Source: http://dutytodefend.com/control-of-the-defense/
Timestamp: 2019-04-22 08:35:12+00:00

Document:
The question of who may control the policyholders defense under what circumstances is very well developed in California law. Nonetheless, the right control of the defense is widely misunderstood by lawyers and judges. The answer to the question requires two separate analyses: 1) what contractual, statutory and common law standards control the insurer-policyholder relationship; and 2) what ethical standards impede dependent counsel from representing both the insurer and the policyholder.
While there are exceptions, the general rules are: 1) A defendant always has the initial right to control the defense. 2) An insurer that says “yes” may control its policyholder’s defense. 3) An insurer that says “no” may not control its policyholder’s defense. 4) An insurer that says “maybe” may or may not control the defense depending on whether its reservation of rights creates a disqualifying conflict of interest.
When a policyholder becomes legally liable to the plaintiff, the insurer must indemnify the policyholder by paying the injured plaintiff. The insurer is not entitled to relitigate issues of the policyholder’s liability to the plaintiff, nor the amount of the victim’s injuries, nor any other issues necessarily decided by the judgment against the policyholder. The insurer’s rights to due process of law are generally satisfied by the insurer’s receipt of notice of the suit. Thus, the insurer is bound by a judgment against the policyholder even though the insurer is not an actual party to the lawsuit.
As a party to the lawsuit, the defendant/policyholder has the initial right to control the defense. The policyholder may choose to relinquish that control to the insurer, but is not required by statute to do so. This right includes the power to select, direct, hire, and fire the attorney. An attorney is the client’s agent on matters for which the attorney is employed, so that the client may be bound by the attorney’s acts. “The interest of the client in the successful prosecution or defense of the action is superior to that of the attorney, and he has the right to employ such attorney as will in his opinion best subserve his interest.” “[A] client should have both the power and the right at any time to discharge his attorney with or without cause.” A defendant who has liability insurance may choose to notify one’s insurer of a plaintiff’s lawsuit, whereupon the insurer may or may not earn the right to control the policyholder’s defense.
Absent a contractual provision to the contrary, the Civil Code confers upon the policyholder the right to conduct the defense. “In the interpretation of a contract of indemnity, the following rules are to be applied, unless a contrary intention appears.” “The [insurer] is bound, on request of the [policyholder], to defend actions or proceedings brought against [the policyholder] in respect to the matters embraced by the indemnity, but [the policyholder] has the right to conduct such defenses, if he chooses to do so.” A contrary intention may appear from an express waiver, the policyholder’s acquiescence, or the language of the policy.
Liability insurance is a “contract whereby one undertakes to indemnify another against . . . liability.” The language of an insurance contract may confer upon the insurer certain rights to control the conduct and the cost of defending the policyholder. However, the meaning of the language used in different kinds of policies varies widely.
Such language may be interpreted to mean that the insurer the contractual right to appoint dependent counsel to conduct the defense. However, such language does not resolve ethical conflicts of interest that may plague dependent counsel. No reported California opinion holds that any of the foregoing provisions constitute a waiver by the policyholder of dependent counsel’s ethical obligations to the policyholder/client. Thus, even where policy language appears to permit the insurer to select a defense lawyer, dependent counsel may not necessarily accept or continue employment to represent both the policyholder and the insurer where their interests conflict. When dependent counsel cannot ethically accept the assignment, control of the defense may not shift to the insurer or its ethically challenged dependent counsel.
A typical CGL policy has a notice provision, such as: “If a claim is made or ‘suit’ is brought against any insured, you must: . . . Notify us as soon as possible.” Many courts and lawyer speak in terms of “tendering” the defense to the insurer by giving notice. However, a typical policy never uses the word “tender.” No reported California opinion holds that a policyholder offers control of the defense to the insurer by the policyholder’s compliance with the notice requirement of the policy. Thus, the policyholder does not cedes control of the defense to the insurer simply by notifying the insurer of a claim.
“[W]hen 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, a conflict of interest may exist.” Where the policyholder selects independent counsel and the insurer selects dependent counsel both “shall be allowed to participate in all aspects of the litigation [and] . . . cooperate fully in the exchange of information that is consistent with each counsel’s ethical and legal obligation to the insured.” However, Rule 3-310 and Cumis require conflicted dependent counsel to withdraw unless the policyholder gives informed written consent. No reported California opinion clarify whether dependent counsel may purport to represent the policyholder with a disqualifying conflict of interest.
California case law is clear that the right to control the conduct of the defense depends upon: 1) the agreement of the parties, if any; 2) whether a disqualifying conflict of interest exists; and 3) whether the insurer is faithfully performing its duty to defend. An agreement of the parties, express or implied, may supercede the policy language, the statutory standard or the common law standard. Generally, if no disqualifying conflict of interest exists, the insurer may control the defense, while the policyholder may control the defense if a disqualifying conflict is present. Also generally, an insurer in material breach of its duty to defend loses control of the defense and settlement.
The right to control the defense largely depends upon whether the insurer says “Yes”, “No”, or “Maybe”. When an insurer says Yes, agreeing to defend and indemnify its policyholder for a plaintiff’s lawsuit, it may generally control the defense. However, conflicts of interest may arise regarding settlement within policy limits and whether the insurer will pay compensatory damages even if punitive damages are awarded.
When an insurer says Maybe, reserving it rights to defer a decision whether to accept responsibility to defend or indemnify its policyholder, control of the defense generally turns on whether the reservation creates a disqualifying conflict of interest. Although courts have used a variety of nomenclature, a reservation of rights always creates disqualifying conflicts of interest unless all grounds upon which the insurer may disclaim coverage are unrelated to, irrelevant to, extrinsic to, independent of, or have nothing to do with the third party litigation.
 The moniker “dependent counsel” acknowledges that “defense counsel and the insurer frequently have a longstanding, if not collegial, relationship” (Gulf Ins. Co. v. Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone (2000) 79 Cal.App.4th 114, 131), “[a]s a practical matter . . . in reality, the insurer’s attorneys may have closer ties with the insurer and a more compelling interest in protecting the insurer’s position, whether or not it coincides with what is best for the insured” (Purdy v. Pacific Automobile Ins. Co.(1984) 157 Cal.App.3d 59), and “[i]nsurance companies hire relatively few lawyers and concentrate their business. A lawyer who does not look out for the Carrier’s best interest might soon find himself out of work.” (San Diego Navy Fed. Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358, 364 (Cumis).
 Crawford v Weather Shield Mfg., Inc. (2008) 44 Cal. 4th 541, 558.
 “An attorney shall have authority: 1. To bind his client; 2. To receive money claimed by his client and to discharge the claim or acknowledge satisfaction of the judgment.”(Cd. Civ. Proc. §283 (ellipses omitted).); Blanton v. Womancare, Inc. (1985) 38 Cal.3d 396, 403.
 Fracasse, supra, 6 Cal.3d at 800.
 Lamb v. Belt Casualty Co. (1935) 3 Cal.App.2d 624, 631-632 (Lamb).
 Gribaldo, Jacobs, Jones & Associates v. Agrippina Versicherunges A.G. (1970) 3 Cal.3d 434, 449.
 Pruyn v. Agricultural Ins. Co. (1995) 36 Cal.App.4th 500, 515.
 See, Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 306: “[C]overage hinges on factual issues that are unrelated to the issues in the third party liability action”.
 See Montrose Chemical Corp. v. Superior Court (Canadian Universal Ins. Co.) (1994) 25 Cal.App.4th 902, 909: “Accordingly, the question before us is whether the coverage questions are logically unrelated (that is, irrelevant) to the issues of consequence in the (third party litigation which might) prejudice [the insured] in the underlying actions”.
 See, Gafcon, supra, 98 Cal.App.4th at 1422. No prejudice “where the coverage issue is ‘independent of, or extrinsic to, the issues in the underlying action’”.

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