizable deductible. In other circumstances, the insured and insurer might agree to engage counsel selected by the insured at the shared cost of the parties, or the insured and the insurer may agree on separate counsel to handle discreet aspects of the same litigation. Either of these approaches is common when tort and contract issues are joined in the same dispute, or when a dispute involves a counterclaim by the insured against the party that filed the original complaint.

Larger companies, especially those with in-house legal and risk management departments, will likely be in contact with their insurers on a routine basis, and this ongoing relationship will facilitate the process of providing notice and working cooperatively toward a mutually agreeable plan that divides up responsibility and, perhaps, allocates responsibility for costs and expenses. It is also not unusual for such policy holders to have long-tenured and trusted relationships with the law firm or lawyers engaged routinely to handle their insurance defense matters, which also will facilitate the parties’ ability to work out plans to manage actual or potential conflicts effectively on an on-going basis.

Only after efforts at negotiating a reasonable plan have failed, or the carrier abdicates its role, should the insured unilaterally take over control over the defense, and even then the insured should continue to provide regular progress reports and copies of legal bills to the carrier and inform the carrier of potential settlement opportunities.

If a negotiated plan is not possible or the insurer refuses to negotiate or to pay for the defense unless it retains complete control in the face of an unacceptable conflict, then the insured should consider the option of filing a declaratory judgment action compelling the carrier’s performance of its duty to defend. Under the law prevailing in virtually all jurisdictions, should the insured prevail in a declaratory judgment seeking defense, the insurer will be responsible for attorneys’ fees incurred to obtain that relief.[15]

Quite frequently, insurance carriers will send out reservation of rights letters as a matter of course, even when there is merely a possibility that they have a basis to decline coverage. When this happens, the insured, or better yet, its outside law firm, should send a letter advising the carrier that, because of the reservation, the outside law firm expects to take over the defense at its regular rates. This tactic often results in a retraction of the reservation by return mail.

III. The Special Problem of Policy Limits

The potential that exposure on a covered claim may exceed the policy limits adds yet another layer of complexity to an already complex situation when the parties are dealing with a mix of covered claims, claims for which coverage is disputed by reservation, and related, but undeniably non-covered, claims and counterclaims for which the insured must retain its own counsel.

A conflict of interest necessarily arises between the insured and the insurer when the potential exists that the damages claimed against the insured exceeds the limits of the available coverage. The insurance company, faced with many claims and perhaps seeking to minimize its costs over time by playing the odds, may believe that its long term interests will be served by rejecting a demand for settlement and forcing certain kinds of cases to trial. The insured, in most circumstances, would prefer to settle the matter within the policy limits and avoid the risk of an award in excess of the available coverage. As a result of this conflict, courts have recognized an insurer’s duty to settle within the policy limits: "The basis for the insurer's duty to settle within policy limits is the insurer's exclusive control over settlement negotiations, plus the inevitable conflict between the insurer's interest to pay as little as possible and the insured's interest not to suffer an excess judgment."[16]
While the precise articulation of the insurer’s duty varies from state to state, the inquiry is typically along the lines of whether, in light of the plaintiff’s damages and the probable liability of the insured, the ultimate judgment is likely to exceed the amount of the settlement offer.[17] When considering the merits of settlement, the insurer's decision-making process should not be influenced by the limits imposed by the policy, a desire to reduce the amount of future settlements, or a belief that the policy does not provide coverage.[18]

If a carrier rejects an offer within the policy limits, and a verdict is rendered in excess of that offer, the liability carrier may be liable for the entire verdict, and may also be exposed to actions for multiple damages and attorneys’ fees in a later action for unfair settlement practices and breach of implied covenant of good faith and fair dealing.[19]

It makes sense that, in a case involving both covered and non-covered claims, a carrier's duty to settle does not extend to the non-covered portions of the claim.[20] The "reasonableness" of the insurer’s settlement offer is measured by the insured's potential exposure in respect to the covered claims alone.[21] But this is more easily said than done when there are multiple, and perhaps overlapping, causes of action. In this context, insurers must avoid conduct that could be interpreted as coercive in connection with a demand for contribution from the insured as a condition of settling any covered claims.

V. Conclusion

Many of the questions troubling our general counsel in the introductory vignette are answered by an understanding of the relevant case law and ethical rules that pertain to the tripartite relationship among the insurer, the insured, and counsel. Depending on the jurisdiction, the general counsel may indeed have the right, simply by virtue of the insurer’s reservation of rights, to retain his trusted regular litigation firm at the insurance company’s expense. In other jurisdictions, the general counsel or his outside lawyers may have to do some analysis to articulate the potential for conflicts and justify why this particular situation permits the insured to select counsel and control the defense. In such jurisdictions, the appropriateness of the insurance company’s response is going to be judged by a standard of reasonableness in light of the facts and circumstances, including, among other things, the order, magnitude, and practical reality of the conflict and the experience, competence, and reputation of the lawyers proposed by the carriers. The lack of a bright line in these circumstances should give the general counsel and insurer incentive to negotiate an arrangement that assures the policy holder an independent defense, but may include concessions to the carrier appropriate to the situation. The presence of other causes of action that are clearly beyond the policy or the need to bring a counterclaim provide other bases for the parties to negotiate some form of joint defense arrangement.

In circumstances where the insurance company selects defense counsel, the general counsel’s concerns about assigned insurance defense lawyers being inclined to find ways to narrow the potential for coverage are, ultimately, addressed by the rules of ethics. Even if the defense lawyer is selected solely by the carrier, that lawyer owes the insured a duty of utmost good faith and loyalty inherent in the attorney-client relationship, including the obligation to advise when actual conflicts arise and a duty to refrain from disclosing to the insurer information obtained during the representation of the insured that might disadvantage the policy holder in any dispute with the insurer over coverage. Should the general counsel sense that the insurance defense lawyers assigned to his matters are not meeting their ethical obligations to provide a zealous defense, there are remedies available via the insurance contract and bad faith claims settlement practice laws, ethical rules and sanctions, and professional malpractice actions.

The general counsel’s concerns about an overly aggressive or optimistic defense exposing his company to a judgment in excess of the policy limits are mitigated to some degree by the protections afforded by the insurer’s duty to settle within the policy limits. This duty protects the insured from an imprudent insurer by shifting the risk of loss over the policy limits and otherwise enhancing the downside risk to the insurer.

When the insurer offers to defend with a reservation of rights, there are a number of options available to the policy holder and its legal team to create an effective alignment of the interests of the insured and the insurer, while assuring the independence of the legal defense. Being knowledgeable about the insured’s legal rights and obligations, and proactive from the start, will allow the policy holder to develop strategies that optimize the benefits of insurance coverage, enhance the effectiveness of the defense effort, and minimize the likelihood of collateral disputes over the competence of representation and the prudence of settlement and trial decisions.

[1] The “your work” exclusion in the standard ISO form general liability insurance form remains an on-going battle ground between insureds seeking coverage for construction defect claims and insurers seeking to limit their exposure. See David Dekker, et al., The Expansion of Insurance Coverage for Defective Construction, The Construction Lawyer, Fall 2008, at 19.

[2] The standard ISO “fungi or bacteria” exclusion reads:

This insurance does not apply to:

a. "Bodily injury" or "property damage" which would not have occurred, in whole or in part, but for the actual, alleged or threatened inhalation of, ingestion of, contact with, exposure to, existence of, or presence of, any "fungi" or bacteria on or within a building or structure, including its contents, regardless of whether any other cause, event, material or product contributed concurrently or in any sequence to such injury or damage.

b. Any loss, cost or expenses arising out of the abating, testing for, monitoring, cleaning up, removing, containing, treating, detoxifying, neutralizing, remediating or disposing of, or in any way responding to, or assessing the effects of "fungi" or bacteria, by any insured or by any other person or entity.

[3] The standard ISO general liability policy states: “[The insurer] will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies. We will have the right and duty to defend the insured against any ‘suit’ seeking those damages. However, we have no duty to defend the insured against any ‘suit’ seeking damages for ‘bodily injury’ or ‘property damage’ to which this insurance does not apply.” ISO Form CG 00 01, §1, ¶1.

[4] Douglas R. Richmond, Lost in the Eternal Triangle of Insurance Defense Ethics, 9 Geo. J. Legal Ethics 475, 476-77 (1995).

[5] See Bankwest v. Fidelity & Deposit Co., 63 F.3d 974, 978 (10th Cir. 1995) (finding insurer’s duty to defend arises “whenever there is a ‘potential of liability’ under the policy”); Intex Plastics Sales Co. v. United Nat'l Ins. Co., 23 F.3d 254, 256 (9th Cir. 1994) (“duty to defend exists if there is a ‘possibility’ or ‘potential’ for coverage”); Boston Symphony Orchestra, Inc. v. Commercial Union Ins. Co., 545 N.E.2d 1156, 1158 (Mass. 1989) (“duty to defend is based on the facts alleged in the complaint and those facts which are known by the insurer”); Commercial Union Ins. Co. v. Royal Ins. Co., 658 A.2d 1081, 1083 (Me. 1995) (“insured is entitled to a defense if there is any legal or factual basis that could obligate an insurer to indemnify….The complaint must show only a potential that the facts ultimately proved could come within coverage”) (citations omitted). For a general discussion of the law on the “duty to defend,” see Philip L. Bruner & Paul J. O’Connor, 4 Construction Law, §11:19 (2002 and supp. 2009). In the construction litigation context, the lines between tort and contract claims are often blurred and disputes over coverage are frequent. Suffice it to say, however, when a complaint includes both tort and contractual claims, defense to purely contractual claims that do not implicate the same conduct as the tort claims, as well the prosecution of counterclaims, remain the responsibility of the insured.

[6] Rhodes v. Chicago Ins. Co., 719 F.2d 116, 120 (5th Cir. 1983) (applying Texas law); Howard v. Russell Stover Candies, Inc., 649 F.2d 620, 625 (8th Cir. 1981) (predicting Missouri law); Union Ins. Co. v. Knife Co., Inc., 902 F. Supp. 877, 880 (W.D. Ark. 1995) (predicting Arkansas law); CHI of Alaska, Inc. v. Employers Reinsurance Corp., 844 P.2d 1113, 1118 (Alaska 1993); Kroll & Tract v. Paris & Paris, 86 Cal. Rptr. 2d 78, 82 (Cal. Ct. App. 1999) (citing Cal. Civ. Code § 2860); Nandorf, Inc. v. CNA Ins. Cos., 479 N.E.2d 988, 994 (Ill. App. Ct. 1985) (finding conflict when punitive damages not covered by policy); Herbert A. Sullivan, Inc. v. Utica Mut. Ins. Co., 788 N.E.2d 522, 539 (Mass. 2003); Moeller v. Am. Guar. & Liab. Ins. Co., 707 So. 2d 1062, 1069 (Miss. 1996).

[7] Twin City Fire Ins. Co. v. Ben-Arnold Sunbelt Beverage Co., 433 F.3d 365, 373 (4^th Cir. 2005); Trinity Universal Ins. Co. v. Stevens Forestry Serv., Inc., 335 F.3d 353, 356 (5th Cir. 2003) (applying Louisiana law); Armstrong Cleaners, Inc. v. Erie Ins. Exch., 364 F. Supp. 2d 797, 816 (S.D. Ind. 2005) (applying Indiana law); HK Sys. v. Admiral Ins. Co., No. 03-C-0795, 2005 U.S. Dist. LEXIS 39939, at *8-10 (E.D. Wis. June 7, 2005) (applying Wisconsin law); Travelers Indem. Co. v. Royal Oak Enters., 344 F. Supp. 2d 1358, 1374 (M.D. Fla. 2004) (predicting Florida law); Cent. Mich. Bd. of Trs. v. Employers Reins. Corp., 117 F. Supp. 2d 627, 634-35 (E.D. Mich. 2000) (applying Michigan law); Fed. Ins. Co. v. X-Rite, Inc., 748 F. Supp. 1223, 1229 (W.D. Mich. 1990) (same); Driggs Corp. v. Pa. Mfrs. Ass'n Ins. Co., 3 F. Supp. 2d 657, 659 (D. Md. 1998) (applying Maryland law); L & S Roofing Supply Co. v. St. Paul Fire & Marine Ins. Co., 521 So. 2d 1298, 1304 (Ala. 1987); Finley v. Home Ins. Co., 975 P.2d 1145, 1150-55 (Haw. 1998); Nisson v. Am. Home Assur. Co., 917 P.2d 488, 490 (Okla. Civ. App. 1996); Tank v. State Farm Fire & Cas. Co., 715 P.2d 1133, 1137-38 (Wash. 1986) (holding potential conflict created by reservation of rights mandates enhanced obligations of good faith for attorneys whose fees are covered by insurer).

[8] San Diego Navy Federal Credit Union v. Cumis Ins. Soc’y, 208 Cal Rptr. 494 (4th Dist. 1984) (this case has been superseded by Cal. Civ. Code § 2860, but noteworthy because it led other courts to refer to independent counsel paid for by insurers as “Cumis Counsel”). See also Am. Family Life Assurance Co. v. U.S. Fire Co., 885 F.2d 826, 831-32 (11th Cir. 1989) (applying Georgia law and holding insurer must pay for co-counsel selected by insured); Rhodes, 719 F.2d at 120-21; Armstrong Cleaners, 364 F. Supp. 2d at 817; Knife Co., 902 F. Supp. at 881;CHI of Alaska, 844 P.2d at 1118-19; Kroll, 86 Cal. Rptr. 2d at 82; Herbert A. Sullivan, Inc., 788 N.E. 2d at 539; Nandorf, 479 N.E. 2d at 992; Moeller, 707 So. 2d at 1069.

[9] See, e.g., Howard, 649 F.2d at 625; Consol. Rail Corp. v. Hartford Accident and Indem. Co., 676 F. Supp. 82, 86 (E.D. Pa. 1987) (predicting Pennsylvania law); Employers Reins. Corp., 117 F. Supp. 2d at 634-35; Finley, 975 P.2d at 1151-52; Patrons Mut. Ins. Ass'n v. Harmon, 732 P.2d 741, 745 (Kan. 1987); Am. Emp. Ins. Co. v. Crawford, 533 P.2d 1203, 1208-09 (N.M. 1975); Nisson, 917 P.2d at 490; Allstate Ins. Co. v. Wilson, 193 S.E. 2d 527, 530 (S.C. 1972); Chatterton v. Walker, 938 P.2d 255, 262 (Utah 1997).

[10] Ethical rules pertaining to insurance defense counsel vary from state to state.

[11] In Twin City, the district court agreed that one of the defendants covered by the policy, whose situation created an irreconcilable conflict, was entitled to a separate defense paid for by the carrier, even though ultimately he was not entitled to indemnity. 433 F.3d at 368-69. The fee claims of that defendant were settled by the parties prior to the appeal. Id.

[12] The standard ISO policy states: “You must see to it that we are notified as soon as practicable after an ‘occurrence’ or an offense which might result in a claim.” ISO GC 01 10 §IV, ¶ a. The form policy also states that the insured must: “cooperate with us in the investigation or settlement of the claim or defense against the ‘suit’.” Id. at §IV, ¶ c(3).

[13] States vary on the enforceability of broad additional insured language, rendering a layer of complexity that will vary from state to state. See generally Bruner & O’Connor, supra note 5, at §11:56.

[14] Insurance company "guidelines" on billing may violate an independent counsel’s duty of loyalty to the insured as client. To the extent billing guidelines interfere with the independent exercise of retained counsel's professional judgment, they may be disregarded in some jurisdictions. See In re The Rules of Professional Conduct and Insurer Imposed Billing Rules and Procedure, 2 P.3d 806, 814, 815 (Mont. 2000) (“requirement of prior approval fundamentally interferes with defense counsels’ exercise of their independent judgment”) (emphasis in original).

[15] Centennial Ins. Co. v. Patterson, 564 F.3d 46, 55 (1st Cir. 2009) ("when there is a declaratory judgment action 'to determine an insurer's contractual duty to defend an insured under an insurance policy, if the insured prevails in such action, the insurer shall pay court costs and reasonable attorney's fees.'" (citation omitted) (quoting Me. Rev. Stat. Ann. tit. 24-A, § 2436-B(2)); Westchester Fire Ins. Co. v. Wallerich, 563 F.3d 707, 720 (8th Cir. 2009) (denying reimbursement to insured of attorneys’ fees under Minnesota law when insured did not prevail in declaratory judgment seeking defense); Mohnkern v. Prof'l Ins. Co., 542 F.3d 157, 161 (6th Cir. 2008) (“purpose of [Fla. Stat. § 627.428] . . . is to reimburse successful insureds for their [attorneys'] fees when they are compelled to defend or sue to enforce their insurance contracts”); A. Kush & Assocs. v. Am. States Ins. Co., 927 F.2d 929, 934 (7th Cir. 1991) (under Illinois law, “an insurer's failure to defend, when it is under obligation to do so, makes it liable for reasonable attorney fees and the costs incurred by its insured” (citation omitted)).

[16] 14 Couch on Insurance § 203:13 (3d ed. 1995).

[17] See, e.g.,Johansen v. Cal. State Auto. Ass'n Inter-Ins. Bureau, 15 Cal. 3d 9, 16 (1975) (liability imposed on insurer for failure to meet duty to accept reasonable settlements); Cf. U.S. Fire Ins. Co. v. Royal Ins. Co., 759 F.2d 306, 309 (3d Cir. 1985) (under Pennsylvania law “although there is no absolute duty on the insurer to settle a claim when the judgment against the insured may exceed the amount of the insurance coverage, an insurer is required to ‘consider in good faith the interest of the insured as a factor in coming to a decision as to whether to settle or litigate a claim against the insured’” (citation omitted)); Hartford Casualty Ins. Co. v. N.H. Ins. Co., 628 N.E. 2d. 14, 18 (Mass. 1994) (“test is not whether a reasonable insurer might have settled the case within the policy limits, but whether no reasonable insurer would have failed to settle the case within the policy limits”).

[18] Johansen, 15 Cal. 3d at 16; R.W. Beck & Assoc. v. City & Borough of Sitka, 27 F.3d 1475, 1487 (9th Cir. Alaska 1994); Schwartz v. Liberty Mut. Ins. Co., 539 F.3d 135, 142 (2d Cir. 2008); Arquilla v. Int’l Ins. Co., 1988 U.S. Dist. LEXIS 17576, at *24 (N.D. Cal. July 15, 1988).

[19] Liberty Mut. Ins. Co. v. Mid-Continent Ins. Co., 405 F.3d 296, 301 (5th Cir. 2005) (if judgment exceeds policy limits, insurer liable for entire judgment if its refusal of the plaintiff's offer to settle within policy limits unreasonable); May v. Ill. Nat'l Ins. Co., 190 F.3d 1200, 1202 (11th Cir. 1999) (“Florida law recognizes a cause of action by an insured against his liability insurer based on the insurer's bad faith failure to settle a claim resulting in a judgment against the insured that exceeds policy limits”); Dairyland Ins. Co. v. Herman, 1998 U.S. App. LEXIS 1258, at *11 (10th Cir. 1998) (“An insurer who refuses to accept a reasonable settlement offer within policy limits, in violation of its duty of good faith and fair dealing, is liable for the entire judgment against the insured even if it exceeds policy limits”); Asermely v. Allstate Ins. Co., 728 A.2d 461, 464 (R.I. 1999) (insurer who refuses to settle a claim within policy limits is liable for excess judgments).

[20] St. Paul Fire & Marine Ins. Co. v. Convalescent Servs., 193 F.3d 340, 343 (5th Cir. 1999); Am. Physicians Ins. Exch. v. Garcia, 876 S.W.2d 842, 847 (Tex. 1994); Fed. Ins. Co. v. Everest Nat'l Ins. Co., 257 S.W.3d 771, 777 (Tex. App. 2008); Camelot by the Bay Condo. Owners' Ass'n, Inc. v. Scottsdale Ins. Co., 27 Cal. App. 4th 33, 51 (Cal. Ct. App. 1994).

[21] Reshamwalla v. State Farm Fire & Cas. Co., 72 Fed. Appx. 543, 545 (9th Cir. 2003); Zieman Mfg. Co. v. St. Paul Fire & Marine Ins. Co., 724 F.2d 1343, 1346 (9th Cir. 1983); Lincoln Gen. Ins. Co. v. Access Claims Adm'rs, Inc., 596 F. Supp. 2d 1351, 1365 (E.D. Cal. 2009); Betts v. Allstate Ins. Co., 201 Cal. Rptr. 528, 539 (Cal. Ct. App. 1984); In re Bongfeldt, 99 Cal. Rptr. 428, 430 (Cal. Ct. App. 1971); Egan v. Mutual of Omaha Ins. Co., 169 Cal. Rptr. 691, 695 (Cal. Ct. App. 1979).