As a matter of conventional wisdom, if an insurer reserves its right to deny coverage, even while agreeing to defend an insured against a third party’s claim, or denies coverage for a loss while accepting the duty to defend the insured, the insured has the right to be represented by defense counsel chosen by the insured and paid by the insurance carrier. The rationale for this result is that a reservation of rights or disclaimer of indemnity creates a conflict of interest between the insured and the insurer. Lawyers familiar with liability insurance issues recognize this principle as axiomatic. (See “Right to Independent Counsel: Effectively Implement an Insurer’s Duty to Defend,” NYLJ, Sept. 10, 2012.) However, while the principle may be simply stated, its application, not surprisingly, is more complex. When does the “right” arise? Who gets to choose? What does “independent” mean? The right answer to each of these questions is, It depends.

When Does Right Arise?

When does a right to independent counsel arise? In Prashker v. U.S. Guarantee Co., 1 N.Y.2d 584, 154 N.Y.S.2d 910 (1956), the New York Court of Appeals laid down the basic rule. If the grounds of liability asserted against an insured fall partly within and partly outside exclusionary clauses in a liability insurance policy, the insurer faces a conflict of interest. Its duty to the insured demands that it attempt to defeat liability on every ground asserted, while its own self-interest requires only that it defeat liability on grounds that might result in liability that is not excluded from the policy.

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