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Conflicts of Interest and Independent Counsel
If a conflict of interest develops between the insurer and insured, the insurer runs the risk that it may lose its right to designate counsel and control the defense of the third party claim. Shephard v. Reinoehl, 2000 WL 973079, at *2 (Del. Super. March 29, 2000) (unpublished opinion). If a conflict of interest arises between the insurer and the insured, the policyholder may no longer have identical interests as the insurance company, so the right to independent defense counsel is activated. Independent counsel is counsel selected by the policyholder and paid for by the insurance company, as opposed to counsel selected directly by the insurance company. Delaware does not have any statutes or published opinions that establish a right to independent counsel. Nonetheless, in situation where a settlement may exceed policy limits, counsel retained by the carrier has a duty to communicate to the policyholder the conflicting interests involved, and that the policyholder has the right to consult with independent counsel. Corrado Bros., Inc. v. Twin City Fire Ins. Co., 562 A.2d 1188, 1193 (Del. 1989).
Further, insurers have a duty to act “equitably” towards their policyholders. Baio v. Commercial Union Ins. Co., 410 A.2d 502, 508 n.6 (Del. 1979). In Baio, the carrier initiated a subrogation action to recover amounts paid on a work- ers’ compensation claim. After the complaint was filed, the
policyholder discovered it had a tort-liability policy with one of the defendants it was suing in the subrogation action. The court explained that to act equitably in such a situation, the carrier may maintain separate files and employ separate counsel.
Reimbursement of Defense Costs
In Delaware, an insurance company may have the right
to recoup defense costs, as long as a proper and timely reservation of rights letter was issued to the insured. Where an insurer has a duty to defend all claims, it may seek reimbursement from insured for those expenses incurred on claims which may be proven to fall outside the policy cover- age. Nationwide Mut. Ins. Co. v. Flagg, 789 A.2d 586, 597 (Del. Super. Ct. 2001).
Conclusion
A reservation of rights letter is an important tool for an insur- ance company when offering to defend under a reserva- tion of rights. It acts to preserve an insurer’s right to assert coverage defenses and seek reimbursement at a later date. With all new pleadings that are filed against the insured, the pleading must be analyzed and a supplemental reservation of rights letter sent.
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