Lead Opinion
OPINION
A seaman aboard a vessel owned by Oceanic Research Services, Inc. (Oceanic) accidentally sustained serious injuries. Oceanic believed it was insured against the loss by a $500,000 bodily injury insurance policy it purchased through CHI of Alaska, Inc. (CHI). That policy, however, actually had a bodily injury limit of only $100,000. Oceanic sued CHI, asserting contract and negligent tort claims, as well as a claim that CHI had intentionally misrepresented that the policy coverage was $500,000. Oceanic sought compensatory and punitive damages.
CHI tendered the defense of this suit to its liability insurer, Employers Reinsurance Corporation (Employers). Employers agreed to defend CHI, conditional on reserving its rights to disclaim coverage with respect to Oceanic’s claim of intentional misconduct. Employers claimed that intentional misconduct would be excluded under the policy if such misconduct was ratified by CHI.
CHI objected, noting that the reservation of rights created a conflict of interest between Employers and CHI, and demanded independent counsel paid for by Employers and selected by CHI. CHI stated that it wanted its personal attorney Brett von Gemmingen to defend it. Employers expressed reservations about von Gemmin-gen’s experience in handling claims of this nature and suggested that CHI provide the names of other attorneys with more experience who might be retained by Employers to defend CHI. This was not acceptable to CHI. Next Employers offered to pay von Gemmingen to defend that portion of the lawsuit pertaining to the intentional misconduct claim while retaining the law firm of Hughes, Thorsness, Gantz, Powell & Brundin to act as co-counsel for CHI with responsibility for the defense of all claims. CHI declined this offer. CHI then brought the present action for declaratory relief, seeking vindication of its position that it is entitled to select independent counsel. In the meanwhile, the Oceanic case has been jointly defended by Hughes Thorsness and von Gemmingen.
CHI and Employers each moved for summary judgment in the present case. CHI contended that there was necessarily a conflict of interest between CHI and Employers respecting the defense of Oceanic’s claim because Employers could win either by defeating all claims of liability or by establishing that CHI is liable for intentional misconduct. Given this conflict of interest, CHI contended that Employers should have no role in the selection of defense counsel because any attorney selected by an insurance company “will attempt to help his real client, the insurance company, at the expense of the insured.” CHI argued that the retention of von Gemmingen “to defend claims as they are pushed outside the policy coverage does not resolve the conflict.” Instead, dual representation, according to CHI, would still permit the at
The superior court granted Employers’ motion for summary judgment. The court ruled that Employers’ offer to allow CHI to retain counsel of its choice to defend it on the intentional tort claim adequately resolved potential conflicts of interest. In addition, the court stated that if CHI contends at the conclusion of the Oceanic lawsuit “that a conflict existed despite Employers’ action in allowing it to retain its own counsel to defend uncovered claims, then it can raise this issue at the coverage trial.” Following the order granting Employers’ motion for summary judgment, a final judgment was entered which contained no explicit declaration. CHI has appealed from this judgment.
There are three issues on appeal:
1. Did Employers’ reservation of rights to disclaim coverage give CHI a right to retain independent counsel?
2. Does the two-counsel scheme proposed by Employers and approved by the superior court satisfy CHI’s right to independent counsel?
3. Does CHI have the unilateral right to select independent counsel?
We turn to a discussion of these issues.
1. Did Employers’ reservation of rights to disclaim coverage give CHI a right to retain independent counsel?
We answer this question in the affirmative.
Liability insurers have separate duties to defend and to indemnify their insureds.
Sometimes, however, the insurer claims that the policy has been breached by the insured. These are so-called policy defenses
Similarly, the insurer may claim that although no condition of the policy has been breached by the insured, a particular claim made by the plaintiff does not come within the coverage of the policy. Such defenses are called coverage defenses. The most typical example is the coverage defense in this case where alternative theories of negligent and intentional tort are plead and negligent acts are covered by the policy but intentional acts are not.
In cases where an insurer asserts either policy or coverage defenses, and defends its insured under a reservation of rights, there are various conflicts of interest between the insurer and the insured. We identified three of these in Continental. First, if the insurer knows that it can later assert non-coverage, or if it thinks that the loss which it is defending will not be covered under the policy, it may only go through the motions of defending: “it may offer only a token defense.... [I]t may not be motivated to achieve the lowest possible settlement or in other ways treat the interests of the insured as its own.” Id. at 289. Second, if there are several theories of recovery, at least one of which is not covered under the policy, the insurer might conduct the defense in such a manner as to make the likelihood of a plaintiffs verdict greater under the uninsured theory. Id. Third, the insurer might gain access to confidential or privileged information in the process of the defense which it might later use to its advantage in litigation concerning coverage. Id. at 291.
Merely because the insurer and the insured have divergent interests when the insurer seeks to defend under a reservation of rights does not necessarily mean that appointed counsel also has conflicting interests. If appointed counsel makes it clear at the outset of his engagement that he is going to be involved only in the defense of the liability claim, not in coverage issues, and that his client is the insured, not the insurer, conflicts should be rare.
Other authorities, however, take the view that appointed counsel represents both the insured and the insurer. A former president of the Defense Research Institute has written that appointed counsel has an obligation to disclose to the insurance company information detrimental to the insured. Thomas A. Ford, The Insurance Contract: The Conflicts of Interest it Breeds, Ins. Couns.J. 610, 620 (Oct. 1969):
In order for the attorney to perform his role properly, he must never lose sight of the fact that he is working for two different and distinct parties — the insured and the insurer. He must fully disclose to both parties the information he has obtained as a result of his unique relationship with them.
See also Shafer v. Utica Mutual Ins. Co.,
Where there is a conflict between insurer and insured, appointed counsel may tend to
In dicta in National Indemnity Co. v. Flesher,
In Continental the insurer claimed that the insured had breached the cooperation clause of the policy, but offered to defend the insured under a reservation of rights. Id. at 283. The insured rejected the insurer’s offer of a conditional defense and demanded a defense without a reservation of rights. Id. at 286. This the insurer refused to do. Id. Subsequently, the insured’s personal counsel took over the defense of the case and entered into a settlement which resulted in a consent judgment against the insured. Id. In the ensuing litigation between the insured and the insurer, the insurer contended that the insured had breached the insurance policy by refusing to accept the insurer’s offer to defend under a reservation of rights. Id. at 288. We held that the insured did not breach the policy and that it was within its rights to require the insurer to defend unconditionally or withdraw from the defense. Id. at 291. We also affirmed the jury’s award which included $4,000 expended by the insured as its defense costs. Id. at 296 n. 28.
In reaching this result, we expressed and adopted in policy defense cases the general rule that the insurer must surrender its right to control the defense to the insured if the insured refuses to accept a defense under a reservation of rights:
[T]he general rule is that, if an insured refuses to accede to the insurer’s reservation of rights, the carrier must either accept liability under the policy and defend unconditionally or surrender control of the defense....
Id. at 288. We explained in some detail the types of conflicts of interests which arise when the insurer asserts a right to later contest its liability. Id. at 289-90. We noted that these conflicts might be avoided if the insured were offered the right to retain independent counsel:
The possibility of a conflict might be avoided in such cases if the insurance company were to offer its insured the right to retain independent counsel to conduct his defense, and agree to pay all the necessary costs of that defense. In that event, it would seem that the company should be entitled to reserve the right to later litigate an alleged policy defense.
Id. at 291 n. 17. As already stated, the holding in Continental was limited to policy defenses; the question as to whether the same rules should apply where coverage defenses are involved was reserved. Id. at 289.
All three general types of conflicts of interests between insurer and insured which we identified in Continental — the insurer may offer mere token defense, the insurer may steer result to judgment under an uninsured theory of recovery, the insurer may gain access to confidential or privileged information which it may later use to its advantage — apply in coverage defense cases. However, the second reason does not apply in policy defense cases. Policy defenses, such as lack of notice or noncooperation, involve facts which are generally irrelevant to the litigation between the plaintiff and the insured. Therefore, appointed counsel has no opportunity to “covertly frame [a] defense to achieve a verdict based upon [a theory under which no coverage would result] so that [the insurer] could later assert that the defense was not covered_” Id. at 289. Thus, the need for independent counsel is, if anything, greater in coverage than in policy defense cases.
2. Does the two-counsel scheme proposed by Employers and approved by the superior court satisfy CHI’s right to independent counsel?
We answer this question in the negative.
The trial court was of the view that neither CHI nor Employers was bound by any determination of fact made in the underlying tort suit concerning whether CHI’s conduct was negligent or intentional. From this the trial court concluded that Employers’ two-counsel scheme would solve the conflict of interest between the insurer and the insured.
This solution overlooks the fact that, during the initial litigation, the insured may transmit information to counsel that the insurer could use in subsequent litigation to the insured’s disadvantage. A heavy burden of silence falls on the attorney the insurer selects to defend the insured.
Berch & Berch, supra, at 32 n. 23. The fact that personal counsel for CHI is acting as co-counsel with counsel appointed by the insurer also does not eliminate this conflict. Appointed counsel has and should have full access to the client so that the defense may be effectively conducted.
Moreover, even where the facts in conflict may be relitigated, the opportunity to direct a case through witness selection, interrogation, and discovery may afford a dispositive advantage in subsequent litigation:
In such cases, the insured’s attorney has the opportunity to develop the facts through discovery and to shape the case for, and present the evidence at, the trial. So even though the insured or the insurer may relitigate the coverage issue in a subsequent proceeding, controlling thedefense in the main proceeding could be critical. Testifying under oath in the main proceeding may freeze in the witnesses’ minds one version of the facts. Very little latitude may remain in subsequent proceedings to mold the evidence bearing upon coverage.
Id. at 37-38.
We conclude therefore that the two-counsel solution does not satisfactorily resolve the conflicts which have given rise to the right to independent counsel.
3. Does CHI have the unilateral right to select independent counsel?
We answer this question in the affirmative.
Most cases which recognize the right to independent counsel express the view that the insured has the right to select independent counsel of its choice. American Family Life Assur. Co. v. United States Fire Co.,
A recent California case, Center Foundation v. Chicago Insurance Co.,
In our view, the duty of good faith imposed upon an insured includes the obligation to act reasonably in selecting as independent counsel an experienced attorney qualified to present a meaningful defense and willing to engage in ethical billing practices susceptible to review at a standard stricter than that of the marketplace. Conduct arguably acceptable in the ordinary attorney-client relationship where the latter pays the former from his own pocket is not necessarily appropriate in the tripartite context created when independent counsel undertakes to represent the insured at the expense of the insurer.
Center Foundation,
A few cases support Employers’ argument that it should have the right to approve of CHI’s choice for independent counsel. In Employers’ Fire Insurance Co. v. Beals,
We conclude that the insured should have the unilateral right to select independent counsel and that this right should be subject to the implied covenant of good faith and fair dealing.
In the present case the record is unclear as to whether it is reasonable for CHI to select von Gemmingen as independent counsel. On remand, a hearing should be conducted promptly in order to determine this question. If the trial court finds that von Gemmingen is a reasonable selection, a declaration should be entered that he may conduct the defense of CHI as independent counsel. If the court finds that he is not a reasonable selection, the court should so declare and CHI should proceed to select qualified counsel.
For the above reasons the judgment of the superior court is REVERSED and this case is REMANDED for further proceedings and entry of a declaration in accordance with this opinion.
MOORE, J., concurs in part and dissents in part.
COMPTON, J., dissents.
Notes
. Sauer v. The Home Indemnity Co.,
. In this opinion we will refer to such counsel as appointed counsel.
. Continental Ins. Co. v. Bayless & Roberts, Inc.,
. See Continental,
. The duty to defend arises "if the complaint on its face alleges facts which, standing alone, give rise to a possible finding of liability covered by the policy,” Afcan v. Mutual Fire, Marine &
. Ronald E. Mallen, A New Definition of Insurance Defense Counsel, Ins.Couns.J. 108, 108-109 (Jan. 1986).
. In addition, at least two of our reported cases demonstrate that appointed counsel sometimes favor the interest of the insurer over those of the insured. Continental,
. "The prevailing view is that the presence of a coverage issue enables the insured to reject appointed counsel, select his own lawyer and control the defense at the expense of the insurer." Mallen, supra, at 113; see, e.g., American Family Life Assur. Co. v. United States Fire Co.,
. See also Berch & Berch, supra, at 38 ("[policy defense] cases do not present the same dangers [of conflicting interests] that coverage cases present").
. We have recently recognized the application of the right to independent counsel expressed in Continental in the context of a coverage defense case in Sauer v. The Home Indemnity Co.,
However, if the insured does not consent to a non-waiver agreement, or to a defense under a reservation of rights, then the insurancecompany must choose whether it wishes to defend unconditionally or pursue other options. One such option is to permit the insured to exercise its right to reject the defense offered by the insurer and to obtain substitute counsel at the insurer’s expense. In the event the defense is conducted by substitute counsel, the insurance company retains the right to later contest policy coverage. See Continental Ins. Co. v. Bayless & Roberts, Inc., 608 P.2d 281 , 291 n. 17 (Alaska 1980).
. As noted earlier, Employers offered to pay CHI’s personal attorney, von Gemmingen, to defend against the noncovered claims.
. See Theodore v. Zurich Gen. Accident & Liab. Ins. Co.,
Effect of Judgment Against Indemnitee on Indemnitor Who Has Independent Duty to Defend Indemnitee
(1) When an indemnitor has an obligation to , indemnify an indemnitee (such as an insured)
against liability to third persons and also to provide the indemnitee with a defense of actions involving claims that might be within the scope of the indemnity obligation, and an action is brought against the indemnitee involving such a claim and the indemnitor is given reasonable notice of the action and an opportunity to assume its defense, a judgment for the injured person has the following effects on the indemnitor in a subsequent action by the indemnitee for indemnification:
(a) The indemnitor is estopped from disputing the existence and extent of the indemni-tee’s liability to the injured person; and
(b) The indemnitor is precluded from relit-igating those issues determined in the action against the indemnitee as to which there was no conflict of interest between the indemnitor and the indemnitee.
(2) A "conflict of interest” for purposes of this Section exists when the injured person’s claim against the indemnitee is such that it could be sustained on different grounds, one of which is within the indemnitor’s obligation to indemnify and another of which is not.
. CHI also notes that there are unresolved problems of which of the two counsel is to control discovery and trial strategy. One commentator has noted: "The role of a second Iaw-yer with clearly antagonistic coverage interests to the insured is uncertain and seems inappropriate." Mallen, supra, at 119.
. We have held that the implied covenant of good faith and fair dealing is inherent in all contractual relationships including the insured-insurer relationship. Guin v. Ha,
Concurrence Opinion
concurring in part and dissenting in part.
In its decision today, the court holds-that an insured has the right to reject the counsel appointed by the insurer and to unilat
Most courts agree that an insured may reject insurer-selected counsel when the insurer assumes the defense under a reservation of rights because of a coverage question.
The court simply fails to recognize that Employers has both a contractual right as well as the contractual duty to defend CHI.
Although the court purports to align itself with what it considers to be the “majority view,” an analysis of the cases it relies on reveals that most courts which have recognized the insured’s “right to independent counsel” have not explicitly analyzed the scope of this right or fully considered its impact on the rights of the insurer.
Two cases cited by the court, while speaking of a “right to independent counsel,” implicitly recognize the right of an insurer to participate in the defense of its insured. The courts in both American Family Life Assur. Co. v. U.S. Fire Co.,
Some courts and commentators recognize that cases permitting an insured to select “independent counsel” do not define what is meant by that term. See, e.g., Federal Ins. Co. v. X-Rite, Inc., 748 F.Supp. 1228, 1228 n. 1 (W.D.Mich.1990) (“ ‘Independent Counsel’ is a term which has not been defined in the case law.”); Allan D. Windt, Insurance Claims and Disputes — Representation of Insurance Companies and Insureds § 4.20 at 179 (2d ed. 1988). Courts have used the phrase in a variety of contexts,
However, if, as the court apparently believes, an insured’s interest in fair representation requires the complete abrogation of an insurer’s right to participate in the defense, the insurer’s right should at least be addressed in terms of established principles of contract law. In interpreting a contract, a court must give effect to the reasonable expectation of the parties. Peterson v. Wirum,
As one court has stated when considering the scope of an insurer’s contractual right to defend in conflict situations:
Unless “right to defend” is to be deemed mere surplusage, ... it must be viewed as conferring upon [the insurer] some prerogative with respect to the defense beyond simply paying expenses. This prerogative cannot, in a conflict of interest situation, include an absolute right to control the litigation. On the other hand, [the insured’s] apparent presumption that the conflict of interest, posing a potential of prejudice to its interests, automatically and completely negated all prerogative, is not reasonable.
... [The] “right to defend” can hardly be deemed to contemplate anything lessthan participation in selection of counsel, which contractual right ought to be enforced unless contrary to public policy.
Federal Ins. Co.,
Courts which have recognized the right of the insurer to participate in the selection of substitute counsel do not agree as to the latitude an insurer should have. In Federal Ins. Co., the court concluded that, under Michigan law, an insurer is entitled to select replacement counsel, but its selection must be made with the utmost of good faith.
Because the insurer has a legitimate interest in seeing that any recovery based on finding of negligence on the part of its insured is kept within reasonable bounds, and since the total expense of this defense is to be assumed by the insurer under its promise to defend, we believe that ... the engagement of an independent counsel to represent the insured should be approved by the insurer. Such approval, however, should not be unreasonably withheld.
[W]here a conflict of interest exists between the insurer and the insured in the conduct of the defense of the action brought against the insured, the insured has the right to refuse to accept an offer of the counsel appointed by the insurer and insurer’s desire to control the defense must yield to its obligation to defend the policyholder; and where a conflict of interest exists the engagement of independent counsel to represent the insured should be approvéd by the insurer to assure the employment of competent counsel. Such approval should not be unreasonably withheld.
7C Appleman, supra, § 4685.01 (footnotes omitted).
The majority dismisses these authorities without analysis, summarily concluding that the insurer’s interests are sufficiently protected by the implied covenant of good faith and fair dealing inherent in all contracts. Principally relying on a recent California court of appeals decision; Center Found. v. Chicago Ins. Co.,
Unfortunately, the majority fails to specify by whose standards the competency of replacement counsel should be measured.
Although I have found no cases discussing what constitutes an insurer’s reasonable withholding of approval of substitute counsel chosen by the insured, I believe that an insurer should approve of an insured’s selection of counsel where the attorney is qualified to handle the case and where there is no reason to expect that the attorney will be unable to maintain a professional working relationship with the insurance company.
In ascertaining whether an attorney is qualified, it may be useful to look to the statute of a state which has turned to the legislature to resolve this issue. California Civil Code Section 2860(c)
When the insured has selected independent counsel to represent him or her, the insurer may exercise its right to require that the counsel selected by the insured possess certain minimum qualifications which may include that the selected counsel have (1) at least five years of civil litigation practice which includes substantial defense experience in the subject at issue in the litigation, and (2) errors and omissions coverage.
While I would not adopt this standard as a per se rule in Alaska, I believe that section 2860(c) provides reasonable guidance as to whether an insurer must approve of its insured’s selection of substitute counsel.
Here, it is undisputed that attorney Von Gemmingen graduated from law school in May, 1985. When this dispute arose in late 1989, he had been practicing law for approximately four years. Nothing in the record indicates that he had substantial defense experience in the types of disputes at issue in the suit against CHI. For these reasons, I would hold that Employers did not unreasonably withhold its approval of CHI’s choice of attorney.
Apparently, the court believes that any participation by the insurer in the appointment of independent counsel automatically taints the outcome. However, it is far from clear that the scope of the conflict of interest problem in the defense context is so broad and the frequency of harm to the insured so great as to warrant such a drastic curtailment of the insurer’s contract rights. None of the authorities cited by the court address the prevalence of the problem in quantifiable terms, nor do they address effectiveness of malpractice actions, disciplinary actions, or insurance bad faith actions in remedying the problem. As one commentator has noted, “[t]he validity of the assumption that there exists a severe risk that an insurer will favor its coverage interests over the insured’s liability has not been critically examined.” Mal-len, supra, at 108. The same can be said of the assumption that there is a severe risk that defense attorneys will favor the interests of the insurer over the insured.
In Continental Ins. Co. v. Bayless & Roberts, Inc.,
A potential conflict of interest between the insurer and the insured arises when, as in this case, a plaintiff brings an action against an insured which is based on both covered and uncovered theories of liability. When the complaint alleges both negligent conduct, which is covered under the policy, and intentional conduct, which is not covered, it would be in the best interest of the insurer if liability were ultimately found based on intentional conduct. In such a case, an attorney selected by the insurer to defend the insured would be under an ethical obligation to disclose the effect of this conflict “on the exercise of [the attorney’s] independent professional judgment on behalf of each.” Alaska Code of Professional Responsibility DR 5-105. Unless “it is obvious that [the attorney] can adequately represent the interest of each” and “each consents to the representation after full disclosure,” the attorney would be required to decline the employment.
The conflict between the insured and the insurer is to be distinguished from that which arises between the insured and the attorney under these circumstances. As commentators have stated:
In this situation, ... separate counsel retained by the insurance company is under the less-than-subtle influence of the insurance company. Insurance companies concentrate their legal representation into a few firms. The attorney, wishing to maintain the insurer’s business, does not want to aggravate the company. Furthermore, the insurance counsel has close ties and a long-term relationship with the insurer, while he has only a transient relationship with the insured. These factors could, unconsciously, dilute the loyalty of the most honest attorney.
Sampson A. Brown & John L. Romaker, Cumis, Conflicts and the Civil Code: Section 2860 Changes Little, 25 Cal.W.L.Rev. 45, 54 (1988) (footnotes omitted). Here again, the attorney’s duties are clear. If
In further support of its conclusion, the majority voices its concern over the danger that an insurer might gain access to information not otherwise available to it which could be used to its advantage in the coverage dispute. In Continental we discussed this danger in the policy defense context.
Of course this does not mean the insured’s attorney is free to share any confidential or privileged information with the insurer. Regardless of whether defense counsel is selected by the insured or the insurer, the attorney is bound by the same ethical duties regarding confidentiality. See Alaska Code of Professional Responsibility DR 4-101. In those rare cases where such a breach of confidentiality actually occurs, the law affords adequate protection and recourse to the insured. An attorney who breaches a client’s confidentiality may be subject to discipline for a violation of his professional responsibility or to a suit by the insured for legal malpractice. Of more significance to the insured, an insurer who relies on breach of confidentiality by defense counsel to assert non-coverage may be subsequently estopped from denying coverage based on policy exclusion. See Parsons v. Continental Nat’l Am. Group,
Other considerations prevent me from supporting the rule adopted today. First, “[t]ypically, the coverage issue [and resulting conflict of interest are] not created by the insurer but by the allegations of the claimant. Often those allegations bear little relationship to reality.” Mallen & Smith, supra, § 23.16. In light of this, a rule which operates to deprive an insurer of its contractual right to participate in the defense whenever the insurer reserves its rights unnecessarily penalizes the insurer. Second, an insurer may be required to issue a reservation of rights letter or risk its right to later challenge coverage of the claim under the policy. See Continental Ins. Co. v. Bayless & Roberts, Inc.,
In summary, I would hold that CHI was within its rights to reject the tender of a defense by Employers and was entitled to select replacement counsel, subject to the reasonable approval of Employers. Here, Employers’ approval of Von Gemmingen was not unreasonably withheld. Nonetheless, because I conclude that the insured has the right to select replacement counsel subject to the reasonable approval of the insurer, CHI cannot be forced to proceed with defense counsel selected by Employers. Accordingly, I concur in the reversal but dissent from the court’s reasoning and the rule of law which it adopts.
. The mere reservation of rights in response to a third party complaint alleging covered and uncovered conduct does not in and of itself create a conflict of interest warranting withdrawal of counsel selected by the insurer. Because the liberal rules of pleading permit third party plaintiffs to allege a variety of legal theories, the pleading alone should not be permitted to precipitate a conflict of interest between an insurer and the insured requiring withdrawal of the attorney chosen by the insurer. Nor should the mere fact that an attorney has previously been utilized by an insurer have this effect. Clearly, under the circumstances of this case, an attorney has an obligation to make the insured and the insurer aware of the potential for conflict and to proceed with the representation only with the consent of both. Alaska Code of Professional Responsibility DR 5-105. This is a continuing duty so the appropriateness of representation will have to be constantly monitored by counsel.
. CHI, citing National Indem. Co. v. Flesher,
. Other alternatives also balance the interests of the insurer and the insured. For example, the insured could agree to proceed with an attorney of its choice to serve as co-counsel to the insurer-selected attorney. Here, because CHI rejected this alternative, I limit my discussion to the approach to be taken when the insured rejects the co-counsel approach.
. Section II of the contract of insurance between CHI and Employers provides that
[Employers], in Insured’s name and behalf, shall have the right to investigate, defend and conduct settlement negotiations in any claim or suit.
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The Insured shall not admit liability for, or make any voluntary settlement, or incur any costs or expenses in connection with any claim involving payment by [Employers], except with the written consent of [Employers].
Section III obligates Employers to pay "all expenses incurred in the defense of any claim or suit against Insured” alleging acts covered by the policy.
. In American Family Life, the court affirmed an award of attorneys’ fees to an insured who hired co-counsel to “monitor and aid in the defense" provided by the insurer.
. The other cases cited for the "majority view” do not hold that an insured has the unilateral right to select defense counsel to the exclusion of any right of the insurer to participate in the defense.
In Rhodes v. Chicago Ins. Co.,
In Previews, Inc. v. California Union Ins. Co.,
In Maryland Casualty Co. v. Peppers,
In Illinois Masonic Medical Ctr. v. Turegum Ins. Co., 168 IlI.App.3d 158,
In Prashker v. U.S. Guar. Co.,
In Gorman v. Pattengell,
In Allstate Ins. Co. v. Noorhassan,
. The full sentence from Appleman reads:
But it has been held that where a conflict of interest exists between the insurer and the insured in the conduct of the defense of the action brought against the insured, the insured has the right to refuse to accept an offer of the counsel appointed by the insurer and insurer’s desire to control the defense must yield to its obligation to defend the policyholder; and where a conflict of interest exists the engagement of independent counsel to represent the insured should be approved by the insurer to assure the employment of competent counsel. Such approval should not be unreasonably withheld.
7C Appleman, supra, § 4685.01 (emphasis added) (footnotes omitted).
. The "right to independent counsel” could be read narrowly to mean the right to reject an insurer’s choice of attorney. It could be read more broadly to encompass the right to select substitute or replacement counsel, either unilaterally or subject to the approval of the insurer.
. In Center Foundation, the insureds filed a claim for breach of contract against the insurer after the insurer refused to accept the independent counsel selected by the insureds when the insurer reserved the right to contest coverage.
. California Civil Code § 2860 was a legislative response to the flood of litigation spawned by the California court of appeals decision in the case of San Diego Navy Fed. Credit Union v. Cumis Ins. Soc’y, Inc.,
The majority opinion is likely to have similar effects in Alaska and will probably require legislative intervention to ultimately bring fairness and order to this complex area of law.
. It seems an equally probable danger that an "independent" attorney selected by the insured would have an interest in favoring the insurer in the hope of establishing a continuing relationship with the insurer, while his relationship with the insured is likely to be transitory. After all, it is the insurer who pays "independent” counsel’s fees, too. The rule adopted by the majority does not address this danger and is a radical step which will be of doubtful effectiveness in resolving a problem which may be more pervasive in the minds of academicians than in the real world.
. DR 5-105 applies to the situation in which a lawyer represents two clients. In the circumstances discussed here, the attorney has but one client, the insured. See Tank v. State Farm Fire & Casualty Co.,
. While that case did not involve the same type of conflict of interest present here, this court's recent decision in Bohna v. Hughes, Thorsness, Gantz, Powell & Brundin,
. The agreement between CHI and Employers provided:
[CHI] shall cooperate with [Employers], and upon [Employers] request, shall attend hearings and trials and shall assist in effecting settlements, securing and giving evidence, obtaining the attendance of witnesses and in the conduct of suits.
.In the typical coverage dispute case where the party suing the insured alleges both intentional and negligent conduct, the plaintiff has a strong interest in developing facts indicating intentional conduct, as this enhances the strength of the plaintiff's case and may be a basis for an award of punitive damages. Such facts would be discoverable by the insurer in subsequent coverage litigation with the insured.
Dissenting Opinion
dissenting.
I agree with Justice Moore’s analysis of the court’s opinion. While I prefer his solution to that selected by this court, I believe a third alternative selected by the superior court is preferable to either. Also, I wish to emphasize what I find particularly disturbing with the court’s solution.
Since the court abrogates entirely a contractual right, the language of the insurance contract ought at least be reviewed. It provides:
SECTION II
DEFENSE AND SETTLEMENTS. The Corporation, in the Insured’s name and behalf, shall have the right to investigate, defend and conduct settlement negotiations in any claim or suit.
The Corporation shall not settle any claim without the consent of the Insured. Should the Insured refuse to consent to any settlement recommended by the Corporation and elect to contest the claim, or continue any legal proceedings in connection with such claim, the Corporation’s liability for the claim shall not exceed the amount in excess of the Insured’s deductible for which the claim could have been so settled, or the applicable limit of liability, whichever is less, plus the costs and expenses incurred with its consent up to the date of such refusal.
The Insured shall not admit liability for, or make any voluntary settlement, or incur any costs or expenses in connection with any claim involving payment by the Corporation, except with the written consent of the Corporation.
(Emphasis supplied).
The court holds that the insurer forfeits the right even to participate in the selection of counsel, encompassed in the insurer’s right to defend, (1) despite its contractual right to do so; and (2) despite the fact that as to covered claims, it is undisputed that
Justice Moore has highlighted the flaw in the court’s effort to legitimize its result by proclaiming the result to be in keeping with the “majority view.” As the result is not dictated by case law, what compels the court to hold that the insurer has forfeited its contractual right to select counsel to defend covered claims for which its money is at risk?
The court points to perceived problems with selection of counsel hired by insurers to conduct the defense of their insured. These “appointed” counsel may tend to favor the insurer’s interests, not the insured’s, because of longstanding ties between the insurer and counsel. Appointed counsel may consciously or subconsciously ‘slant’ efforts in favor of the insurer to receive future business from the insurer. Ongoing contractual relationships, strong financial ties, and sincere friendships between the insurer and appointed counsel will influence counsel’s conduct.
To cure this problem, the court first implies a contractual right in the insured to select “independent” counsel to represent the insured on both covered and reserved claims. To modify this implied right, the court then applies the implied covenant of good faith and fair dealing. The insured must “select an attorney who is, by experience and training, reasonably thought to be competent to conduct the defense of the insured.” “[TJhought” by whom to be competent? The court does not give an answer.
I do not doubt the potential for conflict of interest problems to intrude into relationships between the insurer, the insured and appointed counsel. Yet given the court’s view of the willingness of counsel to follow the dollar and not the Code of Professional Responsibility, why does the court not apply the same standard to independent counsel selected by the insured? If counsel selected by the insured ‘slants’ efforts in favor of the insured, is this a less disturbing result? If ongoing contractual relationships, strong financial ties, and sincere friendships between the insured and independent counsel influence counsel’s conduct, is this a less disturbing result? Worse, if an insured does not happen to be a significant factor in independent counsel’s financial wellbeing, counsel selected by the insured may (consciously or subconsciously) curry favor with the insurer in order to establish an ongoing contractual, financially rewarding relationship with the insurer. Is this a less disturbing result? The dollar still comes out of the same pocket. Once the Code of Professional Responsibility is discarded as setting ethical guidelines for the profession, no attorney/client relationship is safe from manipulation.
The alternative suggested by Justice Moore, but rejected by the court, does not contemplate selection of counsel by an insurer. The insured would select counsel, subject to the insurer’s approval. Approval could not be unreasonably withheld. Counsel would be paid for by the insurer. Yet in the court’s view, permitting the insurer to approve independent counsel selected by the insured would still taint counsel.
In my view the interests of both the insurer and insured would be better served if this court, the insurer, and the insured acknowledged the irremedial conflict created when reserved claims are asserted against the insured. The insured should be entitled to select counsel, paid for by the insurer, to represent it on the reserved claims, subject only to the insured’s contractual obligation to cooperate with the
' While the court is correct in pointing out the potential for conflicts when multiple counsel cooperate in a single defense, such conflicts are not unique to insurance defense litigation. Problems of cooperation and strategy are present whenever there are multiple defendants. In this case there are two real parties in interest; the insurer for the covered claims, and the insured for the reserved claims. There is no reason to treat insurance defense litigation differently than other multiple defendant litigation.
I am disturbed that the court is willing to embrace a solution that abrogates entirely a contractual right. This is particularly so because the court rejects reasonable alternatives which would give some effect to the contractual provision. Neither case law nor reason provides more than token support for the court’s solution. The court determines what it perceives to be the necessary result, apparently on the basis of its view of an industry. It reforms the contract accordingly. Contract law does not give a court such license. I would affirm the superior court.
. Interestingly the court affords CHI a right which it did not believe it had, and which it claimed not to be asserting if it did. In a letter from Lee Houston of Clement-Houston Insurance, Inc. (CHI of Alaska, Inc.) to counsel initially selected by Employers, Houston remarks:
I said, as I am repeating here, that we preferred having our own lawyer. Now — you are twisting this around to indicate we have terminated you. This is not true. I doubt the policy gives us authority to unilaterally dismiss counsel ... and we are not going to try to do so.
Houston doubted too much. Not only did CHI have the right to unilaterally dismiss counsel selected by Employers, but also it had the unfettered right to unilaterally select counsel regardless of its policy with Employers.
. Section X of the insurance contract provides in part:
The Insured shall cooperate with the Corporation, and, upon the Corporation's request, shall attend hearings and trials and assist in effecting settlements, securing and giving evidence, obtaining the attendance of witnesses and in the conduct of suits.
. This is not to say that there must be multiple counsel. The insurer may accept the insured’s choice of counsel to represent its interests, or the insured may accept the insurer’s choice of counsel to represent its interests. This would be a matter of choice, not contract.