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. Continue reading ›