It has been a fairly quiet summer for insurance coverage decisions in Florida, and it has been a while since I added an installment to my series on Commercial Insurance Myths & Misconceptions. So let’s talk about selection of defense counsel.
When appointing counsel to defend a newly-filed lawsuit, insurers typically announce to their policyholder who defense counsel will be, as if the decision were handed down on a stone tablet. Many policyholders believe that this decision is final, and that they need to accept the defense lawyer that their insurer chooses. The insurance industry certainly wants policyholders to believe that, for several reasons.
First, I have discussed before the unethical practice of insurance defense firms acting as coverage counsel for the same insurers that appoint them to defend insureds where coverage is in dispute. Just the other day I had a carrier appoint counsel to defend a policyholder where coverage is hotly contested. As is my practice, I checked the background of the appointed counsel, only to find that the counsel had represented the same carrier as coverage counsel in seeking to nullify coverage based on the same contested coverage issue. Needless to say, I objected to the appointment and the carrier backed down.
Insurers love to appoint defense counsel who are reliant on the insurer for the majority of their work. Many of these insurance defense firms receive practically all of their work from insurance companies. In some instances, a single insurer keeps the firm busy. As you might imagine, not only are these lawyers keenly aware of who their “real” client is (despite what the ethics rules may say), and will never bite the hand that feeds them, but for the volume of work they receive, these insurance defense firms can offer some significant discounts. So insurers get both a law firm that will look out for the carrier on coverage issues and deeply discounted billing rates. It’s a match made in insurer heaven!
Policyholders prefer defense counsel that they are familiar with, and who are familiar with their business. At a minimum, policyholders want defense counsel who are truly independent and will keep their nose out of coverage issues. Policyholders also want a law firm that will put their best lawyers on the case, not a highly-leveraged insurance defense firm that will turn the case over to junior lawyers.
Most jurisdictions give policyholders the ability to demand independent defense counsel when an insurer defends under reservation of rights (which is almost always the case). Florida has a Claims Administration Statute, Fla. Stat. 627.426, which requires an insurer to retain “independent counsel which is mutually agreeable to the parties”. In addition, under this same statute, if the insurer and policyholder agree on counsel but disagree on the rates to be charged, they may petition the court for a fee determination.
Florida does not give policyholders the right to have secondary, “personal” counsel paid for by the insurer. Some states, such as California, require insurers to pay for so-called “Cumis” counsel where a reservation of rights creates the need for independent counsel to protect the policyholder’s interests.
As with most coverage issues, a policyholder’s rights are largely controlled by the terms of the policy. Most comprehensive general liability (“CGL”) policies contain a duty to defend, which means that the insurer must pay for, and has the right to control, the defense of a claim. Some CGL policies do not contain a duty to defend, but require the policyholder to hire defense counsel and pay counsel directly. In these policies, the insurer typically does not have the right to control the defense, and the insurer only has an obligation to reimburse defense costs incurred by the policyholder.
Many claims-made policies, such as Directors & Officers (“D&O”) policies, do not contain a duty to defend, and also contain self-insured retentions (“SIRs”) that must be satisfied before the insurer has an obligation to reimburse defense costs. Some of these claims-made policies grant policyholders the right to select counsel, whereas others require the policyholder to select defense counsel from a list of pre-approved panel counsel. Although insurers sometimes will agree to modify their panel counsel list post-loss to accommodate a policyholder’s request, it is advisable to seek revisions to this list during underwriting — before a claim arises. If a policyholder has preferred defense counsel, it should insist before it buys the policy that its preferred counsel be added to the list of approved counsel, to avoid a defense counsel dispute later on. Your negotiating leverage is never higher than right before you bind coverage.
Even if the insurance policy explicitly vests in the insurer the right to defend, or requires the policyholder to choose among panel counsel, most jurisdictions allow a policyholder to reject the defense offered by an insurer if the policyholder does not agree with the terms of the defense that is offered. In Florida, a carrier’s agreement to defend under reservation of rights is a violation of the carrier’s obligation to unconditionally defend its policyholder, which transfers to the policyholder the right to control the defense. See, e.g., Taylor v. Safeco Ins. Co., 361 So.2d 743, 745-46 (Fla. 1st DCA 1978); Nationwide Mut. Fire Ins. Co. v. Beville, 825 So.2d 999 (Fla. 4th DCA 2002); Bell South Telecommunications, Inc. v. Church & Tower of Florida, Inc., 930 So.2d 668 (Fla. 3rd DCA 2006). What this means is that a policyholder can reject the defense and hire its own counsel to defend, without forfeiting defense or indemnity coverage. The main downside to rejecting the defense is that the policyholder has to front the defense costs until a coverage determination is made. For more on this issue, you can read this Insurance Law 360 article that quotes me on the pros and cons of rejecting a defense.
So the next time your insurer tells your company who its defense counsel is going to be, consult coverage counsel, check your state’s law, and consider whether you want to accept the defense under the terms set out by the insurer. Chances are you have a choice in the matter, if you know your rights and choose to exercise them.