Academic journal article Defense Counsel Journal

Insurer Control of Defense: Reservations of Rights and Right to Independent Counsel

Academic journal article Defense Counsel Journal

Insurer Control of Defense: Reservations of Rights and Right to Independent Counsel

Article excerpt

Insurer loses right to defend only when there is conflict of interest, and even in the independent counsel setting, the insurer retains certain rights

LIABILITY insurance policies normally reserve to the insurer the right to defend potentially covered litigation and obligate the insured to cooperate in the defense. These provisions generally are construed to give the insurer the right to control the defense of the insured. But the law sometimes denies the insurer that right and allows the insured to direct the defense, using independent counsel. When the insurer is denied the right to control the defense, what rights concerning the defense are retained by the insurer even when the insured has independent counsel?


Individuals and businesses purchase insurance to shift financial risk to the insurer. To an insured, the cost of lawyers necessary to defend covered claims is part of that shifted risk. To the insurer, defense lawyers are critical to controlling insurance costs by defeating or limiting their insureds' liability in covered claims. Even so, the cost of defense counsel is a cost ultimately passed on to the insurance-buying public as part of insurance premiums. Thus, it would be wasteful to spend more on defense activities than those activities are expected to yield in reduced indemnity costs-judgments or settlements. Both costs ultimately are borne by the insurance-buying public in premiums.

Insurers have more expertise than most insureds in managing litigation. They have stronger, more immediate incentives to manage litigation efficiently than would insureds who expect their insurers to pay defense counsel's bills. Thus, most liability insurance markets have settled on contract terms that provide for the insurer to manage the defense and give it the "right and duty to defend."

This standard liability policy provision "gives the insurer the right to control the defense of the claim" and "the insured has no right to interfere with the insurer's control of the defense."1 Where the insured has no personal exposure, that control "is virtually absolute."2

Except in the rare case where insurer and insured have a conflict of interest precluding joint representation, the law in most jurisdictions recognizes both as clients of the defense counsel, as shown in the appendix to this article. So, both as a client and pursuant to the insurance contract, the insurer has the right to make expenditure and strategic decisions.

This works well for insureds. Typically they have no interest in how a claim is defended, so long as the insurer pays any resulting judgment or settlement. In the small percentage of cases in which the insurer and insured have inherently inconsistent interests in managing the defense, the insured is entitled to independent counsel.3

The vast bulk of cases defended by insurers are fully covered. In a sample of litigated cases, researchers found that insurance was involved in 80 percent, with lawyers on both sides agreeing that the claim was completely covered in 59 percent, so that just under 75 percent of the cases where insurance was involved were fully covered.4 Of the remainder, some may have involved either independent counsel or indemnity policies under which the insured controls the defense as a matter of contract, precluding any tripartite relationship and problems that might arise from that relationship. Lawyers are more likely to mention doubts about adequacy of coverage when the doubts are objectively insubstantial than they are to omit mention of doubts that are objectively substantial. So the 75 percent figure is probably a significant understatement of the fraction of tripartite relationship claims where coverage is, objectively speaking, both clear and clearly adequate. Even when there is a genuine risk of exposure beyond the policy's coverage, cases are normally resolved without any payment by the insured. …

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