Insurer Appointed Defense Lawyer not Required to Act Affirmative for Insured

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Liability Insurance only Pays for Defense and Indemnity not Prosecution of Suit Against Third Party

After a mechanic named Charles Vititoe was injured while working on the rim assembly of a semi-trailer chassis in Charleston, South Carolina  Flexi-Van Leasing, Inc. (“Flexi-Van”) who owned the chassis to which the rim assembly was attached (the “Chassis”) (the “Underlying Action”) he sued.  Flexi-Van obtained defense from the Travelers subject to a reservation of rights. In Flexi-Van Leasing, Inc. v. The Travelers Indemnity Company, No. 19-1847, United States Court Of Appeals For The Fourth Circuit (November 23, 2020) Flexi-Van alleged there was a conflict with its appointed defense lawyer because he refused to file a counter-claim against another party without Flexi-Van paying the lawyer even though the policy only provided for defense and indemnity.

Because Flexi-Van became concerned that there was a “real possibility” that Flexi would not be covered under the Policy if a judgment was rendered against it in the Underlying Action it requested defense counsel to bring a third-party complaint against Interstar. Defense lawyer Wall informed Flexi-Van he was willing to do so, but Flexi-Van would have to pay him to bring the third-party complaint, as Travelers would not. As a result, Flexi-Van then claimed that Wall had a conflict of interest and could no longer protect Flexi-Van’s interests.

Flexi-Van asserted that it was entitled to: (1) declaratory judgment that it is entitled to a defense and indemnity from Travelers for the claims in the Underlying Action; (2) breach of the Policy for failing to defend and indemnify; and (3) breach of the implied obligation of good faith and fair dealing.

The district court issued a series of orders granting Travelers’ Motion for Summary Judgment as to Flexi-Van’s breach of the implied obligation of good faith and fair dealing claim and that Flexi-Van acted prematurely by firing defense counsel Wall before the interests diverged and an actual conflict arose.

ANALYSIS

Flexi-Van challenged the district court’s determination that there was no conflict of interest. Flexi-Van claimed there was a conflict for two reasons. First, it argued the Travelers’ Reservation of Rights Letter created a conflict. There is no South Carolina law directly addressing this issue. The court, unable to conclude that the Supreme Court of South Carolina would profess so little confidence in the integrity of the members of the South Carolina bar it noted that rigorous ethical standards govern South Carolina attorneys. The South Carolina Rules of Professional Conduct mandate that a lawyer cannot accept compensation for representing a client from a third party unless certain conditions are met, including that the lawyer’s judgment must remain independent.

If an insured refuses to consent to an insurer’s choice of counsel without a conflict, the insured foregoes its right to compensation for defense fees.

While not a per se conflict, a reservation of rights letter may still establish an actual conflict where the parties lack a common interest. As the district court found, however, at the time of the issuance of the Reservation of Rights Letter, Flexi-Van and Travelers had a common interest in proving that Vititoe was at fault in the Underlying Action. Given that common interest, the district court properly found the Reservation of Rights Letter did not create a conflict of interest. Flexi-Van’s termination of defense counsel Wall was, therefore, premature.

Flexi-Van also argued a conflict of interest existed based on Wall’s alleged failure to bring a third-party complaint against Interstar. But the record shows that Wall did not refuse to bring a third-party complaint against Interstar. In fact, he expressly stated he would. Wall merely insisted Flexi-Van pay him to do so, as Travelers would not because it believed it had no duty to pay for Flexi-Van’s third-party claim under the Policy and South Carolina law.

The district court rightly found that the refusal to initiate a third-party action against Interstar arose from Travelers’s refusal to pay Wall to file a third-party action, not from any independent decision-making on the part of Wall. In fact, finding a conflict of interest in this scenario would destroy the ability of an insurer to hire counsel to defend its insured solely within the scope of an insurance policy. The existence of a coverage issue alone does not give rise to an actual conflict.

Flexi-Van fired Wall before an actual conflict arose and Flexi-Van was not entitled to indemnification for settlement costs in the Underlying Action.

Since there was a reasonable ground for contesting a claim there is no bad faith.  Travelers had reasonable grounds for believing coverage might not be a certainty under the exclusion, and Flexi-Van failed to submit any additional evidence that Travelers’ Reservation of Rights Letter was unreasonable.  The judgment was affirmed.

ZALMA OPINION

Flexi-Van was hoist upon its own petard by firing a competent defense counsel appointed by its insurer for a conflict of interest that did not exist, by asking an insurer to have its appointed counsel do work that it had not promised to provide by its policy and by seeking defense counsel to work for free. Firing defense counsel when he refused to work without pay and without a true conflict Flexi-Van gave Travelers a gift it did not seek.


© 2020 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Over the last 52 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

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