An Insurance Company’s Duty to Defend (Part 2)


{6 minutes to read} In Part 1, we discussed types of liability claims and how your insurance company will defend you in such a claim. Below, we continue the discussion and look at how the lawyer hired by your insurance company has a duty to protect your interests.

There are a couple of rules that the hired lawyer must abide by: 

  • The lawyer cannot take steps, in connection with representing you or your business, to hurt or affect your ability to keep your insurance coverage. 

So, the lawyer cannot conspire with the insurance company to figure out which facts they can develop to deny your claim. In fact, they should be doing the opposite. They should be looking for ways to make sure coverage is maintained because that’s in your best interest.

The lawyer must always provide you with informed consent regarding:

•What the lawyer is doing;

•The scope of their representation;

•Their duties to you; and

•The fact that they are being paid by somebody else, and the implications of that.

Thus, the lawyer has to give you general notice and information about your basic rights arising out of this relationship. In addition:

•Lawyers cannot operate under a conflict of interest where they are pressured by the insurance company to make decisions that could either harm their ability to defend your case properly or affect the scope of the insurance coverage.

•If the client wants to settle but the insurance company is refusing to do so, the lawyer should be making every effort, including pressuring the insurance company as best they can, to resolve the matter.

Where there is a specific conflict of interest between you or your business (the insured) and the insurance company, you can hire your own lawyer instead of using the lawyer provided by the insurance company, and the insurance company has to pay their fees.

In New York, for example, the law generally provides that reasonable attorney’s fees must be paid by the insurance company. Reasonable attorney’s fees are, basically, fees for lawyers and paralegals according to the prevailing rates in the geographic region where the law firm is practicing. The attorney’s fees will generally be a higher rate than what the insurance company pays to their law firm, as insurance companies give lawyers a high volume of work in exchange for highly discounted rates. Of course, each state’s laws can vary on these issues, so make sure you consult with a lawyer with expertise in understanding the relevant state law.

There are a lot of different situations in which your rights could be triggered to seek your own lawyer. Potential conflicts include whether the facts being developed in the case could either eliminate or guarantee coverage under your policy.

For example, a product liability claim, where the question is whether there was a manufacturing error or a complete design defect. There are certain exclusions and policies that will exclude a design defect, but won’t exclude a manufacturing error. Those are situations which, depending on the facts, could cause the insured to lose coverage.

Another example, two defendants discover that their separate defenses, once developed, are inconsistent with one another. That creates a conflict of interest because one defendant wants to prove the other defendant is at fault.

It’s important to understand that simply because your insurance company hired a lawyer for you doesn’t mean you have to abide by whatever they do, fear your lawyer, or fear that your lawyer is in cahoots with the insurance company. It would be unethical for them to do so.

If the insurance company sends you a letter stating its refusal to cover X, Y, and Z, but that it is going to defend you under its reservation of rights, you may have the right to hire your own lawyer or, at least, seriously consider it.

Feel free to contact us to discuss any aspect of these potential problems.  


Evan S. Schwartz
Founder of Schwartz, Conroy & Hack