Liability insurance can help companies decrease the financial burden of litigation. When an insurer agrees to participate in the defense of litigation there are certain practical points that all insureds should keep in mind to maximize their protection.

For example, if a company’s insurer agrees to defend it without any “reservation of right,” meaning that the insurer has fully accepted coverage and hired a lawyer to defend the insured, (1) the insurer generally gets to pick the lawyer, and (2) the insured generally should have very little expectation that its conversations with the retained lawyer are privileged vis a vis the insurer. In other words, if the insurer has fully accepted coverage, and the insured has a frank discussion with its lawyer about the case, the insurer generally is entitled to know about the conversation. And, even if the insurer has access to this “privileged” information, it remains protected with respect to others, such as the underlying plaintiff.

If the insurer, instead, agrees to defend, but under a “reservation of rights” (meaning that the insurer agrees to provide coverage, but reserves the right to later deny it) the insured should know that the “reservation” changes what the insured should consider. In fact, many insurers will argue that despite its letter saying that it might later deny coverage, it still gets to choose counsel. And, the insurer may also continue to demand that it be privy to private conversations between counsel and the insured.

However, before agreeing to use the insurer’s lawyer (which may be beholden to the insurer) the insured should know that the specifics of the “reservation” may be enough to entitle the insured to choose its own lawyer (beholden only to the insured). In other words, the reservation may create a conflict of interest between the insurer, the insured and the insurer’s chosen defense lawyer sufficient to, under applicable law, entitle the insured to “independent” counsel, paid for by the insurer. And, “Independent” means just that—the insurer can not control the defense or the insured’s strategy. In that circumstance, as much as the insurer may argue to the contrary, and demand involvement in all strategy determinations, the conflict of interest prevents the insurer from dictating the specifics of the insured’s defense.

The insurer also, given the potential conflict, has no right to demand access to privileged communications with the lawyer. Insurers often will argue to the contrary, and point to the insurance policy’s “duty to cooperate.” According to this argument, the insurer will point to language in the insurance policy and claim that it obligates the insured to provide any and all information necessary to “cooperate” with the insurer with respect to underlying litigation. This issue often arises if a coverage dispute exists and the insurer seeks to review the private communications between the lawyer and the insured to support a coverage denial. The insured should not be persuaded, no matter how aggressively the insurer argues an entitlement to privileged information— in most states and certainly in California, the “duty to cooperate” does not create a privilege waiver. As a result, the insurer cannot access such information, when at the same time it has agreed to defend, but only until its defense duty is determined not to exist.

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