Defense counsel owes a duty of undivided loyalty to the policyholder. As a result, defense counsel cannot do anything that would harm the interests of the policyholder. For instance, if the insurance carrier seeks help from defense counsel to defeat coverage, defense counsel cannot breach its undivided loyalty to the policyholder to assist the insurance carrier.
A potential conflict of interest arises from insurance carrier litigation guidelines. Defense counsel cannot permit the litigation guidelines to compromise the way he defends the claim. Insurance carriers cannot use their litigation guidelines to interfere with defense counsel’s professional judgment.
Another potential conflict of interest arises when the insurance carrier reserves its rights under the insurance policy. The courts in some states have held that when an insurance carrier agrees to defend subject to a reservation of rights, there is an automatic duty to provide independent (cumis) counsel, who is selected by the policyholder, but paid for by the insurance carrier. In California, the legislature enacted California Civil Code §2860 which provides that if the provisions of a policy of insurance pose a duty to defend upon an insurance carrier and a conflict of interest arises which creates a duty on the part of the insurance carrier to provide independent counsel to the policyholder, the insurance carrier shall provide independent counsel to represent the policyholder unless the policyholder waives the right. The Alaska legislature enacted similar legislation (§21.89.100) in 1995. Florida, too, enacted legislation (Florida Statute §627.426) that assumes a conflict of interest whenever the insurance carrier reserves its rights to deny coverage.
Conflicts of interest is a matter of state law and must be carefully monitored to protect the policyholder and prevent defense counsel from committing ethics violations.