AN INSURER’S RIGHT TO SELECT COUNSEL

       Whether an insured is entitled to select its own counsel in defense is a tricky proposition that may require careful analysis.  Under Texas law, it is well settled that an insurer’s right to conduct the defense includes the authority to select the attorney who will defend the claim and to make other decisions that would normally be vested in the insured as the named party in the case. N. County Mut. Ins. Co. v. Davalos, 140 S.W.3d 685, 688 (Tex. 2004).

       However, under certain circumstances, an insurer may not insist upon its contractual right to control the defense.   In a typical coverage dispute, an insurer may issue a reservation of rights letter, which creates a potential conflict of interest.  While not automatically creating a conflict, a reservation rights letter recognizes the possibility that a conflict between insured and insurer may arise in the future.  Unauthorized Practice of Law Comm. v. Am. Home Assur. Co., 261 S.W.3d 24, 40 (Tex. 2008).  And when the facts to be adjudicated in the liability lawsuit are the same facts upon which coverage depends, the conflict of interest will prevent the insurer from conducting the defense.  Davalos, 140 S.W.3d at 688. 

       The existence of a conflict depends on the nature of the coverage issue as it relates to the underlying case.  Rx.com, Inc. v. Hartford Fire Ins. Co., 426 F.Supp.2d 546 (S.D.Tex. 2006).  Thus, an insurer is allowed to select a defense counsel for the insured in all instances except when the counsel would develop facts in the underlying lawsuit that could be used to exclude coverage.  Downhole Navigator, LLC v. Nautilus Ins. Co.¸686 F.3d 325 (5th Cir. 2012).  Such situations, for example, would include where the insurer reserves the right to deny coverage based upon a breach of contract exclusion and the underlying litigation raises a claim for breach of contract, or where the insurer reserves the right to deny coverage for damages taking place outside the contract period and the underlying action involves the issue of when damages took place.  Id. at 330. 

       Although we now have further guidance on this issue from the Fifth Circuit, we continue to await specific examples of when a conflict arises from the Texas Supreme Court. 

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