Additional Insured May Be Entitled to Separate, Independent Counsel When There is a Conflict With a Co-Insured

Recently, I wrote a synopsis of Univ. of Miami v. Great Am. Ins. Co., Case No. 3D09-2010 (Fla. 3d DCA Feb. 20, 2013), which was published on Hinshaw & Culbertson’s website.  In essence, the holding of the case is beneficial for policyholders and may create a duty for an insurer to provide separate counsel (i.e., another attorney), to an additional insured in situations where the named insured and additional insured have a conflict.  For more details, check out the article in its entirety, which can be found here, and is reproduced below as well.

On July 18, 2000, a young child drowned and nearly died while at a summer swim camp held on a university’s campus. The child’s parents sued both the camp and the university for negligent supervision. The lawsuit also included allegations that the university was vicariously liable for the camp’s negligence.

The university was an additional insured under a commercial general liability policy issued to the camp. The policy contained a separation of insureds provision.

In response to the lawsuit, the insurer retained the same defense counsel to represent both the university and the camp. Shortly after suit was filed, the university advised the insurer that there was a conflict of interest in the single representation of itself and the camp, and demanded independent counsel of its own choice. The insurer refused, and the university retained counsel at its own expense.

After the negligence case settled, the university filed a declaratory judgment action against the insurer, arguing that the insurer breached the policy by failing to provide it with separate counsel from the camp. The university sought reimbursement of its defense costs and attorneys’ fees.

The insurer moved for summary judgment, arguing that there could be no conflict of interest in its representation by a single counsel because the camp was contractually bound to indemnify and hold harmless the university for any liability arising out of the camp’s use of its facilities. The trial court agreed and held that the insurer had no obligation to reimburse the university for its fees and costs.

In a case of first impression, Univ. of Miami v. Great Am. Ins. Co., Case No. 3D09-2010 (Fla. 3d DCA Feb. 20, 2013), Florida’s Third District Court of Appeal reversed the trial court’s holding. On appeal, the university argued that there was an obvious conflict of interest with the camp, as evidenced by the pleadings which contained direct allegations of negligence on the part of both defendants as well as vicarious liability. The defendants also each alleged that they were relieved of liability based on the negligence of the other in their answers to the complaint.

The court agreed with the university, concluding that it was entitled to its own independent counsel based on the allegations and record evidence which established “inherently adverse” legal defenses between the university and camp. To defend both co-defendants, the court observed that “counsel would have had to argue conflicting legal positions, that each of its clients was not at fault, and the other was, even to the extent of claiming indemnification and contribution for the other’s fault. In so doing, legal counsel would have had to necessarily imply blame to one co-defendant to the detriment of the other.” According to the court, “[o]n these facts, we believe this legal dilemma clearly created a conflict of interest between the legal defenses of the common insureds sufficient to qualify for indemnification for attorney’s fees and costs for independent counsel.”

While the holding of this case is noteworthy, the dissent is also significant. In a lengthy and well-reasoned dissent, Judge Frank A. Shepherd noted that there was no actual conflict of interest or even a “‘substantial risk’ of conflict” between the insureds. Judge Shepherd observed that the majority’s decision to afford the university and camp separate counsel on the basis of mere finger pointing created by their own pleadings was nothing more than a “paper conflict.” According to the dissent, the majority would afford insureds “separate counsel any time an insured articulates a conflict in a pleading, whether or not real.”

Judge Shepherd further noted that the “flaw in the majority opinion is that it confuses and conflates insurer obligations in three unrelated circumstances: (1) the duty to defend; (2) conflicts between an insured and insurer; and (3) conflicts between insureds.” In a statement based on the majority’s citation of cases from all three circumstances, Judge Shepherd observed that this case involved only the third circumstance and that “the majority makes no effort to distinguish among them in its resolution of this case.”

Practice Note

This case expands an insured’s right to independent defense counsel where there is a perceived conflict of interest with a co-insured. Although the dissent argued that this case expands the requirement to provide separate defense counsel to insureds anytime an insured “articulates a conflict in a pleading,” the majority also relied upon “record evidence” submitted on summary judgment. From a practical standpoint for insurers, where an insured seeks separate, independent counsel from a co-insured and there are allegations of a conflict of interest between them, separate counsel may need to be provided.

The actual case opinion is also available on the link above.

An Insured’s Right to Independent Counsel in Georgia

Whether the insurer has a right to select counsel for an insured when defending under a reservation of rights is a blurry topic in Georgia.  Under Georgia law, defending under a reservation of rights creates a conflict of interest.  In upholding its duty to defend its insured, the issue becomes whether the insurance company can appoint defense counsel unilaterally on behalf of its insured (as is the case in Florida) or whether the insured can choose their own counsel.  The case law indicates that an insured in Georgia can select their own independant defense counsel, but it must first reject the insurers offer of appointed counsel.  

In conflict situations, if the insurer appoints defense counsel, the insured is entitled to reject appointed counsel and hire their own counsel at the expense of the insurer. See Am. Family Life Assur. Co. of Columbus, Ga. v. U.S. Fire Co., 885 F.2d 826, 831 (11th Cir. 1989) (“The existence of a conflict of interest would have justified American Family in rejecting Boston Old Colony’s offer to provide a defense…. In such circumstances, Boston Old Colony would have been obligated to pay for American Family’s defense.”). 

Even if the insured accepts appointed defense counsel, the insured may still be entitled to hire independent counsel which the insurer may also have to pay for. Util. Serv. Co., Inc. v. St. Paul Travelers Ins. Co., 5:06-CV-207 (CAR), 2007 WL 188237 (M.D. Ga. Jan. 22, 2007) (“Am. Family Life held that the presence of a conflict of interest may enable the insured to retain independent counsel at the expense of the insurer.”).  The right to have the insurer pay for both appointed defense counsel as well as independent counsel is much less clear.  In Util Serv., the court simply made this holding in ruling on a motion to dismiss the insured’s request for independent counsel fees.  The motion to dismiss by the insurer was denied.

Accordingly, although an insured may reject appointed defense counsel in a reservation of rights situation and select their own counsel, the law on whether the insured can simply accept appointed defense counsel AND hire their own independent counsel at the expense of the insurance company is much less clear.

Insureds Are Not Entitled to Mutually Agreeable Defense Counsel in Florida

Often times attorneys become confused when reading Florida Statute Section 627.426(2), and think that insureds are entitled to mutually agreeable defense counsel when an insurer agrees to defend under a reservation of rights.  That is generally not the case.  Section 627.426(2) applies to “coverage defenses” which include such things as late notice or other “defenses” to otherwise legitimate coverage.  The exclusions and exceptions to coverage that insurers usually reserve their rights on are not considered “coverage defenses” and are not governed by this statute.  An insurer in Florida is permitted to unilaterally select defense counsel for its insured.  For more explanation, see Travelers Indem. Co. of Ill. v. Royal Oak Enterprises, Inc., 429 F. Supp. 2d 1265 (M.D. Fla. 2004). 

Contrary to Royal Oak’s assertion, this statute does not create a duty to provide mutually agreeable counsel. First, the statute is implicated only when the insurer raises a “coverage defense,” defined by the Florida Supreme Court as “a defense to coverage that otherwise exists.” So defined, a “coverage defense” does not include a disclaimer of liability based on an express coverage exclusion in the policy.²³ Second, the only penalty for noncompliance provided for in the statute is that the insurer is precluded from denying coverage “based on a particular coverage defense.” It does not provide that the insurer’s failure to obtain mutually agreeable counsel in the event of a coverage dispute entitles the insured to recover the fees and costs of its separately retained counsel. Accordingly, § 627.426(2) cannot serve as a basis for imposing a duty on Travelers to obtain mutually agreeable counsel for Royal Oak.

Travelers Indem. Co. of Ill. v. Royal Oak Enterprises, Inc., 429 F. Supp. 2d 1265, 1272 (M.D. Fla. 2004)