Insurance Policyholder Advocate & Attorney David Gauntlett : Gauntlett Law Firm : Insurance Recovery, Policy Interpretation : Irvine, Orange County, California

Royal Indem. Co. v. Hartford Ins. Co. of the Midwest, No. B196406, 2008 WL 2009747 (Cal. Ct. App. (2d. Dist.) May 12, 2008

Two carriers. Both agreed to defend disparagement claims in a trademark/unfair competition lawsuit brought against the insured. Royal permitted the insured to choose independent counsel, Sheppard Mullin, while Hartford contended that it was entitled to appoint counsel, Sedgwick. Hartford decided that no conflict of interest arose precluding it from choosing counsel as it wished.

The court concluded that a conflict of interest arose requiring Hartford to accede to its insured’s request for counsel. Its appointment of Sedgwick, therefore, did not suffice to discharge its defense duty.

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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.

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