Most businesses know that one of the first things it should do when it is sued, is to forward a copy of the petition or complaint to all potential insurers to put the insurance company on notice of the claim. The next question is who has the right to select counsel to represent the insured/company. Most insureds have “go to” lawyers or law firms, but those lawyers or firms are not always on an insurance company’s approved list. The proliferation of “captive” law firms, which are paid lower rates by insurance companies, is making the selection of counsel a more common dispute between the insured and the insurance company.

This dispute between insurer and insured can create tension because an insured is likely to prefer its own counsel to a likely unknown “captive” firm which solely takes cases assigned by the insurance company. Tension also arises if an insured has a high self-insured retention (SIR) and risks having to change counsel half-way through a complicated case. If, as discussed below, an insured decides to use its preferred firm over objection of the insurance company, it can risk not being reimbursed for legal fees incurred in the defense of the claim.

Once an insurance company accepts defense of a lawsuit, the policy usually gives the insurance company the right to conduct the defense of the case. Included in this right to conduct the defense is the right to choose counsel for the insured. However, Texas law has traditionally supported an insured’s right to select its own counsel, at the insurer’s expense, when there is a question of coverage based on the claims in the complaint or petition. A potential conflict of interest is a common occurrence which commences on the insurance company’s decision to send a reservation of rights letter to its insured. Obviously, there is a conflict of interest if a lawyer needs to prove certain facts in the defense of the lawsuit, but it is those same facts which may later defeat coverage in a subsequent coverage dispute. The lawyer is in a difficult position if his bills are paid by the insurer and the litigation plan is being directed by the insurer, yet the lawyer’s fiduciary duties run to its client, the insured.

While there is a certain line of Texas cases which stated that if an insurer offers a defense under a reservation of rights, then the insured is entitled to select its own counsel at the insurance company’s expense.  However, the Fifth Circuit recently clarified that this was not a per se rule. Further, in order for there to be a conflict of interest, the facts to be decided in the underlying liability lawsuit must be the same facts on which coverage depends. An example of such a conflict would occur if the policy excludes fraud. An insured may have reason to be concerned if the lawyer (paid for by the insurance company) directs the defense in a way that may allow for a finding of fraud – a result that would absolve the insurance company for liability for any judgment. In this example, the facts to be decided in the underlying suit (negligence) would be the same facts on which coverage depends. Fifth Circuit and Texas Supreme Court cases would allow an insured to select its own counsel, at the insurer’s expense, only if the conflict rose to this level.

The Court did emphasize that the lawyers hired by the insurance company must not diverge from their duties to the insured. However, these duties may not cure the concern of an insured who is questioning whether the lawyer is acting in its best interests rather than the interests of the insurance company. An insurer can select its own counsel but runs the risk of footing the bill if it is later decided that a true conflict did not exist.