Texas Court Rules Reservation of Rights Alone Does Not Necessarily Give Right to Independent Counsel

February 7, 2012

In a recently issued opinion, the U.S. District Court, Southern District of Texas, Houston Division, ruled that a carrier’s issuance of a reservation of rights letter alone does not give an insured the right to reject panel counsel and select its own independent counsel.

In Joe B. Partain, et al. v. Mid-Continent Specialty Insurance Services Inc., the insured sought coverage for a copyright infringement claim under a general liability insurance policy. The carrier accepted the defense of the case, subject to a reservation of rights, and appointed panel counsel to defend the case. The insured, however, rejected the appointment of panel counsel, insisting on using his own independent counsel on the basis that the reservation of rights created a conflict between insured and insurer, giving the insured the right to reject the insurer’s appointment of defense counsel. A federal court declaratory judgment action on the issue ensued.

The federal court, in a lengthy opinion, analyzed the facts of the case in determining whether a conflict did indeed exist. In so doing, the Court noted that under Texas law, absent a conflict, the insurer of a duty to defend policy has the “right to select the attorney who will defend the claim and to make other decisions that would normally be vested in the insured as the named party of the case.” The Court also noted that “not every disagreement about how the defense should be conducted amounts to a disqualifying conflict of interest.” The Court further held that the issuance of a reservation of rights letter alone does not necessarily give rise to a conflict between insured and insurer. Rather, the Court said, “a disqualifying conflict only exists where the facts to be adjudicated in the liability lawsuit are the same facts upon which coverage depends.”

Analyzing the facts of the case, the issues in contention and the facts to be adjudicated, the Court concluded that there was no disqualifying conflict of interest in the case at hand because the facts to be adjudicated were not the same as those upon which the carrier reserved rights to deny coverage. On that basis, the Court held that the insurer did not breach its duty to defend the insured by rejecting the insured’s independent counsel and insisting on appointment of panel counsel.

This opinion is significant as it further enforces the recent trend by Texas courts to support the right of insurance carriers to select defense counsel and control the defense of the case, absent the existence of a “disqualifying conflict,” which must be based on more than the simple issuance of a reservation of rights.

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