Vol. 5 No. 4		April 1986

Picture this: You return to your office one afternoon to discover that you have been sued. The claim is based on a set of circumstances most of your staff can scarcely remember. You report it to your insurer, an attorney is appointed to mount your defense, and the meter begins to run against your deductible. This is bad enough. It gets worse.

As your attorney begins to investigate the claim, an unsettling fact emerges. The allegations involve negligence in the design of a project you sent out to bid early in 1978. The construction contract was awarded on April 25th. Unfortunately, your insurance policy has a retroactive date of June 1st of that year. Your attorney informs you that there may be a serious question of coverage under the policy.

You begin to have dark thoughts in the night. Questions you might never before have considered suddenly loom large: "What happens if my carrier denies coverage? Whose side is my attorney really on? How do I protect the interests of my firm?"

Your insurer is not likely to deny coverage simply on a suspicion that none may exist. It has a duty to defend you so long as the possibility of coverage is not precluded by the circumstances surrounding the claim or the substance of the allegations made. Even if some of the allegations are clearly excluded under your policy, your insurer must provide a defense until the coverage issue is resolved. In many cases, it never is; settlements are often reached long before the issues are narrowed in court, and awards are typically made by arbitrators without explanation.

Nevertheless, when you report a claim to your insurer, the first responsibility of the company's claims representative is to determine whether coverage, in fact, exists under your policy. Such questions as these are raised: "Was the claim made during the policy period? Does it include allegations for which coverage is afforded? Did the alleged negligence occur within a time frame to which the policy applies? Did the insured have prior knowledge of the claim?"

If the answers to these questions lead your insurer to believe coverage is unlikely, it may choose to defend you under a "reservation of rights." This means that the carrier, unable to establish the absence of coverage beyond reasonable doubt, will provide a defense while it investigates the coverage issue. It also means that your insurer is reserving its right to deny coverage once all the facts are known. Meanwhile, you are left in a position of uncertainty as respects your relationship with the attorney assigned to gather those facts.

Legal ethics and prevailing case law dictate that the primary obligation of your attorney is to protect your interests. But to what extent? There is some support for the argument that his or her unqualified allegiance must be to you, notwithstanding any interests your insurer may have. Anything less, according to this view, would violate the sanctity of the attorney/client relationship. On the other hand, there is also support for the notion that your attorney has a duty of full disclosure, an obligation to report questions of coverage to both you and your insurer alike and to continue to represent you only with your informed consent. Still others stand firm on middle ground. They maintain that discovery of a conflict should lead to immediate withdrawal from the case, lest the interests of either party be compromised.

Where does all this leave you? It could leave you with a need for independent counsel. The attorney assigned to your defense may be (and probably is) professionalism personified. Nevertheless, his or her firm may also enjoy a long-standing business relationship with your insurer, and as soon as a question of coverage emerges, your best interests and the interests of the insurance company paying the bills are clearly in conflict.

Under the circumstances, it would not be unreasonable for you to wonder whether you truly have your attorney's unswerving allegiance. The thing to do is ask. Unless the answer is an unqualified yes, you may want to seek the advice of your own counsel.

For more than a decade, it has been a relative certainty under the law that, in situations involving a coverage dispute, an insured cannot be compelled to relinquish control of its own defense (Three Sons, Inc. v. Phoenix Insurance Co., 357 Mass. 271 (1974)). Thus, faced with a reservation of rights, you have long had the option of insisting that your own counsel be appointed in lieu of the attorney appointed by your insurer. The insurance company then had the choice of dropping its reservation of rights, risking (from its point of view) an inadequate defense, or challenging legal precedent by refusing to give up its contractual right to appoint counsel. Until recently, this game has been something of a roll of the dice for all concerned.

In 1984, however, in another coverage dispute, an appellate court in California ruled that it was impossible for the attorney appointed by the insurer to represent both the company and the insured equally (San Diego Federal Credit Union v. Cumis Insurance Society, Inc., 162 Cal.App.3d 358 (1984)). At issue was the cost of independent counsel retained by the Credit Union to protect its interests. The court not only reaffirmed the insured's right to control its own defense, but it held that the insurer was responsible for the Credit Union's cost of independent counsel, as well.

Insurance companies are not pleased with the Cumis decision. It tends to make reservation of rights riskier than ever, and it adds yet another element of uncertainty to an already uncertain equation. For you, however, it could serve as something of a safety net in the event coverage under your policy were to be challenged.

Professional liability insurance costs are skyrocketing, and many firms are finding themselves forced to increase their deductibles to levels which seem more like policy limits to the rest of us. With substantial amounts of their own money on the line with each and every claim, the issue of control over the defense of claims is being raised more and more often.

Some carriers will agree, in advance, to work with an attorney of your choice under some conditions. Others continue to refuse to do so. From your point of view, you want to be defended by an attorney who is knowledgable, experienced, and committed to protecting your interests. Your insurance company wants a known commodity which will protect its interests (as well as yours) at a cost it can reasonably rely upon. Under certain circumstances, these interests are bound to conflict, and you may want to keep this possibility in mind. If you encounter doubts along the line, give us a call. We will be happy to discuss your situation with you and assist in any way we can.