If you look at the issue on a nationwide basis, you’ll find that, in a majority of jurisdictions, IF an insured can prove that a reservation of rights creates a conflict of interest, the insured is entitled to choose its own counsel at the insurer’s expense.  [And then bring on the rate dispute, but that’s a separate issue.] 

But that’s a big “if.” Policyholders often see conflicts, created by the insurer’s retention of counsel, that courts do not.  Try as they might, Policyholders cannot always convince courts that an insurer’s retention of panel counsel creates a conspiracy that rivals a second shooter on the grassy knoll. 

This is not to say that conflicts are never created by an ROR, thereby giving rise to a policyholder’s right to independent counsel. But it is not always so easy to prove.  Two recent decisions demonstrate this point – both involving issues that often arise in construction defect litigation that is defended under a reservation rights.  In both cases the court rejected the policyholder’s claim that the insurer’s defense, provided under a reservation of rights, gave rise to the policyholder’s right to retain independent counsel. 

In general, the courts concluded that the reservation of rights did not give rise to independent counsel, as the coverage issues were tied to facts that are what they are.  In other words, as the insurer could not control what the facts will be in the litigation, the policyholder was not entitled to independent counsel.   

I am going to keep these write-ups brief.  There is simply no need to provide chapter and verse about the cases to make the relevant points.  Also, I am writing this on Sunday and 1 PM, and the start of football, is close at hand.  And, I’ll remind you that you do not pay for this fine publication.  So I’ll feel no guilt, while I’m overeating on nachos, if you do not believe that you are getting your money’s worth.  I’ll also be feeling no guilt because I’ll be eating baked tortilla chips.  So it’s OK, no matter how many I eat.  Yep, I keep telling myself that. 

In Sempra Energy v. Associated Electric & Gas Insurance Services, No. 19-3340 (C.D. Calif. July 20, 2020) the court addressed a policyholder’s claim, of entitlement to independent counsel, for a defense against suits seeking damages from a gas leak at a natural gas storage facility. 

I know I said that these cases involved issues that often arise in construction defect litigation that is defended under a reservation rights.  Sempra Energy is not a construction defect case.  But the ROR-issue, giving rise to a claim of entitlement to independent counsel, is one that arises with some regularity in construction defect cases.

The insurer in Sempra Energy reserved its rights on the basis that no personal injury or property damage occurred during its policy periods.  This is an ROR that is often asserted when an insurer is defending its insured in a construction defect case.

For two reasons, the court rejected the policyholder’s claim, that a ROR on this basis, gave rise to its entitlement to independent counsel.

First, the timing of personal injury or property damage was not material to the underlying litigation: “Here, Continental reserves rights unrelated to the Underlying Lawsuits. Continental reserves the rights to assert that no individual raises a claim for personal or property damages from an occurrence within the period of the Harbor Policies. However, this is immaterial to the Underlying Lawsuits, because the pleadings in the Underlying Lawsuits do not succeed or fail based on the time period of the claim.”

Second, the timing of personal injury or property damage was not something that the insurer could control: “Continental asserts no conflict exists because it has no control over the issue it reserves—timing of the occurrence. Continental cannot control the fact discovery of when the natural gas leaks began, the nature of the damages the underlying plaintiffs faced (e.g., personal or property), or when the underlying plaintiffs began facing the injuries. Hence, Continental is unable to shape the outcome of the issues it preserves.”

That the insurer could not control the facts, that give rise to whether coverage would be owed, is why the policyholder also did not succeed, in its claim for independent cousnel, in Builders Concrete Services v. Westfield National Insurance Co., No. 19-7792 (N.D. Ill. Sept. 14, 2020).

At issue was coverage for construction defects.  As is often the case, coverage may have been owed for damages caused by an insured’s work, but not for the cost to repair or replace the insured’s own faulty workmanship.  The court addressed whether this gave rise to the insured’s right to independent counsel.  As the insured saw it: “[The insurer’s] chosen counsel could emphasize the damage to Builders’s own (uninsured) work product and downplay the damage to the other (insured) parts of the building—resulting in Builders’s bearing a greater share than it should for any judgment Focus obtains on its counterclaims.”

But the court was not convinced, setting out the following rule: “Unless the insurer, through its chosen counsel, can manipulate or otherwise affect the course of the underlying suit in a way that would “completely and irreparably” eliminate coverage for a judgment, the insured is not entitled to independent counsel. Forge Indus. Staffing, 567 F.3d at 879. Put another way, if different results in the underlying litigation affect only the relative responsibility of the insurer and the insured for the judgment without eliminating coverage completely and irreparably, the insurer retains the right to control the defense.” (emphasis added).

The court concluded that this test for independent counsel – that there be mutually exclusive theories of recovery -- was not satisfied.  The insurer’s chosen counsel could only potentially affect the extent of coverage and not eliminate it entirely. 

The court explained: “The parties agree that at least some of the damages alleged in Focus’s counterclaims would fall within the Westfield policy’s coverage. Westfield correctly observes that the counterclaims allege damage to other parts of the project, separate from Builders’s own work, such as a steel beam which was allegedly damaged as a result of the defective concrete.  Builders likewise acknowledges that Westfield’s chosen counsel could seek only to diminish Westfield’s responsibility to indemnify Builders for a judgment on Focus’s counterclaims, not to eliminate it entirely.”

Sometimes a policyholder counsel needs to conclude that Oswald acted alone.