When an individual or a business with a liability insurance policy is sued, the individual or business (the insured) will generally tender the lawsuit to their insurance company by providing a copy of the lawsuit and asking the insurance company to defend the insured.
It is not uncommon in this situation for the insurance company to take control of the defense of the lawsuit, but to send a reservation of rights (ROR) letter to the insured explaining why the insurer may ultimately deny coverage for the claims asserted in the lawsuit—based on one or more exclusions from coverage in the insurance policy, for example.
In such a situation there is a risk that the lawyer (defense counsel) hired by the insurance company—who wants repeat business from the insurance company—will maneuver the case to be characterized as one for claims not covered by the insurance policy—which may save the insurance company a substantial amount of money, but leave the business holding the bag for any liability on the claims. (Law firms approved to defend lawsuits in which the insurance company’s policyholders (insureds) are sued are often referred to as “panel counsel” because they appear on a list or panel of approved law firms and have generally agreed to lower hourly rates in exchange for recurring business from the insurance company.)
Having reserved its right to deny coverage, the insurance company may, at any time, deny the claim for insurance coverage and discontinue paying the lawyer to defend the lawsuit—leaving the insured to hire a lawyer at their own expense to defend the lawsuit.
This situation—in which the insurance company agrees to defend the lawsuit under a reservation of rights (ROR)—may create a conflict of interest for the defense counsel, who may be torn between the interests of (1) the client (the insured) to whom the lawyer owes a professional, ethical duty of loyalty and (2) the insurance company from whom the lawyer hopes to receive repeat business.
Because of this conflict of interest, the insured may have the right to select its own independent counsel who is not affiliated with the insurance company (is not panel counsel). The right to independent counsel in such a situation varies from state to state but is not always a guaranteed right just because the insurance company agrees to defend the lawsuit under a reservation of rights rather than accepting coverage.
The law governing the right to independent counsel may be based on the governing law agreed to in the insurance policy or on the law of the state or other jurisdiction in which the lawsuit is filed, for example. In some states this law is primarily located in court opinions (common law) and in other states it is located in the state’s statutes.
The right to independent counsel—sometimes referred to as the right to “Cumis counsel” (named after the insurance company in a leading court opinion from California)—is an exception to the general rule that the insurance company’s obligation to defend the insured policyholder entitles the insurance company to control the policyholder’s defense—including the selection of defense counsel.
In South Dakota, when an insured party is sued and their liability insurance company takes over the defense under a reservation of rights (ROR), the insured may face a potential conflict of interest with the defense attorney appointed by the insurer. This conflict arises because the attorney, while ethically bound to defend the insured's interests, may also be influenced by the business relationship with the insurance company. South Dakota does not have a specific statute addressing the right to independent counsel (also known as 'Cumis counsel') in the context of an ROR. Therefore, the right to select independent counsel would typically be determined by the terms of the insurance policy and the general principles of contract and insurance law in the state. If the insurer ultimately denies coverage, the insured may indeed be responsible for their own defense costs. Insured individuals or businesses in South Dakota should review their insurance policies and consult with an attorney to understand their rights and options when faced with an ROR letter and potential conflicts of interest in their defense.
