Last week, I spoke on the topic of “What Every Business Lawyer Needs to Know about Insurance.” One of the most frequent questions for lawyers who represent businesses is whether the insured has the ability to choose counsel.
By way of background, many insurance policies require the insurance carrier to pay for the cost to defend claims that may be covered under the policy. Typically, the insurance carrier maintains the right to pick the lawyer to defend the case when it has a duty to defend the claim. This can make the insured uncomfortable– particularly when the insured is a business that has an attorney that it trusts.
The insurance carrier’s choice of counsel often makes sense because it pays the legal bills and is responsible for any damages; therefore, the insurance carrier’s interests are aligned with the insured’s. However, if an insurance carrier provides a defense under a reservation of rights, the insured may be entitled to choose its own lawyer. A “reservation of rights” preserves the insurance carrier’s ability to invoke policy provisions that end coverage if certain events occur in the future.
When the insurance carrier issues its reservation of rights letter, Texas law makes clear that if the facts to be developed during the case affect both the outcome of the dispute and coverage under the policy, a potential conflict of interest exists. This potential conflict exists because insurer-appointed lawyers receive payment for their work from the insurer, and typically handle multiple cases for that insurer. Thus, when the facts of the case will determine both the outcome of the dispute and the outcome of coverage – the insured is entitled to choose its own counsel.