When your company is sued as a result of an accident, you may be relieved when your insurance company provides a defense for the lawsuit. Questions may arise, however, over who selects the lawyer to defend your case, even if the insurance company is paying the lawyer. Those questions may need careful attention to be certain that everyone’s interests are protected.
When a liability insurance company hires a lawyer to defend its insured, a three party or tripartite relationship is created between the insurance company, lawyer, and insured. The attorney retained by the insurance company has two clients in this situation: the insurer and the insured. The lawyer’s primary allegiance is to the insured, whose best interests must be served at all times.(1)
Depending on the circumstances, there may be a conflict of interest between the insurance company and the insured. For example, suppose your company and the driver of one of your company vehicles have been sued as a result of an automobile accident. The plaintiff alleges that the driver, your employee, was drunk and was driving so recklessly that the plaintiff is entitled to recover punitive damages. After you notify your insurance company about the lawsuit, you receive a response that the insurance company will provide a defense for the lawsuit, subject to the insurance company’s reservation of rights to deny coverage based on a punitive damages exclusion in your insurance policy. Under that scenario, proof of your driver’s reckless conduct will benefit the insurance company’s dispute of coverage and possibly leave your company directly liable for punitive damages. This situation creates a conflict of interest between your company and your insurance company.
In most jurisdictions, courts have decided that a reservation of rights letter from the insurance company, particularly when coupled with the existence of both covered and uncovered claims in the underlying lawsuit, gives the insured the right to select its own legal counsel.(2) North Carolina courts have not ruled directly on the issue of the right to select counsel, although the North Carolina Rules of Professional Conduct require that your attorney avoid representation of a client if that representation is "materially limited by the lawyer’s responsibilities to another client."(3) The lawyer should not accept representation of your company while being paid by the insurance company if a conflict exists between those two clients.
South Carolina’s Supreme Court has not directly addressed this issue, although at least one trial court in South Carolina has ruled that the insured has the right to select counsel once the insurance company issues a reservation of rights letter.(4) A recent case from the United States Court of Appeals for the Fourth Circuit, however, questioned whether South Carolina’s appellate courts would necessarily decide that a conflict of interest exists simply because the insurance company has issued a reservation of rights letter.(5) The Fourth Circuit refused to adopt a per se disqualification rule in the context of a reservation of rights letter, in part because of the rules of professional conduct requiring lawyers to examine potential conflicts of interest and to turn down any representation that presents a conflict for them.
In short, the North Carolina appellate courts and South Carolina appellate courts have not yet issued any definitive rulings on the question of the right to select counsel when the insurance company is paying for the defense.
Regardless of where suit has been filed, if your company has been sued, and the insurance company has issued a reservation of rights letter, you should take steps to be certain that you are comfortable with your company’s representation. If you are satisfied with the attorney retained by your insurance company, you can accept that representation. If you believe a conflict of interest exists, you should raise that question with your insurance company and ask the insurance company to hire counsel of your selection.
Even if no specific conflict exists, and your insurance company is paying for the defense, you still have the right to express a preference for defense counsel. The North Carolina Rules of Professional Conduct require insurance counsel to obtain the consent of the client for the representation when it is paid for by a third party.(6) If you are not satisfied with counsel selected by your insurance carrier, you can withhold that consent and ask for alternatives for you to consider or ask the insurance company to retain counsel you have chosen. Your insurance policy requires you to cooperate with your insurance company in the defense, but you have the right to express your views about selection of counsel.
(1) North Carolina Revised Rules of Professional Conduct, RPC 92 (1991); North Carolina Revised Rules of Professional Conduct, Formal Op. 14 (2000). See also Coverage Concerns, "Your Insurance Company is Defending a Lawsuit-Defense Counsel Selection in the Tripartite Relationship" (January 2005).
(2) See, e.g. Moeller v. American Guaranty and Liability Ins. Co., 707 So. 2d 1062, 1071 (Miss. 1998); Union Ins. Co. v. The Knife Co., 902 F.Supp. 877, 880 (W.D. Ark. 1995).
(3) North Carolina Revised Rules of Professional Conduct, Rule 1.7(a)(2).
(4) Ollie’s Seafood Grille & Bar, LLC v. Selective Ins. Co. of South Carolina, No. 01-CP-07-1994 (2002).
(5) Twin Center Fire Ins. Co. v. Ben Arnold-Sunbelt Beverage Co. of South Carolina, 336 F.Supp. 2d 610 (D.S.C. 2004), aff’d by 433 F.3d 365 (4th Cir. 2005).
(6) North Carolina Revised Rules of Professional Conduct, Rule 1.8(f).