The Insured May Not Always Get to Pick Its Own Counsel. Really!!!
A bane of many insurers is that where there is complex litigation, there is invariably a reservation of rights. And where there is a reservation of rights, the insured invariably insists upon selecting counsel. The insurer invariably has to accede to that demand. That is certainly the Massachusetts view. See, e.g., Three Sons, Inc. v. The Phoenix Ins. Co., 357 Mass. 271 (1970). Once the insured says “I now have the right to select my own counsel,” the insurer has very little control over defense costs that, in many complex cases, can exceed $1 million. Insurers have responded at times by refusing to pay the rates charged, the disbursements billed, or for many of the tasks performed.
Over-aggressiveness on these issues has led to hard feelings on both sides.
Now the Fifth Circuit has weighed in with what may be the beginning of a reversal of fortunes for insurers. In Downhole Navigator, LLC v. Nautilus Ins. Co., 686 F.3d 325 (5th Cir. 2012), the court held, in applying Texas law, that the reservation of rights asserted by the insurer did not permit the insured to select counsel. Downhole (the insured) was alleged to have negligently executed on a plan to drill a wellhole for a client. When Downhole was sued, Nautilus reserved rights, citing many policy exclusions. Downhole responded, as one would expect, saying that the reservation of rights created a conflict and Downhole would choose counsel. Nautilus responded, in a fashion that may now well become all the rage, by saying it had “reserved rights while investigating the matter,” but that “until or unless a coverage issue develops, Downhole is not entitled to a separate defense.”
In what seemed like a cursory review of Texas law for such a transformative decision, the Fifth Circuit acknowledged that under certain circumstances an insurer will lose control of the defense nothwithstanding policy language to the contrary. The court then goes on to say that the insurer only gives up the right to control the defense when the facts to be adjudicated would be the equivalent of the facts upon which coverage depends, and the court did not find that situation present. Thus, the court refused to permit Downhole to recover the fees of the defense counsel it retained. The court did not give a full-blown description of the scope of the claims against Downhole in the underlying case, but its conclusions suggests that, at least in the Fifth Circuit, many more insurers will be emboldened to challenge the insured’s right to independent counsel paid for by the insurer.
For a discussion of other cases discussing the insured’s right to counsel when the insurer reserve rights, and the more controversial topic of whether the insurer must inform the insured of that right, see the August 2012 volume of the Plus Journal.
Posted In: Duty to Defend