The Right to Select Counsel
In their policies, insurers usually reserve to themselves the right to control the insured's defense in any suit. Policies usually contain language to effect that insurer has " the right and duty to defend any suit seeking such damages." Wisconsin courts have generally honored that contract language. See, Gerrard Realty v. American States Ins. Co., 89 Wis. 2d 130, 277 N.W.2d 863 (1979) (holding that the insurer has the right to control the defense and insured who does not timely tender defense usurps the rights of the insurer).
However, in some situations, the insurer and the insured's interests may conflict with regard to the defense of the case. Wisconsin courts have not discussed, in any detail, the rights and obligations of insurer and insured in these circumstances. The only published cases which mention such conflicts do so in dicta. Because of those cases, these issues seem to be coming to the fore more frequently. This article addresses the situations in which the insurer and insured's interests conflict, and what to do about it.
II. Exemplar Situations Which Can Give Rise to Conflicting Interests.
Factual situations which could give rise to conflicting interests are myriad. And it should be remembered that conflicts can arise throughout the course of a claim or suit, not just at the outset.
The typical scenario is where the insurer has reserved its rights because some allegations of the complaint fall outside of the policy's coverage. An insurer could contend that it is contractually obligated to defend only covered claims, but the insured would likely prefer a unified defense as to all grounds. In Wisconsin, because the insurer must defend all claims even if only one is covered, School Dist. of Shorewood v. Wausau Ins. Co., 170 Wis. 2d 347, 488 N.W.2d 82 (1992), another issue arises: whether the insurer will defend in such a manner so as to promote a finding that the insured's conduct was not covered.
Another situation which could give rise to conflicts is where there is a potential for liability in excess of the policy limits. Some courts have found only a potential conflict unless there has been an offer to settle within the limits of the policy and the insured and insurer do not agree or unless coverage is small and excess is great. St. Paul Fire & Marine v. Roach Bros., 639 F. Supp. 134 (E.D. Pa. 1986).
Failure of the insured to cooperate can result in a lack of coverage, thus giving rise to conflicting interests between insurer and insured. Numerous fact situations can arise. For example, the insured simply may not respond to the insurer or defense counsel's communications regarding the claim or suit against the insured. The insured may be inattentive or perhaps might disagree with defense counsel's strategy in defending the case. Another potential conflict arises where the insurer challenges the insured's veracity, for example, with regard to who was operating a vehicle at the time of an accident. In these situations, which might arise well into the defense of the case, conflicting interests might arise.
Should a conflict arise, what resolution is appropriate? It depends on that nature of the conflict.
III. The Nature of The Conflict Governs the Resolution of the Issue.
Where a conflict arises between insurer and insured, some courts suspect that appointed counsel may tend to favor the interests of the insurer primarily because of the prospect of future employment. Chi of Alaska v. Employers Reinsurance, 844 P.2d 1113 (Alaska 1993). See also, Mark A. Saxon, Conflicts of Interest: Insurer's 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."). Not all courts agree. The Seventh Circuit, in Tews Funeral Home, Inc. v. Ohio Casualty Ins. Co., 832 F.2d 1037, 1039 (7th Cir. 1987), stated: "we will not anticipate that counsel selected by Ohio at its expense will violate the strict fiduciary duty owed to Tews and Ohio."
Further, as the Seventh Circuit held in Littlefield v. McGuffey, 979 F.2d 101 (7th Cir. 1992), "Not just any conflict will do." Some courts require more conflict between insurer and insured than others do. For example, in Illinois, the conflict of interest between insurer and insured must be such that "the insurer's interests would be furthered by providing a less than vigorous defense to the allegations . . ." or where both covered and non-covered claims are asserted and the insurer must defend both. Illinois Masonic Med. Center v. Turegum Ins. Co., 168 Ill. App. 3d 158, 522 N.E.2d 611 (1st Dist. 1988).
Other courts have concluded that, for a conflict to exist, it must be "significant, not merely theoretical, actual, not merely potential." Dynamic Concepts, Inc. v. Truck Ins. Exch., 61 Cal. App. 4th 999, 1006-1008, 71 Cal. Rptr. 882, 887-888 (4th Dist. 1998), review denied, (Cal. June 10, 1998). The Dynamic Concepts court explained that "[N]ot every reservation of rights entitles an insured to select Cumis counsel. There is no such entitlement, for example, where the coverage issue is independent of, or extrinsic to, the issues in the underlying action or where the damages are only partially covered by the policy." Id. See, also, Finley v. Home Ins. Co., 975 P.2d 1145, 1151-52 (Haw. 1998) (insured not entitled to select counsel merely because insurer issued a reservation of rights").
In Golotrade Shipping & Chartering, Inc. v. Travelers Indem. Co., 706 F. Supp. 214, 219 (S.D.N.Y. 1989), the court held that the right to select counsel at the insurer's expense "is only necessary where the ‘question of insurance coverage is . . .intertwined with the question of the insured's liability.'" (quoting Public. Service Mut. Ins. Co. v. Goldfarb, 53 N.Y.2d at 401-02). See, also, Littlefield, where the court held: "The insured and insurer, we explained, must be ‘complete adversaries on a crucial issue which would necessarily be decided either one way or the other if liability was [sic] imposed.' Id. at 825.
In Insurance Company of North America v. Forty-Eight Insulations, Inc., 633 F.2d 1212 (6th Cir. 1980), clarified on reh'g, 657 F.2d 814, cert. denied, 454 U.S. 1109 (1981), the court held that a conflict of interest compelling the appointment of independent counsel arose only where the insurer either disclaimed coverage or took affirmative actions against the insured.
Though there is no one formulation regarding when the conflict rises to such a level that intervention may be required, most of these standards require an actual, rather than potential conflict and one which the insurer may be able to manipulate by its provision of a defense.
IV. Remedies Where Conflict Exists.
The two principal methods of resolving the issue are either to allow the insured to select his or her own counsel or to allow the insurer to appoint "independent" counsel. See, American Motorists Ins. Co. v. Trane, 544 F. Supp. at 686. While insureds often insist that they are entitled to choose counsel, courts often conclude to the contrary. See, Cardin v. Pacific Employers Ins. Co., 745 F. Supp. 330, 336-38 (D. Md. 1990) (reservation of rights did not entitle insured to select counsel; defense counsel appointed was in fact independent); Tank v. State Farm Fire & Cas. Co., 715 P.2d 1133, 1138-39 (Wash. 1986). See, also, American Motorists Ins. Co. v. Trane, 544 F. Supp. 669 (W.D. Wis. 1982), aff'd, 718 F.2d 842 (7th Cir. 1983), stating:
A conflict of interest between the insurer and the insured does not relieve the insurer of its contractual duty to defend. Where there is a conflict, the insurer must either provide an independent attorney to represent the insured or pay the costs incurred by the insured in hiring counsel of the insured's own choice.
544. F. Supp. at 686. See, also, Public Serv. Mutual Ins. Co. v. Goldfarb, 53 N.Y.2d 392, 401, 425 N.E.2d 810, 442 N.Y.S.2d 422 (1981) (where conflict exists, insured entitled to defense by attorney of his choice at insurer's expense); Morrone v. Harleysville Mut. Ins. Co., 283 N.J. Super 411, 662 A.2d 562 (App. Div. 1995); and San Diego Navy Fed. Credit Union v. Cumis Ins. Society, 162 Cal. App. 3d 358, 208 Cal. Rptr. 494 (4th Dist. 1984).
V. Wisconsin Law.
Although Wisconsin appellate courts have discussed this issue, there is no detailed analysis of an insurer's obligation when a conflict arises. In fact, in most of the cases discussing the right to select counsel, the discussion is merely dicta, peripheral to the principal issues in the suit.
For example, in Grube v. Daun, 173 Wis. 2d 30, 49, 496 N.W.2d 106 (Ct. App. 1992), discussing an insurer's options where a coverage issue exists, the court states: "When a reservation of rights is made, the insured can pursue his own defense not subject to the control of the insurer, but the insurer still would be liable for legal fees incurred." However, the control of the defense and the right to select counsel were not at issue in Grube. Nor were they at issue in Radke v. Fireman's Fund Ins. Co., 217 Wis. 2d 39, 577 N.W.2d 366 (Ct. App. 1998). But there, the court quotes Grube in this regard but adds no analysis. It did, however, note that an insurer which outright rejected a tender" of defense "allow[ed] the insurer to pursue his or her own defense. Id. at 45.
Jacob v. West Bend Mutual Insurance Company, 203 Wis. 2d 524, 553 N.W.2d 800 (Ct. App. 1996), involved a situation where the insurer provided a defense by the counsel of the insured's choice, but the insured argued that, due to the strategy employed, the insurer had actually failed to defend. The issue was not whether there was an obligation to defend but whether the defense provided fulfilled the duty. Citing Grube, the court concluded that the insurer chose to provide "a ‘paid for' defense by an attorney of the insured's own choosing." Id. at 536-37. This satisfied the insurer's defense obligation pursuant to Grube, according to the court.
Another case mentioning this issue is Loosmore v. Parent, 2000 WI APP 117, 237 Wis. 2d 679, 613 N.W.2d 923, n. 5. But there, too, the issue was addressed only indirectly. In that case, one insurer claimed that it qualified as an "insured" for another insurer's auto policy, and that the other insurer should have provided it with a defense. There, the court held that an insurer which refused to defend an additional insured was required to pay the additional insured's attorney fees. In requiring the insurer to pay the additional insured's attorney's fees despite its inability to select the counsel, the court explained:
We agree with American Family that it generally has the right to select the counsel to defend Allstate. That right, however, does not arise until American Family fulfills its duty to defend. Because American Family failed to defend, it can neither insist on choosing defense counsel nor refuse to reimburse Allstate for its defense costs.
Because none of these cases squarely address the issue of the right to select counsel, the decisions are dicta. Further, because of the lack of analysis with respect to this issue, the cases have "limited instructive value. " Shannon v. Shannon, 150 Wis.2d 434, n. 4, 442 N.W.2d 25 (1989).
Despite these shortcomings, the magistrate in Nowacki v. Federated Realty Group, 36 F. Supp. 1099 (E.D. Wis. 1999), concluded that, once an insurer issues a reservation of rights, the insured has the ability to select its own counsel at the insurer's defense. A Wisconsin trial court judge has reached a contrary conclusion.
In Secura Insurance v. Sizzler USA Franchise, (Milwaukee County Case No. 00-CV-008314 (June 7, 2001), the court rejected Nowacki as an accurate statement of Wisconsin law. In Secura, the court concluded that Grube and Radke were dicta in that neither addressed the issue of who had the right to select counsel; both involved an insurer which simply declined to defend at all. Similarly, Jacob did not address the issue of the right to select counsel, but instead addressed the propriety of counsel's actions. Because the Secura court did not conclude that Grube, Radke, and Jacob expressed the totality of Wisconsin law on the subject, the court rejected the reasoning of the federal magistrate in Nowacki and held that the insurer could appoint independent counsel to defend the insured. Counsel briefing this issue on behalf of insurers should obtain a copy of the Secura decision to use as persuasive authority on this topic.
It should be noted that the Wisconsin Court of Appeals has addressed the issue of selection of counsel indirectly in another case, one it has chosen not to publish. In State v. City of Rhinelander, Case No.00-2666 (Ct. App. 2001), the court rejected the city's contention that the insurers pay for the insured's personal counsel, despite the insurers' provision of a defense to the insured, stating:
To accept the City's argument would allow an insured to select its own attorney at the insurer's expense. While that is an option the insurance company can employ, an insurance company is free to select an attorney to represent the insured without input from the insured. The trial court could reasonably have found that the insurance companies hired a competent attorney with a good reputation to give his undivided loyalty to the City, and spent over $180,000 defending the City. By doing so, the insurance companies fulfilled their contractual obligation to defend the City. See Mowry v. Badger State Mut. Cas. Co., 129 Wis.2d 496, 528, 385 N.W.2d 171 (1986). In an excess of caution, the City continued its relationship with Lonsdorf. The insurance policies do not provide coverage for excessive caution.
Clearly, courts are willing to entertain appropriate arguments regarding the retention of defense counsel for the insured. Counsel must be prepared to raise these arguments when circumstances merit.
VI. What Constitutes "Independent" Counsel?
In Finley, the court concluded that the following requirements guaranteed the independence of appointed defense counsel:
an attorney who follows the above-cited requirements of the HRPC must: (1) consult with the client as to the "means by which the objectives [of the representation] are to be pursued"; (2) not allow the insurer to interfere with the attorney's "independence of professional judgment or with the client-lawyer relationship"; and (3) not allow the insurer "to direct or regulate the lawyer's professional judgment in rendering such legal services." Only if these requirements are met will the representation of an insured, paid for by an insurer with a conflicting interest in the outcome of the litigation, comport with the mandates of the HRPC.
90 Haw. at 33. Some commentators suggest that independence of counsel hinges upon whether counsel currently or has previously represented the insurer. See, A. Anderson, Wisconsin Insurance Law Sec. 7.11 (1998 and 2001 Supp.).
Generally, the test is whether the insurer acted in good faith in appointing defense counsel. Central Michigan Bd. of Trustees v. Employers Reinsurance Corp., 117 F. Supp. 627 (E.D.Mich. 2000); Cardin, 745 F. Supp. at 337-38.
VII.Counsel Selected by the Insured.
The insurer is not the only party who must exercise good faith in selecting defense counsel. The insured, too, must act in good faith in selecting its own defense counsel. Center Foundation v. Chicago Ins. Co., 227 Cal. App. 3d 547, 278 Cal. Rptr. 13 (2d Dist. 1991) (insured has obligation to select experienced attorney who can present meaningful defense and be willing to engage in "ethical billing practices susceptible to review at a standard stricter than the marketplace." Id. at 560). See, also, Chi of Alaska, 844 P.2d at 1121, holding that counsel must bill reasonably for his or her services (in order to protect the insurer from overbilling and overlitigation). Additionally, some courts conclude that the insurer has the right to approve the counsel selected by the insured. See, Employers Fire Ins. Co. v. Beals, 103 R.I. 623, 240 A.2d 397 (1986). See, also, New York State Urban Dev't Corp, supra, enforcing insurer's contractual right to select counsel.
Some courts have concluded that the insured's counsel must not bear animus toward insurer–or the counsel would not be "independent" toward both insurer and insured. See, New York State Urban Dev't. Corp. v. VSL, 738 F.2d 61 (2d Cir. 1984).
The insurer has the right to contest fees which are not "reasonable." See, Illinois Masonic, 522 N.E.2d at 613. The existence of a fee arrangement between the insured and the attorney he or she has selected does not give automatic reasonableness to counsel's bills. See, IMCERA Group, Inc. v. Liberty Mut. Ins. Group,, 47 Cal. App. 4th 699, 50 Cal. Rptr. 583 (2 Dist. 1996); Aetna Cas. & Sur. v. Pitrolo, 176 W. Va. 190, 342 S.E.2d 156 (1986). .
VIII. If the Insured Rejects the Tendered Defense.
In Finley, the Hawaii Supreme Court held that, if the insurer tendered defense by an independent counsel, the insured was free to reject it, but that the insured was then required to pay for its own defense. 90 Haw. at 35. Essentially the same result was had in Dynamic Concepts, in which the insurer agreed to defend under a reservation of rights. The insured refused to accept the defense unless the reservation was withdrawn and the insurer signed an unconditional agreement to indemnify the insured. The insurer declined, and the insured's personal attorney refused to allow the insurer's appointed defense attorneys to assist in the defense or have information about settlement negotiations. Because most of the claims in the underlying action were not covered by the policy in any event, the court concluded that allowing the insured to have defense fees for the entirety of the claim would be a windfall, and so denied the claim for such fees.
While an insured may be entitled to independent counsel in some circumstances, the existence of a conflict between insurer and insured does not give the insured carte blanc to hire any attorney, at any cost. Instead, the courts will often allow the insurer to select independent counsel to handle the defense or will put strictures upon the insured's counsel in order to protect insurers from overbilling or overzealous litigation. Counsel must be prepared to assist the courts in understanding the law and the reasons which underpin the decisions in order to protect their clients' rights in this regard.