I know that this is hard to believe, but even when an insurance company complies with its duty to defend, the interests of the insurance company and its policyholder may not be aligned.  The policyholder may want to settle, while the insurance company wants to roll the dice; or, vice-versa.  Or, the policyholder may want to make certain strategic moves that the insurance company refuses to take.  Or, the policyholder may not be comfortable with assigned defense counsel.  Or, the carrier may contend that certain claims aren’t covered and offer a defense under only a reservation of rights to disclaim coverage later. So, I’ve been asked by a number of clients and brokers: Does the policyholder have the right to independent counsel, paid for by the carrier?  (By which I mean, non-panel counsel selected by the policyholder but paid for by the carrier.)

A number of states do provide for independent counsel.  In California, for example, policyholders have the right to independent counsel, paid for by the carrier, whenever “there are divergent interests of the insured and the insurer brought about by the insurer’s reservation of rights based upon possible noncoverage under the insurance policy.” San Diego Navy Fed. Credit Union v. Cumis Ins. Society, Inc., 208 Cal. Rptr. 494, 506 (Cal. Ct. App. 1984). California even has a statutory provision codifying the law with respect to independent counsel, Cal. Civ. Code §2680.

In New Jersey, the law with respect to independent counsel isn’t as good for policyholders. The seminal case is Burd v. Sussex, 56 N.J. 383 (1970), a case proving the adage that bad facts make bad law. In Burd, the policyholder kneecapped someone with a shotgun and was convicted of atrocious assault and battery. In the subsequent civil suit, our hero attempted to call upon his homeowners’ coverage to pay for his defense.  The carrier refused to provide a defense, on the understandable ground that the policyholder had intentionally caused harm.  The policyholder argued that one of the counts of the underlying complaint alleged negligence, and that he was therefore covered.  

The New Jersey Supremes resolved the conflict as follows:  “If the [underlying] trial will leave the question of coverage unresolved so that the insured may later be called upon to pay, or if the case may be so defended by a carrier as to prejudice the insured thereafter upon the issue of coverage, the carrier should not be permitted to control the defense. In such circumstances the carrier should not be estopped from disputing coverage because it refused to defend. On the contrary the carrier should not be permitted to assume the defense if it intends to dispute its obligation to pay a plaintiff’s judgment, unless of course the insured expressly agrees to that reservation. This is not to free the carrier from its covenant to defend, but rather to translate its obligation into one to reimburse the insured if it is later adjudged that the claim was one within the policy covenant to pay.”

As a result of Burd, in New Jersey, if you have a “right” to independent counsel, you may have to pay for it yourself unless and until you can establish that the supposed non-covered claim is in fact covered. (Think about Tom Sawyer, who convinced his friends that painting a fence was fun, and then got them to pay him for the privilege.)

One important thing to recognize is that, under policies that give the carrier the right to control the defense (read your insuring agreement!), policyholders don’t have the right to independent counsel just because they’re unhappy with the strategy being employed.  There has to be an actual conflict.

Here’s a related question:  What if the policyholder wants to assert affirmative claims (counterclaims against the plaintiff or cross-claims against co-defendants) in the underlying action?  Does the carrier have to pay for those?  I know of no reported New Jersey authority on-point, but a Pennsylvania federal case,  Safeguard Scientifics, Inc. v. Liberty Mut. Ins. Co. 766 F. Supp. 324, 334 (E.D. Pa. 1991), aff’d in part and rev’d in part on other grounds without opinion, has been cited by a number of other courts and is instructive.    In Safeguard Scientifics, the Court held that an insurance company was obligated to cover the costs of counterclaims filed by the policyholder and raised in the same lawsuit if pursuit of those claims was “inextricably intertwined” with the policyholder’s defense and “necessary to the defense of the litigation as a strategic matter.”

One final point:  In some circumstances in which my clients have been unhappy with appointed defense counsel, we’ve convinced carriers to let our clients select new counsel from the carrier’s approved list.  It can’t hurt to ask.

By the way, Tressler, LLP, which is a national law firm that represents insurance companies, has compiled a very useful 50-state survey on the right to independent counsel, which you can access here.