Conflicts, Contracts and Choosing Independent Counsel

When is a policyholder entitled to choose its counsel to defend a suit, rather than simply accepting the defense lawyer selected and controlled by its insurer? According to Downhole Navigator LLC v. Nautilus Insurance Co., a June 29 decision by the 5th U.S. Circuit Court of Appeals, independent counsel is warranted only when facts determining coverage will be adjudicated — not simply developed — in the underlying suit. But, notes the court, the insurer breaches its duty to defend (and thus independent counsel is warranted) if the insurer actually directs counsel to develop coverage facts adverse to the policyholder’s interests.

The decision places the policyholder and its counsel in difficult positions. The onus for ethical conduct remains squarely upon defense counsel, who must protect the policyholder against the insurer’s attempt to benefit its own interests unfairly. If the policyholder rejects the insurer’s counsel without sufficient cause, the policyholder risks losing out on reimbursement of defense costs for independent counsel.