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Vol. 6, Iss. 5
May 17, 2017

Insured May Get Independent Counsel -- For A Defense Without A Reservation Of Rights

Policyholders being defended under a reservation of rights sometimes seek for their insurer to pay for independent counsel, as opposed to taking insurer-appointed counsel. This often comes about when a complaint contains both covered and uncovered claims. You know the drill. The complaint contains a negligence cause of action and one for intentional conduct. The insured argues that insurer-appointed counsel, because he or she is getting assigned lots of cases from the insurer, or would like to, may be motivated to curry favor with the insurer and “steer” the case toward the uncovered claims. Putting aside how insulting this accusation is to defense lawyers, how could a lawyer even go about doing this? And especially without it being detected. This is a complete mystery to me. In any event, courts sometimes permit independent counsel on this basis.

An Illinois federal court recently addressed an insured’s right to independent counsel based on an argument other than so-called “steering.” The insured’s argument was that, because its potential exposure exceeded its policy limit, it was entitled to independent counsel. The court agreed. But, here are the rubs – the court acknowledged that the insured’s risk of exposure, in excess of its limits, was “slim” AND the insured was being defended without a reservation of rights.

DePasquale Steel Erectors was one of nine subcontractors, named by a general contractor, as third-party defendants in a construction defect suit. The total damages at issue were in excess of $1.7 million. DePasquale’s insurer, Gemini, undertook its defense without a reservation of rights. Depasquale demanded independent counsel, at Gemini’s expenses, on the basis that the jury demand exceeded the limits of the Gemini policy. Gemini declined. Litigation ensued.

The court explained that, under Illinois law, “a conflict necessitating independent counsel exists when the insurer’s and the insured’s interests in the conduct of the tort action are in serious conflict and the insurer and the insured are complete adversaries on a crucial issue which would necessarily be decided either one way or the other if liability was imposed.”

However, independent counsel may also be owed, the court noted, when an insurer has an interest in providing a less than vigorous defense.

It seems odd that Gemini would not provide a vigorous defense when it is on the hook for $1 million of a $1.7 million exposure. Nonetheless, the court concluded that such possibility existed. The court held as follows (despite its conclusion that “DePasquale’s odds of finding itself on the hook financially because of the $1 million ceiling on Gemini’s exposure would appear slim”): “In the underlying lawsuit Triumph makes different claims against the nine subcontractors according to their respective roles in the planning, development and construction of the warehouse. Under Illinois law any defendant whose fault is determined to be more than 25 percent of the total fault is jointly and severally liable for the total damages (735 ILCS 5/2-1117). And the input -- or more precisely, the lack of input -- from the parties leaves this Court unable to predict whether DePasquale’s share of the blame will clear that threshold, so that there is no basis to conclude as a matter of law whether or not a conflict of interest exists between the parties such as to require independent counsel.”

While the case was decided on a summary judgment standard, based on the particular facts at issue, the court added this concluding line which may go beyond the matter at hand: “Gemini [has not] offered any explanation as to how its own interests would be disserved by being represented by a well-qualified counsel who would be chosen by DePasquale (which has every incentive to select first class representation) and who would also owe fiduciary responsibility to Gemini.”

Interestingly, as an aside, California’s Cumis statue specifically provides that “[n]o conflict of interest shall be deemed to exist as to allegations of punitive damages or be deemed to exist solely because an insured is sued for an amount in excess of the insurance policy limits.” Cal. Civ. Code § 2860(b).

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