After a company has been sued, its immediate next steps should be twofold: Consult its lawyer and notify its insurance carrier. For a claim covered by an applicable insurance policy, the carrier should pick up defense of the lawsuit and provide an attorney to represent the company in the lawsuit. If so, then the initial lawyer’s (the one who knows the business and may already know the facts underlying the claims) involvement for the company in defense of that covered claim becomes unclear. This article discusses the pros and cons of pre-negotiating the selection of the company’s choice of defense counsel with the insurance carrier.
Choice of Counsel
Once a company submits a claim to insurance, the insurance carrier will respond by providing a coverage position letter. This letter typically will indicate whether the carrier will provide the company a legal defense (that is, a lawyer) of the lawsuit and, if so, any reservations as to whether ultimately there may be claims or damages that the policy will not cover once proven. As a reminder, a carrier’s duty to defend a lawsuit is a separate duty from its duty to ultimately pay out the claim on behalf of the company (that is, duty to indemnify the insured). The carrier’s duty to defend its insured is, in general, based only on the claimant’s allegations against the company, regardless of their truth.
If the carrier agrees that the facts of a lawsuit, taken as true for defense purposes, entitle the company to a legal defense under the terms of the applicable insurance policy, then the policy will typically give the carrier “the right and the duty to defend the insured against the claim.” This means the carrier — not the company — will choose and engage a lawyer or law firm to defend the company against the claim. So, when a claim is submitted to the carrier and the carrier agrees to provide a defense, the company will not have a right to choose its own counsel (and merely then pass on the attorney’s fees for reimbursement by the carrier).
And, the odds are that the company’s go-to lawyer is not on the carrier’s preapproved slate of defense counsel hired to defend policyholders and will not be appointed to represent the company in the lawsuit. At that point, the company has a choice. One option is to continue with the carrier’s appointed counsel — after all, the carrier will cover that lawyer’s fees. The newly appointed law firm, however, does not know the company’s business values or strategy, and has no experience or reputation with the company team.
Another option is to have the company’s go-to lawyer continue representing the company against the lawsuit. This means the company will either pay fully out of pocket for its chosen lawyer (for example, if using the carrier’s appointed counsel while also using the company’s outside counsel for consultation and oversight purposes), or have to negotiate the company lawyer’s rates with the insurance carrier (which likely means paying out of pocket for amounts above the carrier’s rates). The desire to have the lawyer of the company’s choosing is obvious. She or he is reputable, experienced and trusted. So, who does the company use?
A Potential Dilemma
If the company decides to agree with the most cost-effective option and utilize the insurance carrier’s appointed counsel), then a company may still end up in a situation where it needs its own independent counsel. Although unlikely, a conflict between a carrier and the company may unexpectedly arise and lead to complications in the carrier/appointed counsel/insured relationship. Under Texas law, an insured is entitled to independent counsel when the facts at issue in the liability lawsuit against the insured are the same facts that determine whether there is coverage under the policy. In other words, a carrier cannot use the lawyer it hires to establish facts that may be helpful in defending the underlying claim, but simultaneously defeat coverage. The purpose of this rule is so a carrier cannot advance its interest at the expense of its insureds. Although the carrier is paying for a lawyer for its insured (the company), the appointed lawyer’s client is still the company and the lawyer cannot be forced into an ethical conflict.
If such a scenario arises, both the company and the carrier will want clarity on how to remedy the situation. However, many policies do not address the details of what happens when there is a conflict with appointed counsel.
The Solution: Choice of Counsel Endorsement
Companies can avoid having to choose between its trusted lawyer and appointed counsel, and avoid a potential conflict scenario at the outset, by negotiating choice of counsel in their insurance policy. A “choice of counsel endorsement,” “selection of defense counsel endorsement,” or a “designated law firm endorsement,” is an endorsement (that is, amendment to the policy) that allows the company to choose its counsel when faced with a lawsuit.
This type of endorsement comes in differing forms. It may either provide that the company “may select counsel to investigate and defend with [the carrier’s] prior written approval, which shall not be unreasonably withheld” or it may designate a particular law firm and provide that the company “shall have the option to select the below designated law firm as defense counsel.” The former type of the endorsement gives the company flexibility to choose the law firm that is most fitting to the case, while the latter provides more certainty and takes away the necessity of any negotiating with the carrier in the face of a lawsuit.
While allowing the company to choose the lawyer, the carrier will still maintain oversight of the litigation. In particular, the carrier will require the law firm to have or provide certain qualifications and billing rates. The endorsement will also likely require the lawyer to cooperate with the carrier as to billing and reporting procedures and give the carrier the option to terminate the lawyer if they do not comply. And, like many endorsements, it could increase policy premiums.
Regardless, whether it’s a high-profile case or a case close to the heart of the company, having counsel who understands the businesses values and goals in defending a claim may be the company’s ultimate goal. By including this endorsement, companies gain key control over managing the risk and defending the company in the lawsuit.
Business leaders should consult an insurance broker and experienced insurance attorneys about this endorsement during the next policy renewal and whether it fits within the company’s business needs.