Opinion ID: 1249568
Heading Depth: 1
Heading Rank: 1

Heading: Did Employers' reservation of rights to disclaim coverage give CHI a right to retain independent counsel?

Text: We answer this question in the affirmative. Liability insurers have separate duties to defend and to indemnify their insureds. [1] In order to discharge their duty to defend, insurers hire counsel to conduct the defense of their insureds. [2] Often there is no conflict of interest between the interests of the insurers and the interests of the insureds. Both wish to successfully defend and, if that is not possible, minimize damages. Sometimes, however, the insurer claims that the policy has been breached by the insured. These are so-called policy defenses [3] of which the insured's failure to give notice or to cooperate are typical examples. The insurer may wish to preserve its policy defenses and still provide a defense to the insured. By doing so it may be able to avoid paying the underlying claim either by succeeding in its defense of the insured or, failing that, by successfully asserting its policy defense. The insurer can preserve these options by defending the insured under a reservation of rights to later disclaim coverage if the reservation of rights is acquiesced in by the insured. Continental Ins. Co. v. Bayless & Roberts, Inc., 608 P.2d 281, 288 (Alaska 1980). Similarly, the insurer may claim that although no condition of the policy has been breached by the insured, a particular claim made by the plaintiff does not come within the coverage of the policy. Such defenses are called coverage defenses. The most typical example is the coverage defense in this case where alternative theories of negligent and intentional tort are plead and negligent acts are covered by the policy but intentional acts are not. [4] In such cases the insurer's duty to defend may require it to defend even if the most likely theory of recovery is one for which there is no insurance coverage. [5] The insurer can preserve its coverage defense and fulfill its duty to defend by defending under a reservation of rights to later disclaim coverage if liability is attributable to the excluded theory. In cases where an insurer asserts either policy or coverage defenses, and defends its insured under a reservation of rights, there are various conflicts of interest between the insurer and the insured. We identified three of these in Continental. First, if the insurer knows that it can later assert non-coverage, or if it thinks that the loss which it is defending will not be covered under the policy, it may only go through the motions of defending: it may offer only a token defense... . [I]t may not be motivated to achieve the lowest possible settlement or in other ways treat the interests of the insured as its own. Id. at 289. Second, if there are several theories of recovery, at least one of which is not covered under the policy, the insurer might conduct the defense in such a manner as to make the likelihood of a plaintiff's verdict greater under the uninsured theory. Id. Third, the insurer might gain access to confidential or privileged information in the process of the defense which it might later use to its advantage in litigation concerning coverage. Id. at 291. Merely because the insurer and the insured have divergent interests when the insurer seeks to defend under a reservation of rights does not necessarily mean that appointed counsel also has conflicting interests. If appointed counsel makes it clear at the outset of his engagement that he is going to be involved only in the defense of the liability claim, not in coverage issues, and that his client is the insured, not the insurer, conflicts should be rare. [6] A number of authorities hold that this is the appropriate role of appointed counsel. For example, the Arizona Supreme Court held that appointed counsel who in the course of representing the insured gains access to information which may give rise to a policy defense is prohibited from communicating that information to the insurance company. Farmers Ins. Co. of Arizona v. Vagnozzi, 138 Ariz. 443, 448, 675 P.2d 703, 708 (1983): We emphasize that the attorney who represents the insured owes him an undeviating allegiance whether compensated by the insurer or the insured and cannot act as an agent of the insurance company by supplying information detrimental to the insured. Employers agrees with this view, noting that counsel has an absolute duty of fidelity to the insured over the interests of the insurer. Other authorities, however, take the view that appointed counsel represents both the insured and the insurer. A former president of the Defense Research Institute has written that appointed counsel has an obligation to disclose to the insurance company information detrimental to the insured. Thomas A. Ford, The Insurance Contract: The Conflicts of Interest it Breeds, Ins. Couns.J. 610, 620 (Oct. 1969): In order for the attorney to perform his role properly, he must never lose sight of the fact that he is working for two different and distinct parties  the insured and the insurer. He must fully disclose to both parties the information he has obtained as a result of his unique relationship with them. See also Shafer v. Utica Mutual Ins. Co., 248 A.D. 279, 289 N.Y.S. 577, 587 (1936) (appointed attorney acted properly in disclosing to insurer information which enabled insurer to disclaim liability); Alaska Code of Professional Responsibility EC 517 (stating that one typically recurring situation involving potentially different interests is dual representation of insured and insurer). Where there is a conflict between insurer and insured, appointed counsel may tend to favor the interests of the insurer primarily because of the prospect of future employment. United States Fidelity & Guar. Co. v. Lewis A. Roser Co., 585 F.2d 932, 938 n. 5 (8th Cir.1978) (Even the most optimistic view of human nature requires us to realize that an attorney employed by an insurance company will slant his efforts, perhaps unconsciously, in the interest of his real client  the one who is paying his fee and from whom he hopes to receive future business  the insurance company.); San Diego Navy Fed. Credit Union v. Cumis Ins. Soc'y, Inc., 162 Cal. App.3d 358, 208 Cal. Rptr. 494, 498 (1984) (`A lawyer who does not look out for the carrier's best interest may soon find himself out of work.' (quoting the trial court)); Michael A. Berch and Rebecca W. Berch, Will the Real Counsel for the Insured Please Rise?, 19 Ariz.St.L.J. 27, 29-30 (1987) ([T]he attorney's economic interests weigh heavily in favor of the insurer, which, after all, may retain his services in other cases; yet the rules of professional responsibility tip the scales toward the insured.); Arthur P. Berg, Losing Control of the Defense  The Insured's Right to Select His Own Counsel, 26 For the Defense 10, 15 (July 1984) (Although [some] courts seem to trust the insurer and attorney to act in the best interests of the insured, the more common view is that the longstanding ties that defense counsel has with the insurer will inevitably influence his conduct of the case.); Sampson A. Brown and John L. Romaker, Cumis, Conflicts and the Civil Code: Section 2860 Changes Little, 25 Cal. W.L.Rev. 45, 54 (1988) (The attorney, wishing to maintain the insurer's business, does not want to aggravate the company.); Mark A. Saxon, Conflicts of Interest: Insurers' Expanding Duty to Defend and the Impact of Cumis Counsel, 23 Idaho L.Rev. 351, 353 (1987) (Insurance counsel's relationship with the insurer is contractual, usually ongoing, supported by strong financial interests, and often strengthened by sincere friendships.). [7] In recognition of this, most courts hold that in conflict situations the insured has the right to independent counsel to conduct its defense and the insurance company has the obligation to pay the reasonable value of the defense conducted by independent counsel. [8] In dicta in National Indemnity Co. v. Flesher, 469 P.2d 360, 367 n. 22 (Alaska 1970), we recognized the right of the insured to independent counsel under circumstances involving a coverage defense: In such circumstances, the insurer must provide the insured with independent counsel. Ten years later in Continental Insurance Co. v. Bayless & Roberts, Inc., 608 P.2d 281 (Alaska 1980), we recognized the right of the insured to independent counsel in cases involving policy defenses. However, we reserved the question whether the insured had the same right in coverage defense cases. Id. at 289. In Continental the insurer claimed that the insured had breached the cooperation clause of the policy, but offered to defend the insured under a reservation of rights. Id. at 283. The insured rejected the insurer's offer of a conditional defense and demanded a defense without a reservation of rights. Id. at 286. This the insurer refused to do. Id. Subsequently, the insured's personal counsel took over the defense of the case and entered into a settlement which resulted in a consent judgment against the insured. Id. In the ensuing litigation between the insured and the insurer, the insurer contended that the insured had breached the insurance policy by refusing to accept the insurer's offer to defend under a reservation of rights. Id. at 288. We held that the insured did not breach the policy and that it was within its rights to require the insurer to defend unconditionally or withdraw from the defense. Id. at 291. We also affirmed the jury's award which included $4,000 expended by the insured as its defense costs. Id. at 296 n. 28. In reaching this result, we expressed and adopted in policy defense cases the general rule that the insurer must surrender its right to control the defense to the insured if the insured refuses to accept a defense under a reservation of rights: [T]he general rule is that, if an insured refuses to accede to the insurer's reservation of rights, the carrier must either accept liability under the policy and defend unconditionally or surrender control of the defense... . Id. at 288. We explained in some detail the types of conflicts of interests which arise when the insurer asserts a right to later contest its liability. Id. at 289-90. We noted that these conflicts might be avoided if the insured were offered the right to retain independent counsel: The possibility of a conflict might be avoided in such cases if the insurance company were to offer its insured the right to retain independent counsel to conduct his defense, and agree to pay all the necessary costs of that defense. In that event, it would seem that the company should be entitled to reserve the right to later litigate an alleged policy defense. Id. at 291 n. 17. As already stated, the holding in Continental was limited to policy defenses; the question as to whether the same rules should apply where coverage defenses are involved was reserved. Id. at 289. All three general types of conflicts of interests between insurer and insured which we identified in Continental  the insurer may offer mere token defense, the insurer may steer result to judgment under an uninsured theory of recovery, the insurer may gain access to confidential or privileged information which it may later use to its advantage  apply in coverage defense cases. However, the second reason does not apply in policy defense cases. Policy defenses, such as lack of notice or noncooperation, involve facts which are generally irrelevant to the litigation between the plaintiff and the insured. Therefore, appointed counsel has no opportunity to covertly frame [a] defense to achieve a verdict based upon [a theory under which no coverage would result] so that [the insurer] could later assert that the defense was not covered... . Id. at 289. Thus, the need for independent counsel is, if anything, greater in coverage than in policy defense cases. [9] We conclude that the right to independent counsel recognized in Continental should also apply to cases involving coverage defenses. [10] We thus adhere to the dicta contained in National Indemnity, which we noted above.