Are You Really Our Company’s Lawyer? Inherent Conflicts Between the Insured and Its Defense Counsel

October 19, 2000

A. Importance of Liability Insurance
Corporations face liabilities from all sides, not only from third parties, but their customers, their shareholders, and other competitors. Often, it seems that the potential liabilities of a corporation are only limited by the ingenuity of attorneys and the causes of action which they allege on behalf of their clients. For example, e-commerce has spawned an entirely new set of issues relating to intellectual property rights while developing theories of liability have empowered employees to seek redress from their employers under wrongful termination and discrimination theories.
In the face of these real exposures, a company's insurance program remains of critical importance. Specialized insurance products have been developed to insure some of the these exposures, such as directors and officers, environmental and employment practices liability insurance. Nevertheless, the foundation of most business insurance programs remains the commercial general liability (CGL) insurance policy. It provides the"bread and butter" coverage for unintended bodily injury and property damage, as well as certain personal injury torts, including libel and slander, false imprisonment, malicious persecution, wrongful eviction, use of another's advertising idea, and infringement upon another's copyright, trade dress, or slogan in the insured's business advertisement.
Part and parcel of actual coverage for a judgment or settlement on behalf of insured, these policies provide for a defense obligation on the part of the insurer. In other words, the policy requires the insurer to provide a lawyer to defend an insured in a lawsuit with the allegations which are potentially within the coverage of the insurance policy. The defense obligation is often the key consideration in liability insurance, over the actual indemnity obligation of the policy, it is the obligation to pay actual claims. Often, defense costs exceed the amount of settlement, or even judgment.
This paper will focus on the parameters of an insurance company's duty to defend, paying particular attention to the tensions created through the "tripartite relationship" in insurance defense. While the defense counsel owes primary allegiance to the insured client, the attorneys fees and costs are being paid by the insurer which may, at the same time, have defenses to coverage under the insurance policy. The manner in which these potential conflicts of interests have been addressed under Texas law and in general will be discussed.

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