Additional Insured Entitled to Independent Defense Counsel

In University of Miami v. Great American Assurance Company, No. 3D09-2010 (Fla. 3d. DCA Feb. 20, 2013), the Third DCA held that an insurance company had to pay for separate and independent defense counsel to defend its additional insured.  The coverage dispute arose out of a tragic incident in which a four-year-old child suffered severe injuries from a near-drowning at a pool on the University of Miami’s campus.  The child was a camper at a summer camp that was using the pool.  The parents sued both the camp and the university, claiming that they both were negligent for failing to properly supervise the children in the pool.

The insurance company appointed the same defense counsel to defend the camp, its named insured, and the university, its additional insured.  But after the camp asserted that it was entitled to indemnification and contribution from the university, the university demanded that the insurer pay for separate counsel.  The insurer refused, and the university hired and paid its own defense counsel, and then sued the insurer for reimbursement.

The trial court held that the university had no right to independent counsel, and granted summary judgment in favor of the insurer.  The appellate court reversed, and granted summary judgment in favor of the university.  The appellate court agreed with the university that, due to the camp’s indemnification and contribution claims, there was a conflict between the two insureds that required the insurer to pay for separate defense counsel.

In dissent, Judge Shepherd called the conflict a “paper conflict” and warned that the court’s decision “opens a new frontier in insurance litigation of benefit only to the legal profession.”  Judge Shepherd wrote that the insurer’s right to control the defense “is indispensable to the protection of its financial interest in the litigation and thus the product [of liability insurance] itself.”  In Judge Shepherd’s view, the court should have deferred to the opinion of insurance defense counsel as to whether it could continue to represent both insureds fairly given the conflict.  Judge Shepherd stated that he was “persuaded the rules governing the Florida Bar and the attendant threat of malpractice liability provide sufficient assurance that counsel appointed by an insurer will not continue to represent an insured in the event a conflict of interest interferes with counsel’s ability to make independent professional judgments on behalf of the client.”

The University of Miami decision will not open a “new frontier” as predicted by the dissent, but it is an important decision in the area of independent defense counsel in Florida.  The most immediate impact of the decision will be on situations involving co-insureds who are co-defendants in a case.  This situation arises most frequently in the construction context, where subcontractors are required to indemnify and provide additional insured coverage to owners and general contractors, as well as in the manufacturer-supplier-retailer context, in which indemnification and additional insured coverage typically flows downstream.  In both contexts, a plaintiff is likely to sue multiple parties to the relationship, and additional insured and indemnification claims are likely to arise between co-defendants.  Unless the downstream parties and their insurers are willing to provide defense and indemnity coverage without reservations, additional insureds are going to assert their right to independent counsel more often in Florida.

Hopefully, the decision also will have a positive impact of the development of law recognizing a policyholder’s right to independent defense counsel when counsel is conflicted between its allegiances to the insurer and insured.  There is very little Florida law that addresses a policyholder’s right to independent defense counsel when an insurer defends under reservation of rights.  Many other states, like California with its Cumis counsel decisions, have extensive judicial discussions of the conflicts inherent in the tripartite relationship between the insurer, policyholder, and defense counsel, and the rights policyholders have to choose their own defense counsel.  The maneuvering of parties to the tripartite relationship was aptly called the “Dance of the Porcupines” by Andrew Grigsby of Hinshaw & Culbertson, LLP in his excellent 2009 Florida Bar Journal article exploring this topic, which is definitely worth a read.

Florida’s Claims Administration Statute, Fla. Stat. 627.426, which is sometimes referred to as an “independent counsel statute,” requires an insurer defending under reservation of rights to appoint defense counsel that is “mutually agreeable” to the policyholder.  But there is scant caselaw in Florida explaining what “mutually agreeable” means.  The caselaw generally states that a reservation of rights by itself does not give rise to the right to independent counsel, but provides little guidance as to when policyholders can demand independent counsel.

Most individual policyholders are happy to have their insurance company pay for their defense counsel, and neither have a preferred counsel nor care who their counsel is so long as they do not see an invoice.  Corporate policyholders, on the other hand, usually have preferred defense counsel, and they want to make sure they have counsel who is looking out for their interests and not the interests of the insurance company that is paying the bill.  When an insurer defends under reservation of rights to later deny indemnity coverage, the allegiance of defense counsel can be critical to the development of the pleadings and the later coverage dispute that is largely dependent on those pleadings.

One of the dirtiest secrets of the insurance industry is that the insurance companies’ “preferred” defense counsel are frequently at the same law firms as the insurers’ coverage counsel.  That’s right: the lawyers who promise to be independent and fairly represent policyholders – the same lawyers Judge Shepherd is so confident will maintain their independence despite a conflict between co-insureds – are the ones whose partners are arguing that indemnity coverage is excluded.  This problem has only gotten worse since 2003, when Florida Rule of Professional Conduct 4-7.9 (then Rule 4-7.10) was revised to prohibit insurance defense lawyers employed by insurance companies from pretending to have their own independent law firms.  Now, these “captive” law firms are not owned by the insurance companies, but they remain firmly in their pocket.

Another problem in Florida is that the Florida Bar has not been willing to stand up to the insurance industry and make it clear under the Rules of Professional Conduct that an insurance defense attorney’s sole allegiance is to his or her client, the policyholder.  Instead, we have spineless Ethics Opinion 97-1, which states that “An attorney who has been hired by an insurance company to represent an insured owes his primary duty to the insured” (emphasis added).  This rule is broken more often than just about any other Rule of Professional Conduct, and the Bar, and most judges, turn a blind eye.

To the insurance industry, any missed opportunity to save a buck on defense costs is a apocalyptic event.  But, contrary to Judge Shepherd’s Chicken Little-esqe dissent, the sky is not falling.  The Third DCA’s opinion in University of Miami merely reinforces what we already knew but often goes ignored: insurance defense counsel are ethically bound to do what is best for their policyholder clients, not the insurers paying the bill, and policyholders have the right to independent defense counsel where a conflict arises.

(For a further discussion of the University of Miami case, with analysis from myself on the policyholder side and Randy Maniloff at White and Williams LLP and Charlie Lemley at Wiley Rein LLP on the insurer side, see Insurers May Have To Pay More Defense Attys After Fla. Ruling,” Insurance Law360, February 28, 2013.  Subscription required.)