RISKVUE ARCHIVE | FEATURE STORIES

The Policyholder's Right to Select Defense Counsel, Part 3

By Thomas C. Mielenhausen
Lindquist & Vennum, PLLP

In the last issue of riskVue we discussed what information the policyholder should request and receive to give truly "informed" consent to representation by insurer-proposed defense counsel. In this issue, we will address circumstances in which a policyholder may reasonably withhold its consent.

When May The Policyholder Select Defense Counsel?

A policyholder may reasonably withhold its consent, and make its own selection of defense counsel to be paid by the insurer, if: (a) the insurer and its proposed defense counsel fail to provide the information necessary for the policyholder to give truly informed consent; or (b) the information provided shows that the policyholder's withholding of its consent is reasonable. Although a policyholder has a duty to cooperate with its insurer in the defense against a claim, the policyholder also has a right to protect itself. See T. Mielenhausen, "Limits on Policyholder's Duty to Cooperate," 7 riskVue 1 (April 2005). The policyholder need not subordinate its interests to that of the insurer, or comply with an unreasonable or unnecessary request by the insurer. The insurer, on the other hand, is obligated to give as much consideration to the policyholder's interests as its own. The insurer must provide defense counsel whose representation will comply with the Rules of Professional Conduct and common law fiduciary duties.

When the Insurer Fails To Completely Identify and Explain All of Its Coverage Issues

The most common situation in which a policyholder may reasonably withhold its consent to insurer-proposed defense counsel is when the insurer fails or refuses to identify all of the insurer's coverage issues, and explain whether any of those issues involve facts defense counsel might choose to investigate or discover during the course of the defense. In many states, an insurer is not required to assert all of its coverage issues at the outset of a claim. The insurer may defend the policyholder under a broad, open-ended reservation of the right to assert unidentified coverage issues at any time in the future. The insurer is even permitted to defend the policyholder while remaining silent about coverage issues, and then assert coverage issues late in the litigation, as long as the late assertion does not actually prejudice the policyholder's defense.

The table appended to this article illustrates that the insurer's right to issue broad, open-ended reservation of rights letters, and to defend while remaining silent about coverage issues, comes at a price. When the insurer engages in this conduct, it sets up a situation where the policyholder is in no position to give truly informed consent to representation by an insurer-proposed defense counsel, and cannot reasonably be expected to give such consent. The policyholder has not been completely informed of all coverage issues that may create an opportunity for defense counsel's shifting of liability, even if unconsciously or inadvertently, toward non-covered claims and damages. If the insurer fails to completely identify and explain all such coverage issues, or refuses to provide an express written waiver of all coverage issues not disclosed, the policyholder cannot assess whether the insurer's coverage issues involve facts that defense counsel might choose to develop during the course of the defense. The policyholder cannot give truly informed consent to the insurer's proposed defense counsel, and therefore the insurer must pay for policyholder-selected defense counsel.

When the Insurer Asserts Coverage Issues Involving Facts or Strategies That Could Be Developed During the Course of the Defense

When insurers do specify coverage issues in reservation of rights letters, they typically include a kitchen sink of issues--including issues relating to knowledge, intent, fortuity and apportionment--which involve facts that defense counsel might choose to develop during the course of the policyholder's defense. Because these issues give rise to the opportunity for insurer-proposed defense counsel's shifting of liability toward non-covered claims and damages, even if unconsciously or inadvertently, the policyholder may reasonably withhold its consent to be represented by the insurer's proposed lawyer, and insist on its own choice of defense counsel. As discussed previously, most courts recognize that a client is entitled to a lawyer with unquestioned loyalty to the client's interests, regardless of the lawyer's conscious intent or good faith.

When Representation By Insurer-Proposed Defense Counsel Could Jeopardize the Confidentiality of Information

A policyholder, like any client, has a right to a lawyer who is in a position to recognize and maintain the confidentiality of information that may adversely affect the policyholder's interests, including information relating to any potential coverage issue that the insurer could assert to limit or eliminate its duty to defend or indemnify. The policyholder may reasonably withhold its consent to representation by the insurer's proposed defense counsel if, in view of the insurer's coverage issues and adverse interests, there is any opportunity for disclosure or waiver of confidential information by the proposed counsel.

When the Insurer's Relationship with Its Proposed Defense Counsel Is Too Close Under the Circumstances

Most courts recognize that trust between a lawyer and her client is essential to the proper functioning of that relationship, and that unquestioned fidelity to the client's interests is fundamental to establishing that trust. Thus, a court likely would not force a policyholder to accept an insurer-proposed defense counsel when the policyholder is reasonably concerned that the insurer's relationship with the counsel or her law firm is too close under the circumstances. Suppose, for example, the informed-consent disclosure of the insurer or its proposed defense counsel reveals any of the following circumstances:

• the insurer-proposed defense counsel or her law firm also represents the insurer as a client in defeating coverage to other policyholders;
  
  
• the insurer-proposed defense counsel or her law firm has advocated for coverage-defeating or coverage-reducing interpretations of the very language contained in the policyholder's standard-form insurance policy;
  
  
• the insurer-proposed defense counsel or her law firm's overall income depends largely on business received from the insurer;
  
  
• the insurer's guidelines expressly advise the insurer-proposed defense counsel or her law firm that, in view of intense completion for the insurer's business, the insurer does not look favorably upon the counsel or firm pursuing actions that are adverse to the insurer's financial interests; or
  
  
• the insurer has advised the insurer-proposed defense counsel or her law firm that it is in the insurer's financial interest to delay settlements for at least a year in order to maximize the insurer's investment returns.

In view of the basic trust necessary for the proper functioning of the lawyer-client relationship, and the nature and extent of the insurer's relationship with its proposed law firm, a policyholder's insistence on its own choice of defense counsel under these and similar circumstances would be reasonable.

When the Insurer's Limitations On Authorization and Payment for Insurer-Selected Defense Counsel's Activities Could Impair Counsel's Diligence, Competence and Independence of Judgment

An insurer's litigation guidelines, fee and expense restrictions, internal and external audit procedures, write-off practices and other limitations on authorization and payment for defense activities can result in significant financial pressure on an insurer-selected law firm. They can influence the firm to shift an inordinate volume of files to underpaid associate lawyers with lower rates and limited experience. Under these circumstances, and similar circumstances that can lead to an ineffective defense, it would be reasonable for a policyholder to insist on its own choice of defense counsel. Moreover, while policyholder-selected counsel's rates must be reasonable, a reasonable rate may be substantially higher than the insurer's steeply discounted rate. In assessing a reasonable rate, one relevant factor may be whether the rates the insurer pays to defend itself (e.g., in coverage litigation) are higher than the rates it pays to defend its policyholders.

Conclusion

A policyholder may reasonably withhold its consent to representation by insurer-proposed defense counsel, and make its own selection of defense counsel to be paid by the insurer, if the insurer asserts coverage issues involving facts that insurer-proposed defense counsel might investigate or discover during the course of the defense, even if inadvertently or unconsciously. If the insurer fails to identify all such coverage issues, or refuses to furnish an express written waiver of all such issues not asserted, the policyholder is in no position to give informed consent to representation by insurer-proposed defense counsel. It would be unreasonable to force the policyholder to give its consent under these circumstances.

Likewise, a policyholder may reasonably withhold its consent to insurer-proposed defense counsel if: (a) representation by the counsel could jeopardize client confidentiality; (b) the insurer's relationship with its proposed defense counsel is so close that the policyholder is not confident in the basic trust relationship that must exist between lawyer and client; (c) the insurer's limitations on authorization and payment for the insurer-proposed defense counsel's activities could impair counsel's diligence, competence and independence of judgment; or (d) there are any other circumstances reasonably indicating that the policyholder's interests in a full and faithful defense could be impaired.

Read The Policyholder's Right to Select Defense Counsel (Part 1)
Read The Policyholder's Right to Select Defense Counsel (Part 2)

ABOUT THE AUTHOR

Thomas Mielenhausen is co-chair of Lindquist & Vennum's Insurance Recovery practice group. He can be reached at 612-371-3559 or tmielenhausen@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
January 2007