§ 14.3 Staying in Your Lane when Disputes Arise Between Insurer and Insured

§ 14.3 Staying in Your Lane When Disputes Arise Between Insurer and Insured

As litigation progresses through discovery, mediation, and ultimately trial, there may be points where an insured/client's opinions and interests diverge from those of the insurer. When this occurs, insurance-defense counsel must carefully navigate the dispute while continuing to ensure the insured/client's interest is being advanced in the underlying litigation. The most common instances of a divergence between the insured/client and the insurer's interest involve disagreements over the scope or availability of insurance coverage and whether to settle a case or proceed to trial.

§ 14.3.1 Coverage Issues and Disputes

In general terms, an insured/client is interested in securing the maximum amount of insurance coverage available for a claim and in minimizing the scope and applicability of any limitations on coverage which may exist, whether contained in the insurance policy itself or available at law. Conversely, a reasonable insurer is expected to enforce the terms and limitations of its policy, along with any other available limitations on coverage which exist in the law,²⁵ and to provide coverage for only those damages which are covered by the insurance policy's provisions. Insurance-defense counsel may, without advising of the merits of any position, also explain to the insured/client the various coverage positions taken by the insured's personal counsel and the insurer.

If a coverage dispute between the insured/client and the insurer is identified, or seems likely to imminently arise, insurance-defense counsel should again advise the insured/client on the benefit of retaining personal counsel. Insurance-defense counsel should remind the client as to the role of independent personal counsel and why it is prudent that he retain the same.

If a conflict between the insured/client and insurer arises, insurance-defense counsel should be sure not to advise the insured/client as to coverage issues other than recommending that the insured consult with an attorney not retained by the insurer. An attorney retained by the insured/client directly, rather than by an insurer on the

insured/client's behalf, lacks any relationship with the insurer and, unlike insurance-defense counsel, can assert a position favorable to the insured/client's position even if it is contrary to the interest of the insurer.

Prior to trial, coverage issues come up most frequently during depositions and at mediations of the underlying liability lawsuits. In both circumstances, insurance-defense counsel should refrain from taking action which might impact the insured/client's position in the related coverage dispute unless consented to by the insured/client.

With respect to depositions, insurance-defense counsel should not ask questions during depositions which would cause coverage issue to be clarified against insured/client's interest. In other words, counsel should not ask questions which are likely to negatively impact the insured/client's coverage position. For example, in a construction case, an attorney retained by general liability insurer to defend its insured should not solicit testimony that damages relate exclusively to work actually performed by insured and do not include consequential damages to other areas of structure, as this line of questioning could provide insurer opportunity to disclaim coverage under the standard "your work" exclusion in general liability policies.

Note also that an insurer is not permitted to intervene as a matter of right in an underlying liability action to pursue evidence to support its own coverage position.²⁶ The South Carolina Supreme Court has expressed a preference for coverage disputes to be resolved in a separate declaratory judgment action rather than by an insurer (or insurers) intervening in the original action maintained by the plaintiff.²⁷ Concerns over potential conflicts of interest which would be caused by such intervention was one of the bases upon which the Court in Island Pointe, LLC relied to affirm the trial court's denial of the insurers' motions to intervene.²⁸

With respect to mediation, coverage issues may arise based on the form of an offer or demand exchanged between the parties. If such issues arise, the insurance-defense counsel should not advise the insured/client as to the same. This harkens back to the same fundamental conflict of interest recognized by the South Carolina Supreme Court. When, a coverage dispute arises during mediation, that issue should be resolved between the insured and the insurer directly, whether between the insured and the insurer's claims adjuster or between the insured's personal counsel and the insurer's coverage counsel.

PRACTICE NOTE: If the defense case is one which seems likely to have a coverage dispute develop, it is helpful to advise the insured/client to line up personal counsel early in the case. This will enable personal counsel to become familiar with the matter and to participate in a meaningful way.
PRACTICE NOTE: Consideration should also be given to whether an insured/client's personal counsel should attend any mediation. If insurance-defense counsel has, however, identified that the underlying liability claim involves coverage disputes which may materially alter the chances of resolution, the insured/client should be specifically advised that having his personal counsel attend or be involved in the mediation process may be beneficial. Sometimes, the insured/client will not wish to undertake this expense or will not wish to take a more aggressive coverage position by having personal counsel involved. There is no problem with the insured/client choosing not to involve