Conflicts of Interest Between an Insurer and Its Insured

Consider this not uncommon scenario: A company is sued in a high-exposure tort case in which the plaintiff seeks to recover millions of dollars. The company believes the claim is, or may be, covered by its commercial general liability insurance policy and tenders the claim to its insurer. The insurer accepts the tender and retains a law firm to defend the company in the lawsuit. The law firm is on the insurance company's 'approved counsel' list, to which the insurer has referred substantial legal work for the past several years.

In the same letter advising the company of the 'approved' law firm that will be representing it in the litigation, the insurer also reserves its right to deny coverage for the claim. Specifically, the insurer states that depending upon how certain facts are developed in the case, there may be no coverage for the asserted claims. The development of these critical facts will be the responsibility of defense counsel, who, as previously discussed, has had a long relationship with the insurer. The insurer obviously will save money if the facts developed support a finding of no coverage. Thus, the insured is concerned that defense counsel might attempt to develop facts that would place the claim outside the scope of coverage under the subject policy in order to maintain its business relationship with the insurer. In the policyholder's view, this situation results in a conflict of interest between the insured and the insurer, which could impact defense counsel's ability to adequately represent the company.

This article examines potential conflicts of interest between an insurer and
its insured in the above scenario and the extent of an insured's right to its
own independent counsel in