An Overview of Important Insurance Coverage Issues for the Non-Coverage Lawyer
CONFLICTS OF INTEREST AND THE TRIPARTITE RELATIONSHIP
Although defense counsel is often required to walk an “ethical tightrope” between the insurer and the policyholder in a third-party liability claim, it is also a dangerous minefield for insurers. See, e.g., Douglas R. Richmond, Walking a Tightrope: The Tripartite Relationship Between Insurer, Insured, and Insurance Defense Counsel, 73 NEB. L. REV. 265 (1994); Karon O. Bowdre, Enhanced Obligation of Good Faith: A Mine Field of Unanswered Questions After L&S Roofing Supply Co., 50 ALA. L. REV. 755 (1999) (“a mine field awaits even cautious insurance companies and prudent defense counsel”).
The three parties to the tripartite relationship are insurer, insured, and defense counsel. As part of this relationship, “[t]he insured and the insurer have certain obligations to each other…arising from the insurance contract.” Am. Mut. Liab. Ins. Co. v. Superior Court for Sacramento County, 38 Cal. App. 3d 579, 591-92 (1974). Defense counsel is engaged by the insurer to defend the policyholder in the underlying litigation, and
[i]n such a situation, the attorney has two clients whose primary, overlapping and common interest is the speedy and successful resolution of the claim and litigation. . . . The three parties may be viewed as a loose partnership, coalition or alliance directed toward a common goal, sharing a common purpose which lasts during the pendency of the claim or litigation against the insured. . . . Insured, carrier, and attorney, together form an entity—the defense team—arising from the obligations to defend and to cooperate imposed by contract and professional duty.
Id. Certainly, the insurer and its coverage counsel must tread carefully through this minefield, and good claims-handling practice requires an insurer to consider its rights and responsibilities with regard to its duty to defend and indemnify its policyholder. However, the question often arises as to whether, merely because an insurer has a duty to indemnify, the insurer has an obligation to accept any settlement demand made within policy limits. Likewise, issues arise as to the extent of an insurer’s right to control the defense of its policyholder. Even where there is an actual or potential conflict of interest, many jurisdictions still allow the insurer to select defense counsel, and other jurisdictions place limitations on the policyholder’s selection of defense counsel. Finally, does an insurer have the right to recover damages against defense counsel for malpractice either in its own name or on behalf of the insured?