Few courts have found what one court recently mischaracterized as the “knowing violation of rights of another” exclusion bars even a defense for otherwise potentially covered claims. The court found this exclusion evidenced an additional reason for not finding a defense due.
The Insurer’s Selection of Appointed Counsel Cannot Discharge its Duty to Defend an Insured who is Entitled to Receive Independent Counsel
In those jurisdictions where “independent counsel” is required once an “actual conflict of interest” exists, the insurer’s refusal to provide same as well as its selection of defense counsel cannot discharge its legal duty to the insured. Where a matter is pending and lead counsel requires local counsel in jurisdictions where the underlying suit is pending (as often happens in intellectual property litigation), allowing the insurer to select local defense counsel can be problematic.
Where a compulsory counterclaim must be asserted, an insurer may not select appointed counsel to function both as local counsel (typically in responding to declaratory relief claims for invalidity and non-infringement) and pursue a compulsory counterclaim rather than pay for independent counsel. In Polymer Industrial Products Co. v. Bridgestone/Firestone, Inc. [347 F.3d 935 (Fed. Cir. 2003)], the court found that the patent infringement claim was a compulsory counterclaim to the alleged infringer’s declaratory judgment claim of noninfringement. Yet an offensive claim, such as a compulsory counterclaim, may be defensive, and the fees incurred therein “conducted against liability,” and thus the insurer’s obligation.
Vansteen Marine Supply, Inc. v. Twin City Fire Ins. Co., No. 13-05-00231-CV, 2008 WL 599850 (Tex. App. - Corpus Christi March 6, 2008) (Valdez)
Hartford agreed to defend libel and defamation claims in a suit seeking a declaration that a non-competition clause was void and that the former president of Vansteen was entitled to damages from the company. Following a grant of summary judgment on the defamation and libel issues, the insurer sent a notice that it was withdrawing its defense obligation. The court also determined that there was no right to receive affirmative prosecution costs despite the insured’s arguments that they were also defensive of the suit against it. This because requiring a duty to defend which would envision payment of such attorneys’ fees would rewrite the insurance policies that the parties signed. Coker v. Coker, 650 S.W.2d 391, 393 (Tex. 1983); Witkowski v. Brian, Fooshee & Yonge Props., 181 S.W.3d 824, 830 (Tex. App. - Austin 2005, no pet.).
Had the attack on the liable/defamation claims awaited the conclusion of trial, the defense activities would arguably have dovetailed with the affirmative relief sought and entitled the insured to obtain an insurer funded trial. While some inconvenience may have attended the continued presence of the defamation claims throughout, absent evidence that it would have lead to a different result therein, delaying a motion to eliminate them until the trial concluded would have been preferable from an insurance coverage maximization perspective. Absent a dismissal of the liable and defamation claims, these affirmative prosecution costs, to the extent prove to also dovetail with defense costs, would have been recoverable. See
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