When an insurer assumes charge of its policyholder’s defense while simultaneously reserving its rights on a basis adverse to the policyholder’s interests such as an intentional acts exclusion, a conflict of interest exists. In such a situation, the insurer must disclose the conflict and offer the policyholder the option of either waiving the conflict and agreeing to the insurer’s appointment of defense counsel controlled and paid by the insurer or retaining independent defense counsel controlled by the policyholder and paid by the insurer.
Many policies now include a “Selection of Counsel” provision similar to the following:
Section IV. – Commercial General Liability Conditions
10. Selection of Counsel
When we have the duty to defend any “suit” against the insured, we expressly retain the right to select defense counsel even if we reserve our rights concerning the applicability of coverage under this policy. In the event that we agree to the retention of defense counsel of the insured’s choosing, our obligation to pay for such defense shall be limited to “reasonable fees” and reasonable expenses. For purposes of this provision, “reasonable fees” means fees calculated at the rate we would pay counsel selected by us.
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By affording the insurer the exclusive right to select defense counsel where the policyholder would otherwise be entitled to independent counsel, this provision does not preempt all issues concerning independent counsel because it does not address two important considerations. First, the provision is silent as to who controls defense counsel and such control is central to the independent counsel rule. More importantly, it does not excuse the insurer from disclosing to the policyholder the conflict of interests created by the insurer’s reservation of rights, and failure to disclose the conflict could result in a breach of the duty to defend and estoppel from reliance on policy defenses.
Therefore, notwithstanding the “selection of counsel” provision the insurer should disclose the conflict of interests created by its reservation of rights. If the policyholder waives the conflict the insurer can utilize the “selection of counsel” provision and appoint defense counsel. The insurer should also obtain the policyholder’s consent in order to control the defense. If the policyholder does not waive the conflict and selects independent counsel, the insurer can still utilize the “selection of counsel” provision insofar as it limits the insurer’s obligation to paying only independent counsel’s reasonable fees at the rates it would pay to counsel selected by the insurer and independent counsel’s reasonable expenses.
Because in most states it is clear that an insurer cannot retain and control defense counsel where its reservation of rights creates a conflict of interests that must be disclosed to the policyholder, an insurer relying on a “selection of counsel” provision must proceed with caution, be cognizant of all applicable independent counsel requirements, and ensure that those requirements are met because the provision alone may not satisfy those requirements. The insurer should also recognize that in most instances the greatest benefit of the “selection of counsel” provision will be the insurer’s ability to control defense costs.
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