RISKVUE ARCHIVE | FEATURE STORIES

The Right to Select Counsel: A New Twist on Just How Important this Term Can Be in Your Insurance Contract

By Nancy S. Flury, Esq.

How About A Consulting Firm On the Other Side of the Country?

Recently, a client received a Charge of Discrimination. For those readers who are not familiar with employment law, this is a claim filed by an employee, or former employee in this case, with a state or federal administrative agency, either the State Human Rights Department and/or the federal Equal Employment Opportunity Commission (many cases are dual filed). Because the client had insurance that covered employment law claims, the client notified its insurance carrier, expecting that the insurance carrier would appoint legal counsel to defend the Charge. Instead, the insurance carrier notified the client that it was assigning a consulting firm to prepare a response to the Charge.

The client asked the insurance carrier to appoint legal counsel according to the terms of the policy, which specifically provided that the duty to defend included a right to receive legal counsel, not lay persons, in defense of the Charge. The client raised the issue that there would be no attorney/client privilege between the client and the consulting firm and/or it would be waiving its attorney/client privilege by providing information or documents to the consulting firm. The client explained that the action could be withdrawn or dismissed by the administrative body and an action could be filed in court, and anything the client told or gave to the consulting firm would be discoverable. The former employee had also obtained counsel to prepare the Charge and represent him during the administrative process. The client wanted similar representation and asked the insurance carrier to appoint its local corporate counsel, who could respond to the Charge at the same flat rate the consulting firm was going to charge and was familiar with the client’s business and the matter at hand. To the contrary, the consulting firm was on the other side of the United States from the client.

The insurance carrier refused, stating that the consulting firm handles the defense for the insurance carrier on all of the administrative claims. The client argued the insurance carrier was in breach of its obligations under the policy by failing to provide legal defense counsel as provided for under the insurance contract, and that the insurance carrier’s reservation of rights triggered the client’s right to select its own counsel. The insurance carrier claimed the client was failing or refusing to cooperate in the defense or rejecting the defense the insurance carrier agreed to provide. In the end, the client’s corporate counsel successfully defended the client in the Charge of Discrimination, and the insurance carrier has not paid any of the defense costs incurred by the client.

Disrupting the Attorney-Client Relationship

Most courts have long recognized that the relationship between a client and the attorney of his or her choice is one that should not be readily disrupted. When it comes to insurance coverage of a claim, however, that relationship is frequently challenged by the terms of the insurance contract. Many clients are surprised when their insurance carrier forces them to relinquish counsel of their choice based on the terms of the contract, not realizing they were giving up this right—or the right to any legal counsel, as in the case described above—when they accepted the policy. Despite compelling arguments that can be made in court regarding a loss of time and money in being compelled to retain new counsel, who in turn have to become familiar with the client’s operations, the problems with using consulting firms over legal counsel, and the conflict of interest rising from a reservation of rights letter, it is best if the client can negotiate selection of counsel in the insurance policy. The best time to negotiate a favorable selection of counsel clause is when the insurance renews or the business is considering changing insurance companies.

Choosing your Carrier Wisely and Negotiating Selection of Counsel

In particular with regard to Employment Practices Liability Insurance, many carriers are offering the insured a voice in the selection of counsel including:

• Mutual selection
• An opportunity to confer
• Insured’s selection of counsel, except for Designated Claims
• Insured’s selection from panel list
• Insured’s choice with carrier’s approval
• Strong consideration to Insured’s choice—final decision with carrier

The Betterly Report conducts a survey each year reviewing insurance carrier products that form the core of the market. The Report examines the policy forms and endorsements of the standard products, including selection of counsel. Of course, as pointed out by The Betterly Report, special arrangements of coverage, cost, and other variables may be available on a negotiated basis.

One Last Note

Getting back to our case above, as expected by the client, once the Charge of Discrimination was dismissed, the former employee brought a civil suit in state court. Luckily, the client had had the foresight to preserve its attorney-client privilege, or everything that the consulting firm would have worked on would have been discoverable. The insurance carrier finally appointed legal counsel, although it still refused to apply the expenses incurred by the client’s corporate counsel in defending against the Charge of Discrimination towards the client’s self-insured retention.

ABOUT THE AUTHOR

Nancy S. Flury is a partner in the Minneapolis law firm of Lindquist & Vennum PLLP, and a member of the firm’s Employee Benefits, Executive Compensation and Employment Law Group. Ms. Flury regularly advises clients on employment law and represents clients in employment litigation. She can be reached at nflury@lindquist.com.

This article is only a general summary for informational purposes and does not constitute legal advice. Consult a qualified and experienced insurance advisor for your specific situation or particular questions.

riskVue | The webzine for risk management professionals
February 2006