69 The Alabama Lawyer 417 (2008). The Insurance Tripartite Relationship: "Who Is My Client Anyway?".

• Author: By STEPHEN E. WHITEHEAD and JENNIFER W. WALL

The Alabama Lawyer

2008.

69 The Alabama Lawyer 417 (2008).

The Insurance Tripartite Relationship: "Who Is My Client Anyway?"

The Insurance Tripartite Relationship: "Who Is My Client Anyway?"By STEPHEN E. WHITEHEAD and JENNIFER W. WALL Insurance-appointed counsel should be familiar with the "tripartite" relationship. Those who defend under a reservation of rights ("ROR") especially should be aware of the potential conflicts that befall such representation. One commentator aptly described the ROR defense as "deeply and unavoidably vexing."(fn1)The Supreme Court of Mississippi has recognized the "tripartite" relationship creates problems that would "tax Socrates."(fn2)

The "tripartite" relationship refers to the relationship among an insurer, its insured and defense counsel retained by the insurer to defend the insured against third-party claims. This relationship can present actual or potential conflicts between the insurer and the insured, placing defense counsel in difficult, and often confusing, positions. This article examines the tripartite relationship in the context of an ROR defense, and some of the potential conflicts of interest defense counsel may face.

What is an ROR defense?

Liability policies typically require insurers to defend insureds against covered claims. The duty to defend usually is determined at the outset of litigation when coverage issues are still unresolved. Alabama law, like most jurisdictions, provides that the defense obligation in a duty-to-defend policy is triggered by comparing the policy language to the allegations of the complaint.(fn3)If the complaint alleges an incident within the coverage of the policy, the insurer is obligated to defend, regardless of the insured's ultimate liability.(fn4)In Alabama, once the duty to defend is triggered, the insurer has an obligation to defend both covered and non-covered claims.(fn5) An ROR defense allows the insurer to comply with its defense obligation without waiving its right to withdraw the defense at a later date, nor waiving its right to refuse indemnity for non-covered claims. An ROR defense typically is employed when some, but not all, allegations in the complaint trigger the duty to defend, or when the complaint is so vague there is doubt as to whether the defense obligation has been triggered. The insurer's rights are preserved by issuing a letter to the insured (an ROR letter) reserving the insurer's right to later deny coverage, or withdraw its defense despite its initial agreement to defend. The purpose of an ROR letter is to place the insured on notice that even though the insurer is providing a defense in the lawsuit, certain claims ultimately may not be covered by the policy.

Who has the right to control an ROR defense?

Most insurance policies give the insurer the right to control the defense and settlement of claims against the insured. Notwithstanding these contractual rights, courts and legislatures often limit the insurer's control over the defense where conflicts of interest exist between the insurer and the insured.

Potential conflicts of interest are inherent in an ROR defense. Insureds sometimes argue defense counsel appointed by the insurer may attempt to steer the defense toward coverage results that are favorable to the insurer. For obvious reasons, insureds have vested interests in ensuring that the claims asserted remain covered. These interests of the insurer and insured may conflict. While most states have addressed the potential conflicts of interest created by an ROR defense, there is no clear consensus among them on how potential conflicts are to be resolved.

Some states, like California and Florida, have enacted legislation addressing how potential conflicts affect the insurer's defense obligation.(fn6 )According to Section 2860 of the California Civil Code, "when an insurer reserves its rights on a given issue and the outcome of that coverage issue can be controlled by counsel first retained by the insurer for the defense of the claim, a conflict of interest may exist." If a conflict exists, which is a factual determination, the statute requires the insurer to provide independent counsel to defend the insured at the insurer's expense, unless the insured waives, in writing, the right to independent counsel after disclosure of the conflict. This statute codifies to some extent the landmark ROR decision rendered in San Diego Navy Federal Credit Union v. Cumis Insurance Society, Inc., 208 Cal. Rptr. 494 (Ct. App. 1984), which set the stage for future debate on this issue. Unlike the prior Cumis decision, the California legislation stops short of presuming that a conflict of interest is present in every situation involving an ROR defense.

Florida, on the other hand, has enacted legislation that assumes a conflict of interest between the insurer and insured whenever the insurer asserts a coverage defense through an ROR letter. Section 627.426 of the Florida Claims Administration Statute requires the insurer either to: (1) obtain a non-waiver agreement from the insured after "full disclosure of the specific facts and policy provisions upon which the coverage defense is asserted and the duties, obligations, and liabilities of the insurer during and following the pendency of the subject litigation" or (2) retain independent counsel "which is mutually agreeable to the parties."(fn7 )

Most states, including Alabama, address through case law the potential conflicts created by an ROR defense, and the duties of the insurer and defense counsel in that regard. For example, the Mississippi Supreme Court has taken an approach similar to California and Florida legislation requiring independent counsel. In Mississippi, a conflict of interest exists between the insurer and insured when (1) a defense is offered under an ROR and/or (2) only some of the claims asserted against the insured are covered. Moeller v. American Guar. and Liability Ins. Co., 707 So.2d 1062, 1069 (Miss. 1996). According to Moeller, the insurer has an obligation to explicitly notify the insured of its right to select its own independent counsel when the insurer defends under an ROR, or when certain claims are not covered. If the insurer properly notifies the insured of its right to independent counsel, and the insurer only defends the covered claims, then the insured's independent counsel is retained at the insured's own expense. If the insurer elects to defend non-covered claims under an ROR, then the insurer must also pay the legal fees reasonably incurred by the insured's independent counsel.

The Moeller decision was elaborated on further in Twin City Fire Ins. Co. v. City of Madison, Miss., 309 F.3d 901 (5th Cir. 2002). The Twin City court held "the insured should be immediately notified...