In most cases, when an insurance company has a duty to defend an insured, the insurance company gets to pick the attorney that defends the business or individual being sued. Insurance companies often use what is known as “panel counsel,” an attorney or law firm that an insurance company regularly uses to represent its insureds. Many times, the interests of the insurance company and the insured are aligned: resolve the case for the least amount of money possible. But sometimes a conflict of interest exists that causes their interests to diverge. In such instances, the insured is generally entitled to select its own attorney and the insurance company still has to pay the reasonable cost of defense. What circumstances constitute a conflict of interest though? In Xtreme Protection Services, LLC v. Steadfast Ins. Co., the First District found that the possibility of a large award of punitive damages created a conflict of interest that entitled the insured to select its own independent attorneys.
In October 2016, Xtreme Protection Services, LLC (“Xtreme”) was named as a defendant in a lawsuit filed by David Isreal which alleged claims of assault and intentional infliction of emotional distress among other causes of action. The plaintiff alleged that Xtreme, acting though one of its employees, placed listening devices in Mr. Isreal’s office, attached GPS devices to his vehicle, and sent him numerous harassing text messages. The plaintiff sought compensatory damages of $120,000 and more than $4 million in punitive damages.
Xtreme, a security services company, had an “armed security services” liability policy issued by Steadfast Insurance Company (“Steadfast”). The policy included an indemnity for bodily injury and property damage but expressly excluded coverage for intentional conduct and punitive damages. After being sued, Xtreme retained an attorney who tendered the complaint to Steadfast for coverage. Steadfast advised that it would retain its own counsel to defend Xtreme. Steadfast then retained counsel for Xtreme under a reservation of rights based on the punitive damages exclusion and on the basis that the underlying complaint alleged intentional conduct. Xtreme notified Steadfast that it did not want to be represented by Steadfast’s selected counsel due to a conflict of interest between Steadfast and Xtreme.
Xtreme later filed suit against Steadfast seeking a declaration that Xtreme was entitled to select its own counsel because of the conflict of interest caused by the possibility of a large punitive damages award. Steadfast sought its own declaration that it no longer had a duty to defend Xtreme because Xtreme had breached its duty to cooperate with Steadfast. After cross-motions for judgment on the pleadings, the trial judge found that the conflict of interest caused by the potential of a large punitive damages award in the underlying lawsuit entitled Xtreme to select its own counsel.
In affirming the trial court, the First District examined the circumstances that give rise to an insured’s entitlement to select independent counsel, particularly in instances where there is a conflict of interest. The court reasoned that a conflict of interest exists “when the facts to be resolved in the underlying case would allow the insurer-retained counsel to ‘lay the groundwork’ for a subsequent denial of coverage.” In other words, the question is whether the insurance company-retained attorney will seek the outcome that is best for the insured or for the insurance company. Although the attorney is supposed to seek the best outcome for the insured, the court acknowledged that the attorney “may have closer ties with the insurer and a more compelling interest in protecting the insurer’s position.”
The Court noted that the insured may be entitled to retain independent counsel (often referred to as Peppers counsel after the case of Maryland Casualty Co. v. Peppers) in cases where the potential punitive damages far outweigh the compensatory damages sought. In such cases, the insurer has no interest in vigorously defending against an award of punitive damages because the insured, and not the insurance company, would be responsible for paying an award of punitive damages. In Xtreme’s case, the compensatory damages being sought were well within the policy limits, whereas the punitive damages were well in excess of the limits. In such an instance, the court explained, Steadfast had little to lose by letting the case go to trial, whereas Xtreme had a much greater incentive to settle the case before trial.
The court stopped short, however, of holding that a conflict of interest entitling an insured to select its own counsel exists any time a plaintiff seeks punitive damages. Nonetheless, in instances where the punitive damages being sought far outweigh the actual damages being sought, the court’s opinion makes it easier for the insured to select its own independent counsel to represent it in the underlying lawsuit.
The court’s full opinion is available here.
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